STRATEGIC MANAGEMENT
Corporate Strategies, Globalisation,
Competition and Collaboration
Professor Stefan Markowski
E-mail: [email protected]
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z siedzibą w Rzeszowie
Corporate Strategies, Globalisation,
Competition and Collaboration
Content
•
Activity Coordination and the Firm
•
Pros and Cons of Vertical Integration
• Non-ownership Forms of Vertical Integration
• Pros and Cons of Cross-border Diversification
• Determinants of International Location
• Trade vs Direct Foreign Investment Strategies
• Corporate Strategies of Globalised Firms
•
Trends in Corporate Diversification
• Reasons for Diversification
• Risk Management and Diversification
Corporate Strategies, Globalisation,
Competition and Collaboration
• Impact on Performance
• Fragmentation
• Strategic Planning
• Performance Evaluation: Strategic Score Matrices
• Performance Evaluation: Value-based Analysis
• Performance Evaluation: Diversified Companies
• Performance Controls
• New Corporate Structures and Strategies
Activity Coordination and the Firm
• In this course, we do not draw a clear distinction
between business or competitive strategy (how to
compete) and corporate strategy (where to compete)
• All activities are located in space and time and one
cannot easily separate ‘how’ from “where and when’
strategies
• Firms exist because in some areas of activity they are
more efficient than markets as coordinators of
production and distribution (Chandler’s ‘visible hand’
of intra-firm coordination vs the ‘invisible hand’ of the
market)
Activity Coordination and the Firm
• Firms must choose between doing things in-house
(consolidation and integration) or outsourcing them
through the market, ie, they must face make-or-buy
choices
• If the cost of intra-firm activity coordination is lower
relative to the market-facilitated inter-firm
coordination, we would expect firms to become larger
and more complex
• We would also expect a larger proportion of all
business activity to be undertaken by larger firms
• The size and complexity of firms are influenced by
technology, some technologies support vertical
integration (eg. LAN) while others encourage
outsourcing (eg. the Internet)
Pros and Cons of Vertical Integration
• Vertical integration involves the internalisation of
different activities along the value chain/web
Market
Firm
Market
`
Raw
Materials
Component
Production
Final
Products
Labour
Assembly
Power
Wholesale
Pros and Cons of Vertical Integration
• Firms can integrate forward (downstream) or
backward (upstream)
• Advantages of vertical integration:
– lower transaction costs
– less scope for opportunistic behaviour
– enhanced knowledge of processes and products
– economies of scope
– incentives to specialise and use dedicated technologies
– removal of buyer-seller (bilateral) monopolies
Pros and Cons of Vertical Integration
• Disadvantages of vertical integration:
– diseconomies of scope
– different scales of operation along the chain
– high cost of in-house consolidation
– the compounding of ownership risk, for example
• P(A), P(B), P(C) probabilities of success of separate activities
A, B, and C
• P(A+B+C) probability of success when A, B and C are
consolidated into a joint activity (A+B+C)
• if P(A+B+C) = P(A) x P(B) x P(C), then the probability of
success of A+B+C is lower than P(A), P(B), P(C)
Non-ownership Forms of Vertical
Integration
• Market foreclosure provides an alternative to vertical
integration (ie. influence on the upstream activities
through the control of downstream operations)
• Quasi-vertical integration (relational contracts) to
facilitate flexibility and agility:
– partnering
– strategic alliances
– virtual corporation (or hollow corporation?)
