Strategic managementStrategic management

Lecture 7 Lecture 7

Corporate strategy and strategic Corporate strategy and strategic portfolioportfolio

LEVELS OF STRATEGYLEVELS OF STRATEGY

Corporate levelCorporate level

• Determine overall scope of the organisationDetermine overall scope of the organisation

• Add value to the different business unitsAdd value to the different business units

• Meet expectations of stakeholders Meet expectations of stakeholders Business level (SBU)Business level (SBU)

• How to compete successfully in particular marketsHow to compete successfully in particular markets OperationalOperational

• How different parts of organisation deliver strategyHow different parts of organisation deliver strategy

Three levels of the strategyThree levels of the strategy

1. 1. level: The corporate levellevel: The corporate levelAt this level the fundamental task is to develop At this level the fundamental task is to develop a balanced portfolio of businesses which will a balanced portfolio of businesses which will achieve the goals of the corporation and satisfy achieve the goals of the corporation and satisfy its stakeholders. its stakeholders.

2. 2. level: The strategic buslevel: The strategic busiiness unit level (SBU)ness unit level (SBU)At this level the business, or set of activities is At this level the business, or set of activities is given and the major task for strategic planner given and the major task for strategic planner at this level is for business to succeed against at this level is for business to succeed against competitors and also satisfy corporate success competitors and also satisfy corporate success criteria.criteria.

3. 3. level: The functional level: level: The functional level: At this level the major task is to provide an At this level the major task is to provide an appropriate functional strategies ( finance and appropriate functional strategies ( finance and accounting, marketing, R+D, production, accounting, marketing, R+D, production, personnel) for SBU or corporate level strategy. personnel) for SBU or corporate level strategy.

Strategic Business Unit (SBU)Strategic Business Unit (SBU)

A A strategic business unitstrategic business unit (SBU) is a (SBU) is a part of an organisation for which there part of an organisation for which there is a distinct external market for goods is a distinct external market for goods or services that is different from or services that is different from another SBUanother SBU

Definition of strategic business unitsDefinition of strategic business units

The The SBUSBUss areare the the natural ‘grouping’ of part of a natural ‘grouping’ of part of a corporation. corporation.

The SBU has a range of related products/services The SBU has a range of related products/services which has similar technologies and production which has similar technologies and production processes. processes.

The products/services are sold in similar or related The products/services are sold in similar or related market segments.market segments.

The production/services are sold against a welThe production/services are sold against a welll--defined set of competitors.defined set of competitors.

An An SBU is managed by an SBU manager, largely as SBU is managed by an SBU manager, largely as an independent unit. an independent unit.

The SBU has its own set of goals and strategies.The SBU has its own set of goals and strategies. Each SBU in a particular organizationEach SBU in a particular organization should be should be

able to operate independently of any other SBU. able to operate independently of any other SBU.

What is the portfolio stratregy?What is the portfolio stratregy?

From viewpoint of strategic management the From viewpoint of strategic management the corporations are collections of different “product-corporations are collections of different “product-market-consumer-resource packages”market-consumer-resource packages”. These . These areare the the SBUSBU’s’s. We can describe th. We can describe the e sum of SBU’ssum of SBU’s, , as as portfolio.portfolio. The portfolio analysis: The portfolio analysis:

CCombines the assessment of business position with market ombines the assessment of business position with market attractiveness evaluation, which emerges from external attractiveness evaluation, which emerges from external analysis in general and market analysianalysis in general and market analysis,s, in particular. in particular.

IIncludes multiple SBU’s in the same analysis and addresses ncludes multiple SBU’s in the same analysis and addresses the SBU investment decision - which organizational units the SBU investment decision - which organizational units should receive resources, which should have resource should receive resources, which should have resource withheld , and which should be resource generators. withheld , and which should be resource generators.

OOffers baseline recommendations concerning the ffers baseline recommendations concerning the investment strategies for each SBU based on an investment strategies for each SBU based on an assessment of business position and market attractiveness. assessment of business position and market attractiveness.

