Lecture 11,12Corporate Strategy

Professor David Faulkner

PORTER DEFINES CORPORATE STRATEGYAS DECIDING :-

* Which businesses to be in &

* How to run them

The Fundamental Questions inCorporate StrategyHow is economic value created through

multi-market activity?

Why should these activities be undertaken inside the corporation rather than through contracts, joint ventures or other institutional arrangements?

How must the corporation be structured and coordinated to realise the benefits of its multi-market activity

PORTER IDENTIFIES (1987) FOUR CONCEPTS CENTRAL TO CORPORATE STRATEGY

1. Portfolio management

2. Restructuring

3. Transferring skills

4. Sharing activities

Proposition: the large, multi-business corporation is (too often) a value destroyer

Why?

• diversification often takes place for the wrong reasons

• the real synergies are hard to define ex ante

• companies are ineffective in organising to achieve their stated strategic intent

• the problem lies within the corporate centre

Porter stresses that in a successful corporate strategy

THE CENTRE MUST ADD VALUE

Otherwise business units are better off left alone

THERE ARE FOUR BASIC FUNCTIONS OF THE CENTRE IN CORPORATE STRATEGY

SELECTING

PROMOTING

RESOURCING CONTROLLING

PROMOTING -Relations with the city

- Corporate advertising

- Public relations events

- Press relations

- Government relations

- Internal image building

- Mission statements

A BAD MISSION STATEMENT

“We aim to be excellent in all we do, for our customers, employees, shareholders and the community.

We aim to provide a first class service, to improve profitability, to be an excellent employers, and to play an active part in the community.”

MISSION STATEMENT OFAECI - CYANIDE DIVISION (A good one)

We are in the business of manufacturing and distributing cyanide. We believe strongly that safety is paramount in production, storage and handling of the product as well as in security and protecting the environment’ We also believe in the strategic importance of cyanide to the country.

Our primary market is supplying the Southern African gold industrywith an effective means of gold extraction. Secondary and potential markets are in cyanide derived chemicals

These markets will be reached by direct selling backed by technical expertise and service.

We seek to earn sufficient return on investment to encourage the corporation to reinvest in the business.

SELECTING - Portfolio management

- Risk cube

- MBA matrix

- Vertical & horizontal integration

- Scoping:

- Transaction cost analysis

- International scope

Question MarkStar

Cash Cow Dog

0%

THE BOSTON BOX

100%

10%

10X 1X 0.1x

Present position

Position project in 5yrs time

Relative Market Share.

(relative to market leader or nearest competitor).

$

$

X

X

?

?

Marketgrowthrate

Relative market share

The ideal sequence

Catastrophicconsequences

Investment

and

Growth

Selective Growth

Selective

Growth

Harvet/

Divest

Harvet/

Divest

Harvet/

Divest

High Industry attractiveness Low

High selectivity

BusinessStrength selectivity

Low selectivitiy

McKinsey

Time

Sales

Embryonic Growth Mature Ageing

Parenting-Fit Matrix (Goold, Campbell & Alexander 1991)

Heartland

Edge of Heartland

Alien Territory

Value Trap

Ballast

Low HighFit between parenting opportunities & parenting characteristics

Misfit betweencritical successfactors andparentingcharacteristics

High

Low

RESOURCING:- Internal development

- Merger and acquisition

- Cooperation/Joint development

Targets and Bidders: Who win in M&A?

Winners (in most cases)

• The CEO and TMT of the bidder (they get rich)• The shareholders of the target (they get rich)

Losers• The CEO and TMT of the target (they get fired)• the shareholders of the bidder (they face a decline in EPS)

Porter’s (1987) research suggested that approximately

• 70% of acquisitions made in unfamiliar industry sectors fail

• 60% fail even in familiar sectors

• 50% of strategic alliances fail

• 40% of new internal developments fail

Doing anything new is risky!

