corporate level strategy lecture slides 2009.10

EM4002 Strategic EM4002 Strategic ManagementManagement

CORPORATE CORPORATE STRATEGYSTRATEGY

Dr Louise KnightDr Louise Knight

Corporate level strategyCorporate level strategylearning objectiveslearning objectives

• Directional strategy:– identify alternative directions for strategy– recognise when diversification is an effective

strategy for growth– distinguish between related and unrelated

diversification and identify conditions under which they work best

• Corporate parenting– analyse the ways in which a corporate parent

can add or destroy value for its portfolio of business units

• Portfolio analysis– describe the principle and purpose of portfolio

analysis

Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

RATE OF RETURNABOVE THE COST

OF CAPITAL

How do we makemoney?

INDUSTRYATTRACTIVENESS

Which industries/marketsshould we be in?

COMPETITIVEADVANTAGE

How should wecompete?

CORPORATESTRATEGY

BUSINESSSTRATEGY

Grant, 2008: 20

portfoliostrategy

directionalstrategy

parentingstrategy

1

2

3

The Multi-Business The Multi-Business OrganisationOrganisation

Exhibit 6.2Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Boundaries of the firmBoundaries of the firm

Rawmaterials

Manufac-turing

Assembly Retail

Rawmaterials

Manufac-turing

Assembly Retail

Rawmaterials

Manufac-turing

Assembly Retail

scenario 1

scenario 2

scenario 3

Source: Cousins, Lamming, Lawson and Squire (2008)Strategic Supply Management. FT Prentice Hall, London. p.28

A A manufacturimanufacturi

ngngcompany’s company’s networknetwork


‘‘downstream’downstream’

‘‘upstream’upstream’

Directional Strategy:Directional Strategy:GROWTHGROWTHSURVIVALSURVIVALSTABILITYSTABILITY

Directional strategyDirectional strategy

• RetrenchmentRetrenchment– TurnaroundTurnaround– Captive companyCaptive company– Sell-out/divestmentSell-out/divestment– Bankruptcy/liquidationBankruptcy/liquidation

• Stability Stability CONSOLIDATIONCONSOLIDATION– Pause/proceed with Pause/proceed with

cautioncaution– No changeNo change– ProfitProfit

• GrowthGrowth– ConcentrationConcentration

• vertical growthvertical growth• horizontal growthhorizontal growth

– DiversificationDiversification• concentric (related)concentric (related)• conglomerate conglomerate

(unrelated)(unrelated)

Hunger and Wheelen, 2007

Ansoff Matrix – options for Ansoff Matrix – options for growthgrowth

image from http://tutor2u.net/business/strategy/ansoff_matrix.htm

Protect and BuildProtect and Build

• Downsizing or withdrawal from activitiesDownsizing or withdrawal from activities• Maintenance of market shareMaintenance of market share

Consolidation - Protect and strengthen position in current markets with current products

Consolidation - Protect and strengthen position in current markets with current products

• Leverage competencesLeverage competences• Desirability of dominant market shareDesirability of dominant market share

Market penetration - Organization gains market shareMarket penetration - Organization gains market share


Product DevelopmentProduct Development

• With existing capabilitiesWith existing capabilities– Follow changing customer needsFollow changing customer needs– Short product life cyclesShort product life cycles– Exploitation of core competence in market analysisExploitation of core competence in market analysis

• With new capabilitiesWith new capabilities– Change of emphasis in customer needsChange of emphasis in customer needs– Change in Critical Success Factors (CSFs)Change in Critical Success Factors (CSFs)

• Associated dilemmasAssociated dilemmas– Expense, risk and potential unprofitabilityExpense, risk and potential unprofitability– Unacceptable consequences of not developing new productsUnacceptable consequences of not developing new products

Deliver modified or new products to existing markets

Deliver modified or new products to existing markets


Market DevelopmentMarket Development

• New market segments with similar CSFsNew market segments with similar CSFs• New uses for existing productsNew uses for existing products• New geographic marketsNew geographic markets• IssuesIssues

– Normally requires some product Normally requires some product development and capability developmentdevelopment and capability development

– Credibility and expectations Credibility and expectations

Offer existing products in new marketsOffer existing products in new markets


DiversificationDiversification

• Related diversificationRelated diversification• Unrelated diversificationUnrelated diversification

A strategy that takes the organization away from both its current markets and products

A strategy that takes the organization away from both its current markets and products


Reasons for Reasons for Diversification (1)Diversification (1)• Value creationValue creation

