Strategy and Strategic Analysis

Transcription

1 Strategy and Strategic Analysis GEST-S-468 Pr Manuel Hensmans

2 Slide 7.2 Strategic Choices 7: Corporate Strategy and Diversification Johnson, Whittington and Scholes, Exploring Strategy, 9 th Edition, Pearson Education Limited 2011

3 Last class Identify alternative directions for corporate strategy market penetration or consolidation product development market development conglomerate diversification 3

4 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

5 Diversification and performance

6 Diversification: when effective? Imagine you are the CEO of a 100M asset company. Your company is experiencing major difficulties, with low returns and a market value well below total asset book value. You have 3 years to improve the situation. You have four options each year to improve the situation: N: Do nothing D: Diversify (buy assets for growth) I: Improve returns S: Sell assets Implementation of each decision takes 1 year. What sequence of options do you choose during these 3 years? Please just give a sequence of three letters Answer = S I D

7 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

8 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

9 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

10 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...

11 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

12 Main parenting role? Portfolio developer & parenting roles 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 12

13 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.

14 Instead of diversification Vertical integration option

15 Another option: outsourcing Outsourcing is the process by which activities previously carried out internally are subcontracted to external suppliers

16 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

17 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 17

18 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 18

19 Vertical integration 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 19

20 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 20

21 Price + + Horizontal integration Fashion - Fashion + 21 Price -

22 Key competitors: total sales Inditex GAP H&M Benetton

23 Portfolio Matrices Models by which managers can determine what businesses in portfolio to - invest in financially - divest Growth/Share (BCG) Matrix Parenting Matrix 23

24 Annual real rate of market growth (%) HIGH The BCG Growth-Share Matrix 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? Earnings: Cash flow: Strategy: high stable, growing neutral invest for growth Earnings: Cash flow: Strategy: low, unstable neutral or negative divest Earnings: high stable Cash flow: high stable Strategy: milk & invest in? LOW Relative market share HIGH 10

25 BCG analysis (2003) 2: digital camera 3: Kodak digital photo printer 1: film sales: US, Canada, & W. Europe 4: Kodak selfservice kiosk 25

26 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? 26 Can get money from capital markets Don t absolutely need to find internal cash cows Cash cow or star?

27 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 parent understands HIGH BALLAST --typical core business position: fit high, but limited potential to add more value EDGE OF HEARTLAND HEARTLAND --businesses with high potential for adding value -- businesses for which value adding potential exists, yet still a bit low / or negative risks higher ALIEN TERRITORY --exit: no potential for value creation VALUE TRAP --potential for adding value is seldom realized because of problems of management fit LOW LOW HIGH Fit with business unit parenting opportunities parent s competences & resources can add value 12

28 Parenting Matrix (1997) High Food Fit with business unit critical success factors Tea plantations Detergents Speciality products Personal products Low Animal feed 28 Low Fit with business unit parenting opportunities High

29 Slide 8.29 Strategic Choices 8: International Strategy Johnson, Whittington and Scholes, Exploring Strategy, 9 th Edition, Pearson Education Limited 2011

30 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 30

31 Internationalisation drivers Can both facilitate & inhibit! Openness depends on industry Least open industries? agriculture & high-tech Comparative advantage: - Mfct China - Design US - Dependence Belgian exports on German export demand - Maquiladoras in NAFTA

32 11-32 Integration Responsiveness Grid Industry Exercise Hollywood / Bollywood Electronic commerce? Retail banking? Hollywood/Bollywood? Civil aircraft?

33 Pressures for Global Integration Internationalizing strategic capabilities 4 alternative MNE set-ups High Global Strategy International projector Firm views the world as single marketplace. Goal is to create standardized products Transnational Strategy International coordinator Firm combines global scale efficiencies with with host location advantages Low 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 Low High Pressures for Local Responsiveness

34 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

35 Centralized exporter: Limitations Limitations blindsided by differentiated local rivals 35

36 Four ways to internationalize strat cap. 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...

37 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

38 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 Case examples: common financial governance administrative best practices some sense of corporate identity