Strategic Management Models

Week 2 Chapter 7: Strategic Directions and Corporate-Level Strategy.......................2

Ansoff’s Matrix pg. 258.................................................................................................................2

1) Market Penetration..............................................................................................................2

2) Consolidation..........................................................................................................................3

3) Product Development.........................................................................................................3

4) Market Development.......................................................................................................... 3

5) Diversification........................................................................................................................4

Related Diversification Options for a manufacturer pg. 266.......................................4

Portfolio managers, synergy managers and parental developers pg. 274............4

Value-adding potential of corporate rationales pg. 277................................................4

BCG Matrix pg. 279.........................................................................................................................4

Stars.................................................................................................................................................. 4

Question Marks........................................................................................................................... 4

Cash Cows...................................................................................................................................... 4

Dogs.................................................................................................................................................. 4

GE-McKinsey/ Directional Policy Matrix pg. 281..............................................................5

The Parenting Matrix: the Ashridge Portfolio Display pg. 284...................................5

Week 7 Chapter 8: International Strategy................................................................................5

International Strategy Framework pg. 294.........................................................................5

Drivers of Internationalisation pg. 297.................................................................................5

Porter’s Diamond – the determinants of national advantages pg. 301...................5

Boeing’s global R&D network pg. 303....................................................................................5

Four International Strategies pg. 305....................................................................................6

International Competitor Retaliation pg. 310....................................................................6

Market Entry Modes: Advantages and Disadvantages pg. 312...................................6

Subsidiary Roles in Multinational Firms pg. 315..............................................................6

Week 2 Chapter 7: Strategic Directions and Corporate-Level Strategy

Ansoff’s Matrix pg. 258 Looks at the four basic alternative directions for strategic development Growth is rarely a good end in itself

o Public sector organisations often accused of growing out-of-control-bureaucracies

o Private sector managers accused of empire building at the expense of shareholders

Consolidation added which involves protecting existing products and existing markets

Products

Existing New

Markets Existing1) Market Penetration

2) Consolidation3) Product

Development

New4) Market

Development5) Diversification

1) Market Penetration Where an organisation gains market share with existing product range Builds on existing strategic capabilities Organisation’s scope is exactly the same Greater market share implies increased power vis-à-vis buyers and

suppliers, greater economies of scale and experience curve benefits However, 2 constraints with seeking greater market penetration

o Retaliation from competitors: likely to exacerbate industry rivalry and involve price wars or expensive marketing battles

Where organisations face retaliation dangers, seeking market penetration need strategic capabilities that give a clear competitive advantage

In low-growth or declining markets, it can be more effective to acquire competitors

o Legal constraints: concerns from official competition regulators concerning excessive market power

Regulators restrain powerful companies or prevent mergers and acquisitions that would create excessive power

2) Consolidation Where organisations focus defensively on their current markets with

current products Can take two forms:

o Defending market share: differentiation strategies in order to build customer loyalty and switching costs are often effective

o Downsizing or divestment: especially when overall market size is declining, reducing the size of the business through closing capacity is often unavoidable

Selling activities to other businesses; can be dictated by the needs of shareholders

Can also make it easier to sell the core business to a potential purchaser

Sometimes used to describe strategies of buying up rivals in a fragmented industry

Can gain market power and increase overall efficiency by acquiring weaker competitors and closing capacity

3) Product Development Where organisations deliver modified or new products to existing

markets Deliver modified or new products/services to existing markets Implies greater degrees of innovation Same markets are involved but technologies are radically different Product can be expensive and high-risk:

o New strategic capabilities: success frequently depended on a willingness to acquire new technological and marketing capabilities with the help of specialised IT and e-commerce consultancy firms; involves heavy investments and high risk of failures

E.g. banks entering online banking but suffered setbacks with technologies so different from traditional branches of delivering services

o Project management risk: typically subject to the risk of delays and increased costs due to project complexity and changing project specifications over time

E.g. Airbus A380 suffered 2 years of delays in mid-2000s because of wiring problems; high degrees of customisation required by each airline customer and incompatibilities in computer-aided design software

4) Market Development Where existing products are offered in new markets Extension of scope is limited Can take 3 forms:

o New segments: e.g. college might offer its services to older students or evening courses

o New users: e.g. aluminium, which was originally used in packaging and cutlery, and now supplemented by aerospace and automobiles

o New geographies: internationalisation; spread of small retailer into new towns

Essential that market development strategies are based on products/services that meet critical success factors of the new market

Challenge of coordinating different segments, users and geographies which all might have different needs

5) Diversification A strategy that takes an organisation away from both its existing markets

and its existing products Radically increases the organisation’s scope Is a matter of degree

Related Diversification Options for a manufacturer pg. 266 Related diversification: is corporate development beyond current

products and markets, but within the capabilities or value network of the organisation. This can be problematic for two reasons: 1) corporate level time and cost as top managers try to ensure that the benefits of relatedness are achieved through sharing or transfer across business units. 2) Business unit complexity, as business unit managers attend to the needs of other business units, perhaps sharing resources or adjusting marketing strategies, rather than focusing exclusively on the needs of their own unit.