– Efficiency gains from applying existing Efficiency gains from applying existing resources/capabilities to new resources/capabilities to new markets/productsmarkets/products• Economies of scopeEconomies of scope• Benefits of synergyBenefits of synergy

– Applying corporate managerial capabilities Applying corporate managerial capabilities to new markets/products/servicesto new markets/products/services• Dominant logicDominant logic

– Increased market power from diverse Increased market power from diverse product/service rangeproduct/service range• Cross subsidyCross subsidy• Possible monopoly in long-runPossible monopoly in long-run


Reasons for Reasons for Diversification (2)Diversification (2)• Less obvious value creationLess obvious value creation

– In response to environmental changeIn response to environmental change• To defend existing valueTo defend existing value• Or straying too far from dominant logic?Or straying too far from dominant logic?

– To spread risk across range of businessesTo spread risk across range of businesses• Investors can diversify more effectively?Investors can diversify more effectively?• Important for private businesses Important for private businesses

– In response to expectations of powerful In response to expectations of powerful stakeholdersstakeholders• Pressure from financial analysts to produce Pressure from financial analysts to produce

constant growthconstant growth


Porter’s “essential tests”Porter’s “essential tests”

• the attractiveness the attractiveness testtest

• the cost-of-entry testthe cost-of-entry test• the better-off testthe better-off test

• Porter, 1987 in HBR, Porter, 1987 in HBR, cited in Grant, 2008: cited in Grant, 2008: 400-401400-401

• Procter & Gamble’s Procter & Gamble’s acquisition of acquisition of Gillette:Gillette:– combining global combining global

marketing and distrib marketing and distrib networksnetworks

– Gillette R&D Gillette R&D capabilitiescapabilities

– bargaining power bargaining power with retail giantswith retail giants

• Grant, 2008: 401Grant, 2008: 401

Related DiversificationRelated Diversification

• Vertical integrationVertical integration– Backward integration into input activitiesBackward integration into input activities– Forward integration into output activitiesForward integration into output activities

• Horizontal integrationHorizontal integration– Develop into activities complementary to existing Develop into activities complementary to existing

onesones– Exploit strategic capabilities in new marketsExploit strategic capabilities in new markets

Strategy development beyond current products and markets, but within the capabilities or value network of the organisation

Strategy development beyond current products and markets, but within the capabilities or value network of the organisation


Related Related DiversificatioDiversificatio

nnExhibit 6.3


Problems of Related Problems of Related DiversificationDiversification

• Underestimating new capabilities Underestimating new capabilities requiredrequired

• Overestimating synergiesOverestimating synergies• Time and cost of top manager Time and cost of top manager

attentionattention• Difficulties for business units to Difficulties for business units to

share resources/adapt policiesshare resources/adapt policies


Unrelated DiversificationUnrelated Diversification

– Generally unfavourableGenerally unfavourable• No economies of scopeNo economies of scope• Cost of headquartersCost of headquarters

– Can succeed in some casesCan succeed in some cases• Exploit dominant logicExploit dominant logic• In countries with underdeveloped marketsIn countries with underdeveloped markets

Development of products/services beyond the current capabilities or value networkDevelopment of products/services beyond the current capabilities or value network


Diversity and Diversity and PerformancePerformance


ActivityActivity

• Zodiac: inflatable diversificationsZodiac: inflatable diversifications• from Exploring Corporate Strategyfrom Exploring Corporate Strategy

• What were the bases of the synergies What were the bases of the synergies underlying each of Zodiac’s underlying each of Zodiac’s diversifications?diversifications?

• What are the advantages and potential What are the advantages and potential dangers of such a basis of dangers of such a basis of diversification?diversification?

Corporate ParentingCorporate Parenting• From Henry (2008) Understanding Strategic Management From Henry (2008) Understanding Strategic Management

(pp220-221):(pp220-221):

• ““Corporate parentingCorporate parenting is concerned with is concerned with how a parent company adds value across the how a parent company adds value across the businesses that make up the organization”businesses that make up the organization”

• ““Corporate parentCorporate parent refers to all those levels refers to all those levels of management that are not part of of management that are not part of customer-facing and profit run business customer-facing and profit run business units in multi-businesses companies.”units in multi-businesses companies.”

