Lesson 8: Developing Corporate Strategies

Question 1

What is the corporate task of the corporate center?

Answer 1

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

Question 2

What is value creation at the corporate level?

Answer 2

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

Question 3

Value adding activities corporate parent?

Answer 3

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

Question 4

Value destruction at the corporate level?

Answer 4

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.

Question 5

What are the types of corporate roles?

Answer 5

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

Question 6

What are portfolio managers?

Answer 6

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

Question 7

What is the restructuring manager?

Answer 7

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

Question 8

What is the synergy manager

Answer 8

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.

Question 9

What is the parental developer?

Answer 9

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

Question 10

What are the different models for portfolio management?

Answer 10

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

Question 11

What is the BCG model?

Answer 11

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@

Question 12

What is the idea behind the BCG model?

Answer 12

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

Question 13

What are the dimensions of assumptions of the BCG model?

Answer 13

High market shares lead to sales and reduce unit cost

High market growth reduce competition and increase the remaining life time of the investment

Question 14

What are the theories behind the BCG model?

Answer 14

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.

Question 15

What are the problems with the BCG model?

Answer 15

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

Question 16

What is the directional policy matrix?

Answer 16

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

Question 17

What is the parenting matrix?

Answer 17

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.

Question 18

What are the 2 dimensions for choosing and managing subsidiary companies?

Answer 18

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)

Question 19

Who are the founders of transaction cost theory?

Answer 19

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

Question 20

What is the point of departure for the transaction cost theory

Answer 20

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.

Question 21

How can we regulate and control transactions?

Answer 21

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

Question 22

What are the advantages of firms, markets and collaboration

Answer 22

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

Question 23

What is the transaction cost theory as a research program?

Answer 23

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.

Question 24

What dimensions determine the organising of transactions

Answer 24

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.

Question 25

What is the link between transaction cost theory and strategic management?

Answer 25

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

Question 26

What kind of critic can be raised against the theory?

Answer 26

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.