strategy and strategic analysis...

Strategy and Strategic Analysis

GEST-S-468

Pr Manuel Hensmans

Schedule Remaining Classes

• Class 7: Corporate strategy (08/11)

• Class 8: International Strategy (18/11)

• Class 9: Innovation I (25/11)

• Class 10: Innovation II (29/11)

• Class 11: Methods / Strategy dvpt Processes (02/12)

• Class 12: Q&A exam (06/12)

2

Slide 7.3

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Slide 7.3

Strategic Choices

7: Corporate Strategy and

Diversification

This Class: Corporate Strategy

• Different types of corporate diversification – market penetration – product development – market development – conglomerate diversification

• Relation diversification & performance – value-creating drivers – value-destroying drivers – Western versus Emerging Market firms

• Different parenting roles

• Integrate or outsource

• Parenting matrix strategies – How can a parent make investment/divestment decisions?

4

Corporate Strategy is...

• Logic for owning more than one business

– Where to compete

• Product & market choices

– Corporate parenting capability

Responsibility of corporate parent

The corporate parent refers to the levels of management above that of the business units, and

therefore without direct interaction with buyers and competitors.

6

Corporate Diversification

• Diversification – increase the range of products or markets served by an organisation

• Related diversification – diversify into products or services with relationships to the existing

business.

• Unrelated diversification – diversify into products or services with no relationships to the existing

businesses.

Case

8 |

• Madonna competes in multiple markets • recorded music, concerts, videos, movies, book publishing, mgmt

– What kind of diversification? • Related

– Corporate value creation?

• Madonna’s overarching capabilities in “popular entertainment”

• Spotting emerging trends + gathering team

– Synergies between multiple businesses?

• Superstar status synergies!

– Madonna has highly consistent image across multiple media

» >< Elvis (wild rocker versus clean-cut all-American movie star)

– Superstar!

» Higher status than competitors in individual markets

Diversification types (Ansoff Matrix)

9

Did you read case on Virgin?

What is Market Penetration?

Market penetration refers to a strategy by which an organisation takes increased share of its existing

markets with its existing product range.

Virgin case?

11

Constraints of Market Penetration

Retaliation from

competitors

Legal constraints

12

Cola Wars

Mutually-targeted TV ads and marketing campaigns

since 1980s Winner?

Google vs EC (monopoly + privacy concerns)

What is Product Development?

Product development refers to a strategy by which an organisation delivers modified or new products

to existing markets

EasyJet, EasyCar,

easyHotel, EasyMoney...

What is Market Development?

Market development refers to a strategy by which an organisation offers existing products

to new markets.

14

Virgin case?

Conglomerate diversification?

Conglomerate diversification takes the organisation beyond both its existing markets and its existing products and radically increases the organisation’s scope

Virgin case?

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-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

Cautionary tale banking industry

Diversification does not decrease

systemic risk!

Synergetic drivers of diversification

• Exploiting economies of scope – by applying the

organisation’s existing resources or competences to new markets or services

• Stretching corporate management competences

• coaching & facilitating

• Increasing market power (can cross-subsidize)

From books to multi-media hardware to content & software to apparel…

18

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

• What type of companies apply this parenting style?

Mostly private equity companies!

But also

• Jack Welch-style

– Ruthlessly prune businesses that are not winners

» GE shareholders first!

» From 411,000 employees (1980) to 299,000 (1985)

– Winning is everything

» E-clip

Portfolio managers Some of the richest investors in the world

• Richest person in the world (2009)?

– Warren Buffet

• Investor company? – Berkshire Hathaway

• Parenting strategy? – Avoid businesses with unclear profit margins and returns on capital

• No matter how exciting products may be

– Invest in sure bets

• in terms of shareholder return

– Delegate as much as possible of the managerial grunt work

• To business managers

20 |

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

• What capabilities? – use of experienced start-up managers

– public relations and marketing skills

– “David versus Goliath” branding

• What industries? – “We move into areas where the customer has traditionally

received a poor deal, and where the competition is complacent.”

as parental developer

• Anti-establishment face of “acceptable capitalism” – Only hire friendly & fun people

– Never let a business go bust >< Jack Welch style

– Provide customers with transparency & “value for money”

against

• BA known in 1980s as…

“Bloody Awful”

• One BA handbook rule for flight attendants

“As you walk down the aisle, do not catch the eye of a passenger, otherwise they will just ask you for something”

– 23 |

Problem of parental attachment parent capabilities, wrong industry

• What business should Virgin not be in? • Virgin Cola

• Virgin Active (health clubs)

• Virgin Money

Against Coke & Pespi!

We take all competition seriously!

What key business is in trouble? Yet parental attachment…

• Accounts for more than half of Group revenues!

• Tip: embattled both by – Larger transatlantic players

– Domestic discounters

25 |

Parenting role and type of diversification

Unrelated (conglomerate) or related diversfication?