Vertical integration: is backward or forward integration into adjacent activities in the value network

Backward integration: is development into activities concerned with the inputs into the company’s current business.

Forward integration: is development into activities that are concerned with a company’s output.

Horizontal integration: is development into activities, which are complementary to present activities.

Un-related Diversification Is the development of products and services beyond the current

capabilities and value network Advantages: exploiting dominant logics (rather than concrete operational

relationships), countries with under developed markets (can be fertile ground for conglomerates).

Diversification can be dangerous if large corporations were diversifying simply to spread risks for managers, to save managerial jobs in declining businesses or to preserve the image of growth. Some diversification is good- but not too much.

Portfolio managers, synergy managers and parental developers pg. 274 A portfolio manager is a corporate parent acting as an agent on behalf of

financial markets and shareholders. Its role is to identify and acquire undervalued assets or businesses and improve them. In terms of value

creating activities, the portfolio manger concentrates on intervening and the provision or withdrawal of investment, they also seek to keep costs of the centre low. They give autonomy to their chief executives and thus can manage a large number if businesses as they are not directly managing their everyday strategies; rather they are acting from above.

The synergy manager: is a corporate parent seeking to enhance value across business units by managing synergies across business units. It S value creating activities are: envisioning, building a common purpose, and facilitating cooperation across businesses and providing central services and resources. Three problems arise: excessive costs (managing synergetic relationships tends to involve expensive investments in managing time), overcoming self-interest (likely to be unwilling to sacrifice their time and resources for the common good), illusory synergies (claims synergies often prove illusory when managers actually have to put them into practise).

The parental developer is a corporate parent seeking to employ its own competences as a parent to add value to its businesses and build parenting skills that are appropriate for its portfolio of business units. They focus on the resources or capabilities they have as parents which they can transfer downwards to enhance the potential of business units. Four challenges exist: 1) identifying parental capabilities (if the value adding capabilities of the parent are wrongly identified then its contribution will only be counter productive. 2) parental focus corporate executives should focus their energy and time on activities where they really do add value. 3) The crown jewel problem (parental developers should divest businesses they do not add value to even profitable ones. 4) Sufficient feel (corporate parents must have an understanding of the businesses within the portfolio to know where they can add value and where they cannot.

Value-adding potential of corporate rationales pg. 277

BCG Matrix pg. 279

Stars High market share in a growing market May be spending heavily to keep up with growth, but market share should

yield sufficient profits to make it sufficient in terms of investment needs

Question Marks Growing market but not yet with high market share Developing question marks into stars takes heavy investment BCG advises corporate parents to nurture several question marks at a

time because not all succeed Because existing stars will eventually become cash cows or dogs, it is

important to develop question marks into stars

Cash Cows High market share in a mature market Because growth is low, investment needs are less High market share profitable business unit Cash cow should be a provider of investments to question marks

Dogs Low share in static or declining markets May be a cash drain and use up disproportionate amount of money and

resources

Market Share

Market Growth

High Low

High

Low

Stars Question marks

Cash Cows Dogs

GE-McKinsey/ Directional Policy Matrix pg. 281 The directional policy matrix positions business units according to (i) how

attractive the relevant market is in which they are operating and (ii) the competitive strength of the SBU in that market. The matrix suggests that the businesses with the highest growth potential and the greatest strengths are those in which to invest for growth. Those that are the weakest and in the least attractive markets should be divested or harvested.

The Parenting Matrix: the Ashridge Portfolio Display pg. 284 The parenting matrix introduces parental fit as an important criterion for

including businesses in the portfolio. The two key dimensions of fit in the parenting matrix: 1) feel (which is a measure of the fit between each business unit’s critical success factors and the capabilities of the corporate parent. 2) benefit (which measures the fit between the parenting opportunities or needs of business units and the capabilities of the parent. Parenting should be avoided if there is no benefit.

Four kinds of business along these two dimensions of feel and benefit: Heartland: business units are one, which the parent understands well and

can continue to add value. Ballast: are ones the parent understands well but can do little for.

Value trap: appear attractive because there are opportunities to add value but they are deceptively attractive because the parent’ lack of feel will result in more harm then good.

Alien business units offer little opportunity to add value and the parent does not understand them anyway.

Week 7 Chapter 8: International Strategy

International Strategy Framework pg. 294

Drivers of Internationalisation pg. 297 Market drivers

Similar customer needs Global customers Transferable marketing

Government drivers Trade policies Technical standards Host government policies

Competitive drivers Interdependence between countries Competitors’ global strategies

Cost drivers Scale economies Country-specific differences Favourable logistics

Porter’s Diamond – the determinants of national advantages pg. 301 Porter’s diamond suggests that there are inherent reasons why some

nations are more competitive than others, and why some industries within nations are more competitive than others.

