lecture week 9

BLB10089-3 Tutor Peter Considine. (Core Text Exploring Corporate Strategy, © Pearson Education Ltd 2008) 1

Lecture Week 9

Corporate Level Strategy


Learning Outcomes: Week 9Be 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


Corporate Level Issues

Exhibit 6.1


The Multi-Business Organisation

Exhibit 6.2


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

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

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


Diversity and Performance

Exhibit 6.4


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

• 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 (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

• Locational 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 Activities

EnvisioningCoaching and

facilitating

Providing centralservices and

resourcesIntervening


Value-Adding Corporate Parents

Envisioning Strategic Intent Central Services and Resources

FocusClarity to external stakeholders Clarity to business units

InvestmentScale advantagesTransferable management capabilities

Intervention at Business Level Expertise

Monitor performanceAction to improve performanceChallenge/develop strategic ambitionsCoaching/trainingDevelop strategic capabilitiesAchieve synergies

Provide expertise/servicesKnowledge creation/sharingLeverageBrokering 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


Exhibit 7.5 Portfolio and Synergy Managers and Parental Developers


Problems Achieving Synergy

Excessive costs

Overcoming self-interest

Illusory synergies


Challenges for Parental Developers

• Identifying parent capabilities

• Parental focus

• The ‘crown jewel’ problem

• Sufficient ‘feel’


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 developersSynergy 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 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

Exhibit 6.8


Public Sector Portfolio Matrix

Exhibit 6.9

Source: J.R. Montanari and J.S. Bracker, Strategic Management Journal, vol. 7, no. 3 (1986), reprinted by permission of John Wiley & Sons Ltd.


Ashridge Portfolio Display

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 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

lecture week 9

Documents