Exploring Corporate Strategy 7 th Edition Part III

Exploring Corporate Strategy 7 th Edition Part III Strategic Choices Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Exploring Corporate Strategy 7 th Edition Chapter 6 Corporate Level and International Strategy Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

Corporate Level Issues Exhibit 6. 1 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

The Multi-Business Organisation Exhibit 6. 2 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

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

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

Related Diversification Exhibit 6. 3 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

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

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

Diversity and Performance Exhibit 6. 4 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

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

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

Entry Modes: Advantages and Disadvantages Exhibit 6. 5 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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 Difficult to select and agree with of host 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 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

International Value Network • Internationalisation of value network – FDI – JVs – Global sourcing • Locational advantages – Cost advantages – Unique capabilities – Characteristics of national locations Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

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

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

Portfolio managers, synergy managers and parental developers Exhibit 6. 6 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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 performance-based incentives Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Value Adding Fundamentals of Corporate Rationales Exhibit 6. 7 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

The Growth Share (or BCG) Matrix Exhibit 6. 8 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

Indicators of SBU Strength and Market Attractiveness Exhibit 6. 10 a Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Market Attractiveness/SBU Strength Matrix Exhibit 6. 10 b Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Strategy Guidelines Based on Directional Policy Matrix Exhibit 6. 10 c Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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. Exhibit 6. 10 d Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Ashridge Portfolio Display Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley 1994. This material is used by permission Exhibit 6. 11 of John Wiley & Sons Inc. Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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. Exhibit 6. 12 Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

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

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