Corporate Portfolio ManagementCorporate Portfolio Management

Portfolio balancePortfolio balance• MarketsMarkets• Organisation’s needsOrganisation’s needs

Attractiveness of business unitsAttractiveness of business units• ProfitabilityProfitability• Growth ratesGrowth rates

Portfolio ‘fit’Portfolio ‘fit’• Synergies between business unitsSynergies between business units• Synergies with corporate parentSynergies with corporate parent

The Growth Share (or BCG) MatrixThe Growth Share (or BCG) Matrix

Strategic implication of the BCG matrixStrategic implication of the BCG matrix

The stThe strraattegies for the overall portfolio products are egies for the overall portfolio products are concerned with the issue of balance, I.e. is the portfolio of concerned with the issue of balance, I.e. is the portfolio of products balanced internally in terms of the following?products balanced internally in terms of the following?

Are there a sufficient number of Are there a sufficient number of „„cash cowscash cows”” to support to support those other products in the portfolio which are at stages those other products in the portfolio which are at stages of their lifecycles when they are require cash?of their lifecycles when they are require cash?

Are there Are there „questions-marks” „questions-marks” which have resonable which have resonable prospects of becoming future stars and which do not , at prospects of becoming future stars and which do not , at present, constitute a disproportionate drain on current present, constitute a disproportionate drain on current cash flow?cash flow?

Are there an appropriate number of Are there an appropriate number of „„starsstars”” which will which will provide sufficient cash generation when the current cash provide sufficient cash generation when the current cash cows are no longer able to fulfill this role?cows are no longer able to fulfill this role?

Are there any Are there any „„dogsdogs”” and if so why? and if so why?

How to do a portfolio analysis?How to do a portfolio analysis?

Construct a summary of the industry and competitive Construct a summary of the industry and competitive environment of each business units.environment of each business units.

Appraising the strength and competitive position of each Appraising the strength and competitive position of each business unit. Understanding how each business unit business unit. Understanding how each business unit ranks against its rivals on the key factors for competitive ranks against its rivals on the key factors for competitive successsuccess. .

IdentifyinIdentifyingg the external opportunities, threats and the external opportunities, threats and strategic issues peculiar to each business units.strategic issues peculiar to each business units.

Determining how much corporate financial support is Determining how much corporate financial support is needed to fund each unit’s businneeded to fund each unit’s busineess strategy and what ss strategy and what corporate skills and resources could be deployed to boots corporate skills and resources could be deployed to boots the competitive strengtthe competitive strengthh of various business units. of various business units.

Comparing the relative attractiveness of the businesses Comparing the relative attractiveness of the businesses in the corporate portfolio. in the corporate portfolio. CComparompare e the businesses on the businesses on various historical and projected performance measures - various historical and projected performance measures - sale growth, profit margin, return on investment, and the sale growth, profit margin, return on investment, and the like.like.

Checking the corporate portfolio to ascertain whether the Checking the corporate portfolio to ascertain whether the mix of businesses is adequately “balanced”mix of businesses is adequately “balanced”

The Industry Life CycleThe Industry Life Cycle The Industry Life CycleThe Industry Life Cycle

Drivers of industry evolution Drivers of industry evolution :: demand growthdemand growth creation and diffusion of knowledgecreation and diffusion of knowledge

Introduction Growth Maturity Decline

Ind

us

try

Sa

les

Time

Assumptions and limitations of BCGAssumptions and limitations of BCG

The use of highs and lows to make just four The use of highs and lows to make just four categories is too simpcategories is too simpllistic.istic.

The link between market share and profitability The link between market share and profitability isn’t necessarily strong. Low-share businesses isn’t necessarily strong. Low-share businesses can be profitable, too (and vican be profitable, too (and vicca versa.)a versa.)

Growth rate only Growth rate only one one aspect of industry aspect of industry attracattracttiveness. High-growth market may not iveness. High-growth market may not always be the best for every business unit or always be the best for every business unit or product line.product line.

It considers the product line or business unit It considers the product line or business unit only relation to one competitor: the market only relation to one competitor: the market leader. It misses small competitors with fast-leader. It misses small competitors with fast-growing market share.growing market share.

Market share is only one aspect of overall Market share is only one aspect of overall competitive position. competitive position.

