MGT. 5491 Session # 8 Strategic and Global Management: Corporate Strategies

1. MGT. 5491 Session # 8 Strategic and Global Management: Corporate Strategies

2. Corporate/Enterprise (Parent) Level Strategies

3. The New Reality - #1 Firms must learn to compete differently if they are to achieve strategic competitiveness in the 21st-century competitive landscape. To provide an idea of what this means, new ways of competing may include: • bringing new good and services to market more quickly • The use of new technologies (e.g., Amazon.com) • Diversifying the product line (e.g., Barnes and Nobles into music as a catalyst for growth)

4. The New Reality - #2 • Shifting product emphasis (e.g., U-Haul’s new focus on accessory sales) (i.e., Dual Branding) • Consolidation (e.g., the merger of Exxon and Mobil) • Combining online selling with physical stores (e.g., CompUSA’s new strategy)

5. The New Reality - #3 • Dell Model for Growth • Have New Business Model (maybe changes every 5 years?) • Identify Core Competencies and then improve the four capabilities • Outsource non-core competencies • Create a “Brand Management Company”

6. Those strategies concerned with the broad and long-term questions of what business(es) the organization is in and what it wants to do with those businesses Brief Overview of Corporate Strategy

7. Key Questions of Corporate/Firm-level Strategies 1. What businesses should the corporation/enterprise be in? 2. How should the corporate/G.O. office manage the array of business units (GBU’s/SBU’s/ Wholly owed subsidiaries) Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts

8. 21st Century Organization Strategies for Growth and Profitability Multi-International: One Consumer Products Company (Corporate Level) Demand Side Strategies: Supply Chain Strategies: Global Scope Streamline and obtain A Seamless Supply Chain/ Demand Side (Value Chain) Integration Driving Growth (8) Funding Growth (5) Consumer Promotion 3600 Marketing Use of Technologies to create Cost Savings Superior Knowledge of Customers/Consumers Creating the Best Place To Work (10) IS/SAP/ Consolidated Partnership Coverage of Trade Strong Alliances/ Partnerships with Customers HPWS Move to “Global” And “Local” Regional Business Vision Direction: Guiding Core Values, Philosophies, Principles, Mission, & Others Focus on Product Quality Acquisitions/JV’s Shared Leadership, Coaching & Feedback Lean & Flat Structures Horizontal, Structures, Systems, & Processes: Integration/communication/coordination Innovative New Products/Services Community Involvement Empower People Stimulating Careers Regionalization With Local Control Recognition & Financial Rewards Source: Barry A. Macy, Successful Strategic Change, Berrett-Koehler Publishers, San Francisco, CA (forthcoming)

9. Three directions for corporate strategy Growth M&A , JV, and SA (external growth) International (internal growth) Stability (internal growth) Renewal (internal growth) Retrenchment Turnaround Increase the four capabilities via core competencies Corporate (and International) Strategies

10. How does it fit together? Vision Direction and Strategies: Vision Direction External and Internal Strategies (Corporate & Business) 1st Business Imperatives: Globalization (External Growth) 2nd Year 2009 Success Factors Capabilities: Strategic Alliances (External and/or Internal Growth) Improvement in the four Capabilities via Core Competencies along Value Chain 3rd Future Work Trends Barry A. Macy, Successful Strategic Change, Berrett-Koehler Publishers, San Francisco, CA. (forthcoming)

11. External and Internal Growth Strategy One that involves the attainment of specific growth objectives by increasing the level of an organization’s capabilities Typical growth strategies include goals for: Increase in sales revenues Profits Other balanced scorecard performance measures Organizational Growth: External and/or Internal

12. Types of Growth Strategies International Concentration Organizational Growth • Diversification • Related Businesses • Unrelated Businesses • Vertical Integration • Related Businesses • Unrelated Businesses Horizontal Integration: Along Value Chain

13. Organization concentrates on its primary lines of business and looks for ways to meet its growth objectives through increasing its level of capability in this primary business Concentration

14. Concentration Product(s) Customers

15. Another Possible Way for Growth

16. The “Right” People or the “Right” Organization? A Values-Based View of Strategy Fundamental Values or Beliefs • What are our basic Principles, Philosophies • and Core Values? • What do we believe in? Design Management Practices That Reflect and Embody These Values • What policies and practices are consistent • with these Values and Philosophies? Use These to Build Core Capabilities • What can we do for the customer better • than our competitors? • Given our core capabilities, how can we deliver • value (EVA) to customers in a way our • competitors cannot easily imitate? Invent a Strategy That is Consistent with the Values and Uses the Talents & your four Capabilities to Compete in New and Unusual Ways • Senior management “manages” the values • and culture of the firm. Senior Management’s Role

17. Possible Strategic Focus Trust: Is it Valuable, Rare, Costly to Imitate, and Nonsubstitutable? The following examples are provided as evidence that the trust structures contribute to the above average performance of each firm. • Anderson & Associates practices open-book management, meaning that all financial data are readily accessible on the firm’s Intranet. The company’s CEO claims that this practice contributes to employee loyalty. • Radius, a French restaurant in Boston, relies upon trust to sustain one of its competencies – excellent teamwork. • MTW Corp., a software and Internet applications provider, relies upon “expectation agreements” among the boss , an employee, and his or her work team.

18. Possible Strategic Focus Trust: Is it Valuable, Rare, Costly to Imitate, and Nonsubstitutable? • What is the value of a friend who can be trusted compared to one who cannot be trusted? • Would you be willing to loan your car to the less-than-trustworthy acquaintance if they were going to need it for a few hours? • Would you trust them at all? For firms, trust relationships can easily make the difference between a deal getting done or not, or it can impact the size of the deal that is done. Trust carries a great deal of weight, especially in an environment where it is in short supply. AND Today’s deal that is based on trust can lead to a sustainable edge when future deals are considered. 3-18

19. Possible Strategic Focus Trust: Is it Valuable, Rare, Costly to Imitate, and Nonsubstitutable? Trust and organizational success are closely linked. Trust benefits the organization in that it reduces the overall transaction costs. There are many attributes to trust, the most prominent of which is risk. This risk can be divided into two categories: • Managerial Risk – the general risk of management decisions • Organizational Risk – characteristic of forms with volatile income streams

20. Possible Strategic Focus Trust: Is it Valuable, Rare, Costly to Imitate, and Nonsubstitutable? Davis, Schoorman, Mayer and Tan define trust as “the willingness of a party (trustor) to be vulnerable to the actions of another party (trustee) based on the expectation that the trustee will perform an action important to the trustor, regardless of the trustor’s ability to monitor or control the trustee.” Trust between general manager and employees may be a source of competitive advantage. This trust rests upon the trustor’s perception of the trustees: • ability – skills and competencies by which trustee may influence outcomes • benevolence – degree to which trustor believes trustee acts for the good of the trustor • integrity – belief that the trustee will follow a set of principles that are desired by the trustor 3-17

21. Possible Strategic Focus Trust: Is it Valuable, Rare, Costly to Imitate, and Nonsubstitutable? The Davis, et al. study suggests that these three factors of trust can contribute to competitive advantage of the firm. We can conclude that trust satisfies at least three of the four (and conceivably all four) criteria for sustainable competitive advantage. • Valuable – the study demonstrated that trust increased profitability and reduced turnover. • Rare – this relationship dynamic is uncommon. • Costly to imitate – trust is an intangible social construct that cannot easily be replicated. • Nonsubstitutable – possibility, since trust is difficult to observe 3-17

22. Value Chain Capabilities/ Core Competencies Related Diversification Product Similarities Distribution Channels Similar Technology Customer Use Another Way: Diversification

23. Level Horizontal Anti-trust laws prohibit a lot of these Vertical Suppliers buying buyers (or vice versa) Two Types Related Businesses Unrelated Businesses Diversification

24. Competitive advantage can result from related diversification if opportunities exist to Transfer expertise / capabilities / technology Combine related activities into a single operation and reduce costs Leverage use of firm’s brand name reputation Conduct related value chain activities in a collaborative fashion to create valuable competitive capabilities Related Diversification and Competitive Advantage

25. Involves diversifying into businesses with NO strategic fit NOmeaningful value chain relationship NO unifying strategic theme Approach is to venture into “any business in which we think we can make a profit” Firms pursuing unrelated diversification are often referred to as conglomerates What is Unrelated Diversification?

26. Companies with undervalued assets Capital gains may be realized Companies in financial distress May be purchased at bargain prices and turned around Appeal of Unrelated Diversification Strategy Business risk scattered over different industries Financial resources can be directed to those industries offering the best profit prospects If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced Attractive Merger/Acquisition Targets

27. Difficulties of competently managing many diverse businesses Lack of strategic fits which can be leveraged into competitive advantage Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse) Likely effect is 1 + 1 = 1.5, not 1 + 1 = 3 Promise of greater sales-profit stability over business cycles seldom realized Drawbacks of Unrelated Diversification

28. Dominant-business firms One major core business accounting for 50 – 80 percent of revenues, with several small related or unrelated businesses accounting for remainder Narrowly diversified firms Diversification includes a few (2-5) related or unrelated businesses Combination Related-Unrelated Diversification Strategies

29. Broadly diversified firms Diversification includes a wide ranging collection of either related or unrelated businesses or a mixture Multi-business firms Diversification portfolio includes several unrelated groups or related businesses Combination Related-Unrelated Diversification Strategies (cont.)

30. A company is diversified when it is in two or more lines of business Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed and implemented for several different businesses competing in diverse industry environment Diversification and Corporate Strategy

31. Low Levels of Diversification > 95% of revenues from a single business unit Single business A Dominant business A Between 70% and 95% of revenues from a single business unit B Moderate to High Levels of Diversification A < 70% of revenues from dominant business; all businesses share product, technological and distribution linkages Related constrained B C Related linked (mixed) A < 70% of revenues from dominant business, and only limited links exist B C Very High Levels of Diversification A Unrelated-Diversified Business units not closely related B C Levels and Types of Diversification

32. Some companies do EXCELLENTLY and are not diversified McDonald’s, SWA, Coca-Cola, Domino’s Pizza, Wal-Mart, FedEx, Timex, Gerber Why stay single business Clear understanding of who we are/what we do No Dilution of management’s attention Risks of a single business strategy Putting all the “eggs” in one industry basket Unforeseen changes can undermine a single business firm’s prospects When to Diversify

33. Adding Value by Diversification By developing economies of scope between business units in the firms which leads to synergistic benefits By developing market power which leads to greater returns • ECR (Efficient Consumer Response) • Efficient Assortment • Efficient Product Introduction • Efficient Replenishment • Efficient Promotion • TOTAL ECR SCORE = Sum of 4 above Diversification most effectively adds value by either of three mechanisms:

34. Alternative Diversification Strategies Strong sense of corporate identity Clear corporate mission that emphasizes the importance of integrating business units Incentive system that rewards more than just business unit performance (balanced scorecard) Sharing Activities Assumptions:

35. Sharing Activities (Shared Global Services) Transferring Core Competencies Efficient Internal Capital Market Allocation Restructuring Alternative Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies

36. Alternative Diversification Strategies Sharing Activities often lowers costs or raises differentiation Sharing Activities can lower costs if it: Achieves economies of scale Boosts efficiency of utilization Helps move more rapidly down Learning Curve Sharing Activities Key Characteristics: Example: Using a common physical distribution system and sales force such as Procter & Gamble’s disposable diaper and paper towel divisions Example:General Electric’s costs to advertise, sell and service major appliances are spread over many different products

37. Alternative Diversification Strategies Sharing Activities can enhance potential for or reduce the cost of differentiation Must involve activities that are crucial to competitive advantage Sharing Activities Key Characteristics: Example:Shared order processing system may allow new features customers value or make more advanced remote sensing technology available Example:Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to ship

38. Alternative Diversification Strategies Exploits Interrelationships among divisions Start with Value Chainanalysis Identify ability to transfer skills or expertise among similar value chains Exploit ability to transfer activities Transferring Core Competencies Key Characteristics:

39. Summary Model of the Relationship Between Firm Performance and Diversification Capital Market Intervention and Market for Managerial Talent Resources Firm Performance Incentives Diversification Strategy Managerial Motives Strategy Implementation

40. Dominant Business Related Constrained Unrelated Business Diversification and Firm Performance Performance Level of Diversification

41. How does it fit together? Vision Direction and Strategies: Vision Direction External and Internal Strategies (Corporate & Business) 1st Business Imperatives: Globalization (External Growth) 2nd Year 2009 Success Factors Capabilities: Strategic Alliances (External and/or Internal Growth) Improvement in the four Capabilities via Core Competencies along Value Chain 3rd Future Work Trends Barry A. Macy, Successful Strategic Change, Berrett-Koehler Publishers, San Francisco, CA. (forthcoming)

42. Questions for Strategy to Consider Competitive Dynamics

43. Strategic Actions and Organizational Size - 1 An organization’s size affects the likelihood that it will take competitive actions as well as the types of action it will take and their timing. Small firms are more likely to launch competitive actions and tend to be quicker in doing so. 5-10

44. Strategic Actions and Organizational Size - 2 Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period. Thus, the competitive actions a firm will likely ecounter from larger competitors will be different than the competitive actions it will encounter from smaller firms. 5-10

45. Strategic Actions and Organizational Size - 3 Large organizations often have the slack resources required to launch a larger number of total competitive actions, and thus do. However, smaller firms have the flexibility needed to launch a greater variety of competitive actions. 5-10

46. Factors Leading to More Complex Rivalry Declining emphasis on single, domestic markets and increasing emphasis on global markets Advances in communication technology make coordination easier across multiple markets Advances in technology and innovation have increased competitiveness of small and medium sized firms National barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC)

47. Competitive Dynamics Results from a series of competitive actions and competitive responses among firms competing within a particular industry Competitive Rivalry Exists when two or more firms jockey with one another in the pursuit of better market position

48. A firm’s strategic conduct is dynamic in nature Actions taken by one firm elicit responses from competitors Competitive responses lead to additional actions from the firm that acted originally Competitive Dynamics Actions and responses shape the competitive positions of each firm’s business level strategy

49. Do managers understand the key characteristics of competitors? Awareness Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability

50. Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Does the firm have appropriate incentives to attack or respond? Motivation Capability