lect11 12 corporate strategy
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corporate strategyTRANSCRIPT
Lecture 11,12Corporate Strategy
Professor David Faulkner
PORTER DEFINES CORPORATE STRATEGYAS DECIDING :-
* Which businesses to be in &
* How to run them
The Fundamental Questions inCorporate StrategyHow is economic value created through
multi-market activity?
Why should these activities be undertaken inside the corporation rather than through contracts, joint ventures or other institutional arrangements?
How must the corporation be structured and coordinated to realise the benefits of its multi-market activity
PORTER IDENTIFIES (1987) FOUR CONCEPTS CENTRAL TO CORPORATE STRATEGY
1. Portfolio management
2. Restructuring
3. Transferring skills
4. Sharing activities
Proposition: the large, multi-business corporation is (too often) a value destroyer
Why?
• diversification often takes place for the wrong reasons
• the real synergies are hard to define ex ante
• companies are ineffective in organising to achieve their stated strategic intent
• the problem lies within the corporate centre
Porter stresses that in a successful corporate strategy
THE CENTRE MUST ADD VALUE
Otherwise business units are better off left alone
THERE ARE FOUR BASIC FUNCTIONS OF THE CENTRE IN CORPORATE STRATEGY
SELECTING
PROMOTING
RESOURCING CONTROLLING
PROMOTING -Relations with the city
- Corporate advertising
- Public relations events
- Press relations
- Government relations
- Internal image building
- Mission statements
A BAD MISSION STATEMENT
“We aim to be excellent in all we do, for our customers, employees, shareholders and the community.
We aim to provide a first class service, to improve profitability, to be an excellent employers, and to play an active part in the community.”
MISSION STATEMENT OFAECI - CYANIDE DIVISION (A good one)
We are in the business of manufacturing and distributing cyanide. We believe strongly that safety is paramount in production, storage and handling of the product as well as in security and protecting the environment’ We also believe in the strategic importance of cyanide to the country.
Our primary market is supplying the Southern African gold industrywith an effective means of gold extraction. Secondary and potential markets are in cyanide derived chemicals
These markets will be reached by direct selling backed by technical expertise and service.
We seek to earn sufficient return on investment to encourage the corporation to reinvest in the business.
SELECTING - Portfolio management
- Risk cube
- MBA matrix
- Vertical & horizontal integration
- Scoping:
- Transaction cost analysis
- International scope
Question MarkStar
Cash Cow Dog
0%
THE BOSTON BOX
100%
10%
10X 1X 0.1x
Present position
Position project in 5yrs time
Relative Market Share.
(relative to market leader or nearest competitor).
$
$
X
X
?
?
Marketgrowthrate
Relative market share
The ideal sequence
Catastrophicconsequences
Investment
and
Growth
Selective Growth
Selective
Growth
Harvet/
Divest
Harvet/
Divest
Harvet/
Divest
High Industry attractiveness Low
High selectivity
BusinessStrength selectivity
Low selectivitiy
McKinsey
Time
Sales
Embryonic Growth Mature Ageing
Parenting-Fit Matrix (Goold, Campbell & Alexander 1991)
Heartland
Edge of Heartland
Alien Territory
Value Trap
Ballast
Low HighFit between parenting opportunities & parenting characteristics
Misfit betweencritical successfactors andparentingcharacteristics
High
Low
RESOURCING:- Internal development
- Merger and acquisition
- Cooperation/Joint development
Targets and Bidders: Who win in M&A?
Winners (in most cases)
• The CEO and TMT of the bidder (they get rich)• The shareholders of the target (they get rich)
Losers• The CEO and TMT of the target (they get fired)• the shareholders of the bidder (they face a decline in EPS)
Porter’s (1987) research suggested that approximately
• 70% of acquisitions made in unfamiliar industry sectors fail
• 60% fail even in familiar sectors
• 50% of strategic alliances fail
• 40% of new internal developments fail
Doing anything new is risky!