Indicators of SBU Strength Indicators of SBU Strength and Market Attractivenessand Market Attractiveness

Market Attractiveness/SBU Strength MatrixMarket Attractiveness/SBU Strength Matrix

Strategy Guidelines Based on Directional Policy Strategy Guidelines Based on Directional Policy MatrixMatrix

Corporate Level and International Corporate Level and International Strategy Strategy

Product and geographical diversityProduct and geographical diversity Related and unrelated diversificationRelated and unrelated diversification Attractions of international marketsAttractions of international markets Multidomestic and global strategiesMultidomestic and global strategies Effect of product and geographical Effect of product and geographical

diversity on performancediversity on performance Corporate parentingCorporate parenting Portfolio managementPortfolio management

Corporate Level IssuesCorporate Level Issues

The Multi-Business OrganisationThe Multi-Business Organisation

Exhibit 6.2

Reasons for Diversification (1)Reasons for Diversification (1) Value creationValue creation

• Efficiency gains from applying existing Efficiency gains from applying existing resources/capabilities to new resources/capabilities to new markets/productsmarkets/products

Economies of scopeEconomies of scope Benefits of synergyBenefits of synergy

• Applying corporate managerial capabilities Applying corporate managerial capabilities to new markets/products/servicesto new markets/products/services

Dominant logicDominant logic

• Increased market power from diverse Increased market power from diverse product/service rangeproduct/service range

Cross subsidyCross subsidy Possible monopoly in long-runPossible monopoly in long-run

Reasons for Diversification (2)Reasons for Diversification (2) Less obvious value creationLess obvious value creation

• In response to environmental changeIn response to environmental change To defend existing valueTo defend existing value Or straying too far from dominant logic?Or straying too far from dominant logic?

• To spread risk across range of businessesTo spread risk across range of businesses Investors can diversify more effectively?Investors can diversify more effectively? Important for private businesses Important for private businesses

• In response to expectations of powerful In response to expectations of powerful stakeholdersstakeholders

Pressure from financial analysts to produce Pressure from financial analysts to produce constant growthconstant growth

Reasons for International DiversityReasons for International Diversity

Market-based Market-based Exploit cultural/Exploit cultural/geographic differencesgeographic differences

Globalisation of markets & Globalisation of markets & competitioncompetition

Cash in on differences in Cash in on differences in cultureculture

Following customersFollowing customers Administrative differencesAdministrative differences

Bypass limitations in home Bypass limitations in home marketmarket

Specific geographical/Specific geographical/economic differenceseconomic differences

Utilise strategic capabilitiesUtilise strategic capabilities Economic benefitsEconomic benefits

Broaden market sizeBroaden market size Economies of scaleEconomies of scale

Internationalise value-adding Internationalise value-adding activitiesactivities

Stabilisation of earnings across Stabilisation of earnings across marketsmarkets

Enhance knowledgeEnhance knowledge

Related DiversificationRelated Diversification

Entry Modes (1)Entry Modes (1)Exporting AdvantagesExporting Advantages JV/Alliance AdvantagesJV/Alliance Advantages

No operations in host countryNo operations in host country Shared investment riskShared investment risk

Economies of scaleEconomies of scale Complementary resourcesComplementary resources

Internet access for small firmsInternet access for small firms Possible government conditionPossible government condition

Exporting DisadvantagesExporting Disadvantages JV/Alliance DisadvantagesJV/Alliance Disadvantages

No benefit from location No benefit from location advantages of hostadvantages of host

Difficult to select and agree with Difficult to select and agree with partnerpartner

Limited local knowledgeLimited local knowledge Managing relationshipManaging relationship

Dependence on intermediariesDependence on intermediaries Loss of competitive advantage Loss of competitive advantage through imitationthrough imitation

Exposure to trade barriersExposure to trade barriers Limits integration/coordination Limits integration/coordination of activities across countriesof activities across countries

Transportation costsTransportation costs

Slow response to customersSlow response to customers

Entry Modes (2)Entry Modes (2)Licensing AdvantagesLicensing Advantages FDI AdvantagesFDI Advantages

Contractually agreed incomeContractually agreed income Control of resources/capabilitiesControl of resources/capabilities

Limit financial/economic riskLimit financial/economic risk Integration/coordination of Integration/coordination of activities across countriesactivities across countries

Acquisitions – rapid entryAcquisitions – rapid entry

Greenfield – state of art and Greenfield – state of art and government financegovernment finance

