Strategy and Strategic Analysis
GEST-S-468
Pr Manuel Hensmans
Slide 7.2
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 7.2
Strategic Choices
7: Corporate Strategy and
Diversification
Last class
• Identify alternative directions for corporate strategy – market penetration or consolidation
– product development
– market development
– conglomerate diversification
3
This class
• When is diversification effective?
– Relation diversification & performance
• Exercise
– Identify value-creating & value-destroying drivers
– Parenting roles
• Case Virgin
• To integrate or outsource?
• Portfolio management matrices
– BCG matrix
– Ashridge parenting matrix
4
Diversification and performance
Value-destroying diversification
Some drivers for diversification which may involve value destruction (negative synergies):
Responding to market decline
Spreading thin (risk) (may be destructive, but not necessarily)
N.B. Despite these being common justifications for diversifying, finance theory suggests these are misguided.
Managerial ambition
Value-creating diversification drivers
• Exploiting economies of scope – by applying the organisation’s
existing resources or competences to new markets or services
• Stretching corporate management competences
how to develop classic brands + nurture highly creative pple
• Exploiting superior internal processes
superior market/site research (food->non-food->e-retail)
Chinese conglomerates in imperfect labour & capital markets
• Increasing market power (can cross-subsidize)
Author –> Publisher –> Printer –> Distributor –> Bookstore –> Customer
Different parenting roles
• portfolio manager
– active investor in a way that shareholders in the stock market are
either too dispersed or too inexpert to be able to do
Case
• Jack Welch-style
– Differentiate between
» Business units that are winners or losers
» Leaders that are winners or losers
– Winning is everything!
» E-clip
Different parenting roles
• synergy manager
– Is a corporate parent seeking to enhance value for business
units by managing synergies across business units
Case
• Founder works with all designer teams
– Same training across all business units/brands
– Zara, Stradivarius, Bershka, Pull and Bear...
Different parenting roles
• parental developer – seeks to employ its own central capabilities to add value to its
businesses
Case
- offers central technological and branding support
- offers ambitious vision for the future
Problem of parental focus!
What should we not do
The “crown jewel” problem!
parental attachment but added value?
versus
& parenting roles
• Main parenting role?
– Portfolio developer
• low-cost branding impetus for small businesses – the use of experienced start-up managers to increase the chance of success
– public relations and marketing skills
• Focus on institutionalized industries
– “David versus Goliath” branding
– Portfolio manager
• Virgin is a « branded venture capital house »
• Appropriate parenting? Private limited company?
- can invest in long-term objectives (Virgin Airlines)
- & make swift choices (Virgin Cola & Computers)
“Crown jewel” problem?
- Virgin Rail & tremendous, sustained investments with little return
11 |
Instead of diversification…
Vertical integration option
• Vertical integration
– enter activities where the organisation is its own supplier or
customer
• Backward integration
– development into activities concerned with the inputs into the
company’s current business.
• Forward integration
– development into activities concerned with the outputs of a
company’s current business.
Instead of diversification…
Vertical integration option
Outsourcing is…
the process by which activities previously carried out
internally are subcontracted to external suppliers
Another option: outsourcing
To integrate or outsource?
Value chain activity / Business…
a) Building block of distinctive strategic capability?
Yes: integrate
No: outsource
b) Prone to opportunism on the part of subcontractors? •Reduce standards
•Extract higher prices
–When there are few subcontractor alternatives
–When product/service is complex & changing (impossible to specify ex ante)
–When investments are needed in specialized assets
Yes: integrate
No: outsource
Case
• Distinctive strategic ability?
– “Instant fashion”
• E.g. Madonna tour in Spain
– Increase “buyer urgency”
• Few re-stocks
• Customers willing to pay premium price
– Cheap for mum
– Trendy for daughter
16
Vertical integration
• Higher costs
– Logistics operations at northwest tip Spain
– 50% produced at headquarters, most of the rest in Spain
– Single shifts!
• But production flexibility
– Shortest lead times (2 weeks)
» React fast to consumer fads, do not forecast!
» Smaller batches
» More styles, less quantities
17
• But superior coordination
• Informal, fast, flat decision-making
– Founder
» Never gave interview, top models?
» Mostly in women’s design team
» Own office used for visitors
– Power to small teams
» Not full automation!
» But very fast & flexible decision-making
18
Vertical integration
• But bidirectional flexibility (upstream & downstream)
• Designers do not rule!
– are very autonomous
– Yet, only 15% designs go into production
» Those most promising in terms of instant fashion trends
– Versus 60% industry average
» Sent to production
» upstream regardless of downstream changes
19
Vertical integration
20
Price +
Price -
Fashion - Fashion +
+ Horizontal
integration
Key competitors: total sales
21
0
2000
4000
6000
8000
10000
12000
14000
16000
2003 2004 2005 2006 2007 2008
Inditex
GAP
H&M
Benetton
Portfolio Matrices
Growth/Share (BCG) Matrix
Parenting Matrix
22
Models by which managers can determine what businesses in portfolio to
- invest in financially
- divest
HIGH
The BCG Growth-Share Matrix
LOW
An
nu
al
rea
l ra
te o
f m
ark
et
gro
wth
(%
)
Relative market share
Earnings: high stable
Cash flow: high stable
Strategy: milk & invest in ?