All Acquisitions % made by 1980 Acquisitions in % made by 1980

in new industries then divested entirely new fields then divested

Average/Co. 61.2 53.4% 20 60.0%

P&G 14 17 11 17

UTC 28 25 10 20

Exxon 19 62 5 80

GE 51 65 14 100

Xerox 33 71 9 100

Acquisition Success Rates

Source:33 Large US companies 1950-86: Porter, HBR, 1987

COOPERATIVE STRATEGY

LEARNING SKILL SUBSTITUTIONALLIANCES COOPERATIONS

* Joint ventures * Virtual corporations* Collaborations * Distributor agreements* Consortia * Networks

* Keiretsu

Coop Strategies fall into Two Distinct Types

ALLIANCEINVEST

& MAKE

MAKE

ALLIANCE ALLIANCE

MAKE

BUY BUY BUY

Low Med High

High

Med

Low

COMPETENCE COMPARED WITH THE BEST IN THE INDUSTRY

STR

AT

EG

IC I

MP

OR

TA

NC

E O

F A

CT

IVIT

Y

CONTROLLING : - Organisation structure

- Style

- Synergy achievement

- Systems

Lecture 12

Organisation Structures

OPERATING CORE

TECHSUPPORT

ADMINSUPPORT

MIDDLE LEVEL

STRATEGIC APEX

A MINTZBERG ORGANOGRAM

FIVE BASIC TYPES OF ORGANISATION:-

1. The Entrepreneurial Form

2. The Machine Bureaucracy

3. The Multi-divisional Form

4. The Professional Organisation

5. The Adhocracy

STYLE AND STRUCTURE

Goold and Campbell (1987) tried to find the best way to run a diversified Corporation. They researched 16 large UK companies.

They concluded that they fell into three groups:-

1. BOC, BP, CADBURY, LEX, STC AND UB (SP)

2. COURTAULDS, ICI, IMPS, PLESSEY, VICKERS (SC)

3. BTR, FERRANTI, GEC, HANSON & TARMAC (FC)

Corporate

SP

SCPlanninginfluence FC

Largely SBU Flexible strategy tight strategy tight financial Control influence

NATURE OF BUSINESS RESOURCES IN ORG-shape of portfolio - financial situation- size & payback of - personality of CEO investments - senior management- stability of competitive skills environment

STYLE

- Strategic planning - Strategic control - Financial control

Opportunities for Synergy

% of total potentiallycosts importantor assets

Potentially important

Low Unimportant

Low High sensitivity to scale, learning or utilisation in value activity

HighStrategic relationship

IN ADDITION SOME CORPORATE CENTRES ADD VALUE THROUGH THEIR OWN ACTIONS EG

* Unique corporate values

* External actions

* Astute m&a identification and negotiation

* Charisma eg unusual CEO

Campbell identifies four ways in which a corporate centre or parent can create (or destroy) value

1.Stand alone influence eg strategy development, resource allocation

2. Linkage influence eg developing synergies between business units

3. Central services provision eg IT

4. Corporate development activities eg alliances, acquisitions

He warns that his research indicates that the probability of value destruction by a parent is greater than that of value creation

To create value therefore a parent must :-

1. Build on insights on how to create value

2.Understand what is the company’s ‘heartland’

3. Identify parenting opportunities

4. Assess accurately how to grasp those opportunities

Only then will the parent avoid destroying value

What kind ofdiversification

(related, unrelated,or mixture)?

Evidence of efforts tobuild diversificationaround some strategic theme, with unifying well-defined mission

Efforts to createcorporate-levelcompetitive advantage

Criteria and prioritiesfor allocatinginvestment capital tobusiness units

Corporate-levelstrategic objectivesand financialperformance targets

Key corporate-levelfunctional area support strategies (esp. finance, R&D, & HR)

Use of any distinctiveapproaches tomanaging key business units

Any corporate-levelor corporate-widedistinctive competence

Use of acquisitionto build thecorporate portfolio

Actions to divestweak or unattractivebusiness units

How much diversification?

CorporateStrategy

Assessing CorporateStrategy