Licensing DisadvantagesLicensing Disadvantages FDI DisadvantagesFDI Disadvantages

Difficult to select and agree Difficult to select and agree with partnerwith partner

Substantial investment – Substantial investment – financial exposurefinancial exposure

Loss of competitive advantage Loss of competitive advantage through imitationthrough imitation

Problems of integration/Problems of integration/coordination of acquisitionscoordination of acquisitions

Limits benefit from location Limits benefit from location advantages of hostadvantages of host

Greenfield – time consuming Greenfield – time consuming and unpredictable costand unpredictable cost

International StrategiesInternational Strategies IssuesIssues

• Global-local Global-local • Centralised/decentralisedCentralised/decentralised

Generic StrategiesGeneric Strategies• Multi-domesticMulti-domestic

Value adding activities located in national marketsValue adding activities located in national markets Products/services adapted to local requirementsProducts/services adapted to local requirements

• GlobalGlobal Standardised productsStandardised products Produced in centralised locationProduced in centralised location

Value-Adding Corporate ParentsValue-Adding Corporate Parents

Envisioning Strategic IntentEnvisioning Strategic Intent Central Services and Central Services and ResourcesResources

FocusFocus

Clarity to external stakeholders Clarity to external stakeholders

Clarity to business unitsClarity to business units

InvestmentInvestment

Scale advantagesScale advantages

Transferable management Transferable management capabilitiescapabilities

Intervention at Business Intervention at Business LevelLevel

ExpertiseExpertise

Monitor performanceMonitor performance

Action to improve performanceAction to improve performance

Challenge/develop strategic Challenge/develop strategic ambitionsambitions

Coaching/trainingCoaching/training

Develop strategic capabilitiesDevelop strategic capabilities

Achieve synergiesAchieve synergies

Provide expertise/servicesProvide expertise/services

Knowledge creation/sharingKnowledge creation/sharing

LeverageLeverage

Brokering linkages/accessing Brokering linkages/accessing external networksexternal networks

Value-Destroying Corporate ParentsValue-Destroying Corporate Parents

BureaucracyBureaucracy• Adds costAdds cost• Hinders responsivenessHinders responsiveness

Buffer from realityBuffer from reality• Financial safety netFinancial safety net

Diversity and sizeDiversity and size• Lack of clarity on overall visionLack of clarity on overall vision

Managerial ambitionManagerial ambition• Empire buildingEmpire building

Corporate RationalesCorporate Rationales

SBUs below potential SBUs below potential (‘parenting (‘parenting opportunity’)opportunity’)Relevant central Relevant central resourcesresourcesSuitable portfolioSuitable portfolio

Share Share resources/skillsresources/skillsIdentify bases for Identify bases for sharingsharingIdentify benefitsIdentify benefits

Acquire assetsAcquire assetsDivest assetsDivest assetsLow strategic Low strategic role in SBUrole in SBU

Strategic Strategic requirementsrequirements

Competences used Competences used to create value in to create value in SBUsSBUs

SynergySynergyAgent for Agent for financial marketsfinancial marketsLimited SBU Limited SBU value creationvalue creation

LogicLogic

ParentalParental developersdevelopers

Synergy Synergy managersmanagers

Portfolio Portfolio managersmanagers

Understand SBUs Understand SBUs (‘feel’)(‘feel’)Effective linkagesEffective linkagesSBUs autonomousSBUs autonomousSBU performance-SBU performance-based incentivesbased incentives

Collaborative SBUsCollaborative SBUsCorporate staff as Corporate staff as integratorsintegratorsOvercome Overcome resistance to resistance to sharingsharingCorporate-based Corporate-based incentivesincentives

Autonomous Autonomous SBUsSBUsSmall, low cost Small, low cost corporate staffcorporate staffSBU SBU performance-performance-based incentivesbased incentives

Organisational Organisational requirementsrequirements

OwnershipMission and strategic intentScope and diversityThe global dimension

Corporate purpose and aspirations

Bases of SBU strategy

Enhancing SBU strategy: corporate parenting

Portfolio managementFinancial strategyThe role of the corporate parentThe parenting matrix

Achieving competitive advantagePrice-based strategiesDifferentiation strategiesFocus strategies

Bases of strategic choice