The Corporation

• Author: Bert Spector
• Profession: Professor of Strategy at Northeastern University
• Pages: 29-46

The Corporation 29

CHAPTER 3

THE CORPORATION

Chapter 2 explored business strategy and competitive advantage. Let’s

now turn to the corporation: the legal entity responsible for the oversight

of the business and the care of investors’ money. It is the corporate level

that attracts the direct involvement of both the in-house and outside coun-

sel. The goal of this chapter is to provide an understanding of the complex

structure and strategies of a corporation.

The Structure of the Corporation

The distinction between a business—which is a config uration of product/

service (what), target ma rket (who), and business model (how)—and a cor-

poration may seem like one of semantics, especially when the corporation

consists of a single business. Wawa, a convenience store chain in the North-

east, and In-N-Out Burger, a hamburger chain in the West, are examples

of corporations that run a single business. In cases like these, the sa me

executives will be performing both the corporate role and the business role.

But those examples are rare, and becoming more so. Today, most busi-

nesses exist in what we call a multi-business corporation. Exhibit 3-1 provides

examples of multi-business corporations and the businesses they operate. In

the multi-business corporation, a corporate center governs the corporation’s

divisions. The corporate center issues securities, allocates c apital to the

30 The Corporation

divisions, reports to federal and state

agencies as well as to shareholders,

makes merger and acquisition decisions,

manages risk, ac quires and protects

intellectual property, and so forth.

If a business is part of a multi-business corporation, a question needs

to be answered: what is the benefit? What is the advantage to the Olive

Garden, for example, of being part of Darden rather than a separate cor-

poration? To put this in economic language, we ca n look at market capi-

talization. It is the corporation, not the business units, that issues stock.

Investors buy stock in Darden Restaurants, not in Olive Garden or Capital

Grille. So, analysts ca n compare the corporation’s market capitalization—

the total dollar value of the corporation’s outstanding common stock—to

the apparent breakup value of the individual businesses. That apparent

breakup value is an informed estimate: What va lue would each of the busi-

nesses within the multi-business corporation fetch on the open market if

sold separately? Now, the calculation becomes straightforward. If the mar-

ket capitalization is significantly higher than the apparent breakup va lue

of the member businesses, then the corporation is adding value to the busi-

nesses. If the market capitalization is significantly lower than the apparent

breakup value of the member businesses, then the corporation is thought to

be destroying value.

Good to Know

The multi-business corporation originated with Alfred Sloan at General

Motors, who operated each of the car lines—Chevrolet, Buick, Oldsmobile,

Pontiac, and Cadillac—as separate and relatively autonomous divisions within

the GM corporate structure. Starting in the 1920s, Sloan spun an elaborate

web of governance mechanisms, including policy and operating commit-

tees, intended to encourage divisional autonomy while empowering the

corporate center to oversee the divisions in order to strengthen the overall

corporation.

Good to Know

In Europe, the corporate entity is typically referred to as the Group.

A corporation is an artificial, intangi-

ble person or being created by state

law. It has rights and duties separate

from those of the shareholders.

Point of Order