– Portfolio manager?

• Unrelated

– Synergy manager?

• Related

– Parental developer?

• Unrelated

26 |

Diversification and performance

True for both Western & Emerging Market firms?

Typical structure Western diversified business (M-form)

• Conglomerate discount! Proof of related or strong corporate capability

• Wholly owned subsidiaries

• No choice but to use/undergo corporate services

• Winners tend to get more attention

Typical structure Emerging Markets diversified business

• Related & unrelated businesses; minimum oversight corporate parent

• All individual businesses are separate companies (legal entities)

• Parent controlling stake; provides trusted brand & non-operational cap.

• Businesses can choose to use or not; brand and political clout Tata most used

• Live and let live in“ Large house : “Haveli”

• Some common property shared by all; some private property

• Strong help weak

Another option: outsourcing

Outsourcing is…

the process by which activities previously carried out internally are subcontracted to external suppliers

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

• Distinctive strategic capability? – “Instant fashion”

• From 1 year to 22 days lead design time

– E.g. Madonna tour in Spain

– Increase “buyer urgency”

• Only 50% in stores at start of a season

– >< 80 % rivals

• Few re-stocks

• Customers willing to pay premium price

– Cheap for mum

– Trendy for daughter

32

33

Price +

Price -

Fashion - Fashion +

Pros & cns Vertical Int.

• >50% vertical integration: 20 % more expensive

– Higher costs!

» Logistics operations at northwest tip Spain

» Portugal & Morocco are nearby

• Production flexibility: 17-20% profit vs 8-13% competition

– Shortest lead times (2 weeks)

» React fast to consumer fads, do not forecast!

» Smaller batches / more styles, less quantities

• “Little advertising”: 0.3% total costs vs H&M’s 3%

– But best locations in top cities

34

supported by unusual management style

• “Management as unusual”

• Informal, fast, flat decision-making

– Very down-to-earth, humble founder

» Never gave interview, top models?

» Own office used for visitors

– Power to small teams

» Not full automation!

» But very fast & flexible decision-making

– No-one rules (not even designers)

» Designers very autonomous

» Yet, only 15% designs go into production

» Versus 60% industry average

35

36

Price +

Price -

Fashion - Fashion +

+ Horizontal

integration

Vertical and horizontal integration

Key competitors: total sales

38

0

2000

4000

6000

8000

10000

12000

14000

16000

2003 2004 2005 2006 2007 2008

Inditex

GAP

H&M

Benetton

Portfolio matrix strategy

Growth/Share (BCG) Matrix

Parenting Matrix

39

Models by which managers can determine what businesses in portfolio to

- invest in

- or divest

LOW

The BCG Growth-Share Matrix

HIGH

An

nu

al

real

rate

of

mark

et

gro

wth

(%

)

Relative market share

Earnings: high stable

Cash flow: high stable

Strategy: milk & invest Iittle ?

Earnings: low, unstable

Cash flow: drain on resources

Strategy: divest

Earnings: high stable, growing

Cash flow: neutral

Strategy: invest for growth

Earnings: low, unstable, growing

Cash flow: negative

Strategy: can business be grown into a

star, or will become a dog?

HIG

H

?

10

41

2: digital camera

New CEO (2003)

1: film sales: US, Canada, & W. Europe

4: Kodak self- service kiosk

3: Kodak digital photo printer

Star to become

cash cow?

Question Mark to

New Star?

42

Result in 2012?

Patent litigation

Problems with BCG matrix

• Core capability becomes core rigidity across business units – From chemical film to digital

• Cannot separate one business unit (cash cow or dog) from another (star)

• Danger of self-fulfilling prophecy? – Motivation problems for cash cows…

• Exaggerated milking

– Become dogs even quicker

• Internal investment assumption? – Can get money from capital markets

• Don’t absolutely need to find internal cash cows

43

HEARTLAND

High potential

for adding value EDGE OF

HEARTLAND Value adding potential

needs to be specified

,

BALLAST

Typical old crown

jewel business:

Business better off

stand-alone

VALUE TRAP

Posesses some parental

competences and resources,

but not crucial ones!

ALIEN TERRITORY

Exit: only potential to

destroy value

LOW

HIGH

LOW HIGH

12

Potential value

destruction through

misfit business unit

critical success factors

and parental

capabilities

Potential for parent to add value to business

Parenting Matrix: parenting added value!

Potential value destruction

High

Low

45

Premium fragrances

Tea plantations

Animal feed

Ice Cream

Food

Home & Personal care products

Parenting Matrix

Frozen food

Low

Potential parental added value Scaling up mass-marketing & mass-distribution platforms

High

Parent adds R&D, but mass

vs premium marketing & distribution

BALLAST

ALIEN

VALUE TRAP