This is a book about corporate strategy written for industrial economists. It is intended for students who have already completed an introductory course in economics, and who, therefore, have some familiarity with the conventional theory of the firm. They may also be acquainted with some of the modern revisions to the conventional theory, although such knowledge can probably be treated as an optional extra.

Corporate strategy is concerned with long-term decision taking. It reflects the firm's need to prepare for an uncertain future in an uncertain environment, which may be subject to almost continual change. By contrast, formal economic analysis often concentrates on equilibrium conditions in a world with little or no uncertainty, and, although equilibrium analysis is a powerful tool, it sometimes seems to be far removed from the world of the corporate strategist. Indeed, in casual conversation I have often heard businessmen explaining why they had to reject an “economic” solution for “strategic” reasons. In reality this conflict is more apparent than real, but the appearance is both misleading and unfortunate: misleading, because it ignores the deep insights into strategic behavior which can be developed from the analytical and empirical work of many economists, and unfortunate, because it simultaneously denies the potential usefulness of those insights. I hope that this book may help to dispel some of this misunderstanding by synthesizing a fairly broad range of economic and management literature and relating the economic analysis directly to its strategic context.

The previous chapter reviewed some developments in the theory of the firm in order to provide some early pointers to the way in which economic analysis may assist our understanding of corporate strategy. In this chapter, we first consider the role of the corporate strategist in a little more detail, and then seek to justify that role in principle (section 2.2) and by reference to the experience of corporate planners (section 2.3). At this stage we are still concerned with a very general view of strategic planning. Specific planning problems will be dealt with in later chapters.

The role of the strategist

Our initial definition suggested that the strategist is concerned to identify policies which contribute to the long-term goals of the organization. Implicit in this definition are several intellectual tasks that must face all managers involved in the formulation of corporate strategy. First, they must identify the value systems and the long-term objectives that are to be sought by the members of the organization, including the obligations that are acknowledged to outsiders. Secondly, they must define the current and expected future state of the environment in which the organization operates, so as to pick out the opportunities which may arise and the threats which may have to be faced. Thirdly, they must consider the organization's relative strengths and weaknesses in responding to those opportunities and threats.

A merger or takeover occurs when two or more firms are combined under common ownership. Sometimes a merger is distinguished from a takeover. A “takeover” is then said to occur when one dominant firm acquires the assets of another, whereas a “merger” produces a new firm from a marriage of two more-or-less equal partners. But, in practice, this distinction may be difficult to maintain, as would happen, for example, if a merger were actually effected by means of a takeover bid in which one of the firms offers to buy the assets of the other. We shall therefore use the terms “merger” and “takeover” interchangeably; and when appropriate, we shall refer to the actual, or potential, buying firm as Beta and to the potential victim, or seller, as Sigma.

Our major purpose is to investigate the contribution which mergers can make to the strategic development of a firm. But if we are to do this satisfactorily, we must have some understanding of the institutional constraints that affect merger activity and of the various factors which influence the costs of a takeover. It may also help to have some background knowledge of the history of mergers. With this in mind, our discussion starts in 7.1 with a general review of the procedures involved in a merger, and follows this in 7.2 with a brief historical survey.

When a firm chooses to become more vertically integrated, it is choosing to take on activities that might otherwise have been covered by a market transaction in which it acted as either customer or supplier. This is in direct contrast to the process of diversification, which involves the addition of activities which were previously outside the firm's areas of direct interest and influence, although the activities may have been related as substitutes or complements in the eyes of consumers.

There are many possible motives for integration, and any attempt to classify these motives may involve some ambiguity. Nevertheless it is often fruitful to recognize at least two broad alternatives. First, integration may be undertaken consciously to reduce the costs of manufacturing or distributing existing items. Second, integration may be undertaken for longer-term strategic reasons, to improve the general competitive position and to reduce the risks faced by the firm. However, almost as a third category, we should note that, in some cases, it may be difficult or impossible for a firm to develop at all unless it does so as an integrated unit, because the existing sources of supply are inadequate and cannot develop quickly enough to offer a realistic alternative.

For example, in the early stages of development of the motorcar industry in the United Kingdom, the domestic light-engineering industry was unable to provide satisfactory component supplies, and car manufacturers had to provide capital and know-how to manufacture their own components.

Introduction: The nature of innovation

Innovation is a process which involves the adoption of procedures or products which are perceived as being new by the adopter. It is therefore concerned with changes in the established ways of doing things. In many cases, it will result from progress in science and technology, which permits new methods of production, new designs for existing products, or completely new products or services. But innovation is not necessarily tied to prior technical change. It may also reflect changes in (say) marketing techniques or management procedures. Perhaps the clearest example is the growth of self-service retailing, which is a significant innovation with a widespread social impact but very low technological content.

In other cases, the technological input may be significant but invisible, as in the spread of credit-card trading, which has been made possible by advances in electronic data processing to handle the centralized accounts. Conversely, even when the innovation has followed from a technical breakthrough, its successful use will depend upon the social and economic environment as well as upon the technical specifications of the product. Further, although technical change sometimes requires significant preinvestment in research and development, this is not always the case.

Introduction

No discussion of the direction of strategic growth can be complete without some reference to the increasing importance of multinational activities. The multinational enterprises (MNEs) which own and control income-generating assets in more than one country account for at least one-fifth of the world's output (excluding the centrally planned economies). In the United Kingdom, about one-third of company profits are derived from overseas operations, and about one-half of the one hundred largest manufacturing firms had a quarter or more of their output produced outside the United Kingdom (Dunning 1974, Stopford 1974).

The MNEs comprise a relatively small number of very large enterprises. The Comparative Multinational Enterprise Project run by the Harvard Business School covered those firms on Fortune's list of the 500 largest industrial companies in the United States in 1968 that had manufacturing subsidiaries in at least six foreign countries (187 U.S. companies in all), together with the 200 firms on Fortune's list of the largest non-American industrial companies in 1970. The project therefore surveyed approximately 400 MNEs. It estimated that in 1970 these enterprises operated nearly ten thousand wholly or partially owned foreign manufacturing subsidiaries. (For a convenient summary see Franko 1976, Chap. 1. For more detail see Vaupel and Curhan 1973). At the same time, some of the largest MNEs, such as General Motors or the Exxon Corporation (then Standard Oil of New Jersey), had annual sales which exceeded the gross national product of many countries, including Denmark and Norway (Tugendhat 1971).