All Acquisitions % made by 1980 Acquisitions in % made by 1980
in new industries then divested entirely new fields then divested
Average/Co. 61.2 53.4% 20 60.0%
P&G 14 17 11 17
UTC 28 25 10 20
Exxon 19 62 5 80
GE 51 65 14 100
Xerox 33 71 9 100
Acquisition Success Rates
Source:33 Large US companies 1950-86: Porter, HBR, 1987
COOPERATIVE STRATEGY
LEARNING SKILL SUBSTITUTIONALLIANCES COOPERATIONS
* Joint ventures * Virtual corporations* Collaborations * Distributor agreements* Consortia * Networks
* Keiretsu
Coop Strategies fall into Two Distinct Types
ALLIANCEINVEST
& MAKE
MAKE
ALLIANCE ALLIANCE
MAKE
BUY BUY BUY
Low Med High
High
Med
Low
COMPETENCE COMPARED WITH THE BEST IN THE INDUSTRY
STR
AT
EG
IC I
MP
OR
TA
NC
E O
F A
CT
IVIT
Y
CONTROLLING : - Organisation structure
- Style
- Synergy achievement
- Systems
Lecture 12
Organisation Structures
OPERATING CORE
TECHSUPPORT
ADMINSUPPORT
MIDDLE LEVEL
STRATEGIC APEX
A MINTZBERG ORGANOGRAM
FIVE BASIC TYPES OF ORGANISATION:-
1. The Entrepreneurial Form
2. The Machine Bureaucracy
3. The Multi-divisional Form
4. The Professional Organisation
5. The Adhocracy
STYLE AND STRUCTURE
Goold and Campbell (1987) tried to find the best way to run a diversified Corporation. They researched 16 large UK companies.
They concluded that they fell into three groups:-
1. BOC, BP, CADBURY, LEX, STC AND UB (SP)
2. COURTAULDS, ICI, IMPS, PLESSEY, VICKERS (SC)
3. BTR, FERRANTI, GEC, HANSON & TARMAC (FC)
Corporate
SP
SCPlanninginfluence FC
Largely SBU Flexible strategy tight strategy tight financial Control influence
NATURE OF BUSINESS RESOURCES IN ORG-shape of portfolio - financial situation- size & payback of - personality of CEO investments - senior management- stability of competitive skills environment
STYLE
- Strategic planning - Strategic control - Financial control
Opportunities for Synergy
% of total potentiallycosts importantor assets
Potentially important
Low Unimportant
Low High sensitivity to scale, learning or utilisation in value activity
HighStrategic relationship
IN ADDITION SOME CORPORATE CENTRES ADD VALUE THROUGH THEIR OWN ACTIONS EG
* Unique corporate values
* External actions
* Astute m&a identification and negotiation
* Charisma eg unusual CEO
Campbell identifies four ways in which a corporate centre or parent can create (or destroy) value
1.Stand alone influence eg strategy development, resource allocation
2. Linkage influence eg developing synergies between business units
3. Central services provision eg IT
4. Corporate development activities eg alliances, acquisitions
He warns that his research indicates that the probability of value destruction by a parent is greater than that of value creation
To create value therefore a parent must :-
1. Build on insights on how to create value
2.Understand what is the company’s ‘heartland’
3. Identify parenting opportunities
4. Assess accurately how to grasp those opportunities
Only then will the parent avoid destroying value
What kind ofdiversification
(related, unrelated,or mixture)?
Evidence of efforts tobuild diversificationaround some strategic theme, with unifying well-defined mission
Efforts to createcorporate-levelcompetitive advantage
Criteria and prioritiesfor allocatinginvestment capital tobusiness units
Corporate-levelstrategic objectivesand financialperformance targets
Key corporate-levelfunctional area support strategies (esp. finance, R&D, & HR)
Use of any distinctiveapproaches tomanaging key business units
Any corporate-levelor corporate-widedistinctive competence
Use of acquisitionto build thecorporate portfolio
Actions to divestweak or unattractivebusiness units
How much diversification?
CorporateStrategy
Assessing CorporateStrategy