• The advantages of vertical integration without much
common ownership
Non-ownership Forms of Vertical
Integration
• Focus on non-contractual arrangements and
collaborative management
• The importance of trust
• Problems when ‘things go wrong’
Pros and Cons of Cross-border
Diversification
• Cross-border activity:
– international trade in goods and services
– foreign direct investment (FDI)
Trade
International Activity
high TRADING (eg. wool,
low
GLOBAL (eg. automobiles,
watches)
electronics, petroleum)
LOCAL (eg. housebuilding,
electricity transmission)
MULTINATIONAL (eg. fast
food, insurance)
high
FDI
Pros and Cons of Cross-border
Diversification
• Cross-border trade is a function of comparative
advantages of different jurisdictions (division of labour
between nations)
• Foreign direct investment is a function of the
attractiveness of different jurisdictions as(activity)
hosts (and it may displace cross-border trade)
• Firms must determine the mix of trade and direct
investment activity
• Competitive advantages are in part determined by
national natural endowments but largely developed by
firms and host economies (eg. through investments in
education, R&D, physical infrastructure, legal system)
Pros and Cons of Cross-border
Diversification
• Michael Porter’s framework of dynamic competitive
advantage of nations (springboard for exports and
FDI):
– factor endowments created rather than natural
– strong supporting industries and infrastructure
(complementary resources)
– strong domestic demand
– highly competitive industry structure
• Strong home economy encourages expansion into
other (host) economies
• Globalisation through exports and FDI may be
especially advantageous if global demands converge
and there are scale and scope related efficiencies
Trade vs Direct Foreign Investment
Strategies
• Relative advantage of FDI over exports:
– direct access to customers
– leapfrogging trade barriers
– low cost locations
– commitment to host economy
– diffusion of technology
– efficient use of complementary resources
• If a firm has no competitive advantages specific to
itself but benefits from the strength of its home
economy, it should export rather than FDI
Trade vs Direct Foreign Investment
Strategies
• Exports of goods and services
– spot contracts
– forward contracts
– host agents/distributors
– technology licensing
– franchising
• Modes of FDI
– joint ventures
– wholly owned subsidiaries
– equity holdings
Determinants of International
Location
See S. Jackson & S. Markowski, 1996, The Attractiveness of
Countries to Foreign Direct Investors, The Australian Journal of
Management, AGSM
• Determinants of FDI location:
– previous FDI
– availability and dependability of complementary
resources (law, infrastructure, related activities)
– appropriability of returns (can profits be repatriated?)
– relative costs of transacting business (FDI vs exports)
– market penetration and visibility (global presence)
Corporate Strategies of
Globalised Firms
• To globalise, firms may:
– export from strong home technological base (eg.
Rolex watch) and with limited FDI (eg, BMW)
– form a multinational supply web of closely
integrated subsidiaries (eg, Microsoft)
– form a network of highly independent subsidiaries
serving different host markets (“multidomestic
multinationals”) (eg, Thales)
– become transnational (no national identity) (eg,
Murdoch family holding company)
Trends in Corporate Diversification
• The 1960s and 1970s witnessed rapid growth of
diversified companies in the USA and western Europe
• To combine growth with diversity, companies adopted
multi-divisional structures
• Opportunistic empire building - managements
unencumbered by shareholders’ interests acquiring
unrelated businesses
• Support from employees, unions and financial
institutions (corporatism)
Trends in Corporate Diversification
• End of opportunistic empire building in the 1980s and
1990s
• Corporate profitability back in fashion after the
stagflation of the 1970s - growth and profits often
diverge
• Shareholder activism put pressure on management
performance (some CEOs driven out)
• Shareholder value - key performance metric
• Corporate white elephants attractive to corporate
raiders and leveraged (through borrowing) buy-outs
• Deregulated and globalised capital markets became
more efficient mechanisms for allocating resources
Reasons for Diversification
• Growth through empire building
• Risk management - risk pooling (portfolio of diverse
interests) and spreading (over a larger number of
stakeholders)
• Market power in output and input markets
– more scope for predatory pricing
– more mutual forbearance with rival firms
– stronger internal support from employees and bankers
• Economies of scope/expected synergies (cost
efficiencies) in production, marketing and procurement
and information/knowledge sharing
• Tax advantages (buying loss makers to offset tax
liabilities)
Reasons for Diversification
• Concentric diversification focuses on commonalities in
divisional markets, products, technologies (synergistic
or related activities)
• But concentric benefits could also be achieved
through joint ventures and strategic alliances: is the
diversified company best placed to achieve such
synergies?
• Conglomerate diversification focuses on portfolio
management of functionally unrelated activities
• Key question: in what way does the diversified
company improve on investment in a portfolio of
shares in independent companies?
