Lesson 8: Developing Corporate Strategies Flashcards
What is the corporate task of the corporate center?
Formulating and communicating the overall mission, vision, goals, strategies and values of the corporation.
Approval and control of strategic and financial goals.
Procure and allocate resources (capital, people)
Develop and allocate the corporation’s core competences
Development of stakeholder relations and stakeholder communcation
What is value creation at the corporate level?
Create economies of scale in corporate functions: finance, accounting, HRM, IT, marking, communications
Develop core competences in corporate functions through specialisation and critical mass
Negotiate, balancing and eliminating risk
Consulting and training in the area of management
Facilitate innovation
Connect SBU’s with stakeholder relations
Value adding activities corporate parent?
1) Envisioning = clear strategic intent = common purpose
2) Facilitating synergies
3) Coaching: coorporation, build relationships
4) Provide central services and resources
5) Intervening
Challenge and develop strategic ambitions business units
Value destruction at the corporate level?
Delaying decision-making processes through bureaucratic behaviour
Subsidiary companies become part of the power play (political game) between top manager at the corporate center.
Resources are not allocated optimal according to market possibilities and future profit potential
Losses in one subsidiary are covered by the other subsidiaries.
What are the types of corporate roles?
1) Portfolio manager:
Corporate office: small, main emphasis: downward, investing and intervening
2) Synergy manager:
Corporate office: medium
Main emphasis: across, facilitating cooperation
3) Parental developer
Corporate office: large
Main emphasis: downward, providing parental capabilities
4) Restructering manager
Turn around specialist, value creation
What are portfolio managers?
Agent for financial markets
Identifying and acquiring undervalued assets
Divesting low-performing SBUs quickly and good performers at a premium
Autonomous SBU’s, small, low cost corporate staf, incentives based on SBY result
Many independent companies controlled at their bottom line.
Eg. Conglomerates: popular in ‘60 and 70s
Agent acts on behalf of shareholders/financial markets.
Conglomerate strategy: not closely involved in routine management of businesses
Eg. Private equity Blackstone
What is the restructuring manager?
Value creation at the SBU level: limited role to create SBU ‘finesse’
Identifies restructuering opportunities. Intervention in SBU to transform performance. Sale of SBU when restructuring complete or unfeasible or market conditions favourable.
Autonomous SBUs, small specialist corporate centre, turnround skills of corporate staff, incentives based on acquired SBU results
Vertical coordination when time limited
What is the synergy manager
Corporate parent seeking to enhance value for business units by managing synergies across business units –> common purpose, good if close to core business.
Challenges:
1) Excessive costs: benefits > financial and opportunity costs
2) Overcoming self-interest: managers unwilling to work for common good
3) Illusory synergies: easy to overestimate –> eg. In acquisitions
Sharing activities/resources or transferring skills/competences to enhance competitive advantage of SBU’s
Identification of appropriate bases for sharing or transferring
Identification of benefits which outweigh costs
Collaborative SBs, corporate staff as integrators, overcoming SBU resistance to sharing or transferring, incentives affected by corporate results.
What is the parental developer?
Empoy its own central capabilities to add value to its businesses.
Challenges:
1) Parental focus: focused to identify –> value adding capabilities
2) Crown jewel problem:
Parents add little value = divest and buy where parent can add value
Vertical coordination between SBU and corporate center;
Central competences can be used to create value in SBUs
SBUs no fulfilling their potential (a parenting opportunity)
The centre has clear and relevant resources or capabilities to enhance SBU potential
What are the different models for portfolio management?
1) Boston Consulting Group: BCG model
Optimising cash flow and consolidation
2) Market attractiveness model:
Optimising growth
3) Parenting matrix model:
Optimising the managerial fit between the corporate centre and the SBU, focus on competences
What is the BCG model?
Boston Consulting Group matrix: uses market share and market growth criteria for determining attractiveness and balance of a business portfolio
1) Star = high market share in a growing market –> we need to spend to keep up with growth, but sufficient profits to be self sufficient
2) Question mark = problem child
Growing market but no high market share yet –> stars = heavy investment required. Many fail, nurture several at time
3) Cash cow = high market share in mature market, growth is low, profitable. Cash generator here –> question marks
4) Dogs = low share in static or declining markets = cash drain = divestment or closure@
What is the idea behind the BCG model?
Balancing the product/market
Focus on cashflow and return on investment
Acquisition and sale of SBU’s
Development of termination of SBU’s
Presume independency between business areas
What are the dimensions of assumptions of the BCG model?
High market shares lead to sales and reduce unit cost
High market growth reduce competition and increase the remaining life time of the investment
What are the theories behind the BCG model?
