Strategy and Strategic Analysis

GEST-S-468

Pr Manuel Hensmans

Slide 7.2

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Slide 7.2

Strategic Choices

7: Corporate Strategy and

Diversification

Last class

• Identify alternative directions for corporate strategy – market penetration or consolidation

– product development

– market development

– conglomerate diversification

3

This class

• When is diversification effective?

– Relation diversification & performance

• Exercise

– Identify value-creating & value-destroying drivers

– Parenting roles

• Case Virgin

• To integrate or outsource?

• Portfolio management matrices

– BCG matrix

– Ashridge parenting matrix

4

Diversification and performance

Value-destroying diversification

Some drivers for diversification which may involve value destruction (negative synergies):

Responding to market decline

Spreading thin (risk) (may be destructive, but not necessarily)

N.B. Despite these being common justifications for diversifying, finance theory suggests these are misguided.

Managerial ambition

Value-creating diversification drivers

• Exploiting economies of scope – by applying the organisation’s

existing resources or competences to new markets or services

• Stretching corporate management competences

how to develop classic brands + nurture highly creative pple

• Exploiting superior internal processes

superior market/site research (food->non-food->e-retail)

Chinese conglomerates in imperfect labour & capital markets

• Increasing market power (can cross-subsidize)

Author –> Publisher –> Printer –> Distributor –> Bookstore –> Customer

Different parenting roles

• portfolio manager

– active investor in a way that shareholders in the stock market are

either too dispersed or too inexpert to be able to do

Case

• Jack Welch-style

– Differentiate between

» Business units that are winners or losers

» Leaders that are winners or losers

– Winning is everything!

» E-clip

Different parenting roles

• synergy manager

– Is a corporate parent seeking to enhance value for business

units by managing synergies across business units

Case

• Founder works with all designer teams

– Same training across all business units/brands

– Zara, Stradivarius, Bershka, Pull and Bear...

Different parenting roles

• parental developer – seeks to employ its own central capabilities to add value to its

businesses

Case

- offers central technological and branding support

- offers ambitious vision for the future

Problem of parental focus!

What should we not do

The “crown jewel” problem!

parental attachment but added value?

versus

& parenting roles

• Main parenting role?

– Portfolio developer

• low-cost branding impetus for small businesses – the use of experienced start-up managers to increase the chance of success

– public relations and marketing skills

• Focus on institutionalized industries

– “David versus Goliath” branding

– Portfolio manager

• Virgin is a « branded venture capital house »

• Appropriate parenting? Private limited company?

- can invest in long-term objectives (Virgin Airlines)

- & make swift choices (Virgin Cola & Computers)

“Crown jewel” problem?

- Virgin Rail & tremendous, sustained investments with little return

11 |

Instead of diversification…

Vertical integration option

• Vertical integration

– enter activities where the organisation is its own supplier or

customer

• Backward integration

– development into activities concerned with the inputs into the

company’s current business.

• Forward integration

– development into activities concerned with the outputs of a

company’s current business.

Instead of diversification…

Vertical integration option

Outsourcing is…

the process by which activities previously carried out

internally are subcontracted to external suppliers

Another option: outsourcing

To integrate or outsource?

Value chain activity / Business…

a) Building block of distinctive strategic capability?

Yes: integrate

No: outsource

b) Prone to opportunism on the part of subcontractors? •Reduce standards

•Extract higher prices

–When there are few subcontractor alternatives

–When product/service is complex & changing (impossible to specify ex ante)

–When investments are needed in specialized assets

Yes: integrate

No: outsource

Case

• Distinctive strategic ability?

– “Instant fashion”

• E.g. Madonna tour in Spain

– Increase “buyer urgency”

• Few re-stocks

• Customers willing to pay premium price

– Cheap for mum

– Trendy for daughter

16

Vertical integration

• Higher costs

– Logistics operations at northwest tip Spain

– 50% produced at headquarters, most of the rest in Spain

– Single shifts!

• But production flexibility

– Shortest lead times (2 weeks)

» React fast to consumer fads, do not forecast!

» Smaller batches

» More styles, less quantities

17

• But superior coordination

• Informal, fast, flat decision-making

– Founder

» Never gave interview, top models?

» Mostly in women’s design team

» Own office used for visitors

– Power to small teams

» Not full automation!

» But very fast & flexible decision-making

18

Vertical integration

• But bidirectional flexibility (upstream & downstream)

• Designers do not rule!

– are very autonomous

– Yet, only 15% designs go into production

» Those most promising in terms of instant fashion trends

– Versus 60% industry average

» Sent to production

» upstream regardless of downstream changes

19

Vertical integration

20

Price +

Price -

Fashion - Fashion +

+ Horizontal

integration

Key competitors: total sales

21

0

2000

4000

6000

8000

10000

12000

14000

16000

2003 2004 2005 2006 2007 2008

Inditex

GAP

H&M

Benetton

Portfolio Matrices

Growth/Share (BCG) Matrix

Parenting Matrix

22

Models by which managers can determine what businesses in portfolio to

- invest in financially

- divest

HIGH

The BCG Growth-Share Matrix

LOW

An

nu

al

rea

l ra

te o

f m

ark

et

gro

wth

(%

)

Relative market share

Earnings: high stable

Cash flow: high stable

Strategy: milk & invest in ?

