Transcript WK09-CorporateLevelStrategy

Lecture Week 9
Corporate Level Strategy
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Learning Outcomes: Week 9
Be Able To
• Understand why organisations might increase their
product and geographic diversity
• Understand what is meant by related and
unrelated diversification
• Understand issue and factors relating to
international dimensions of strategy
• Understand the difference between mulit-domestic
and global strategies
• Explain the different rationales for value creation of
corporate parents
• Explain and apply different frameworks for
managing corporate portfolios
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Corporate Level Issues
Exhibit 6.1
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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The Multi-Business Organisation
Exhibit 6.2
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Product/Market Diversity
Diversification is a strategy which takes the
organisation into new markets and products or
services
• What is the extent and nature of
products/services offered by the corporate
parent?
• How does the parent create value?
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Reasons for Diversification (1)
• Value creation
– Efficiency gains from applying existing
resources/capabilities to new markets/products
• Economies of scope
• Benefits of synergy
– Applying corporate managerial capabilities to
new markets/products/services
• Dominant logic
– Increased market power from diverse
product/service range
• Cross subsidy
• Possible monopoly in long-run
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Reasons for Diversification (2)
• Less obvious value creation
– In response to environmental change
• To defend existing value
• Or straying too far from dominant logic?
– To spread risk across range of businesses
• Investors can diversify more effectively?
• Important for private businesses
– In response to expectations of powerful
stakeholders
• Pressure from financial analysts to produce constant
growth
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Related Diversification
Exhibit 6.3
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Related Diversification
Strategy development beyond current products and
markets, but within the capabilities or value network of the
organisation
• Vertical integration
– Backward integration into input activities
– Forward integration into output activities
• Horizontal integration
– Develop into activities complementary to
existing ones
– Exploit strategic capabilities in new markets
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Problems of Related Diversification
•
•
•
•
Underestimating new capabilities required
Overestimating synergies
Time and cost of top manager attention
Difficulties for business units to share
resources/adapt policies
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Unrelated Diversification
Development of products/services beyond the
current capabilities or value network
– Generally unfavourable
• No economies of scope
• Cost of headquarters
– Can succeed in some cases
• Exploit dominant logic
• In countries with underdeveloped markets
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Diversity and Performance
Exhibit 6.4
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Reasons for International Diversity
Market-based
Exploit cultural/
geographic differences
Globalisation of markets &
competition
Cash in on differences in culture
Following customers
Administrative differences
Bypass limitations in home market
Specific geographical/
economic differences
Utilise strategic capabilities
Economic benefits
Broaden market size
Economies of scale
Internationalise value-adding
activities
Stabilisation of earnings across
markets
Enhance knowledge
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Factors for Market Selection and Entry (1)
• Macro-economic conditions
• Political environment
• Infrastructure
– Transport and communication
– Availability of local resources
– Tariff and non-tariff trade barriers
• Cultural norms and social structures
• Political and legal risks
– Sovereign risk
– Absence of regulation and control
• Protection of intellectual property
• Corruption
– International risk
– Security risk
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Entry Modes (1)
Exporting Advantages
JV/Alliance Advantages
No operations in host country
Shared investment risk
Economies of scale
Complementary resources
Internet access for small firms
Possible government condition
Exporting Disadvantages
JV/Alliance Disadvantages
No benefit from location
advantages of host
Difficult to select and agree with
partner
Limited local knowledge
Managing relationship
Dependence on intermediaries
Loss of competitive advantage
through imitation
Exposure to trade barriers
Limits integration/coordination of
activities across countries
Transportation costs
Slow response to customers
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Entry Modes (2)
Licensing Advantages
FDI Advantages
Contractually agreed income
Control of resources/capabilities
Limit financial/economic risk
Integration/coordination of activities
across countries
Acquisitions – rapid entry
Greenfield – state of art and
government finance
Licensing Disadvantages
FDI Disadvantages
Difficult to select and agree with
partner
Substantial investment – financial
exposure
Loss of competitive advantage
through imitation
Problems of integration/
coordination of acquisitions
Limits benefit from location
advantages of host
Greenfield – time consuming and
unpredictable cost
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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International Value Network
• Internationalisation of value network
– FDI
– JVs
– Global sourcing
• Locational advantages
– Cost advantages
– Unique capabilities
– Characteristics of national locations
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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International Strategies
• Issues
– Global-local
– Centralised/decentralised
• Generic Strategies
– Multi-domestic
• Value adding activities located in national markets
• Products/services adapted to local requirements
– Global
• Standardised products
• Produced in centralised location
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Value-Adding Activities
Envisioning
Coaching and
facilitating
Providing central
services and
resources
Intervening
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Value-Adding Corporate Parents
Envisioning Strategic Intent
Central Services and
Resources
Focus
Clarity to external stakeholders
Clarity to business units
Investment
Scale advantages
Transferable management
capabilities
Intervention at Business Level
Expertise
Monitor performance
Action to improve performance
Challenge/develop strategic ambitions
Coaching/training
Develop strategic capabilities
Achieve synergies
Provide expertise/services
Knowledge creation/sharing
Leverage
Brokering linkages/accessing
external networks
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Value-Destroying Corporate Parents
• Bureaucracy
– Adds cost
– Hinders responsiveness
• Buffer from reality
– Financial safety net
• Diversity and size
– Lack of clarity on overall vision
• Managerial ambition
– Empire building
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Exhibit 7.5 Portfolio and Synergy Managers
and Parental Developers
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Problems Achieving Synergy
Excessive costs
Overcoming self-interest
Illusory synergies
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Challenges for Parental Developers
•
•
•
•
Identifying parent capabilities
Parental focus
The ‘crown jewel’ problem
Sufficient ‘feel’
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Corporate Rationales
Portfolio
managers
Synergy managers
Parental developers
Logic
•Agent for financial
markets
•Limited SBU value
creation
•Synergy
•Competences used to
create value in SBUs
Strategic
requirements
•Acquire assets
•Divest assets
•Low strategic role
in SBU
•Share
resources/skills
•Identify bases for
sharing
•Identify benefits
•SBUs below potential
(‘parenting opportunity’)
•Relevant central
resources
•Suitable portfolio
Organisational
requirements
•Autonomous SBUs
•Small, low cost
corporate staff
•SBU performancebased incentives
•Collaborative SBUs
•Corporate staff as
integrators
•Overcome resistance
to sharing
•Corporate-based
incentives
•Understand SBUs
(‘feel’)
•Effective linkages
•SBUs autonomous
•SBU performancebased incentives
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Corporate Portfolio Management
• Portfolio balance
– Markets
– Organisation’s needs
• Attractiveness of business units
– Profitability
– Growth rates
• Portfolio ‘fit’
– Synergies between business units
– Synergies with corporate parent
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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The Growth Share (or BCG) Matrix
Exhibit 6.8
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Public Sector Portfolio Matrix
Source: J.R. Montanari and J.S. Bracker, Strategic Management Journal, vol. 7, no. 3 (1986), reprinted by permission of
John Wiley & Sons Ltd.
Exhibit 6.9
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Ashridge Portfolio Display
Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley 1994. This material is used by
Exhibit 6.11
permission of John Wiley & Sons Inc.
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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Key Points
• Corporate parent
– Activities above business unit level
• Corporate strategy
– Decisions on product and international scope
– How to add value to business units
• Product diversity
– Related/unrelated diversification
• Benefits of international scale and scope
– Which markets, which elements of value chain, how much standardisation?
• Parenting roles
– Portfolio manager, synergy manager, parental developer
• Portfolio models
– BCG, and others (re chapter 7) Parenting Matrix, International
Diversification
BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008)
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