Risk Management and Diversification
• Portfolio approach
Expected Return (R)
RB
Activity B
RAB Mix
RA
AB Mix
Activity A
Risk (V)
VA
VAB Mix
VB
Risk Management and Diversification
• Diversified Structure I - Risk Mitigation
Firm AB (for AB to fail, both A and B must fail)
`
Activity A
Activity B
A and B are statistically independent
Probability of Failure (AB) = PFa x PFb
PF(AB) = 0.001 x 0.002 = 0.000002
Risk Management and Diversification
• Diversified Structure II - Risk Enhancement
Firm CD (for CD to fail, either C or D must fail)
`
Activity C
Activity D
C and D are statistically independent
Probability of Failure (CD) = 1 - [(1 - PFC) x (1- PFD)]
Impact on Performance
• Weak relationship between diversification and
profitability
• Focus on complementary activities and core
competencies improves profitability - shareholder value
as a function of synergy between different
divisions/businesses
Fragmentation
• Demerger (American spin-off) - a parent company is
split into two or more fully independent entities, ie. a
fully owned subsidiary or an operable part of a quoted
company is separated into an independent entity with
its shares distributed to the shareholders of the
parent on a pro-rata basis
• A study undertaken by the Interdisciplinary Institute
of Management at the London School of Economics
showed that European demergers have been adding
shareholder value
• This is more likely to be the case in the USA, where
demergers were invented in the 1920s
Fragmentation
• Reasons for (benefits of) demergers:
– untangling the value destroying conglomerates/mergers
from the 1970s
– diseconomies of size experienced by the parent (eg.
excessive cost of holding a large entity together)
– divesting non-core activities and less (intra firm) crosssubsidisation
– technological change may favour fragmentation
Strategic Planning
• Strategic management is largely a strategic
planning process
Corporate Investment
Corporate Strategic Plan
Corporate Budget
Plan
Business Unit
Strategic Business Unit
Business Unit
Investment Plans
Plans
Budgets
Operational Business Unit Plans
Production Master Plans, etc.
Strategic Planning
• To plan future business activities, a firms should
assess its current position in its business environment
against its strategic objectives
• Technical evaluation is complex and detailed but its
final outcome may be presented in a concise form, eg.
score matrices (see below)
• Complex/diversified business entities may be
evaluated as separate divisions or subsidiaries but
there are risks in aggregating component data when
assessing the whole business (see below)
Performance Evaluation: Strategic
Score Matrices
• Score matrices are to provide at a glance view of the
company’s performance and strategy
• Most such devices combine a perspective on a firm’s
external operating environment (eg, market growth)
with an assessment of the company’s position within
that environment (eg, market share)
• The choice of variables depends on a company’s key
strategic objective (eg. the growth of shareholder
value)
• The Boston Consulting Group (BCG) matrix combines
the annual rate of market growth (environment) with
the relative market share (ratio of a company’s sales
to those of its largest competitor)
Performance Evaluation: Strategic
Score Matrices
Boston Consulting Group Score Matrix
Annual Market Growth
High
STAR
Strategy: invest in
QUERRY
Strategy: hold & watch
COW
Low Strategy: milk
High
DOG
Strategy: divest
Relative Market Share
Low
Performance Evaluation: Strategic
Score Matrices
• McKinsey Matrix (developed for the US General
Electric) uses composite, weighted indices of the
operating environment (market attractiveness) and the
firm’s competitive position in the market
• Market attractiveness is a composite of:
– market size (eg, total sales)
– real long term growth rate (ten year average)
– medium term (market) average profitability (3 year
average rate of return)
– market variability (variance around trend sales)
– export-orientation (export/domestic sales ratio)
– inflation recovery (scope for absorbing cost escalation)
Performance Evaluation: Strategic
Score Matrices
• The firm’s competitive position is a composite of:
– market position (share of domestic sales, share of all
sales in an export market, ratio of own sales to those of
the largest rival)
– competitive position (product quality, process
technology, strength of distribution networks)
– return on sales (ROS) relative to those of key rivals
• Strategy recommendations:
– high-high
excellent growth and profit
potential (invest/develop)
– medium-medium
hold
– low-low
harvest cash, no investment
Performance Evaluation: Strategic
Score Matrices
McKinsey (US General Electric) Score Matrix
