What is Corporate Strategy?
Corporate strategy is strategy that firms use to compete across multiple businesses. It is relevant for 2 groups of firms: multi-business firms and single-business firms that think about extending into a new business. Having different strategy for different business is not sufficient. A business vary by both corporation and industry, but corporation matters even more. If we want business to do well, we need to consider corporation’s perspective, in particular, it is corporate strategy.
Corporate strategy is about choosing 2 things:
- portfolio selection – deciding on which business to be active in
- portfolio organization – how to organize multiple business to create value by organizational design
Corporate Strategy vs Business Strategy
Business strategy is at the level of business, about a single business. Corporate strategy is at the level of corporation, about multiple businesses. We can describe a business as follows. We say 2 businesses differ at least on 1 of these dimensions:
- Who are the customers?
- What are we selling?
- How are we producing and distributing?
Competitive Advantage vs Corporate Advantage
The goal of business strategy is often seen as maximizing competitive advantage, which is defined as the difference between the willingness to pay and the willingness to supply.
- Willingness to pay is the maximum for which the buyers are wiling to pay for your products.
- Willingness to supply is the minimum for which the supplier are willing to provide you all the inputs.
When we talk about corporate advantage, what we are really comparing is:
- When all these businesses are under common ownership
- When each of these businesses is under separate ownership
We say that the corporate advantage exist if the value of all these businesses under common ownership is greater than the value of them under separate ownership.
Competition
At business level, competition is anyone who can negatively affect price and cost. At corporation level, competition is anyone who can assemble similar portfolios of businesses, for example (with ability to influence business goes up):
- mutual fund managers
- activist investors
- private equity investors / other corporate strategist
Based on who the competition is, it influences us what type of corporate strategies are attractive to us and not. As a corporate strategies you can compete in 2 ways:
| selection | picking business for better prices or business that shareholders have no access to. “Which business to combine under common / joint ownership?” |
| modification | giving a set of business, you are going to change them to make them better together. “Joint decision making or modification.” |
Sum-of-the-parts Analysis
This is a quantitative technique that people use to value multi-business firm.
Value a single business
We start by valuing a single business. Given enterprise value (EV) and earnings (E) of a business, we can calculate the multiple of enterprise value over earnings (EV / E). It basically means, if you buy the business you have to pay EV / E times of the last year’s earnings. We can calculate the average of a few similar businesses and then use this average to calculate enterprise value of a new business given its earnings: EVnew = Enew * (EV / E)avg
Value a multi-businesses firm
Now we move to value multiple businesses of a firm. When you have come up with a value for each business separately, you also need to include or incorporate headquarters.
After getting the enterprise value, we can think of it is consisting of 2 parts:
| Debt / Net debt | belongs to bondholders |
| Equity | belongs to shareholders |
Then, we have Equity = Enterprise Value – Debt, and also Equity per Share = Equity / Number of Shares. Finally we can compare the Equity per Share with how much this share is trading for. It is usual that current price of a share is cheaper than its evaluation, in other words, the share is undervalued. If the share is very undervalued, you might be willing to trade on that – buy it.
Can not infer corporate advantage
Sum-of-the-Parts analysis is the sum of businesses, it gives enterprise value of the entire multi-businesses firm. Recall that corporate advantage is “businesses owned together” are worth more than “the businesses owned separately”. Sum-of-the-Parts analysis can not indicate “corporate advantage” directly, because earnings of the businesses are owned jointly and taken as fixed. From the calculation we can never infer what the earnings would be like if owned separately.
However a sum-of-the-parts analysis can tell you whether the market values a given level of earnings differently for your multi-businesses firm than for comparable single-business firms. If we find the sum-of-the-parts is higher than the share price, it basically means the multiple (EV / E)avg for which the single business peers are trading, is higher than the multiple for which you are trading. The market values a $1 earnings of your single business peer, more than a $1 earning of your multi-businesses firm, probably because the market does not understand your strategy, and in particular how you could create value across your different businesses.
In summary, sum-of-the-parts analysis can provide insight on the multiple, not on the earnings.
My Certificate
For more on Corporate Strategy: Sum-of-the-Parts Analysis, please refer to the wonderful course here https://www.coursera.org/learn/corporatestrategy
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