Understanding Corporate Theory - MGMT 449

Todd Zenger explores the benefit of value creation by means of the corporate theory in his article.

Synopsis

Managers often choose to align their organizations with the red ocean strategy. This implies that they choose to develop attractive markets through a competitive advantage, be it technological or otherwise. In order to sustain this advantage, they might consider efficient ways to manage resources or develop a strategy to provide goods or services at a notably low cost. This of course limits growth. Investors search for companies that have the foresight to develop blue oceans, which are characteristic of creating and capitalizing on new market spaces. A critical element of developing blue oceans is value creation. This is the essence of corporate theory. Zenger offers a strategy that companies can use to continuously create value. He claims that using this method will guide industries in their efforts to select strategies.

Defining Corporate Theory

Corporate theory is based on executives’ ability to understand the industry, develop insight based on past experience, and create a model of the existing market. Following this, executives should be able to recognize opportunities to create value. Zenger believes that companies that have been consistently successful employ a working model of corporate theory. Once they lose sight of how to maintain regular value creation, companies suffer. Disney is a prime example of a company that was founded on a system of value creation but lost their vision upon the death of Walt Disney. It wasn’t until Michael Eisner was hired and harnessed Walt’s original theory of value creation through complimentary entertainment media and generated Disney classics such as Beauty and the Beastand The Lion King. Eisner innovated Disney’s original application of the theory by opening new theme parks, establishing a cruise line, and furthering Saturday morning cartoons among other value adding projects. Beyond their internal work to create value, Disney has taken steps to broaden their horizons. In acquiring Pixar to maintain the quality of their animation, Disney also found a way to stabilize this source of value. In addition to Pixar, Disney recently acquired Marvel and Lucasfilm which provided an opportunity to not only diversify, but also add value to the greater corporation. This consistent grasp of Disney’s theory has proved itself a consistent strategy for long-term profitability.

The Three Sights of Strategy

Zenger identifies three strategic “sights” that promote value creation; foresight, insight, and cross-sight. Foresight relies on recognizing potential in the market. This element of the strategy proposes that managers should seek out opportunities based on developing technology, growing industries, and fluctuations in demand. It is crucial that foresight be moderately specific to clearly identify which assets to pursue. This clarity should translate to efficient management strategies for the company. Insight offers a more internal perspective, choosing to offset external observation by maintaining a comprehensive understanding of the industry’s existing place in the market. The concept behind insight is that in order to grow, a company must first have a firm grasp of its own operations. Cross-sight is a means by which companies might identify complementary goods or services that add value to the larger corporation. Disney did this by adding items such as cruise lines and absorbing companies like Lucasfilm to their large portfolio. The driving force in all of these elements is still value creation. These three perspectives are essential for businesses to understand their current place and strategize accordingly. Zenger understands the importance of outlining each “sight” to ensure managers continue to evaluate both their own industry and the market as a whole.

Understanding Steve Jobs’ Corporate Theory of Value Creation

Jobs, like Disney, was able to bring his vision for Apple to life by means of this Corporate Theory. In terms of employing the different sights, Jobs used all three. He had the foresight to understand evolving demand; consumers would be interested in purchasing computers. Beyond the product itself, Jobs recognized the importance of design and maintained sleek profiles for all Apple products. This was also a facet of his own insight. Jobs knew that creating a product with an unparalleled user interface and design that emphasized perfection. In terms of cross-sight, Jobs identified value in the graphical user interface (GUI) technology that Apple had acquired from Xerox. He beseeched the company to commercialize the asset, understanding that it provided the friendly user interface he identified in his own insight. Alas, Jobs was forced out of his own company and in the years he was away they struggled to maintain his vision. This is also similar to Disney in that his absence marked a period of decline for Apple. His return in 1996, however, began the introduction of a new line of Macintosh products that Jobs had the vision to integrate with adjacent markets. The fluidity of the software he developed for the music library, smartphones, MP3 players, and other complementary products maintained his signature elegance and simplicity. It also granted Apple a new title as the world’s most valuable corporation.

Implications for Strategic Managers

Zenger’s Corporate Theory, similar to Porter’s Five Forces Theory, recognizes that value creation is not a strategy in it of itself, but rather requires the consideration of both internal and external factors. Marrying these two theories might result in a strategist having a dynamic understanding of the industry and could provide a greater opportunity for developing a blue ocean. The three sights he discusses provide a guide for managers to map their next steps. Foresight will provide an opportunity to understand external market factors while insight offers a more internal analysis of the industry. Cross-sight could grant strategists the freedom and creativity to lend these observations to developing blue oceans. Companies like Disney and Apple are examples of corporate strategy in action. The concept of value creation should be prevalent in all long-term strategic management plans. It is only through a deep understanding of where value can be added or developed that companies can sustain high levels of profitability and growth.