Earnings: low, unstable
Cash flow: neutral or negative
Strategy: divest
Earnings: high stable, growing
Cash flow: neutral
Strategy: invest for growth
Earnings: low, unstable, growing
Cash flow: negative
Strategy: analyze to determine
whether business can be grown into a
star, or will degenerate into a dog
HIG
H
?
10
24
2: digital camera
BCG analysis (2003)
1: film sales: US,
Canada, & W. Europe 4: Kodak self-
service kiosk
3: Kodak digital
photo printer
Problems with BCG matrix?
• Winner-take-it-all markets
– Based on technological innovation
• From chemical film to digital – From special-purpose cameras & printers to smartphones & multi-functional
– Large network effects across business units
• Cannot separate one business unit (cash cow or dog) from another (star)
Conclusion: dominant logic at corporate level should change!
• Danger of self-fulfilling prophecy? • Motivation problems of categorization
• Exaggerated milking of cash cows – Become dogs even more quickly
• Projected dogs (e.g. Kodak’s films) may be linked to all business units – Divestment is problematic!
• Internal investment assumption?
– Can get money from capital markets
• Don’t absolutely need to find internal cash cows
25
HEARTLAND
--businesses with
high potential
for adding value
EDGE OF
HEARTLAND
-- businesses for which
value adding potential exists,
yet still a bit low / or negative
risks higher
BALLAST
--typical core
business position:
fit high, but limited
potential to add
more value
VALUE TRAP
--potential for adding value is
seldom realized because of
problems of management fit
ALIEN TERRITORY
--exit: no potential for
value creation
HIGH
LOW
LOW HIGH
12
Fit with business unit
critical success factors
“parent understands”
Fit with business unit parenting opportunities
“parent’s competences & resources can add value”
Parenting Matrix Most dangerous!! Parent thinks it can add value (e.g. marketing),
but actually needs new competences
Fit with
business unit
critical
success
factors
Low
High
27
Speciality
products Tea plantations
Animal feed
Fit with business unit parenting opportunities
High Low
Food
Detergents
Personal
products
Parenting Matrix (1997)
Slide 8.28
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 8.28
Strategic Choices
8: International Strategy
This class: Part II
• Sustaining/building a strategic capability can involve
internationalization
– Internationalization drivers
– Integration – responsiveness grid (industry level)
• 4 alternative MNE set-ups
– To internationalize strategic capabilities
• Central exporter
• International projector
• International coordinator
• Multi-centred MNE
• Home country location advantage
– Branding: country of origin reputation
• Blue ocean strategy
– Porter’s diamond
29
Internationalisation drivers
Comparative
advantage: - Mfct China - Design US
- Dependence Belgian
exports on German export demand
- Maquiladoras in NAFTA
Can both facilitate & inhibit!
Openness depends on industry Least open industries?
agriculture & high-tech
11-31
Integration – Responsiveness Grid
Industry Exercise
Hollywood / Bollywood
Internationalizing strategic capabilities
4 alternative MNE set-ups
Global Strategy
International projector Firm views the world as
single marketplace. Goal is to
create standardized products
Home Replication Strategy
Centralized exporter Firm uses unique location-bound
strategic capability
Multidomestic Strategy
Multi-centred MNE Firm operates as a
collection of relatively
independent subsidiaries
Transnational Strategy
International coordinator Firm combines global scale
efficiencies with
with host location advantages
Low High
Pressures for Local Responsiveness
Pre
ssure
s fo
r G
lobal I
nte
gra
tion
High
Low
Four ways to internationalize strat cap.
Centralized Exporter
• Standardized products manufactured at home embody the firm’s strategic capability – themselves developed on the basis of a favourable home country
environment
– make the exporting firm successful in international markets
• Case examples: motion picture studios
• Limitations
– blindsided by differentiated local rivals
34
Centralized exporter:
Limitations
International Projector
• The international projector MNE seeks international expansion
by projecting its home country success recipes abroad
– Strategic cap. developed in the home country is transferred to subsidiaries
in host countries.
– Champion worldwide consistency and standardization
• World is one market place
• Produce standardized products/services
– strong pressure for cost reductions but weak pressure for local
customization
• Digital cameras, TV’s, portable disc & DVD players...
Four ways to internationalize strat cap.
Four ways to internationalize strat cap
International Coordinator
• International operations are specialized in specific value added
activities and form vertical value chains across borders.
• Firm combines global scale efficiencies with
host location advantages
• Case example:
International coordination of…
- Swiss engineering centre: new products
- Design partners in Ireland: design ideas
- Operating HQ in California: design approval
- Taiwan engineering centre: runs pilots - China plant: high-volume manufacturing
Four ways to internationalize strat cap
Multi-centred MNE
• The multi-centred MNE consists of a set of entrepreneurial
subsidiaries abroad that are primarily nationally responsive
– The common strategic cap. that holds these firms together is minimal:
• Key competences
– common financial governance
– administrative best practices
– some sense of corporate identity
• Case examples: