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Lecture Week 9

Lecture Week 9. Corporate Level Strategy. Learning Outcomes: Week 9. Be Able To Understand why organisations might increase their product and geographic diversity Understand what is meant by related and unrelated diversification

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Lecture Week 9

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  1. Lecture Week 9 Corporate Level Strategy

  2. Learning Outcomes: Week 9 Be 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

  3. Corporate Level Issues Exhibit 6.1

  4. The Multi-Business Organisation Exhibit 6.2

  5. 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

  6. 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

  7. 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

  8. Related Diversification Exhibit 6.3

  9. 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

  10. 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

  11. 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 network

  12. Diversity and Performance Exhibit 6.4

  13. Reasons for International Diversity

  14. 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

  15. Entry Modes (1)

  16. Entry Modes (2)

  17. International Value Network • Internationalisation of value network • FDI • JVs • Global sourcing • Locational advantages • Cost advantages • Unique capabilities • Characteristics of national locations

  18. 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

  19. Value-Adding Activities Envisioning Coaching and facilitating Providing central services and resources Intervening

  20. Value-Adding Corporate Parents

  21. 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

  22. Exhibit 7.5 Portfolio and Synergy Managers and Parental Developers

  23. Problems Achieving Synergy Excessive costs Overcoming self-interest Illusory synergies

  24. Challenges for Parental Developers • Identifying parent capabilities • Parental focus • The ‘crown jewel’ problem • Sufficient ‘feel’

  25. Portfolio managers Synergy managers Parental developers Logic • Agent for financial markets • Limited SBU value creation • Synergy • Competences used to create value in SBUs Strategic requirements • Acquire assets • Divest assets • Low strategic role in SBU • Share resources/skills • Identify bases for sharing • Identify benefits • SBUs below potential (‘parenting opportunity’) • Relevant central resources • Suitable portfolio Organisational requirements • Autonomous SBUs • Small, low cost corporate staff • SBU performance-based incentives • Collaborative SBUs • Corporate staff as integrators • Overcome resistance to sharing • Corporate-based incentives • Understand SBUs (‘feel’) • Effective linkages • SBUs autonomous • SBU performance-based incentives Corporate Rationales

  26. 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

  27. The Growth Share (or BCG) Matrix Exhibit 6.8

  28. Public Sector Portfolio Matrix Source: J.R. Montanari and J.S. Bracker, Strategic Management Journal, vol. 7, no. 3 (1986), reprinted by permission of John Wiley & Sons Ltd. Exhibit 6.9

  29. Ashridge Portfolio Display 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. Exhibit 6.11

  30. 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

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