Home base determinants are: Factor conditions which refer to the factors of production that go into

making a product or service Home demand conditions- the nature of the domestic customers can

become a source of competitive advantage. Related and supporting industries- can be important, which are regionally

based and make personal interaction easier. Firm strategy, industry structure and rivalry- in different countries can

also be a basis of advantage, a competitive local industry structure is also helpful if too dominant in their home territory, local organisations can become complacent and lsoe advantage overseas. Some domestic rivalry can be good.

Boeing’s global R&D network pg. 303 Global sourcing: purchasing services and components from the most

appropriate suppliers around the world regardless of their location. Different location advantage can be identified:

Cost advantage- includes labour costs, transportation, and communication costs, taxation and investments incentives.

Unique capabilities may allow an organisation to enhance its competitor’s advantage.

National characteristics can enable organisations to develop differentiated product offerings aimed at different segments.

On of the consequences of organisations trying to exploit locational advantages can be that they create complex networks of intra and inter-organisational relationships.

Four International Strategies pg. 305 The global-local dilemma relates to the extent to which products and

services may be standardised across national boundaries or need to meet the requirements of specific national markets.

The four basic international strategies are: Simple export-, which involves a concentration of activities in one

country, typically the country of the organisation’s origin. Multi-domestic- this strategy is similarly loosely coordinated

internationally, but involves dispersion overseas of various activities, including manufacturing and sometimes product development.

Complex export- which involves the location of most activities in a single country but builds on more coordinated marketing.

Global strategy- describes the most mature international strategy with highly coordinated activities dispersed geographically around the world. Using international value networks to the full, geographical location is chosen according to the specific locational advantage for each activity, so that product development, manufacturing, marketing, and headquarters functions might all be located in different countries.

Configuration of Activities

Coordination of

Activities

Dispersed Concentrated

High

Low

Global Complex Export

Multidomestic Simple Export

International Competitor Retaliation pg. 310

Market Entry Modes: Advantages and Disadvantages pg. 312 An organisation needs to choose how to enter the market. The key entry modes are:

Exporting:

Advantages Disadvantages No operational facilities needed

in the host country Does not allow the firm to

benefit from the locational advantages of the host nation

Economies of scale can be exploited

Limits opportunities to gain knowledge of local markets and competitors

By using internet, small/inexperienced firms can gain access ti international markets

May create dependence on export intermediaries

Exposure to trade barriers such as import duties

Incurs transportation costs

May limit the ability to respond quickly to customer demands

Joint ventures and alliances

Advantages Disadvantages Investment risk shared with

partner Difficulty of identifying

appropriate partner and agreeing appropriate contractual terms

Combining of complementary resources and know-how

Managing the relationship with the foreign partner

May be a gov condition for market entry

Loss of competitive advantage thorugh imitation

Limits ability to integrate and coordinate activities across national boundaries

Licensing

Advantages Disadvantages Contractually agreed income

through sale of production and marketing rights

Difficulty of identifying appropriate partner and agreeing contractual terms

Limits economic and financial exposure

Loss of competitive advantage through imitation

Limits benefits from the

locational advantages of host nation

FDI

Advantages Disadvantages Full control of resources and

capabilities Substantial investment in and

commitment to host country leading to economic and financial exposure

Facilities integration and coordination of activities across national boundaries

Acquisition may lead to problems of integration and coordination

Acquisition allow rapid market entry

Greenfield entry time consuming and less predictable inn terms of cost

Greenfield investments allow development of state of the art facilities and can attract financial support from the host government.

Entry modes are often selected according to stages of organisational development.

Staged international expansion: firms initially use entry modes that allow them to maximise knowledge acquisiton whilst minimising the exposure of their assets.

Internationalisation and performance:

An inverted U-curve: the combination of diverse locations and diverse business units also give rise to high levels of organisational complexity. After a point the costs of organisational complexity may exceed the benefits of internationalisation. Moderate levels of internationalisation leads to best results instead of an inverted u curve.

Service sector disadvantage: internationalisation may not lead to improved performance for service sector firms. 1) The operations of Foreign Service firms in some sectors remain tightly regulated and restricted in many countries. 2) Due to intangible nature of service they are often sensitive to cultural differences and require greater adaptation, which may lead to higher initial leading costs. 3) Services typically require a significant local presence and reduce the scope for the exploitation of economies of scale in production.

Internationalisation and product diversity: those firms are likely to do better from international expansion because they have already developed the necessary skills and structures for managing internal diversity. But those may also face excessive costs of coordination and control leading to poor performance.

Subsidiary Roles in Multinational Firms pg. 315Capabilities

Strategic Importance of the Local

Environment

Low High

High

Low

Black Hole Strategic Leader

Implementer Contributor

Strategic leaders: are subsidiaries that not only hold valuable resources and capabilities but are also located in countries that are crucial for competitive success.

Contributors: are subsidiaries with valuable internal resources but located in countries of lesser strategic significance, which none the less play key roles in a multinational organisation’s competitive success.

Implementer: simply executive strategies developed elsewhere and may generate surplus financial resources to help fund initiatives elsewhere.

Black holes: are subsidiaries locate in countries that are crucial for competitive success but with low-level resources or capabilities.