The Corporation

AuthorBert Spector
ProfessionProfessor of Strategy at Northeastern University
The Corporation 29
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
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

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