Corporate Strategy PDF

Advanced Strategic Management Sessions 13-14: Corporate Strategy Introduction Strategic Choices Corporate Business Strategy Strategy Methods...

Advanced Strategic Management Sessions 13-14: Corporate Strategy Introduction Strategic Choices Corporate Business Strategy Strategy Methods Strategy How to compete across How to compete in the business lines How to pursue strategies market 2 Corporate Strategy Level of analysis: Corporate Level Focus: SCOPE OF THE ORGANIZATION/ DIVERSIFICATION DEGREE à Diversification drivers à Diversification Direction (Horizontal/vertical) à Value creation in diversified firms à Balancing portfolio 3 Corporate Strategy 4 Corporate Strategy 5  Corporate Strategy Why firms diversify? DIVERSIFICATION DRIVERS 6 Corporate Strategy Why do firms diversify? Main divers for diversification: - OPPORTUNISTIC MOTIVATIONS (es Hybris, Incentives) - FINANCIAL MOTIVATIONS ARE OFTEN INTERRELATED - OPERATIONAL - STRATEGIC 7 Corporate Strategy Why firms diversify? - Financial Capitalize opportunities in related and unrelated markets Investors are typically better-off in diversifying and capitalize other opportunities (i.e. they can rely on Reduce firm volatility firms specialized in this type of activity FINANCIAL RESONS SOLELY ARE NOT ENOUGH 8 Corporate Strategy Why firms diversify? - Operational Exploit scope economies : efficiency gains through applying the organisation’s existing resources or competences to new markets or services. Stretching corporate management capabilities (special case of scope economies exploitation) such as marketing capabilites Improve coordination among business 9 Corporate Strategy Why firms diversify? - Strategic INCREASING MARKET POWER - Cross-subsidizing a price war: Entering new market to eliminate competition in your core market [Repetita iuvant: MICROSOFT – NETSCAPE] - Some requirements: being in the dominant market position in the origin market & being aggressive - Raise rival cost (if vertically integrated) - Mutal forebearence: reduce incentive to fight - If a price war start it might be severe https://www.forbes.com/sites/gordonkelly/2014/02/10/how-google-used-motorola-to- smack-down-samsung-twice/?sh=11e0251621fa 10  Corporate Strategy Strategy directions: ANSOFF MATRIX PRODUCT Firm basically has a choice among: Existing New 1) Exploiting current market with existing products 2) Expand into new markets with existing products Existing Market Penetration Product & Services Development 3) Developing new product/services for existing markets MARKET 4) Moving into prodcuts and services with no relationships with existing businesses Unrelated New Market Development Not the same for all the firms Diversification It’s often a path (i.e when market penetration has limits -> diversify) 11  Corporate Strategy Strategy directions: ANSOFF MATRIX Market penetration →Increasing share of current PRODUCT markets with the current product range. Existing New This strategy builds on: Established strategic capabilities Does not require the organization to venture Existing Market Penetration Product & Services into uncharted territory Development Greater market share implies increased power MARKET vis-à-vis buyers and suppliers (in terms of Porter’s five forces) Unrelated Greater economies of scale and experience New Market Development Diversification curve benefits. Often requires the definition alternative/complementary business models (es. Il Post) 12  Corporate Strategy Strategy directions: ANSOFF MATRIX PRODUCT Limits: Existing New Retaliation from competitors. → ↑exacerbate industry rivalry → price wars or expensive marketing battles. In particular in mature markets gains in volume will be much more at Existing Product & Services the expense of other players. Market Penetration Development As competiton increase the capabilites MARKET needed might be different Legal constraints → excessive market power. Unrelated New Market Development Diversification 13  Corporate Strategy Strategy directions: ANSOFF MATRIX PRODUCT Product development → Firms deliver modified or new products (or services) to existing markets. Existing New Existing Market Penetration Product & Services Development MARKET APPLE CASE-> different technological solutions Unrelated but: market segment and distribution channels New Market Development are the same, similar production processes Diversification !=APPLE PATH over time its an interesting story of diversification (and divestment) 14  Corporate Strategy Strategy directions: ANSOFF MATRIX PRODUCT Limits: the strategy can be risky for two reasons: Existing New New resources and capabilities: mastering new processes or technologies that are unfamiliar to the organization. Success (willingness to acquire new Existing Market Penetration Product & Services technological and marketing capabilities)→ Development heavy investments and high risk of project MARKET failures. Project management risk: Even within fairly familiar domains, product development projects Unrelated New Market Development are typically subject to the risk of delays and Diversification increased costs due to project complexity and changing project specifications over time. 15  Corporate Strategy Strategy directions: ANSOFF MATRIX PRODUCT Market development involves offering existing products to new markets. It might entail: Existing New new users (e.g. extending the use of aluminium to the automobile industry) new geographies (e.g. extending the market Existing Market Penetration Product & Services Development to new areas – international markets being the most important). MARKET Unrelated NEXT WEEK MORE DETAILED DISCUSSION! New Market Development Diversification 16  Corporate Strategy Strategy directions: ANSOFF MATRIX PRODUCT Unrelated diversification takes the firm beyond both its existing markets and its existing products. Existing New no obvious ways in which the businesses are better off for being together clear cost in the managers at Existing Market Penetration Product & Services headquarters who control them. Development conglomerate companies’ share prices MARKET often suffer from what is called the ‘conglomerate discount’ Unrelated New Market Development Diversification 17 Corporate Strategy Diversification and performance This is the conventional wisdom about diversification. Not 100% convincing: _WEAK ISTITUTIONAL CONTEXTS (e.g TATA) _SUPERIOR DYNAMIC CAPABILITES TO MANAGE CONGLOMERATE BUSINESSES 18 Corporate Strategy Vertical Integration Vertical integration describes entering activities where the organisation is its own supplier or customer. 