1) The product life cycle model
The market is most attractive during growth, growing markets have a need for investment.
Mature and declining markets do not need investments.
2) The experience curve
When we repeat an activity, the cost of doing so decreases because we learn, the unit cost will fall over time as a result = leads to a cash cow.
What are the problems with the BCG model?
Difficult to determine what the market share really is, dpeends on how we define the market
How can we motivate managers and people working in a cash cow?
The model assumes independency between strategic business units in order to invest or determine a SBU
Undermine the idea of synergies across the SBUs
What is the directional policy matrix?
The GE-McKinsey model = look for growth, based on SBU strength, long-term market attractiveness
Positions business units according to:
1) How attractive is the relevant market in which they are operating?
2) Competitive strength of SBU in that market –> Porter’s 5 forces or PESTEL
Strategy guidelines: highest growth potential and greatest strength = invest
The model is applied at the corporate level, we ought to invest in attractive markets where we have a strong SBU
What is the parenting matrix?
Also called the Unilever model = parental fit is an important criterion for inclding businesses in portfolio –> can the parent add value
1) Fit between business unit critical success factors and the parent’s skills, resources and characteristics (feel).
2) Fit between business unit parenting opportunities and the parent’s skills, resources and characteristics (benefit)
4 kinds of benefits:
1) Heartland business unites:
= parents understand well and add value = core of future strategy, high feel and high benefit
2) Ballast
= parents understand, but can do little for, at least as succesful as independent = divest or spared from corporate bureaucracy
3) Value traps
= Dangereous appear attractive but deceptively, parent’s lack of feel –> more harm than good, parent needs new capabilities to turn it into heartland, otherwise sell
4) Alien = clear misfits = exits.
What are the 2 dimensions for choosing and managing subsidiary companies?
1) Fit between SBU’s critical success factors and the parent company’s resources and competences (avoid problems, avoid a lack of understanding and minimize risk)
2) Fit between SBU’s possibilities of being managed and the parent company’s resources and competences (increase possibilities of value adding and managing)
Who are the founders of transaction cost theory?
Coases article: “The Nature of the Firm” from 1939 and later on Williamson’s book: “Markets and Hierarchies” from 1975.
A theory which explains when it is most efficient to organise activities/transactions through the market, through collaboration and through organsations
What is the point of departure for the transaction cost theory
Organisations and markets are made up by transactions between actors and transactions are the unit of analysis.
Transactions are not for free, they cost
Transaction costs are connected with contact, contract and control.
How can we regulate and control transactions?
Transactions can be regulated either by the markets, contracts or through organisations
Transactions within the market are governend through market mechanisms, the trade law and the court for commercial issues
Transactions within the organisations are governed through salary formation, the labour law and the worker’s legislation system.
Transactions through collaboration are governed by the law of agreement and the arbitration system
What are the advantages of firms, markets and collaboration
Markets can adapt quickly to simple changes
Markets are good at pricing performance
Firms are good at adapting to complex changes
Firms are good at facilitating learning
Collaboration is flexible and not as risky as firms
If collaborating disagreements, it can be resolved with anonymity
What is the transaction cost theory as a research program?
The basic assumptions are that an agents acts bounded rational and potentially opportunistic
The research program focuses on under which conditions different coordination mechanisms (governance structures) are the most efficient
The most common conditions are the frequency of transaction and asset specificity.
What dimensions determine the organising of transactions
The asset specificity (specialisation) determine the risk of the transaction
The frequency of the transactions determine the possibility of learning and scale of economics
High asset specificity and high frequency of transaction draw in the direction of organising through the organisation
Low asset specificity and low frequency of transaction draw in the direction of organsing through the markets
Low frequency of transactions limit the possibilities of learning and reversed
A high asset specificity (much content of for instance technology and knowledge) lock the transaction partners to each other.
Transactions are organised in a way so that transaction costs are minimised.
What is the link between transaction cost theory and strategic management?
Through the theory we can determine when to do related diversification
We can calculate when to buy a customer or a supplier
We can also calculate when to outsource or insource an activity
The theory also explains why a corporate structure is more efficient than a functional structure
What kind of critic can be raised against the theory?
People and firms do rarely act opportunistic
It is not sufficient just to point out the good qualities of a phenomenon in order to justify it. Everything can have good qualities
We need to specify the feedback mechanism in order to explain how a phenomenon has emerged
It is not sufficient to argue that the organisations and markets have emerged because of their benefits.
Here Williamson points to the above specific good qualities of the corporate structure ars an argument for organising.