Market attractiveness
Low
Medium
High
Low
Medium
Competitive position
High
Performance Evaluation:
Value-based Analysis
• Focus on shareholder value
• Start with the current market valuation of a firm and
analyse potential improvements that could be realised
through:
– better information for shareholders (to enhance their
confidence in the company, increase loyalty)
– internal improvements (eg. higher cash flow, faster sales
growth, different sales patterns)
– external improvements (product innovation, new market
penetration, divestment of non-performers)
Performance Evaluation:
Value-based Analysis
Value Enhacement Quadrant
Current Market
Potential
Potential
Value
Value Gap
Market Value
4
1
Information
Gap
External
Improvements
loop
2
3
Internal
Improvements
Performance Evaluation:
Value-based Analysis
• To produce score matrices, data on business
performance are needed
• The US Strategic Planning Institute maintains Profit
Impact of Market Strategy (PIMS) database, which
helps to analyse profitability as a variable dependent
on performance-related independent variables (eg,
market growth, inflation, market share, capital
intensity, productivity)
• Regression analysis can be used to identify key drivers
of profitability in a particular environment and to
benchmark a firm’s profit performance against the
market performance
Performance Evaluation: Diversified
Companies
• Most large companies are diversified into business
units and could be represented as portfolios of related
and unrelated divisions, cost/profit centres,
subsidiaries, and so on
• In such cases strategic evaluation must focus on:
– the logic of diversified structure to identify core and noncore activities
– coordination of business units to achieve the overall
company objectives
– resource allocation between business units
– control of business unit performance
– the nature and role of headquarter management
Performance Evaluation: Diversified
Companies
• It is possible to use score matrices and value-based
techniques to analyse individual business units and to
combine scores into the overall company score
• This is normally done to:
• set strategies and performance targets for individual units
• allocate resources between them
• monitor their performance
• analyse and re-balance the portfolio of units/businesses
• There is a danger of the fallacy of composition in that
individual units may score well but if they may pull in
different directions the whole business may become
dysfunctional
Performance Controls
• Strategic performance controls:
– Strategic premise validation - are strategies and
their underlying assumptions still valid?
(SWOT, competitive advantage, and so on)
– Implementation monitoring - is strategy
implementation on track? Should it continue?
(milestone reviews, monitoring short term plans)
– Strategic surveillance - environmental scanning
(continuous look out for opportunities and threats)
– Emergency measures - rapid response to special
events
Performance Controls
• Operational performance controls:
– Budgets
– Schedules
– Audits
– Key Success factors
– Customer feedback
– Share market signals
New Corporate Structures
and Strategies
• Central issue: how to balance centralisation (focus on
the overall mission and resource allocation) with
devolution (responsiveness, innovation, flexibility,
agility)
• Changing role of the headquarters from that of the top
level decision maker to a company coordinator, driver
of organisational change (leadership rather than
management), and corporate service provider
• Central management to concentrate on:
• entrepreneurship (core opportunity and resource
management)
• business integration (capability development and
deployment)
• business renewal (defining mission and leading change)
New Corporate Structures
and Strategies
• Blurring of boundaries between intra-company
business units (GE’s boundaryless company) and
delayering of the hierarchy (network/web-based
structures)
• More emphasis on relationships and teaming between
units rather than the formal decision-making hierarchy
• Devolution of authority and responsibility and more
employee participation (‘personal touch’) and profit
sharing
• Relationship contracting with suppliers and customers
Corporate Strategies, Globalisation,
Competition and Collaboration
Reading
Grant, chs. 13-16
Pearce and Robinson, chs. 4 and 8, 12
Questions for Discussion
• As larger manufacturing firms globalise and
become multinational, why many smaller,
nationally-focussed manufacturers continue
to survive? Give examples.
• Using appropriate examples, distinguish
between the following strategies:
– vertical and horizontal integration;
– product development and innovation; and
– joint venture and strategic alliance.