Corporate Level

and

International Strategy

Corporate Level and International

Strategy - Outline

• Product and geographical diversity

• Related and unrelated diversification

• Attractions of international markets

• Multidomestic and global strategies

• Effect of product and geographical diversity

on performance

• Corporate parenting

• Portfolio management

Corporate Level Issues

The Multi-Business Organisation

Product/Market Diversity

• What is the extent and nature of

products/services offered by the corporate

parent?

• How does the parent create value?

Diversification is a strategy which takes the

organisation into new markets and products or

services

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

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

Related Diversification

Exhibit 6.3

Related Diversification

• 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

Strategy development beyond current products and

markets, but within the capabilities or value network of the

organisation

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

Unrelated Diversification

– Generally unfavourable

• No economies of scope

• Cost of headquarters

– Can succeed in some cases

• Exploit dominant logic

• In countries with underdeveloped markets

Development of products/services beyond the

current capabilities or value network

Diversity and Performance

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

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

Factors for Market Selection and Entry (2)

• 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

Entry Modes: Advantages and Disadvantages

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

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

International Value Network

• Internationalisation of value network

– FDI

– JVs

– Global sourcing

• Location advantages

– Cost advantages

– Unique capabilities

– Characteristics of national locations

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

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

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

Portfolio managers, synergy managers

and parental developers

Corporate Rationales

•SBUs below potential

(‘parenting opportunity’)

•Relevant central

resources

•Suitable portfolio

•Share

resources/skills

•Identify bases for

sharing

•Identify benefits

•Acquire assets

•Divest assets

•Low strategic role

in SBU

Strategic

requirements

•Competences used to

create value in SBUs

•Synergy •Agent for financial

markets

•Limited SBU value

creation

Logic

Parental developers Synergy managers Portfolio

managers

•Understand SBUs

(‘feel’)

•Effective linkages

•SBUs autonomous

•SBU performance-

based incentives

•Collaborative SBUs

•Corporate staff as

integrators

•Overcome resistance

to sharing

•Corporate-based

incentives

•Autonomous SBUs

•Small, low cost

corporate staff

•SBU performance-

based incentives

Organisational

requirements

Value Adding Fundamentals of Corporate Rationales

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

The Growth Share (or BCG) Matrix

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.

Indicators of SBU Strength & Market Attractiveness

Market Attractiveness/SBU Strength Matrix

Strategy Guidelines Based on Directional

Policy Matrix

International investment opportunities

based on the directional policy matrix

Source: Harrel, G.D. and R.D. Kiefer (1993), ‘Multinational market portfolio in global strategy development’, International Marketing Review 10 (1); Phillips, C., I. Duole, and R. Lowe, International Marketing Strategy, Routledge 1994, pp. 137–8.

Ashridge Portfolio Display

Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley 1994.

This material is used by permission of John Wiley & Sons Inc.

Subsidiary Roles in Multinational Firms

Source: Reprinted with permission of Harvard Business School Press. From Bartlett, C.A. and S. Ghoshal, Managing Across Borders: The Transnational Solution, Boston,1989 Copyright © 2001 by the Harvard Business School Publishing Corporation;

all rights reserved.

Key Points (1)

• 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

Key Points (2)

• 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, DPM, Parenting Matrix, International Diversification