19 Corporate Strategy Vertical Integration Backward integration refers to development into activities concerned with the inputs into the company’s current business. Forward integration refers to development into activities concerned with the outputs of a company’s current business. 20  Corporate Strategy Vertical Integration Coordination Deploying capabilites Managing different Control business Lower cost Lock-in risk Potential barriers to entry Insulation risk Strategic independence Lack of flexibility 21 Corporate Strategy Vertical Integration Key point here is: Which activites of the value chain should be integrated? Which activites should be outsourced? HOW DO YOU DECIDE IT? 22 Corporate Strategy Vertical Integration Relative strategic capabilities Does the subcontractor have the potential to do the work significantly better? Risk of opportunism Is the subcontractor likely to take advantage of the relationship over time? Opportunistic There are few alternatives to the subcontractor →hard to shop around; behavior (i.E. Reducing Product or service is complex and changing→ impossible to specify fully quality or in a legally binding contract; increasing price over time) is Investments have been made in specific assets→ which the higher when subcontractor knows will have little value if they withhold their product or service. 23 Corporate Strategy Vertical Integration Relative strategic capabilities Does the subcontractor have the potential to do the work significantly better? Risk of opportunism Is the subcontractor likely to take advantage of the relationship over time? Strategic importance of the activity Is the activity strategic for the firm? (i.e its role to competitive advantage) Availability Sometimes firms have no choice (es. early stage of the industry /antitrust) 24  Corporate Strategy Corporate Parent advantage Envisioning > provide a clear overall vision or strategic intent for its business units Management costs Facilitating synergies Bureaucratic complexity Coaching Providing central services and resources> Obscuring financial performance investments, hr services, treasury Intervene within its business units in order to ensure appropriate performance. 25  Corporate Strategy Corporate Parent advantage Portfolio manager Synergy manager Parental manager Its role is to identify and acquire to enhance value for business The parental developer seeks under-valued assets or units by managing synergies to employ its own central businesses and improve them. across business units. capabilities to add value to its businesses. Risk: Risk: Excessive costs Overestimating the value of SBUs self-interest. parent capabilites Illusory synergies 26 Corporate Strategy Corporate Parent advantage Large diversified firms owns portfolios of SBUs. Such SBUs are heterogamous in term of: - Life cycle - Market share - Market attractiveness How they allocate efforts/investments towards such SBUs? Rationales: - Create a balanced portfolio (BCG MATRIX) - Retain attractive SBUs (GE McKinsey MATRIX) - Retain SBUs which fit with the parent (Parenting Matrix) 27 Corporate Strategy Balancing SBUs portolio 28 Corporate Strategy Balancing SBUs portolio – the BCG Matrix Star has a high market share in a growing market. HIGH INVESTMENTS, TYPICALLY REPAID BY MARKET SHARE LOW PROFIT Question mark is a SBU that is in a growing market, but low market share. HIGH INVESTMENTS, NEGATIVE PROFITS. à RISKY BUT NEEDED. Hint: Diversify to develop several over time A cash cow is a bu that has a high market share in a mature market. LOW INVESTMETNS, take the profit to sustains question mark and stars [Risk of declining] Dogs - Divest or closure 29 Corporate Strategy Balancing SBUs portolio – the BCG Matrix Definitional vagueness -> hard to decide what high and low growth or share mean in particular situations. Capital market assumptions -> it assumes that parent is better-off than capital markets to raise money and sustain the growth. Assumption about industry-lifecycle -> neglect that mature industries might growth again Self-fulfilling prophecy -> Cash cows will become dogs even more quickly than the model expects if they are simply milked and denied adequate investment. Synergies? Es. the notion that a dog can be simply sold or closed down also assumes that there are no ties to other business units in the portfolio, whose performance might depend in part on keeping the dog alive. 30 Corporate Strategy Balancing SBUs portolio – GE – McKinsey Matrix It positions business units according to: how attractive the relevant market is in which they are operating (es. PESTEL + FIVE FORCES) the competitive strength of the SBU in that market defined by competitor analysis / how large the market is for a given SBUs/market share 31 Corporate Strategy Balancing SBUs portolio – GE – McKinsey Matrix 1. Divest: SBU’s running in losses with uncertain cash flows. 2. Phased withdrawal: SBU’s with weak competitive position in a low growth market with very little chance of generating cash flows. They should be phased out gradually. 3. Double or quit: Gamble on potential major SBU’s for the future. Either invests more to use the prospects presented by the market or else better to quit the business. 4.Custodial: SBU’s are just like a cash cow, 5. Try harder: SBU’s could be vulnerable over a longer period of time, but fine for now. They need additional resources to improve 6.Cash Generator: Even more like a cash cow, milk here for expansion elsewhere 7.Growth: Grow the market by focusing just enough resources here. These SBU’s need funds to support product innovations, R&D activities. 8.Market Leadership: Major resources are focused upon the SBU. It must receive top priority. 32 Corporate Strategy Balancing SBUs portolio – Parenting matrix There are two key dimensions of fit in the parenting matrix Feel → measure of the fit between each business unit’s critical success factors and the capabilities (in terms of competences and resources) of the corporate parent. Benefit’. → fit between the parenting opportunities, or needs, of business units and the capabilities of the parent. 33