• ““SynergySynergy occurs when the total output from occurs when the total output from combining businesses is greater than the combining businesses is greater than the (sum of the) output of the businesses (sum of the) output of the businesses operating individually” (2+2=5)operating individually” (2+2=5)

Value-Adding Corporate Value-Adding Corporate ParentsParents

Envisioning Strategic IntentEnvisioning Strategic Intent Central Services and Central Services and ResourcesResources

FocusFocus

Clarity to external stakeholders Clarity to external stakeholders

Clarity to business unitsClarity to business units

InvestmentInvestment

Scale advantagesScale advantages

Transferable management Transferable management capabilitiescapabilities

Intervention at Business Intervention at Business LevelLevel

ExpertiseExpertise

Monitor performanceMonitor performance

Action to improve performanceAction to improve performance

Challenge/develop strategic Challenge/develop strategic ambitionsambitions

Coaching/trainingCoaching/training

Develop strategic capabilitiesDevelop strategic capabilities

Achieve synergiesAchieve synergies

Provide expertise/servicesProvide expertise/services

Knowledge creation/sharingKnowledge creation/sharing

LeverageLeverage

Brokering linkages/accessing Brokering linkages/accessing external networksexternal networks


Value-Destroying Corporate Value-Destroying Corporate ParentsParents

• BureaucracyBureaucracy– Adds costAdds cost– Hinders responsivenessHinders responsiveness

• Buffer from realityBuffer from reality– Financial safety netFinancial safety net

• Diversity and sizeDiversity and size– Lack of clarity on overall visionLack of clarity on overall vision

• Managerial ambitionManagerial ambition– Empire buildingEmpire building


Corporate Rationales (1)Corporate Rationales (1)

•SBUs below potential SBUs below potential (‘parenting opportunity’)(‘parenting opportunity’)•Relevant central Relevant central resourcesresources•Suitable portfolioSuitable portfolio

•Share Share resources/skillsresources/skills•Identify bases for Identify bases for sharingsharing•Identify benefitsIdentify benefits

•Acquire assetsAcquire assets•Divest assetsDivest assets•Low strategic role Low strategic role in SBUin SBU

Strategic Strategic requirementsrequirements

•Competences used to Competences used to create value in SBUscreate value in SBUs

•SynergySynergy•Agent for financial Agent for financial marketsmarkets•Limited SBU value Limited SBU value creationcreation

LogicLogic

Parental developersParental developersSynergy managersSynergy managersPortfolio managersPortfolio 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


Corporate Rationales (2)Corporate Rationales (2)Portfolio manager

• corporate office: small

• main emphasis: downward, investing and intervening

Synergy manager

• corporate office: large

• main emphasis: across, facilitating co-operation

Parental developer

• corporate office: large

• main emphasis: downward, providing parental capabilities

Value Value Adding Adding Activities Activities for for Different Different Types of Types of CorporatCorporate Parente Parent

Exhibit 6.7


Portfolio ManagementPortfolio Management

Corporate Portfolio Corporate Portfolio ManagementManagement

• Portfolio balancePortfolio balance– MarketsMarkets– Organization’s needsOrganization’s needs

• Attractiveness of business unitsAttractiveness of business units– ProfitabilityProfitability– Growth ratesGrowth rates

• Portfolio ‘fit’Portfolio ‘fit’– Synergies between business unitsSynergies between business units– Synergies with corporate parentSynergies with corporate parent


Strategy Guidelines Based Strategy Guidelines Based on Directional Policy Matrixon Directional Policy Matrix

Exhibit 6.10cExploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Indicators of SBU Strength Indicators of SBU Strength and Market Attractivenessand Market Attractiveness

Exhibit 6.10aExploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

The Growth Share (or The Growth Share (or BCG) MatrixBCG) Matrix


Market Attractiveness/SBU Market Attractiveness/SBU Strength MatrixStrength Matrix

Exhibit 6.10bExploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Ashridge Portfolio Ashridge Portfolio DisplayDisplay

Exhibit 6.11

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.


Key PointsKey Points• Corporate parentCorporate parent

– Activities above business unit levelActivities above business unit level

• Corporate strategyCorporate strategy– Decisions on product, market type and geographic scopeDecisions on product, market type and geographic scope– How to add value to business unitsHow to add value to business units

• Product diversityProduct diversity– Related/unrelated diversificationRelated/unrelated diversification

• Parenting rolesParenting roles– Portfolio manager, synergy manager, parental developerPortfolio manager, synergy manager, parental developer

• PortfolioPortfolio– balance, fit, synergy, long-term prospects balance, fit, synergy, long-term prospects – (models BCG, DPM, Parenting Matrix)(models BCG, DPM, Parenting Matrix)


Next weekNext week

corporate level strategy lecture slides 2009.10

Documents