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Unit 9 lecture Corporate Level strastegy (Corporate strategy definition:…
Unit 9 lecture Corporate Level strastegy
Corporate strategy definition: The decisions senior management makes and the goal directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously.
To add value to constituent businesses and the whole
"What business are we in? What business should we be in?"
Key Questions: Where to compete and how to get there
-Corporate level strategy determines the boundaries of the firm along three dimensions
Industry value chain (vertical integrgation)
Products and services - Horizontal integration
Geography (global strategy)
To add value to a firms operations, a corporate strategy should enable a firm or a business unit within the wider firm
to perform one or more of the value creation functions at a lower cost, or in a way which supports a differentiation advantage
-Corp strategy is the way a company creates value through the configuration and coordination of multi market activities
Diversification - related and unrelated
Single Business - >95% rev from primary activity
Dominant Business - 70-90%
Related Diversification
1) Related-constrained <70% (Exxon, Johnson and Johnson)
2) Related Linked <70% (Amazon, Disney)
3) Unrelated <70% (GE, TATA etc)
Check Ansoff's directional growth matrix
Vertical integration:
I already understand much of this but pay more attention.
Backwards integration is in terms of the supply of materials. Downstream industries are markting and sales etc.
Vert int benefits
Securing critial supplies and dist channels.
Lowering costs
Improve quality
Mitigating risks repute and CSR
Risks
Increasing costs (through loss of competition)
Org complexity increasing admin costs
Reduces flexibility and innovation
Increasing the potential for legal repercussions
Close related diversification - different products but there is some affinity. eg Unilever produces magnums, flora, mayonnaise etc so similar area
2 Distant related - diverse products but underpinned by core tech or competenticies
3 Unrelated - little relation like Siemens, VIrin, GE
RELATED Benefits include synergies, shared value chain activities, leverage of brands and resourves, knowledge sharing etc. Exploit economies of scope and scale
UNRELATED diversificitation benefits
Financial resources can be directed to those industries offering best profits
Risk reduction through diverse portfolio
reduces fluctuations in profit
internal transactional costs may be less
Potential drawbacks of diversification
FLawed response to structural decline
Management self interest/dysfunction
Bandwagon effect
Coordination costs
Role of the HQ
Goold and Campbell
Conglomerates
A company that combines two or more stratefic business units under one overarching corporation using an unrelated div strat - eg Tata or Virgin
Is there an optimal portfolio?
BCG Matrix can be used to assess market position of a portfolio of business units as well as products
Issues with matrices
Overly simplisticanalysis of position and strat
Ignores synergies between prodducts
Innovations are ignored
Divesting unwanted products areas - may be substantial costs such as labour redundancy etc
Tools of corporate level strategies
Internal/Organic development: Where a strategy is pursued by building on and developing an organisations own capabilities. eg Amazon or Virgin growing from start ups
Acquisitions
Often termd as mwergers but few really are.
Friendly acquisitions where the board of directors recommends to offer to shareholders and remain to integrate companies
Hostile takeover - target board resists takeover and argues business case to remain independent to shareholders, often resulting in an ulifted bid.
Motives for M&A - Strategic
Synergy
Extension _ extend the firms reach in terms of products, markets and geography
Consolidation - increases market power, economy of scale etc
Capabilities - increase of capabilities
Overcome a competitive disadvantage - eg Adidas acquired Reebok to compete with Nike
Motives for M&A - Financial
Create efficiencies - save interest payments etc
Unbundling - underlying assets are worth more than the company as a whole. Buy and sell off the assets (asset stripping)
Reasons for failure
Fail to realise value of synergy
overpaying for the target, often caused by hubris
lack of due dilligence on the target
Post acquisition integration
Acquisitions fail to create value for shareholders between 70 and 90% of the time
Strategic alliances
Voluntary arrangemnt between firms that involvews the sharing of knowledge, resources and capabilities with the intention of develping processes or services
Non equity alliance - partnership based on contract eg franchising etc
Equity alliances - Mutual shareholding - eg Renault own 44% of Nissan and Nissan own 15% of Renault
Joint Ventures
A standalone org created and jointly owned by two or more parent companies
Long term commitment, exchange of both tacit and explicit knowledge, interaction or personnel
used to enter foreign markets
Value Adding activity
Setting direction - developing the enterprise level strategy
Advisory role - counselling individual businesses
Protector role - often asked to deal competently with external stakeholders
Policing role - corp centre may intervene to deal with disputes, conflict or poor performance
Central services - the corp centre has its own capabilities, such as financial resources and managerial expertise that can be used to support the individual businesses
Value destroying activity
Poor central management - the larger the org, the more central managers must divide their time
Information filters - what reportinf systems are used to inform firm-level decision making? How many businesses are represented in the centre?
Portfolio Manager
Hands off approach
Unrelated diversification
primary interest is accumulation of capital
Synergy Managers
Asian and Jap corp strategies
Aim to enhance value across all business units
Build and maintain core competencies - eg Honda and engines
Parental developer
Similar to synergy manager
Focus on core competencies of corp centre - for example Virgin with brand across all businesses
Managing the corporation
See slide from lecture
Corporate growth
Managing the corporation