Earnings: low, unstable

Cash flow: neutral or negative

Strategy: divest

Earnings: high stable, growing

Cash flow: neutral

Strategy: invest for growth

Earnings: low, unstable, growing

Cash flow: negative

Strategy: analyze to determine

whether business can be grown into a

star, or will degenerate into a dog

HIG

H

?

10

24

2: digital camera

BCG analysis (2003)

1: film sales: US,

Canada, & W. Europe 4: Kodak self-

service kiosk

3: Kodak digital

photo printer

Problems with BCG matrix?

• Winner-take-it-all markets

– Based on technological innovation

• From chemical film to digital – From special-purpose cameras & printers to smartphones & multi-functional

– Large network effects across business units

• Cannot separate one business unit (cash cow or dog) from another (star)

Conclusion: dominant logic at corporate level should change!

• Danger of self-fulfilling prophecy? • Motivation problems of categorization

• Exaggerated milking of cash cows – Become dogs even more quickly

• Projected dogs (e.g. Kodak’s films) may be linked to all business units – Divestment is problematic!

• Internal investment assumption?

– Can get money from capital markets

• Don’t absolutely need to find internal cash cows

25

HEARTLAND

--businesses with

high potential

for adding value

EDGE OF

HEARTLAND

-- businesses for which

value adding potential exists,

yet still a bit low / or negative

risks higher

BALLAST

--typical core

business position:

fit high, but limited

potential to add

more value

VALUE TRAP

--potential for adding value is

seldom realized because of

problems of management fit

ALIEN TERRITORY

--exit: no potential for

value creation

HIGH

LOW

LOW HIGH

12

Fit with business unit

critical success factors

“parent understands”

Fit with business unit parenting opportunities

“parent’s competences & resources can add value”

Parenting Matrix Most dangerous!! Parent thinks it can add value (e.g. marketing),

but actually needs new competences

Fit with

business unit

critical

success

factors

Low

High

27

Speciality

products Tea plantations

Animal feed

Fit with business unit parenting opportunities

High Low

Food

Detergents

Personal

products

Parenting Matrix (1997)

Slide 8.28

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Slide 8.28

Strategic Choices

8: International Strategy

This class: Part II

• Sustaining/building a strategic capability can involve

internationalization

– Internationalization drivers

– Integration – responsiveness grid (industry level)

• 4 alternative MNE set-ups

– To internationalize strategic capabilities

• Central exporter

• International projector

• International coordinator

• Multi-centred MNE

• Home country location advantage

– Branding: country of origin reputation

• Blue ocean strategy

– Porter’s diamond

29

Internationalisation drivers

Comparative

advantage: - Mfct China - Design US

- Dependence Belgian

exports on German export demand

- Maquiladoras in NAFTA

Can both facilitate & inhibit!

Openness depends on industry Least open industries?

agriculture & high-tech

11-31

Integration – Responsiveness Grid

Industry Exercise

Hollywood / Bollywood

Internationalizing strategic capabilities

4 alternative MNE set-ups

Global Strategy

International projector Firm views the world as

single marketplace. Goal is to

create standardized products

Home Replication Strategy

Centralized exporter Firm uses unique location-bound

strategic capability

Multidomestic Strategy

Multi-centred MNE Firm operates as a

collection of relatively

independent subsidiaries

Transnational Strategy

International coordinator Firm combines global scale

efficiencies with

with host location advantages

Low High

Pressures for Local Responsiveness

Pre

ssure

s fo

r G

lobal I

nte

gra

tion

High

Low

Four ways to internationalize strat cap.

Centralized Exporter

• Standardized products manufactured at home embody the firm’s strategic capability – themselves developed on the basis of a favourable home country

environment

– make the exporting firm successful in international markets

• Case examples: motion picture studios

• Limitations

– blindsided by differentiated local rivals

34

Centralized exporter:

Limitations

International Projector

• The international projector MNE seeks international expansion

by projecting its home country success recipes abroad

– Strategic cap. developed in the home country is transferred to subsidiaries

in host countries.

– Champion worldwide consistency and standardization

• World is one market place

• Produce standardized products/services

– strong pressure for cost reductions but weak pressure for local

customization

• Digital cameras, TV’s, portable disc & DVD players...

Four ways to internationalize strat cap.

Four ways to internationalize strat cap

International Coordinator

• International operations are specialized in specific value added

activities and form vertical value chains across borders.

• Firm combines global scale efficiencies with

host location advantages

• Case example:

International coordination of…

- Swiss engineering centre: new products

- Design partners in Ireland: design ideas

- Operating HQ in California: design approval

- Taiwan engineering centre: runs pilots - China plant: high-volume manufacturing

Four ways to internationalize strat cap

Multi-centred MNE

• The multi-centred MNE consists of a set of entrepreneurial

subsidiaries abroad that are primarily nationally responsive

– The common strategic cap. that holds these firms together is minimal:

• Key competences

– common financial governance

– administrative best practices

– some sense of corporate identity

• Case examples: