Technical University of Munich
Strategies in MNEs
– 1. Strategy context, financial success,
and strategy levels
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
TUM.SIM.MSc.SMNE.01.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
2
Strategic redirection
3
Portfolio management and product diversification
4
Growth programs and internationalization
5
Corporate growth modes and acquisitions
6
Corporate transformation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 2
TUM.SIM.MSc.SMNE.01.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
1.1
The context of strategy making
1.2
Financial success
1.3
Strategy levels and advantages
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 3
TUM.SIM.MSc.SMNE.01.pptx
CEOs manage the relationship between the firm and its
stakeholders based on corporate governance
Shareholders
Country A
Country B
Country C
Sources of
supply
Customers
Corporate governance
Employees
Consumers
CEO / Top Management – Mandate to lead
Suppliers
Creditors
Companies
Middle management
Employees
Country A
Country B
Country C
Country
Public
Country A
Country B
Country C
Society
Country A
Country B
Country C
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 4
TUM.SIM.MSc.SMNE.01.pptx
Multinationality adds another dimension to stakeholder
management
Case examples
Working conditions
“Stop the killing, act now” Clean Clothes
Campaign urges brands to sign Safety
Agreement
Clean Clothes Campaign (Homepage), 29.04.2013
Environmental issues
Once your reputation is gone…
Brent-Spar and the Nigeria-engagement bring the oil multinational Shell into headlines
WELT, 28.05.1995
Shareholder issues
LUFTHANSA-BOARD OF DIRECTORS
Foreign investors […] announce concerns against
the return of former CEO
FAZ, 07.05.2013
Governmental issues
DUMPING-ACCUSATION
EU imposes duty on Chinese solar cells
However, suppliers fear serious consequences for their
business – and retaliation.
Handelsblatt, 08.05.2013
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 5
TUM.SIM.MSc.SMNE.01.pptx
Overview
What do stakeholders
tolerate?
Zone of acceptance
What do CEO‘s
aim for?
Success and Objectives
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 6
TUM.SIM.MSc.SMNE.01.pptx
Managerial Discretion describes the latitude of managerial
action
Managerial Discretion
Zone of
acceptance (ZoA)
• Defines stakeholders’ tolerance
for actions and
outcomes
• Possibility of
resistance and/or
withdrawal
• Perceived distance
between expected
and actual action
• Relative power of
stakeholders
Managerial
discretion (MD)
Managerial
awareness (MA)
• Intersection of MA
and ZoA
• Support of
stakeholders
• Describes latitude
of action
• Action depends
upon allocation of
attention
• Describes potential
actions of a
manager
Source: Hambrick, D. C. & Finkelstein, S. 1987. Managerial Discretion: A Bridge between Polar Views of Organizational Outcomes.
In B. M. Staw & L. L. Cummings (Eds.), Research in Organizational Behavior, Vol. 9: 369-406.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 7
TUM.SIM.MSc.SMNE.01.pptx
Zone of acceptance
Internal environment
Resource availability
Inertial forces (size, age, culture)
Powerful inside forces
+
Zone of acceptance (ZoA)
-
Task environment
Industry structure (esp. oligopoly)
Quasi-legal constraints
Powerful outside forces
-
Product differentiability
Market growth
Demand instability
+
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 8
TUM.SIM.MSc.SMNE.01.pptx
Power of stakeholders influences the zone of acceptance
The situation of Porsche and Daimler in 2007
„Sometimes companies can do better outside of the requirements of quarterly
analysts reports, outside of the continuous attention to short term results.“
John W. Snow, Chairman Cerberus Capital Management (CNN, 2007/05/15)
100%
Porsche &
Piech family*
75,9%
institutional
investors
16,9% private
investors
7,2%
Emirate Kuwait
Porsche refuses to provide quarterly results.
As a result Porsche is excluded from the
prime segment of the Deutsche Börse.
Although seen critically, Daimler has to fulfill
the expectations of powerful stakeholders, in
particular institutional investors and provide
quarterly financial reports.
*ordinary shares
Sources: manager-magazin online 2004/11/08; Daimler AG. Annual Report 2007. p. 28;
http://archives.cnn.com/TRANSCRIPTS/0705/14/sitroom.02.html.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 9
TUM.SIM.MSc.SMNE.01.pptx
The zone of acceptance may change over time
Example: Herbert Hainer
Revenues (in million)
€ 6.112
Revenues (in million)
€ 10.084
Revenues (in million)
€ 13.344
Profit (in million)
€
Profit (in million)
€
Profit (in million)
€
Employees
13.941
Employees
26.376
Employees
46.522
376
Herbert Hainer
became CEO
723
927
Adidas bought
Reebok for
€ 3.1 bn
2001
2006
2011
“Over the years I made a lot of decisions in the company and
have gained the unquestionable confidence of the supervisory
board. That makes me feel that I can change a lot.”
Herbert Heiner
CEO of Adidas AG
“If I had bought Reebok at the beginning of my career as
CEO and not in the fourth year of my tenure, I probably would
have been fired.”
Source: FAZ, 04/24-25/2010: Cheftrainer mit drei Streifen; Adidas, Financial Reports, 2001-2011.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 10
TUM.SIM.MSc.SMNE.01.pptx
How do CEOs‘ decisions influence stakeholders and the zone
of acceptance over time?
Stakeholders
Zone of
acceptance
CEO’s decisions
t0
CEO’s decisions
t1
?
Stakeholders
Zone of
acceptance
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 11
TUM.SIM.MSc.SMNE.01.pptx
Overview
What do stakeholders
tolerate?
Zone of acceptance
What do CEO‘s
aim for?
Success and Objectives
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 12
TUM.SIM.MSc.SMNE.01.pptx
What is success?
Results
Objectives
Success
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 13
TUM.SIM.MSc.SMNE.01.pptx
The aspiration level is a function of comparisons and path
dependent factors
Comparison to:
Own past
performance
Aspiration Level
=
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
What does past mean?
Past performance
of others
Who is my relevant peer group?
Other factors
Which (unexpected) events
influence what we want to achieve?
Chapter 1 | 14
TUM.SIM.MSc.SMNE.01.pptx
Stakeholders’ expectations entail multiple objectives firms
should fulfill
Shareholders
Objective:
Own past
performance
Past performance
of others
Employees
Other factors
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Customers
Chapter 1 | 15
TUM.SIM.MSc.SMNE.01.pptx
Top management organizes a political process to determine
objectives of the company
From results to objectives
Company level
Stakeholder level
Company level
Past performance
Performance
of others
Political
process
Top
management
Objectives
of the
company
Other factors
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 16
TUM.SIM.MSc.SMNE.01.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
1.1
The context of strategy making
1.2
Financial success
1.3
Strategy levels and advantages
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 17
TUM.SIM.MSc.SMNE.01.pptx
Profit is king!
“Management must always, in every
decision and action, put economic
performance first.”
Peter F. Drucker, US-American economist
“For a public company, profit is everything, but in order to be profitable it
must be a happy company, and I will
do everything in my power to make us
a happy company again.”
Hasso Plattner, Chairman, SAP AG (02/08/2010)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 18
TUM.SIM.MSc.SMNE.01.pptx
Financial success is, if financial value is increased
Change of financial value
How much is
someone willing to
pay to become a
company’s owner?
How much is
someone willing to
pay to become a
company’s owner?
Financial Value
in t0
Financial Value
in t1
t0
t1
Success / failure
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 19
TUM.SIM.MSc.SMNE.01.pptx
How much increase in financial value is a success?
Success/failure threshold
What is success?
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Δ Financial value
=
0
Δ Financial value
>
0
Δ Financial value
>
?
Chapter 1 | 20
TUM.SIM.MSc.SMNE.01.pptx
Success of strategy is measured across time
Determination of the success of strategy
Value for
shareholders
Gross Value
Added
(Net)/Economic
Value Added
Opportunity costs
(alternative value
enhancement)
t0
t1
time
Note: Here, we look at financial objectives of shareholders. This does not neglect that a) other
objectives of shareholders exist and that b) objectives of other stakeholders are also of relevance.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 21
TUM.SIM.MSc.SMNE.01.pptx
There are two general alternatives to evaluate financial value
Financial valuation approaches
Cash-based
• Financial value as capitalization of future
cash inflows
• Financial value as sum of discounted free
cash flows
.
𝐹𝐶𝐹'
𝐹𝑉 = %
(1 + 𝑊𝐴𝐶𝐶)'
'/0
Profit-based
• Financial value as capitalization of future
excess capital income
• Financial value as sum of discounted
economic value adds in addition to invested
capital
.
𝐹𝑉 = 𝐼𝐶 + %
'/0
.
= 𝐼𝐶 + %
'/0
Free cash flow principle
Discounting principle
Cost of Capital and opportunity cost principle
𝐸𝑉𝐴'
(1 + 𝑊𝐴𝐶𝐶)'
𝑅𝑂𝐼 − 𝑊𝐴𝐶𝐶 ∗ 𝐼𝐶
(1 + 𝑊𝐴𝐶𝐶)'
Capital productivity and efficiency principle
Economic value add principle
ROI and profit concepts
FV = Financial value, FCF = Free cash flow, WACC = Weighted average cost of capital, IC = Invested capital, EVA = Economic value added,
ROI = Return on investment
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 22
TUM.SIM.MSc.SMNE.01.pptx
The total shareholder return concept is based on market data
Total shareholder return
TSRt+1;t = [(MVt+1 + Dt+1;t – Ct+1;t) / MVt]– 1
>
TSR < Risk equivalent alternative rate of return
=
MVt Market-value of equity capital at the point in time t
Ct+1;t Increase in equity between the points in time t and t+1
t+1 Today
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Dt+1;t
Dividend payments between the points in time t and t+1
TSRt+1;t Total Shareholder Return between the points in time t and t+1
Chapter 1 | 23
TUM.SIM.MSc.SMNE.01.pptx
Free cash flow is a periodic excess cash that could be paid out
to debt- and shareholders
Free cash flow principle, Example SAP AG, in mio. €
Principle
Cash that is potentially
paid to debt- and
shareholders
Free cash
and
excessively created
in a period
flow
Cash Flow Statement, SAP AG 2015
Profit after tax
Adjustments to reconcile profit after taxes to net cash provided by
operating activities
Depreciation and amortization
Income tax expense
Financial income, net
Decrease/increase in sales and bad debt allowances on trade
receivables
Other adjustments for non-cash items
Decrease/increase in trade and other receivables
Decrease/increase in other assets
Decrease/increase in trade payables, provisions, and other liabilities
Decrease/increase in deferred income
Interest paid
Interest received
Income taxes paid, net of refunds
Net cash flows from operating activities
Business combinations, net of cash and cash equivalents acquired
Cash receipts from derivative financial instruments related to
business combinations
Total cash flows for business combinations, net of cash and cash
equivalents acquired
Purchase of intangible assets and property, plant, and equipment
Proceeds from sales of intangible assets or property, plant, and
equipment
Purchase of equity or debt instruments of other entities
Proceeds from sales of equity or debt instruments of other entities
Net cash flows from investing activities
Free Cash Flow
3,056
1,289
935
5
45
-2
-844
-313
757
218
-172
82
-1,420
3,638
-39
266
226
-636
68
-1,871
1,880
-334
3,304
Source: Adapted from SAP AG (2015)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 24
TUM.SIM.MSc.SMNE.01.pptx
Discounting makes payments out of different periods
comparable, addable, substitutable
Discounting principle
Problem:
Value of identical nominal payments out of different periods
not comparable
Solution:
Transforming the value of a payment out of later periods in
what someone would invest today to exactly get this value in
this later period
Discounting:
𝑉 𝐹𝐶𝐹' 𝑖𝑛 𝑡𝑜𝑑𝑎𝑦 =
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
>?>@
(AB CD'EFEG' FH'E)@
Chapter 1 | 25
TUM.SIM.MSc.SMNE.01.pptx
Which interest rate to choose in order to discount future
payments?
Cost of capital and opportunity cost principle
Problem:
Assume you are investing in a company. If you choose an
alternative investment, what would you earn? Are both
investments comparable?
Solution:
The return rate of an alternative investment that comes with
the same risk can be seen as opportunity costs. Costs,
because not investing in this alternative makes you loosing
the return on this investment alternative.
The cost of capital represent the opportunity cost of investing
in a company.
Measure:
WACC = 𝑖L ∗
L
+ 𝑖N ∗
M?
N
M?
WACC = Weighted Average Cost of Capital, iE = cost rate of equity, iD = cost rate of debt, E = Equity, D = Debt, TC = Total Capital
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 26
TUM.SIM.MSc.SMNE.01.pptx
Despite using financial statement data the return on residual
profit approximates to the theoretically correct solution
Economic profit on equity
T
æ
ö
(1 + rft +1 )÷÷
åt ççè (EBTi;t - (rft + bi (rmt - rft ))EQi;t )Õ
t +1
ø
=
T
EPoEi ;T ;t
Economic profit
on equity
T
åt EQ
t=
(T - t ) + 1
with:
T
τ
t
EBTi;t
rft
rmt
βi
EQi;t
i ;t
= Year the analysis ends
= Year the analysis starts
= Year
= Earnings before taxes of company i in year t
= Risk-free interest rate in year t (historic one year FIBOR)
= Market-return in year t, Market-index (all stocks listed at the
Frankfurter Börse) as Market-portfolio
= Beta-factor of company i
= Book value equity of company i in year t.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 27
TUM.SIM.MSc.SMNE.01.pptx
Economic value add asks whether capital income exceeds cost
of capital, …
EVA logic
Economic
perspective
Profit
+
WACC
Capital
income
Interest paid
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
versus
Cost of
capital
*
Invested capital
Chapter 1 | 28
TUM.SIM.MSc.SMNE.01.pptx
… or you could say, whether capital productivity exceeds cost
of capital rate
Capital productivity and efficiency principle
NOPAT
/
ROI
Capital
productivity
versus
Cost of
capital rate
WACC
Invested
capital
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 29
TUM.SIM.MSc.SMNE.01.pptx
Economic value add is if capital income exceeds cost of capital
Economic value add principle
Absolute perspective
NOPAT
(Capital income)
EBIT
(Operating income)
Taxes
EVA
WACC
Cost of capital
Cost of capital rate
*
Invested capital
Relative perspective
Return spread
(Excess return rate)
EVA
*
ROI
(Return rate)
WACC
(Cost of capital rate)
NOPAT
(Capital income)
/
Invested capital
Invested capital
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 30
TUM.SIM.MSc.SMNE.01.pptx
The ROI scheme lets identify various profit concepts (1/2)
ROI and profit concepts
Earnings before interest,
taxes, depreciations, and
amortization (EBITDA)
Return on
Investment
Earnings before interest
and taxes (EBIT)
(Operating Income)
-
NOPAT
(Capital Income)
-
Depreciation and
amortization
/
Taxes
Invested capital
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 31
TUM.SIM.MSc.SMNE.01.pptx
The ROI scheme lets identify various profit concepts (2/2)
ROI and profit concepts
EBITDA
Sales profit
margin
Return on
Investment
EBIT
-
NOPAT
-
D/A
/
Taxes
Revenues
*
Revenues
Capital turnover
/
Invested capital
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 32
TUM.SIM.MSc.SMNE.01.pptx
Measures for increasing value and four dimensions of financial
value creation
Financial value management components
Profit
Management
• Product, price
• Process efficiency
• Administrative costs
Taxes
Tax Management
• Balancing procedure
• Cross-subsidization
Invested
capital
Asset
Management
• Asset management
• Down payments
• Liquidity management
Financial
Management
• Risk management
• Capital structure
• Financing
Operating
income (EBIT)
NOPAT
EVA
-
-
Cost of
capital
*
Weighted
Average Cost
of Capital
(WACC)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 33
TUM.SIM.MSc.SMNE.01.pptx
The financial value of corporations can be created based on
three main financial value measures
Financial value measures
∆ EVA
Profitability
Return
ROCE
EVA
Growth
WACC
Invested Capital
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Financing
Chapter 1 | 34
TUM.SIM.MSc.SMNE.01.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
1.1
The context of strategy making
1.2
Financial success
1.3
Strategy levels and advantages
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 35
TUM.SIM.MSc.SMNE.01.pptx
Strategy making can occur at different levels in the organization
Levels of strategy
Corporate
Level
Corporation
Product
Area A
Regional
Area Level
…
Product Area
Level
Regional
Area I
…
Product /
Region Level
Functional
Level
Resource
Level
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 36
TUM.SIM.MSc.SMNE.01.pptx
A competitive advantage is created if a company’s service to its
customers is superior to that of its competitors
Nature and characteristics of competitive advantage
Characteristics of competitive advantage
4
1
The company creates value for its
customers (value / price ratio greater 1)
2
The realized price is above the company’s
costs
Customer
1
Value /
price
Company
Value /
price
Competitive
advantage
Competitor
2
Costs
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Costs
3
3
4
The value / price ratio of the company is
superior to the value / price ratio of its
competitors
The area where the company provides
superior value is
• Perceived by customers
• Important to customers
• Defendable against competitors
Chapter 1 | 37
TUM.SIM.MSc.SMNE.01.pptx
Which advantages do we achieve at which levels?
Levels of strategy and advantages
Corporation
Product
Area A
Regional
Area Level
Regional
Area I
Corporate Advantage across
Regional Areas
…
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
…
Corporate
Level
Corporate
Advantage
Product Area
Level
Corporate
Advantage
across Product Areas
Product /
Region Level
Competitive
Advantage
Functional
Level
Functional
Advantage
Resource
Level
Resource
Advantage
Chapter 1 | 38
TUM.SIM.MSc.SMNE.01.pptx
The management of the portfolio must lead to corporate
advantages
Corporate advantage and the role of the corporate parent
Shareholders/ Stakeholders
Corporate
Parent
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 39
TUM.SIM.MSc.SMNE.01.pptx
Corporate versus competitive advantage can be compared
based on different variables
Corporate versus Competitive advantage
Competitive
Advantage
Corporate
Advantage
Standard of
comparison
Other companies operating
as suppliers of same/similar
products
Other companies as potential
owner of businesses a firm
owns
Cause of advantage
Better management at the
business level leading to
serving customers
Better management at the
corporate level leading to
• better
• cheaper
• faster
Decision by/focus on
Customer
• relating businesses
(horizontal integration)
• influencing single businesses
(vertical intervention)
Owners/Investors/Stakeholders
How to create corporate advantage?
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 40
TUM.SIM.MSc.SMNE.01.pptx
The price ultimately determines how the total added value is
shared between shareholders and customers
Total added value of a firm
Ø Value
Price
Ø Costs
Costs
of firm
Value for Ø
customer
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Total
added
value
Added
value for Ø
customer
Added
value for
shareholders
Chapter 1 | 41
TUM.SIM.MSc.SMNE.01.pptx
Given the same total added value, a competitive advantage can
only be achieved at the expense of performance
Ø Value
A, B, C
Firm A,
B, & C
Firm A
Firm B
Firm C
Unprofitable
competitive advantage
compared to firm A
Profitable competitive
disadvantage
compared to firm A
pfirm C
pfirm A
pfirm B
Ø Costs
A, B, C
Total Ø
added
value
Added
Added
value for Ø value for
customer Ø shareholder
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Added
Added
value for Ø value for
customer Ø shareholder
Added
Added
value for Ø value for
customer Ø shareholder
Chapter 1 | 42
TUM.SIM.MSc.SMNE.01.pptx
A profitable competitive advantage can only be achieved if
compared to competitors a higher total added value exists
Firm A
Ø Value B
Ø Value A
Firm B
pfirm A,B
Ø Costs A
Ø Costs B
Profitable competitive
advantage compared
to firm A
Total Ø
added
value
Added
Added
value for Ø value for
customer Ø shareholder
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Total Ø
added
value
Added
Added
value for Ø value for
customer Ø shareholder
Chapter 1 | 43
TUM.SIM.MSc.SMNE.01.pptx
A corporate advantage is a performance effect on the corporate
level
Concept of corporate advantage
A+
VA
Product-regional areas
A and B stand alone
PA
Product-regional areas
A and B combined
C
C
S
S
CA
S’
S’
CB
PB
VB
S
S
C
C
B+
C: Ø Costs V: Ø Value P: Price
value
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
costs
c
for Ø customers
s
for Ø shareholder
s‘
Ø Corporate advantage
Chapter 1 | 44
TUM.SIM.MSc.SMNE.01.pptx
A corporate advantage is possible even the firm does not have
a competitive advantage in the respective business area
A+
Product-regional areas
A and B stand alone
VA
PA
Product-regional areas
A and B combined
Product-regional areas
C and D stand alone
C
C
C
S
S
S
CA
S’
S’
CB
PB
VB
S
S
S
C
C
C
+
C: Ø Costs V: Ø Value P: Price
value
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
costs
c
for Ø customers
s
for Ø shareholder
s‘
Ø Corporate advantage
Chapter 1 | 45
TUM.SIM.MSc.SMNE.01.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
1.1
The context of strategy making
1.2
Financial success
1.3
Strategy levels and advantages
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 46
TUM.SIM.MSc.SMNE.01.pptx
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 1 | 47
Technical University of Munich
Strategies in MNEs
– 2. Strategic redirection
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
TUM.SIM.MSc.SMNE.02.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
2
Strategic redirection
3
Portfolio management and product diversification
4
Growth programs and internationalization
5
Corporate growth modes and acquisitions
6
Corporate transformation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 2
TUM.SIM.MSc.SMNE.02.pptx
Strategies in MNEs
Agenda
2
Strategic redirection
2.1
Overview
2.2
Strategy analysis, formulation, and implementation
2.3
Strategy redirection plan
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 3
TUM.SIM.MSc.SMNE.02.pptx
What changes the firm?
Events & Behavior in the external
environment – anticipated –
Environments
Events & Behavior in the external
environment – unanticipated –
Events & Behavior in the external
environment – anticipated –
Environments
Events & Behavior in the external
environment – unanticipated –
Change process
Initiation
The firm
Formulation
Implementation
Behavior within the firm
– intended –
Initiation
The firm
Behavior within the firm
– unintended –
t-n
t0
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Formulation
Implementation
Behavior within the firm
– intended –
Behavior within the firm
– unintended –
t1
tn
time
Chapter 2 | 4
TUM.SIM.MSc.SMNE.02.pptx
An idealized process of strategy making includes three phases
Process of internal business strategy making
Initiation
Perception:
What is going on?
Formulation
External
analysis
Implementation
Internal
analysis
Developing structures
and systems to
support strategy
Identification: Do we have a
problem, and what
is it?
Structuring:
What are subproblems that we
can work on?
Strategy
options
Objectives
Evaluation
Processing: What do we have
to do to come to a
strategy?
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Strategy
as plan
Strategy
as
action
Deriving plans of
operations
Envisioning, enabling,
empowering people
to live strategy
Strategy control
Chapter 2 | 5
TUM.SIM.MSc.SMNE.02.pptx
Strategies in MNEs
Agenda
2
Strategic redirection
2.1
Overview
2.2
Strategy analysis, formulation, and implementation
2.3
Strategy redirection plan
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 6
TUM.SIM.MSc.SMNE.02.pptx
External and internal analyses help to understand current
performance and to predict future performance
External and internal factors and their influence on performance
External
External
• Competitive forces
• Demand forces
• Environments
- Political
- Economic
- Social
- Technological
- Ecological
- Legal
• Suppliers
• Other environments
- Political
- Economic
- Social
- Technological
- Ecological
- Legal
Internal
Internal
• Value to customer
• Price to customer
• Value chain
(primary processes)
• Value chain
(secondary processes)
Revenues
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Profit/
Performance
Costs
Chapter 2 | 7
TUM.SIM.MSc.SMNE.02.pptx
From resources and positioning to competitive advantage to
performance advantage is the core of strategic thinking
Strategy and antecedents of performance advantage
Antecedents
Competitive advantage
Performance advantage
Market position
Value advantage
Return spread
Price advantage
Financial value
Resource base
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 8
TUM.SIM.MSc.SMNE.02.pptx
The market-based view and the resource-based view form the
theoretical basis of strategy
Overview of theoretical concepts
Market-based
view
• Structure-Conduct Performance
paradigm as basis
• Attractiveness of markets and
influencing of market structure as
main drivers of success
Market imperfection as
central assumption:
- Information asymmetry
- Specific resources
- Opportunistic behavior
Theoretical
explanations for
temporary outperformance
Resource-based
view
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
• Resource-conduct-performance
paradigm as basis
• Valuable, inimitable, non-transferable
resources (core competencies) as
main drivers of success
Chapter 2 | 9
TUM.SIM.MSc.SMNE.02.pptx
Firms are influenced by their environments
Environments of a firm
Legal + Political
Environment
(Government)
Economic
Environment
(Economy)
Macro
Environment
Industry
Environment
Customer
Ecological
Environment
(Nature)
Company
Technological
Competitors Environment
(Technology)
Social Environment
(Society)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
• The industry environment is
composed of a set of forces
that directly shape competition
• The macro environment has
an impact on the firm through
its effect on the industry
environment
• The macro environment affects
all firms of an economy in a
general fashion
• The industry environment can
partly be shaped by firms; the
macro environment can hardly
be influenced
Chapter 2 | 10
TUM.SIM.MSc.SMNE.02.pptx
Industrial organization economics provides the theory of how
industry structure affects industry profitability/attractiveness
Profitability
potential
2
Actual profitability (= share of profitability
potential remaining with producers) depends on:
1
Value of the product to the customer
• Importance of product
• Alternatives/substitutes
2
Relative bargaining power
• Of producers and customers
3
Relative bargaining power
• Of producers and suppliers
(customer power, supplier power)
4
Intensity of competition (most obvious force
and historical focus of analysis)
• Monopoly: producer captures surplus
• Competition: price tends toward cost
of producers (rivalry, entrants)
4
1
3
Cost of
products
Price of
products
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 11
TUM.SIM.MSc.SMNE.02.pptx
Porter‘s five forces framework helps to understand the industry
environment
Forces affecting industry attractiveness
Potential entrants
Threat of new
entrants
Suppliers
Bargaining power
of suppliers
Industry
competition
Rivalry among
existing firms
Bargaining power
of buyers
Buyers
Threat of
substitutes
Substitutes
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 12
TUM.SIM.MSc.SMNE.02.pptx
Core competencies are the basis for success in any kind of
business system
Definition of core competencies
VRIN model
Resources
Tangible
resources
(Equipment,
location, ...)
Intangible
resources
(Technology, knowhow, brand, ...)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Core competencies
Capabilities
The ability to
deploy resources
by coordinating
them through
• Structures
• Processes
• Systems
• Valuable (revenues,
cost, customers for
free)
• Rare
• Inimitable (defendable/
difficult/impossible
to imitate/substitute)
• Not transferable
Chapter 2 | 13
TUM.SIM.MSc.SMNE.02.pptx
Resources are built and exploited in value chain systems
Value chain and generic competitive strategies
R&D
Differentiation
Price
leadership
• Patents
• Creativity
• Cutting edge
Purchasing
• Quality
• Supplier
relationship
• “Design to
• Price
manufacture” • Volume
• “Democratize”
innovation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Operations
Marketing/
sales
Service
• Quality control • Brand
• Relationship
• Flexibility
• Target group • Training
focus
• Economies of • Mass market • Automation
scale
• Market
penetration
• Volume
• Automation
Chapter 2 | 14
TUM.SIM.MSc.SMNE.02.pptx
SWOT Analysis summarizes internal and external analyses and
identifies key issues
SWOT Analysis
Key environmental /
industry
developments
Opportunities
Threats
Strengths
• Do we have strengths • Do we have strengths
to meet opportunities?
to master threats?
Weaknesses
• Which opportunities
do we miss because
of our deficits?
Core
competencies
• What are the threats
our weaknesses
expose to us?
Source: Bruner et al., The Portable MBA, 2003, p. 223.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 15
TUM.SIM.MSc.SMNE.02.pptx
The resource-based view of strategy has altered the dominant
perspective of strategic management
Logic of the market and resource-based view of strategy
Industry,
environment
Opportunities
and threats
Develop a
strategy that
exploits
opportunities /
masters threats
• Outside-in-perspective
• Creating strategies on
opportunities
Develop a
strategy that
exploits core
competencies to
use and creates
opportunities
• Inside-out perspective
• Creating strategies on
strengths
Fit
Resources,
capabilities / core
competencies
Strength and
weaknesses
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 16
TUM.SIM.MSc.SMNE.02.pptx
A competitive advantage is created if a company’s service to its
customers is superior to that of its competitors
Nature and characteristics of competitive advantage
Characteristics of competitive advantage
4
1
The company creates value for its
customers (value / price ratio greater 1)
2
The realized price is above the company’s
costs
Customer
1
Value /
price
Company
Value /
price
Competitive
advantage
Competitor
2
Costs
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Costs
3
3
4
The value / price ratio of the company is
superior to the value / price ratio of its
competitors
The area where the company provides
superior value is
• Perceived by customers
• Important to customers
• Defendable against competitors
Chapter 2 | 17
TUM.SIM.MSc.SMNE.02.pptx
Two generic competitive strategies are to be distinguished
Generic competitive strategies
Assumption
Strategy
Better perceived value
(Providing a unique product/service, that is
valuable to the customer)
Similar prices
“Differentiation”
Better prices
Same value
compared to
competitors
“Price Leadership”
Competitive
advantage
(Better value/
price-ratio)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 18
TUM.SIM.MSc.SMNE.02.pptx
What is strategy: Five elements that form a whole
Arenas: In which markets do we want to be active in?
Differentiators: Which competitive advantages do we want to achieve?
Economic Logic/Financials: How will we obtain revenues and profits?
Vehicles/Systems: What is our business system?
Staging/Timing: What will be our speed and sequence of moves?
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 19
TUM.SIM.MSc.SMNE.02.pptx
Strategy implementation distinguishes four fields
Fields of strategy implementation - overview
Structures + Systems
Structures: formally defined roles, responsibilities,
lines of reporting
Systems:
Functional plans
support and control
Concrete goals and measures for all functional units
Envisioning, Enabling, Empowering To make people understand and believe in strategy, to ensure
(Env., Ena., Emp.)
their qualifications to live strategy, and to give them the power
to make decisions and implement these according to strategy
Strategic control
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
To provide information on outcome of actions and enable
feedback loops on assumptions, consistency, and strategyaction fit
Chapter 2 | 20
TUM.SIM.MSc.SMNE.02.pptx
‘Strategy needs structure’ instead of ‘structure follows strategy’
Interdependence of strategy and structure
Emergent
“strategy“
Structure
Action
Realized
“strategy“
needs
Strategy
Structure determines how the corporation really acts.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 21
TUM.SIM.MSc.SMNE.02.pptx
Strategic change tries to create a new situation for the company
Strategic change - overview
high
Level 3:
Liquidity
problems
Level 3:
Liquidity
problems
(Anti) - Change forces
Change initiatives
Need to
change
low
Level 2:
Performance
problems
Level 1:
Expectation
problems
Level 0:
Healthy
company
t0
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Actors
Styles,
approaches
Change
fields
Level 1:
Expectation
problems
Change resistance
Actors
Styles,
approaches
Strategic
change
Level 2:
Performance
problems
Resistance
fields
Level 0:
Healthy
company
t1
time
Chapter 2 | 22
TUM.SIM.MSc.SMNE.02.pptx
Strategies in MNEs
Agenda
2
Strategic redirection
2.1
Overview
2.2
Strategy analysis, formulation, and implementation
2.3
Strategy redirection plan
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 23
TUM.SIM.MSc.SMNE.02.pptx
Executives have to specify five strategy objects
Co-evolution of the firm and its environments
Complexity
The firm
Environments
t-m
Causality
•
•
•
•
•
Mission
Vision
Strategy
Structure
Systems
Events and Behavior in the
external environment
t0
Uncertainty
The firm
Environments
t1
…
…
tn
time
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 24
TUM.SIM.MSc.SMNE.02.pptx
Strategies in MNEs
Agenda
2
Strategic redirection
2.1
Overview
2.2
Strategy analysis, formulation, and implementation
2.3
Strategy redirection plan
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 25
TUM.SIM.MSc.SMNE.02.pptx
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 2 | 26
Technical University of Munich
Strategies in MNEs
– 3. Portfolio management and product
diversification
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
TUM.SIM.MSc.SMNE.03.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
2
Strategic redirection
3
Portfolio management and product diversification
4
Growth programs and internationalization
5
Corporate growth modes and acquisitions
6
Corporate transformation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 2
TUM.SIM.MSc.SMNE.03.pptx
Strategies in MNEs
Agenda
3
Portfolio management and product diversification
3.1
Status quo analysis
3.2
Portfolio management concepts
3.3
Expansion within and across industries (product diversification)
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 3
TUM.SIM.MSc.SMNE.03.pptx
Portfolio management starts with a scope, performance, and
portfolio analysis
Environments
The firm
t-m
Events and Behavior in the
external environment
Corporate Strategies
• Investments
• Divestments
• Structural Adjustments
t0
Environments
The firm
t1
…
…
tn
time
• Scope analysis
• Performance
analysis
• Portfolio analysis
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
• Scope analysis
• Performance
analysis
• Portfolio analysis
Chapter 3 | 4
TUM.SIM.MSc.SMNE.03.pptx
In what product and regional areas is the firm active?
Product and regional scope of example firm
Germany
China
Japan
U.S.
Compact
cars
• Importance
• Profitability
Financial
Services
• External
conditions
• Organizational
structure
Batteries
presence in regional and product area
no presence in regional and product area
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 5
TUM.SIM.MSc.SMNE.03.pptx
The importance of portfolio elements is indicated by their
respective shares
Analysis of product-regional areas
Germany
Compact
cars
Financial
Services
Batteries
China
Japan
U.S.
Sales
84
35%
74.9
31%
37.1
15%
10
4%
EBIT
8.0
38%
8.9
42%
3.7
18%
0.3
1%
Assets
117
42%
75
27%
2
1%
1
0%
Employees 12.5
21%
20
33%
1
2%
0.5
1%
Sales
8
3%
2
1%
EBIT
2.7
13%
0
0%
Assets
73
26%
2
1%
Employees 18.5
31%
0.5
1%
Sales
6
3%
18
8%
EBIT
-3.2
-15%
0.7
3%
Assets
2
1%
6
2%
Employees
5
8%
2
3%
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
absolute values
relative values
Chapter 3 | 6
TUM.SIM.MSc.SMNE.03.pptx
The performance measurement variables can be classified into
financials and non-financials
Measurement classification
Absolute
•
•
•
•
Revenues, expenses, income
Cash inflow, cash outflow
NPV, EVA
…
•
•
RoS, RoA, RoE, RoCe, RoiC
…
•
•
•
•
Δ Share price
Δ Tobin’s Q
Total shareholder return (TSR)
…
•
•
Price-Earnings ratio
…
•
•
•
Market share, market growth
productivity, error frequency
…
Accounting-based
Relative
Financials
Market-based
Non-financials
Accounting- &
market-based
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 7
TUM.SIM.MSc.SMNE.03.pptx
The disaggregation of past performance helps to find areas
with performance gaps
Disaggregating past performance
Corporate Level
Realized | Target
Sales
240
250
How are the targets
disaggregated on the
inferior levels?
…
EBIT
21.1
25.0
Compact Cars
Realized | Target
Sales
206
200
Financial Services
Realized | Target
Sales
10
20
Batteries
…
…
…
EBIT
20.9
20.0
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
EBIT
2.7
2.0
Sales
EBIT
Realized | Target
24
30
-2.5
3.0
Chapter 3 | 8
TUM.SIM.MSc.SMNE.03.pptx
The detailed forecast is usually conducted on a business
level and aggregated afterwards on a corporate level
Forecasting – future performance
2008
2009
2010
2011
2012
250
260
280
295
312
Compact cars
200
210
225
230
240
Financial services
20
25
27
30
32
Batteries
30
25
28
35
40
EBIT - Total
25
39
48
58
68
Compact cars
20
35
40
45
50
Financial services
2
4
5
8
10
Batteries
3
0
3
5
8
Sales - Total
…
Which conflicts can arise between the different levels in the forecasting process?
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 9
TUM.SIM.MSc.SMNE.03.pptx
Forecasting is based on time stability hypothesis
Forecasting – Time stability
1st order
… object stability
Rt+1 = Rt
2nd order
… pattern stability
Rt+1 = f(xt+1)
3rd order
… pattern change
stability
Rt+1 = f(xt+1(yt+1))
…
…
Time stability is…
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 10
TUM.SIM.MSc.SMNE.03.pptx
A meaningful analysis includes an external perspective on each
market
External conditions for each portfolio segment
Batteries in Japan
…
Compact cars in Germany
Product
• Price: ~ € 12,000-24,000
• Typical characteristic: hatchback
and large tailgate
• Most popular cars: VW Golf and
Toyota Corolla
Market volume
• 1,390,516 new registrations
• € 28 bn. revenue
Competitors
• German competitors
(e.g., VW, Opel, BMW, Mercedes)
• Foreign competitors
(e.g., Toyota, Peugeot, Fiat)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Market share analysis
unit-based
revenue-based
Own firm
36%
30%
Competitor 1
26%
31%
Competitor 2
15%
9%
Competitor 3
9%
14%
14%
16%
Others
Chapter 3 | 11
TUM.SIM.MSc.SMNE.03.pptx
Organizational structure indicates how strategy is currently
executed
Organizational structure – Overview
Germany
China
Japan
U.S.
Compact
cars
BU
Germany
BU Asia
BU
America
Financial
Services
Batteries
BU Batteries
presence in regional and product area
no presence in regional and product area
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
BU
organizational unit
business unit
Chapter 3 | 12
TUM.SIM.MSc.SMNE.03.pptx
Strategies in MNEs
Agenda
3
Portfolio management and product diversification
3.1
Status quo analysis
3.2
Portfolio management concepts
3.3
Expansion within and across industries (product diversification)
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 13
TUM.SIM.MSc.SMNE.03.pptx
Portfolio planning was developed to address the issue of
complexity
Basic Concept of Traditional Portfolio Concepts
Background of portfolio planning
• Developed during the ’70s by leading
consulting firms
• Understands the overall business
activities of the firm as a set (portfolio) of
independent business activities/units
• Aims at/used to
- reach a better understanding of the
competitive position of the overall
portfolio of businesses
- suggest strategic alternatives for each of
the businesses
• ‘Single most influential’ management tool
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
External
dimension
• Attractiveness
of businesses
• Uncontrollable
by the firm
Positioning of
businesses
according to two
dimensions
• Strength of
businesses Internal
• Controllable dimension
by the firm
Chapter 3 | 14
TUM.SIM.MSc.SMNE.03.pptx
The BCG-matrix separates each dimension in two sectors
Technical details of the growth-share matrix
Total
market
2015
Total
market
2014
Total market
2014
*100
Market
growth
rate (%)
High
Question
marks
Stars
Poor
dogs
Cash
cows
Cut-off point:
Industry growth rate,
GDP growth rate,
objective for overall
growth, …
Low
Low
=1
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
High (relative)
Market
share
Business sales 2014
Leading competitor's
sales 2014
Chapter 3 | 15
TUM.SIM.MSc.SMNE.03.pptx
Why did BCG choose market growth rate and relative market
share?
Concepts behind the BCG matrix
Market growth
rate (%)
Market
volume
Market
intro
Growth
Maturity Saturation/
decline
High
Question marks
Stars
Low
Poor dogs
Cash cows
Time
Product-life
cycle
Low
Relative
market
share (%)
High
Cost/
unit
100
-20%
80
Experience
curve
1
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
2
Cum. quantity of
units produced
Chapter 3 | 16
TUM.SIM.MSc.SMNE.03.pptx
Each portfolio segment comes with suggestions for further
di-/investment
Suggestions of the growth-share matrix
Question Marks
Positioning of each business unit in the
portfolio matrix is
• Associated with a strategy that fits the
competitive strength of businesses /
degree of attractiveness of industry
(‘generic strategy’)
• Contains a suggestion of resource
allocation to each business
• Size of bubbles indicates sales
volume/importance of businesses
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Strategy: Increase or
divest
Profit: None or
negative
Investment: Very
high or disinvest
Net cash flow: Highly
negative or positive
Poor Dogs
Strategy: Divest
Profit: Low, none or
negative
Investment: Desinvest
Net cash flow:
Positive
Stars
Strategy: Hold/
increase
Profit: High
Investment: High
Net cash flow: Zero
or slightly negative
Cash Cows
Strategy: Hold/
harvest
Profit: High
Investment: Low
Net cash flow: Highly
positive
Chapter 3 | 17
TUM.SIM.MSc.SMNE.03.pptx
The portfolio matrices that followed varied or refined the
external and internal factors
Characteristics of important Portfolio Matrices
Portfolio
matrix
External
factors
Internal
factors
Growth-share matrix
(BCG)
Market growth
Market share
Industry attractivenessbusiness strength matrix
(McKinsey)
Industry attractiveness
determined by critical
structural factors
Business strength
determined by critical
success factors
Life-cycle matrix
(Arthur D. Little)
Industry maturity
(based on life-cycle
approach)
Business strength
determined by overall
competitive position
.
.
.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 18
TUM.SIM.MSc.SMNE.03.pptx
The McKinsey portfolio matrix refined the growth-share matrix
McKinsey‘s Attractiveness-Strength Matrix
Industry attractiveness
• Market growth
• Market size
• Competitive structure
• Barriers to entry
High
Selective
growth
Investment and
growth
Medium
Selectivity
Selective
growth
•…
Low
Business strength
• Market share
Harvest
/ divest
Low
Medium
High
• Financial resources
• R&D-position
• Brand identity
•…
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 19
TUM.SIM.MSc.SMNE.03.pptx
Recently, many firms use Return-Spread-Growth portfolios
Example: Portfolio management at Siemens (2007)
ROCE
Profiteers
“We concentrate on the business
units which create the most
value” (Joe Kaeser, 2007)
Top Groups
high
1
2
Siemens’
average
3
6
7
Substance keepers
4
8
5
9
low
High growth groups
10
1x world GDP
2x world GDP
Business Units
1. Automotion and
Drives
2. Power Generating
3. Medical Solutions
4. Power Transmission
and Distribution
5. Industrial Solutions
and Services
6. Transportation Systems
7. Osram
8. Building Technologies
9. VDO Automotive
10.Business Services
Growth rate
The size of the bubbles represents the percentage of sales of the particular business unit
Source: Früchte des Zorns. Capital, Nr.10, p.124. 04/26/2007
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 20
TUM.SIM.MSc.SMNE.03.pptx
With the merger of Thyssen and Krupp a conglomerate
providing industrial products and services was formed
Example: Portfolio management at ThyssenKrupp (2000)
ROCE
1999 merger of
• Thyssen AG and
• Friedrich Krupp AG HoeschKrupp
2x world GDP
30
10
20
3
10
5 6
8
0
“ThyssenKrupp is well on the way
to becoming a focused conglomerate centered on Steel, Capital
Goods and Services. (…) To this
end we will continue our ongoing
portfolio optimization.”
(ThyssenKrupp annual report 2000/01, p. 32)
9
4
-20
-30
0
7
1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
-10
-20
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
2
20
Thyssen
Krupp’s
average
Steel
Automotive
Elevators
Production Systems
Components
MaterialsServices
FacilitiesServices
Real Estate
Engineering
Others
Growth
rate
40
60
Chapter 3 | 21
TUM.SIM.MSc.SMNE.03.pptx
With ‘Divest 33+‘ ThyssenKrupp shaped its portfolio and
formed a focused conglomerate
Example: Portfolio management at ThyssenKrupp (2012)
ROCE
“In May 2003 we launched the
‘Divest 33+’ program to dispose of
more than 30 nonstrategic interests. This will allow us to concentrate on our core businesses and
create more scope for strategic
acquisitions in these areas.”
2x world GDP
30
5
20
3
1a.
1b.
1c.
3.
4.
5.
Stainless Global
Steel Europe
Steel Americas*
Elevator Technology
Production Systems (sold)
Components Technology
(incl. 2. Automotive,
9. Engineering)
6. MaterialsServices
7. Facilities Services (sold)
8. Real Estate (sold)
10. Others (partially sold)
11. Plant Technology**
12. Marine Systems Growth
10
(ThyssenKrupp annual report 2003/04, p. II)
1b
0
Divestment of companies with
sales of €7.1 bn.
(e.g. sale of Residential Real
Estate activities)
Acquisition of companies with
the same volume of sales
(e.g. majority shareholding in
Howaldtswerke-Deutsche Werft)
ThyssenKrupp’s
average
6
12
-10
-20
1a
-30
-20
0
20
40
60
rate
* Not pictured, Growth rate 77%, ROCE -69.8, Sales €2,014m.; ** Not pictured, Growth rate 2%, ROCE 155.2, Sales €4,070m.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 22
TUM.SIM.MSc.SMNE.03.pptx
Strategies in MNEs
Agenda
3
Portfolio management and product diversification
3.1
Status quo analysis
3.2
Portfolio management concepts
3.3
Expansion within and across industries (product diversification)
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 23
TUM.SIM.MSc.SMNE.03.pptx
Portfolio management decides on type and importance of
industries the company is active in
Areas of portfolio decisions
Expansion within industries
• Economies of scale
ØC
Expansion across industries
• Opportunities in new/other industries
(product diversification)
• Revenue synergies
R(A) + R(B) < R (A+B)
Cumulated
quantity
• Cost synergies
C(A) + C(B) > C (A+B)
• Market power
Profitability
# Market
position
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 24
TUM.SIM.MSc.SMNE.03.pptx
Expansion across industries shapes the degree of product
diversification
Types of product diversification
Concentric
diversification
A
Characteristics
Relational
diversification
B
High similarity
Example Passenger cars &
Sport utility vehicles
A
Conglomerate
diversification
B
B
A
Related but different value
chains, also vertical
(forward/backward) integration
Different value chains
Beer & Soft drinks
Power plants &
Medical devices
Source: Hutzschenreuter, T. 2006. Wachstumsstrategien: 54.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 25
TUM.SIM.MSc.SMNE.03.pptx
Revenue synergies are possible, if customers perceive a
packaged offering as more valuable
Packaged versus unpackaged offering – the case of passenger aviation
Example:
Transatlantic flight with
intermediate stop
Connection
flight
Flight booked via single airline:
V(flight) + V(connection flight) +
V(reduced standby time) +
V(reduced search costs for
customers)
>
Flights booked separately:
V(flight) + V(connection flight)
Flight
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 26
TUM.SIM.MSc.SMNE.03.pptx
Cost synergies are possible, if resources are shared across
product areas
Resource sharing – the example of VW
Logistics
Plant Zwickau
Paint
facility
Multiple resources are
shared in the production process of the VW
Golf and VW Passat.
Finishing
facility
Paint
facility
Logistics
Passat
Pressing
plant
Aluminum
competence
centre
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Golf
Chapter 3 | 27
TUM.SIM.MSc.SMNE.03.pptx
Strategies in MNEs
Agenda
3
Portfolio management and product diversification
3.1
Status quo analysis
3.2
Portfolio management concepts
3.3
Expansion within and across industries (product diversification)
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 28
TUM.SIM.MSc.SMNE.03.pptx
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 3 | 29
Technical University of Munich
Strategies in MNEs
– 4. Growth programs and internationalization
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
TUM.SIM.MSc.SMNE.04.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
2
Strategic redirection
3
Portfolio management and product diversification
4
Growth programs and internationalization
5
Corporate growth modes and acquisitions
6
Corporate transformation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 2
TUM.SIM.MSc.SMNE.04.pptx
Strategies in MNEs
Agenda
4
Growth programs and internationalization
4.1
Stand-alone value of international growth options
4.2
Combination value of international growth options
4.3
Growth programs
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 3
TUM.SIM.MSc.SMNE.04.pptx
The increase of corporate value consists of two components
The role of corporate parent and corporate financial value
Financial
Value
>
=
<
FV(
Δ Financial
Value
=
∑ Δ FV(
) + FV(
Stand-alone
value
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
) + … + FV(
)
) + Δ FV(Combination)
Combination
value
Chapter 4 | 4
TUM.SIM.MSc.SMNE.04.pptx
The price ultimately determines how the total added value is
shared between shareholders and customers
Total added value of a firm
Ø Value
Price
Ø Costs
Costs
of firm
Value for Ø
customer
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Total
added
value
Added
value for Ø
customer
Added
value for
shareholders
Chapter 4 | 5
TUM.SIM.MSc.SMNE.04.pptx
The price ultimately determines how the total added value is
shared between shareholders and customers
Total added value of a firm
Ø Value
Price
Ø Costs
Costs
of firm
Value for Ø
customer
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Total
added
value
Added
value for Ø
customer
Added
value for
shareholders
Chapter 4 | 6
TUM.SIM.MSc.SMNE.04.pptx
Given the same total added value, a competitive advantage can
only be achieved at the expense of performance
Ø Value
A, B, C
Firm A,
B, & C
Firm A
Firm B
Firm C
Unprofitable
competitive advantage
compared to firm A
Profitable competitive
disadvantage
compared to firm A
pfirm C
pfirm A
pfirm B
Ø Costs
A, B, C
Total Ø
added
value
Added
Added
value for Ø value for
customer Ø shareholder
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Added
Added
value for Ø value for
customer Ø shareholder
Added
Added
value for Ø value for
customer Ø shareholder
Chapter 4 | 7
TUM.SIM.MSc.SMNE.04.pptx
A profitable competitive advantage can only be achieved if
compared to competitors a higher total added value exists
Firm A
Ø Value B
Ø Value A
Firm B
pfirm A,B
Ø Costs A
Ø Costs B
Profitable competitive
advantage compared
to firm A
Total Ø
added
value
Added
Added
value for Ø value for
customer Ø shareholder
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Total Ø
added
value
Added
Added
value for Ø value for
customer Ø shareholder
Chapter 4 | 8
TUM.SIM.MSc.SMNE.04.pptx
A stand-alone value compares the internationalizing (focal) firm
to both local and foreign competitors in the host country
Stand-alone value and host country competitive advantage
Customer in
host country
V
P
V
P
Local
competitor in
host country
V
P
Internationalizing (focal)
firm
Foreign
competitor in
host country
Value advantage
Price advantage
Value advantage
Price advantage
Sources
Sources
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 9
TUM.SIM.MSc.SMNE.04.pptx
Strategies in MNEs
Agenda
4
Growth programs and internationalization
4.1
Stand-alone value of international growth options
4.2
Combination value of international growth options
4.3
Growth programs
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 10
TUM.SIM.MSc.SMNE.04.pptx
The increase of corporate value consists of two components
The role of corporate parent and corporate financial value
Financial
Value
>
=
<
FV(
Δ Financial
Value
=
∑ Δ FV(
) + FV(
Stand-alone
value
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
) + … + FV(
)
) + Δ FV(Combination)
Combination
value
Chapter 4 | 11
TUM.SIM.MSc.SMNE.04.pptx
Transfer of advantages is only successful if the company is
able to cope with liabilities of outsidership
Positive and negative outcomes of international growth
Higher costs
Destroying
advantages
Outsidership due
to distance and
unembeddedness
Lower value
Outcomes of
international
growth
Higher value
Transferability
and relevance
Creating
advantages
Lower costs
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 12
TUM.SIM.MSc.SMNE.04.pptx
Regional context-specific conditions cause dissimilarities
which can lead to outsidership
Dissimilarities and outsidership
Outsidership occurs because of dissimilarities between the new regional area
and the firm’s previously existing
portfolio.
What does the level of outsidership
depend on?
• Type of dissimilarity / distance
• Relevance of dissimilarity / distance
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 13
TUM.SIM.MSc.SMNE.04.pptx
Investments into new regional areas are reviewed with regard to
the different types of dissimilarities/distances
Types of regional dissimilarities
Regional area dissimilarities…
Economic
§ Economic development
§ Technological advancement
§ Membership of trade agreements
§…
Cultural
§ Values, norms, and beliefs
§ Religion
§ Language
§…
Institutional
§ Degree of government intervention
§ Level of Corruption
§ Formal colonial ties/historical ties
§…
Geographic
§ Physic distance between countries
§ Time zone
§…
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
may affect …
?
Chapter 4 | 14
TUM.SIM.MSc.SMNE.04.pptx
Firm-specific advantages and investment characteristics lead
to the question of transferability and relevance of advantages
Transferability and relevance of advantages
Transferability
and relevance
of advantages
Environmental settings of
new regional markets
Firm-specific advantages
Success
Given the information about both the firm-specific advantages and the characteristics of investments into new regional areas, decision-makers have to find out whether the firm-specific
advantages are transferable and relevant for the considered product market/host country
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 15
TUM.SIM.MSc.SMNE.04.pptx
Managers have to consider whether firm-specific advantages
are transferable to other product or regional areas
(Non-)area bound advantages
Non-area bound advantages
•
•
•
•
General technological knowledge
General marketing knowledge
Administrative knowledge
…
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Area bound advantages
Product area
bound
• Specific
technological
knowledge
• Specific customer
knowledge
•…
Regional area
bound
• Privileged locations
• Local marketing
knowledge
• Local brands, local
best practices
• Physical
infrastructure
•…
Chapter 4 | 16
TUM.SIM.MSc.SMNE.04.pptx
The outsider firm has to become an insider
Adaption in the host country
Outsider
• A step into a new product or
regional market with different
environmental settings to the
existing portfolio
• Lack of market-specific
knowledge
Gaining market-specific
knowledge by acting
within the various
environmental settings
Becoming an insider
in a new area:
• with a partner
• without a partner
Insider
• Generated knowledge may
enable a firm to use its specific
advantages in the new settings
• Market-specific responsiveness
time
t0
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
t1
Chapter 4 | 17
TUM.SIM.MSc.SMNE.04.pptx
The establishment chain shows an idealized path of becoming
an insider
Establishment chain
Knowledge,
resources,
commitment
Higher commitment subsidiary
Sales
subsidiary
Independent
representative
agent
No regular
export
time
A firm might intensify its activities in a certain host country – in terms of an increasing resource
commitment – with growing knowledge about the specific settings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 18
TUM.SIM.MSc.SMNE.04.pptx
Time to insidership can be shortened by cooperation modes
Cooperation modes
Market entry without own subsidiary
Market entry via own subsidiary
• Licensing
Greenfield
• Franchising
Joint venture
Acquisition
Firms can use market-specific knowledge of partners to sell products / services and
overcome liabilities of outsidership
Managers have to take into account possible dependencies and opportunistic
behavior of the partners
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 19
TUM.SIM.MSc.SMNE.04.pptx
The choice of entry mode depends on a cascade of local
circumstances
Logic tree of entry mode choices
No
Yes
Should we
Yes own contact
to customer?
Are markets
for resources
efficient?
Yes
No
Are we
allowed to
enter without local
partner?
Yes
No
Should we
own contact
to end
customer?
No
Are markets
for firms
efficient?
Are markets
for firms
efficient?
Yes
Full or potential
acquisition
No
Partial acquisition
Yes
(Partial)
acquisition or
greenfield
No
Wholly owned
greenfield
Can partner
operations
efficiently be
integrated?
Yes
Partial acquisition EJV
No
Greenfield EJV
Should we
determine
business
model?
Yes
Franchising
No
Licensing
EJV = Equity Joint Venture
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 20
TUM.SIM.MSc.SMNE.04.pptx
Partner modes come with the question of whether I get what I
hope for and at what price
Opportunistic
behavior?
Speed?
Risk?
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Managerial
control?
Access to customers,
resources, knowledge?
Chapter 4 | 21
TUM.SIM.MSc.SMNE.04.pptx
Strategies in MNEs
Agenda
4
Growth programs and internationalization
4.1
Stand-alone value of international growth options
4.2
Combination value of international growth options
4.3
Growth programs
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 22
TUM.SIM.MSc.SMNE.04.pptx
Growth programs consist of various single growth steps
Growth programs
Single growth step
Growth program
n
• å single growth stepi = growth program
i=1
• Growth programs can be characterized by the
timely configuration of single cross-border steps
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 23
TUM.SIM.MSc.SMNE.04.pptx
Temporal dimension of management
Actions and their outcomes
Action
Action
Results
Change
(external,
internal)
Results
time
t0
(today)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
t1
(future)
Chapter 4 | 24
TUM.SIM.MSc.SMNE.04.pptx
The growth program of Puma combined product scope and
regional scope expansions
Growth programs
Number of expansion steps
16
Entries into new countries:
12
11
8
3
2003
2004
2005
2006
2007 time
Into new product area
Into new foreign country
Within existing product area
Within existing foreign country
Within Germany
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 25
TUM.SIM.MSc.SMNE.04.pptx
Within a specific growth program, decision-makers can choose
between different timing strategies
Timing strategies
Sequential approach
Timing strategies
Parallel approach
Combined approach
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 26
TUM.SIM.MSc.SMNE.04.pptx
Is there a rationale behind this sequence?
Sequential introduction of products in different markets, the example of Amazon.com (selection)
Tools
Toys
Consumer electronics
Software
DVD
Music/Video
Books
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: http://media.corporate-ir.net/media_files/irol/97/97664/Goldman_Sachs_Final.pdf
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 27
TUM.SIM.MSc.SMNE.04.pptx
What approach to choose?
Criteria to evaluate timing approaches
Explanation
Criteria
Example
• Urgency
• The extend to how time
critical it is to expand in the
near future
• The introduction of a new
technology that can easily
be copied
• Path dependency
• The extend to which future
strategies are dependent
upon the sequence of past
and today’s decisions
• The decision to adopt a
specific standard can limit
future steps to one direction
• Constraints
• Limitations of firm
resources that prohibit
further growth
• A firm that has a financing
potential of 10 € m may not
acquire a target that costs
20 € m
• Complexity
• Complexity occurs, if the
demand for management
decisions goes beyond the
managerial capacity
• A manager has to control
10 projects each day, but
he manages only to take
care of 8 projects
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 28
TUM.SIM.MSc.SMNE.04.pptx
Urgency
The example of RIM‘s Blackberry in 2002
Evaluation criteria:
• First-mover (dis-)advantage
• First smartphone optimized for wireless email use
ØPartnerships with e.g. VoiceStream (T-Mobil USA today)
and Vodafone to push sales
ØParallel introduction to all GSM, CDMA, DataTAC,
Mobiltex, and GPRS wireless networks throughout the
US and Europe to increase attractiveness
• Competitive reactions
• Fast expansion was urgent, as competitors such as Palm
or Handspring would follow with own applications and
devices the same year
ØRIM licenses software to competitors like Nokia and
makes it compatible to Windows Mobile and Palm OS to
increase market penetration
• Product lifecycle
• Timeless email-application, yet shortlived handheld model
• …
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 29
TUM.SIM.MSc.SMNE.04.pptx
The sequence of decisions can determine future options
Path dependency
t0
A
t1
Outcome
B
C
Sequence does not matter
B
A
C
A
B
C
B
A
D
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Sequence matters
• Standards
• Lock-in
Chapter 4 | 30
TUM.SIM.MSc.SMNE.04.pptx
In case of path dependency, which sequence to choose
Criteria to evaluate timing approaches
First priority
High
Building
own
strength
05/2000:
Web search in
other languages
Second priority
Low
12/2000:
Google toolbar
Low
Second priority
10/2000:
Ad Words
Last priority
2004:
Google Books
High
Competitor’s
reaction to be
expected
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 31
TUM.SIM.MSc.SMNE.04.pptx
In case of path dependency, which sequence to choose
Criteria to evaluate timing approaches
First priority
High
Building
own
strength
2004:
Google Mail
Second priority
Low
11/2011:
Google Play
Music
Low
Second priority
09/2011:
Google+
Last priority
06/2012:
Nexus 7 tablet
High
Competitor’s
reaction to be
expected
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 32
TUM.SIM.MSc.SMNE.04.pptx
The growth rate is limited by the resources of the firm
Criteria to evaluate timing approaches – constraints
Net cash
flow (in € bn)
2
1
1
2
time
•
•
•
•
-2
Internal
financing
potential
(in € bn)
2
2
1
2
-2
1
1
1
2
0
t1
t2
Factors influencing the
maximum growth rate
Own capabilities & know-how
Own (financial) capacity
Own managerial capacity
…
t3
t4
t5
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
time
Chapter 4 | 33
TUM.SIM.MSc.SMNE.04.pptx
Time compression diseconomies reduce the gains from firms
expansion
Criteria to evaluate timing approaches – complexity
Management
capacity /
Expansion
steps
t1
Time compression
diseconomies
t2
Management capacity
t4
t3
time
Additional advantages higher than
disadvantages
Additional advantages lower than
disadvantages
Performance
Expansion rate
Expansion steps
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 34
TUM.SIM.MSc.SMNE.04.pptx
The four criteria let the pendulum swing
Criteria to evaluate timing approaches
Parallel approach
Sequential approach
• Urgency
• Path dependency
• Constraints
• Complexity
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 35
TUM.SIM.MSc.SMNE.04.pptx
How to design growth programs?
Factors:
Checks:
1
What is the role of path dependencies?
What sequences are possible?
2
Does the firm face (financial) constraints?
Which growth steps can we take at each
point in time?
3
Are there factors that make certain
growth steps urgent?
Should priority be given to certain growth
steps?
4
Can the management handle the
complexity of growth?
Do the benefits from growing faster
outweigh the diseconomies?
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 36
TUM.SIM.MSc.SMNE.04.pptx
Strategies in MNEs
Agenda
4
Growth programs and internationalization
4.1
Stand-alone value of international growth options
4.2
Combination value of international growth options
4.3
Growth programs
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 37
TUM.SIM.MSc.SMNE.04.pptx
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 4 | 38
Technical University of Munich
Strategies in MNEs
– 5. Corporate growth modes and acquisitions
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
TUM.SIM.MSc.SMNE.05.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
2
Strategic redirection
3
Portfolio management and product diversification
4
Growth programs and internationalization
5
Corporate growth modes and acquisitions
6
Corporate transformation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 2
TUM.SIM.MSc.SMNE.05.pptx
Strategies in MNEs
Agenda
5
Corporate growth modes and acquisitions
5.1
Corporate growth modes
5.2
Acquisition process
5.3
Value creation and distribution
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 3
TUM.SIM.MSc.SMNE.05.pptx
Acquisitions are one form of external growth
How to grow – the example of the pharmaceutical industry
Origin of resource
External
Internal
Internal
Development
Own development
of new drug
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Cooperation
License production
of new drug from
other firm
Acquisition
Acquisition of
competitor that
owns a new drug
Chapter 5 | 4
TUM.SIM.MSc.SMNE.05.pptx
In which situations do firms prefer M&A over other growth
modes?
Reasons for different growth modes
Internal
External
Internal
Development
Cooperation
Acquisition
Non-Availability of
partner/target
+
-
-
Fit to existing
operations
+
-
-
Preference for control
+
-
+
Lack of competencies
for growth project
-
+
+
Time constraints
-
±
+
…
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 5
TUM.SIM.MSc.SMNE.05.pptx
What are the motives for M&A?
Overview M&A motives
Value creation through sales synergies
Value creation through cost synergies
Shareholder motives
Value creation through financial synergies
Value creation through restructuring
Motives for M&A
Power and increase of salary
Manager motives
Job protection
Source: Glaum & Hutzschenreuter (2010): Mergers & Acquisitions. Kohlhammer: 55.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 6
TUM.SIM.MSc.SMNE.05.pptx
Firms can expand along different dimensions
Where to grow - dimensions
Corporation
Within existing
product area
…
New product
area
Product
area level
Within existing
regional area
New functions
Functional
level
…
Within existing
functions
Regional New regional
area level area
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 7
TUM.SIM.MSc.SMNE.05.pptx
The (potential) relationship between acquirer and target
determines the acquisition direction
Where to grow - directions
Forward integration
Potential customer
Same industry/
competitor
No potential
business
relationship
Vertical
Lateral
Horizontal
Company
Vertical
Backward integration
Potential supplier
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 8
TUM.SIM.MSc.SMNE.05.pptx
Mergers and Acquisitions can be classified according to
different criteria
Types of M&A
Criteria
Categories
•
Value chain direction
Horizontal
Vertical
Lateral
•
Value chain
relatedness
Concentric
Related
Conglomerate
•
Regional dimension
•
Takeover attitude
•
Payment
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Domestic
Cross-border
Friendly
Hostile
Cash
Shares
Chapter 5 | 9
TUM.SIM.MSc.SMNE.05.pptx
Cross-border M&As are a popular form of foreign direct
investment
Top 10 countries with the highest cross-border acquisition activity in 2011
Netherlands
Canada
31
1.2
USA
UK
105
1.1
France
201
1.4
10
1.4
47
1.7
17
Switzerland 1.8
Germany
31
0.6
China
Value of crossborder M&A
(in US $ bn)
67
n.a.
46
0.8
Hong Kong
Japan
29
2.3
M&A transaction
value (in US $ bn)
2011
Total
1,243
Crossborder
% of
total
584
47%
Ratio
Outbound/
inbound
Source: Allen & Overy, M&A index, 2011
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 10
TUM.SIM.MSc.SMNE.05.pptx
Is M&A successful?
Success of M&A
USA
Europe
Total
UK
Continental
23
20
11
31
54
- positive effect
5
2
5
7
12
- neutral/non-significant effect
3
6
3
9
12
15
12
3
15
30
7
8
7
15
22
- positive effect
2
2
0
2
4
- neutral/non-significant effect
2
3
5
8
10
- negative effect
3
3
2
5
8
Post-acquisition abnormal
return of buyer
Total Studies
- negative effect
Post-acquisition operating
performance
Total Studies
Total
Source: Sudarsanam (2010): Creating value from mergers and acquisitions (2nd Edition). FT Prentice Hall: 94-107.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 11
TUM.SIM.MSc.SMNE.05.pptx
Empirical studies show inconclusive results when it comes to
factors that influence the success of acquisitions
Acquirer criteria
Transaction criteria
Selected factors of the acquisition success to the acquirer
Studies
1
+
4
-
1
+
3
-
Acquisition
relatedness
4
+
2
o
Experience with
acquisitions
4
+
1
-
1
+
3
-
Stock offer
Hostile takeover
Past performance
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Success of
acquisition for
acquirers
Chapter 5 | 12
TUM.SIM.MSc.SMNE.05.pptx
Strategies in MNEs
Agenda
5
Corporate growth modes and acquisitions
5.1
Corporate growth modes
5.2
Acquisition process
5.3
Value creation and distribution
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 13
TUM.SIM.MSc.SMNE.05.pptx
The acquisition process consists of three phases and is
embedded in pre- and postacquisition activities
Acquisition and implementation process
Defining
objectives
Acquisition
Planning
• Identifying sources
• Defining search field
for creating corporate
- markets/industries
advantage
- candidate’s target
profile (list of k.o.
• Deriving goals for
criteria)
value creation by
• Search for candidates
- Cost reduction
(e.g. utilization of
• Evaluation of candicapacity, manadates in regard to k.o.
gement improvecriteria
ment, resource
sharing, etc.)
• Evaluation of candi- Revenue increase
dates in regard to
(e.g. utilization of
acquisition objectives
brand name, skill
transfer, access
• Determining target price
to markets, etc.)
Take-over
Integration
• Approaching can- • Realignment of
didates / owners
groups / employees
(with partners, e.g.
investment banks) • Refinement of
management
• Due diligence
responsibilities
• Negotiation / Deal
structuring
• Execution of takeover
• Realization of
process improvements
• Realization of
synergies
Company
Restructuring
• Selling parts
of businesses
• Reorganization
of the company
• Refinement of
management
system
• ...
• Getting rid of
unutilized resources
Consideration of implementation during all acquisition
steps decreases the risk of an acquisition
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 14
TUM.SIM.MSc.SMNE.05.pptx
Potential synergies only lead to value creation if they are
realized in the post-merger integration process
Realization of synergies
“All economic value is to be created after the deal,
through interactions among individuals who have to
be willing and able to collaborate in the transfer of a
strategic capability”
Sumantra Ghoshal
“Many mergers that seem to make economic sense
fail because managers cannot handle the complex
task of integrating two firms with different
production processes, accounting methods and
corporate cultures.”
Richard A. Brealey & Stewart C. Myers (2000: 942)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 15
TUM.SIM.MSc.SMNE.05.pptx
The aspired synergies define the integration requirements
Possible integration forms
Holding
Symbiosis
Holding
Parent
Business
unit A
Absorption
Acquisition
object
Business
unit A
•Just vertical intervention
•Optimizing of financing and
management
•Influence on strategy
New business
unit
•Integration of several
business units for corporate
use of resources (e.g. R&D,
Production)
•Partial maintenance of the
acquired company
Complete merger in all
domains
Source: Jensen, Mergers & Acquisitions, 2. Auflage, Wiesbaden 1999, S.208 ff.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 16
TUM.SIM.MSc.SMNE.05.pptx
Integration has to take place multi-plane
Planes of the integration
Planes of the integration
Strategic integration
• To aim at defined strategic objectives
• Implementation of defined corporate and
business area strategy
Organizational
integration
• Integration of the organization structure
• Process integration
System integration
• Integration of information systems
• Integration of incentive systems
Cultural integration
• Integration of corporate culture
External integration
• Communication with and integration of
stakeholders (customer, supplier, etc.)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 17
TUM.SIM.MSc.SMNE.05.pptx
Strategies in MNEs
Agenda
5
Corporate growth modes and acquisitions
5.1
Corporate growth modes
5.2
Acquisition process
5.3
Value creation and distribution
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 18
TUM.SIM.MSc.SMNE.05.pptx
To create value from acquisitions synergies have to be realized
Economic logic of value creation
Potential
for value
creation
Costs of
value
creation
Δ NV
T
(A+T)´
(A+T)
A
Value of
the
acquirer
before
acquisition
Value of
the target
before
acquisition
Sum of
values of
acquirer
and target
Source: Glaum & Hutzschenreuter (2010): Mergers & Acquisitions. Kohlhammer: 58.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Value
of the
combined
company
Net value
creation
A: Acquirer
T: Target
NV: Net value creation
Chapter 5 | 19
TUM.SIM.MSc.SMNE.05.pptx
Methods of payment and gains for shareholders (1/3)
Payment in cash
Bidder’s shareholders
Target’s shareholders
NewCo.’s
combined value
-
Cash paid to
target’s shareholders
-
Cash paid to
target’s shareholders
Pre-merger value
of target
Remainder
Gains/Losses for
target’s
shareholders
Pre-merger value
of bidder
Gains/Losses for
bidder’s
shareholders
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 20
TUM.SIM.MSc.SMNE.05.pptx
Methods of payment and gains for shareholders (2/3- 1/3)
Payment in stock
Bidder’s shareholders
Target’s shareholders
NewCo.’s
combined value
NewCo.’s
combined value
*
Bidder’s proportion
of NewCo.’s stocks
Value of bidder’s
stock proportion
-
*
Target’s proportion
of NewCo.’s stocks
Value of target’s
stock proportion
-
Pre-merger value
of bidder
Pre-merger value
of target
Gains/Losses for
bidder’s
shareholders
Gains/Losses for
target’s
shareholders
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
See next
chart
Chapter 5 | 21
TUM.SIM.MSc.SMNE.05.pptx
Calculation of proportions of NewCo.’s stocks for
shareholders (2/3 – 2/3)
Payment in bidder’s stock
# of target’s stocks
paid in bidders stock
Exchange ratio (B:T)*
*
*
# of new bidder’s
stocks issued
+
# of old bidder’s
stocks
# of old bidder’s
stocks
# of NewCo.’s
stocks
# of NewCo.’s
stocks
÷
Proportion of
bidder’s stocks
÷
# of new bidder’s
stocks issued
# of NewCo.’s
stocks
Proportion of
target’s stocks
* B:T - # of bidder’s stocks for one target stock
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 22
TUM.SIM.MSc.SMNE.05.pptx
Calculation of proportions of NewCo.’s stocks for
shareholders (2/3 – 3/3)
Payment in NewCo.’s stock
# of old bidder’s stocks
# of old target’s stocks
*
*
Exchange ratio (N:T)*
Exchange ratio (N:B)*
# of NewCo.’s stocks
for bidder’s shareholders
# of NewCo.’s stocks
for target’s shareholders
+
÷
# of NewCo.’s stocks
for bidder’s shareholders
# of NewCo.’s stocks
for target’s shareholders
# of NewCo.’s stocks
# of NewCo.’s stocks
Proportion of
bidder’s stocks
÷
# of NewCo.’s stocks
Proportion of
target’s stocks
* N:B(T) - # of NewCo.'s Stocks for one bidder (target) stock
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 23
TUM.SIM.MSc.SMNE.05.pptx
Methods of payment and gains for shareholders (3/3)
Payment in stock and cash
Bidder’s shareholders
Target’s shareholders
NewCo.’s
combined value
-
Cash paid to
target’s shareholders
Remainder
*
Value of target’s
proportion
Remainder
*
Target’s proportion
of NewCo.’s stocks
Bidder’s proportion
of NewCo.’s stocks
Pre-merger value
of target
Value of bidder’s
proportion
Cash paid to
target’s shareholders
Pre-merger value
of bidder
Gains/Losses for
target’s shareholders
-
+
Gains/Losses for
bidder’s shareholders
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 24
TUM.SIM.MSc.SMNE.05.pptx
Strategies in MNEs
Agenda
5
Corporate growth modes and acquisitions
5.1
Corporate growth modes
5.2
Acquisition process
5.3
Value creation and distribution
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 25
TUM.SIM.MSc.SMNE.05.pptx
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 5 | 26
Technical University of Munich
Strategies in MNEs
– 6. Corporate transformation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
TUM.SIM.MSc.SMNE.06.pptx
Strategies in MNEs
Agenda
1
Strategy context, financial success, and strategy levels
2
Strategic redirection
3
Portfolio management and product diversification
4
Growth programs and internationalization
5
Corporate growth modes and acquisitions
6
Corporate transformation
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 2
TUM.SIM.MSc.SMNE.06.pptx
Strategies in MNEs
Agenda
6
Corporate transformation
6.1
Corporate transformation in historical perspective
6.2
Theories of corporate transformation
6.3
From SDSNE to MDMNE
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 3
TUM.SIM.MSc.SMNE.06.pptx
Management thinking used to concentrate on the contribution
of businesses
‘Business-focused era‘ of Management Thinking
1950
Decentralization
Issues
Companies become
increasingly diverse
Growing concern about
work overload of top
management
Main
ideas
‘Structure follows
strategy‘ (Chandler)
(M form of organization)
Decentralization in order
to separate strategic and
operational management
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
1960
Diversification
External growth into
unrelated businesses
becomes major thrust of
companies
1970
Portfolio
Rationale for allocating
resources among divers
businesses required
Determine successful
diversification strategies
Portfolio concepts to allocate
resources depending on the
type of business and overall
Look for justification/
corporate portfolio balance
success patterns of
Follow generic strategies
diversification
• Exploitation of synergies based on a business
portfolio position
• Sharing/reducing risks
•…
Chapter 6 | 4
TUM.SIM.MSc.SMNE.06.pptx
The emphasis has recently been turned to the corporate
contribution to business success
‘Corporate-focused era‘ of Management Thinking
1980
Value
Issues
Changes in the capital
markets / corporate
raiders discover and
exploit value gaps
Stronger evidence for
underperformance of
large, diversified firms
Main
ideas
1990
Focus
Value destruction
of diversified firms
Companies should
focus on core
activities/products
Emphasis on
shareholder value
Core competencies
as driver of strategy
Value based restructuring
of firms (outsourcing,
down-sizing, delayering)
Corporate advantage
as ultimate yardstick
of corporate strategy
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
2000
Parenting
Adjustment of management style to type of
diversification rather
than diversification itself
as cause of underperformance
Defining the role of the
corporate parent that fits
to diversification strategy
Narrowing product
range/business portfolio
Chapter 6 | 5
TUM.SIM.MSc.SMNE.06.pptx
Currently, overall corporate (growth) transformation is focused
on developing truly global companies
‘Globalization-focused era‘ of Management Thinking
2010
Growth
Issues
Liberalization and
digitalization open up
extra ordinary growth
potential
2020
Digital transformation?
1970
Portfolio
?
International corporate
growth as main value
driver
Main
ideas
Firm specific advantages
to be managed across
national borders
?
Regional (non-home)
headquarters as
institutions towards
global companies
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 6
TUM.SIM.MSc.SMNE.06.pptx
Strategies in MNEs
Agenda
6
Corporate transformation
6.1
Corporate transformation in historical perspective
6.2
Theories of corporate transformation
6.3
From SDSNE to MDMNE
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 7
TUM.SIM.MSc.SMNE.06.pptx
Penrose is the mother of management theories on firm growth
The theory of the growth of the firm
• What limits growth?
Penrose, E. 1955. Research on the
Business Firm – Limits to the Growth
and Size of the Firm. American
Economic Review, 25(2): 531-543.
Penrose, E. 1959. The Theory of the
Growth of the Firm. Oxford University
Press.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
• What determines the
optimal growth rate?
Chapter 6 | 8
TUM.SIM.MSc.SMNE.06.pptx
Penrose‘s work rests upon a resource-based view of firms
Foundations of the theory of the growth of the firm:
• Firms are conceptualized as bundles of resources.
• Resources render (multiple) services. The unique character of a firm is given by the
heterogeneity of services from its resources.
• Firms differ from markets in their coordination mechanism. Firms allocate resources by
authoritative direction. Markets allocate resources via price mechanism.
• Managerial resources are of essence. They render both administrative and entrepreneurial
services. Administrative services are required to use the resources of the firm.
Entrepreneurial services are used to develop the firm.
• Managerial resources require experience internal to the firm and in working together with
other members of the firm to provide high quality services to the firm.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 9
TUM.SIM.MSc.SMNE.06.pptx
The maximum growth rate is limited…
• Maximum growth rate between t1-t2
= f(amount of free entrepreneurial services in t1)
• Amount of free entrepreneurial services in t1
= f(management capacity in t1,
demand for administrative services in t1)
• Management capacity in t1
= f(management capacity in t0,
growth rate of management capacity
between t0-t1)
• Growth rate of management capacity
between t0-t1
=?
Maximum growth rate of a firm between t1 and t2 becomes a function
of maximum growth rate of management capacity between t0 and t1.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 10
TUM.SIM.MSc.SMNE.06.pptx
…by the growth rate of management capacity
• New managers need experience internal to the firm as firms are idiosyncratic
• To gain this experience, new managers need to work with experienced managers in a team
• Management capacity in t0 thus limits opportunities of new managers to work with experienced
managers in t0-t1
• Management capacity in t0 further limits the amount of managers that can be hired as it takes
time to hire, install and instruct new personnel
Growth rate of management capacity is path dependent.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 11
TUM.SIM.MSc.SMNE.06.pptx
Growth and performance
• Limitation of growth:
“The maximum amount of expansion will be determined by the relevant managerial services
available for expansion in relation to the amount of these services required per dollar of expansion. The factors determining the availability of managerial services and the need for them in
expansion will therefore determine the maximum rate of growth of the firm.” (Penrose, 19591)
• Buckley and Casson‘s model (20072) with:
Pt
profit of the period preceding t;
PG
profit of all periods;
g
growth rate;
X0=1
firm size at the beginning of period 0;
Xt=eg*t
firm size at the beginning of period t;
α*Xt-1+(1- α)*Xt weighted average size of the firm;
A
size independent profit rate, which is determined by market conditions;
B*DXt-1;t
costs directly proportional to growth in period t;
C*(DXt-1;t)2
costs disproportional to growth in period t;
r
discount factor.
1
2
Penrose, E. 1959. The Theory of the Growth of the Firm. New York: Oxford University Press, p. 200.
Buckley, P. & Casson, M. 2007. Edith Penrose and the Strategic Management of Multinational Enterprises. mir, 47(2): 151-173.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 12
TUM.SIM.MSc.SMNE.06.pptx
Growth and performance
• Profit function:
2
Pt = a * A * X t -1 + (1 - a ) * A * X t - B * D X t -1;t - C * (D X t -1;t )
(1)
• Optimal growth rate:
1
g* = r - (r 2 - (( A - B * r ) / C ) ) 2
(2)
• „Because size of firm does not matter, there is no reason to believe that the firm’s growth
rate will vary systematically over its lifetime, and so it is reasonable to postulate the
existence of a steady state rate of growth.“ (Buckley and Casson, 20071)
• However: reality shows that continuous growth is the exception. The mean growth rate per
year of German firms2 is +13.12% with a standard deviation of 22.90%.
1
2
Buckley, P. & Casson, M. 2007. Edith Penrose and the Strategic Management of Multinational Enterprises. mir, 47(2): 151-173.
Annual reports; 91 firms from H-Dax between 1985 and 2007 were investigated
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 13
TUM.SIM.MSc.SMNE.06.pptx
Firm growth is highly discontinuous
Histogram of standard deviation of growth rate
Number of firms
20
18
16
14
12
10
8
6
4
2
0
0
5%
10%
15%
20%
25%
30%
35%
40%
45%
>50%
Standard deviation of sales growth rate
Source: Annual reports; 91firms from H-Dax between 1985 and 2007 were investigated
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 14
TUM.SIM.MSc.SMNE.06.pptx
Growth discontinuity of a firm in a two-period model
Profit of firm between t=1 and T:
t -1
t
t
t -1
g
g
g
å t
å t
å t
å gt
=
[
a
*
A
*
(
)
+
(
1
a
)
*
A
*
(
)
B
*
((
)
(
å
e t =0
e t =1
e t =1
e t = 0 ))
PG
t =1
t
t -1
å g
å g
- C * ((e t =1 t ) - (e t = 0 t ) ) 2]
T
(3)
A central assumption of the two-period-model is:
e 2 g = e g1 + g 2 = const .
respectively
g2 = 2g - g1
(4)
The growth discontinuity of a firm, s, is consequently:
s = g1 - g
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 15
TUM.SIM.MSc.SMNE.06.pptx
Determination of profit maximizing growth rate and optimal
growth discontinuity of a firm
To determine the profit maximizing growth rate g*, the profit function P(g1) is maximized:
P( g1 ) = a * A + (1 - a ) * A * e g1 - B * (e g1 - 1) - C * (e g1 - 1) 2 + a * A * e g1
+ (1 - a ) * A * e 2 g - B * (e 2 g - e g1 ) - C * (e 2 g - e g1 ) 2
(5)
Þ max!
The first and second derivatives are:
dP( g1)
= A * e g1 + 2 * C * e g1 - 4 * C * e2 g1 + 2 * C * e2 g * e g1
d g1
d ² P( g1 )
= A * e g1 + 2 * C * e g1 - 8 * C * e 2 g1 + 2 * C * e 2 g * e g1
d g1 ²
(6)
(7)
The profit maximizing growth rate g* and the optimal growth discontinuity of a firm are:
A + 2 * C + 2 * C * e2g
A 1 1 2g
g1* = ln(
) = ln(
+ + *e )
4*C
4C 2 2
s
*=
ln(
A + 2 * C + 2 * C * e2g
4*C *e
g
)
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
(8)
(9)
Chapter 6 | 16
TUM.SIM.MSc.SMNE.06.pptx
Impact of profit rate, growth rate, and disproportional cost rate
of growth on optimal growth discontinuity of a firm
Optimal growth discontinuity of a firm s*
Optimal growth discontinuity of a firm s*
with:
g = 0.2
C = 0.2
1
0.75
Optimal growth discontinuity of a firm s*
with:
A = 0.1
C = 0.2
1
0.75
0.75
0.5
0.5
0.5
0.25
0.25
0.25
0
0
0
0
0.25
0.5
Profit rate A
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
0
0.25
0.5
Growth rate g
with:
A = 0.1
g = 0.2
1
0
0.25
0.5
Disproportional cost
rate of growth C
Chapter 6 | 17
TUM.SIM.MSc.SMNE.06.pptx
Impact of a profit rate that is dependent on time
With s *A(t ) = ln(
2g
A1 + a * ( A 2 - A1) + 2 * C + 2 * C * e
4*C *e
g
)
If
A1 < A2 : optimal growth discontinuity of a firm is higher
If
A1 > A2 : optimal growth discontinuity of a firm is lower
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
(14)
Chapter 6 | 18
TUM.SIM.MSc.SMNE.06.pptx
Impact of a profit rate that is dependent on size
*
With s A(t , X )
= ln(
A1b + a * ( A 2a - A1b) + 2 * C + 2 * C * e
4*C *e
g
2g
)
If
A
>
A : optimal growth discontinuity of a firm is higher
If
A
<
A : optimal growth discontinuity of a firm is lower
2a
2a
(15)
1b
1b
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 19
TUM.SIM.MSc.SMNE.06.pptx
Impact of interest rate on optimal growth discontinuity of a firm
Extension of the model by taking into account the time value of profits and the interest rate i:
P( g1 ) = [a * A1a + (1 - a ) * A1b * e g1 - B * (e g1 - 1) - C (e g1 - 1) 2 ] * (1 + i )
(17)
+ a * A 2a * e g1 + (1 - a ) * A 2b * e 2 g - B * (e 2 g - e g1 ) - C * (e 2 g - e g1 ) 2
Optimal growth discontinuity of a firm is given by:
s *A(t , X );i > 0
= ln(
(1 - a ) * A1b * (1 + i ) + a * A 2a - i * B + 2 * C * (1 + i ) + 2 * C * e 2 g
(4 * C + 2 * C * i) * e
g
)
(19)
Continuous growth is optimal if:
i=
(1 - a ) * A1b + a * A2a + 2 * C * [(e 2 g - e g ) - (e g - 1)]
g
2 * C * (e - 1) + B - (1 - a ) * A1b
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
(20)
Chapter 6 | 20
TUM.SIM.MSc.SMNE.06.pptx
Greiner understands firm growth as a sequence of evolution
and revolution
Size
Company in
high-growth
industry
large
in mediumgrowth
industry
in lowgrowth
industry
small
young
Revolution stage
Evolution stage
mature
Age
Source: Greiner, L. 1972. Evolution and Revolution as Organizations Grow. Harvard Business Review, 50(4): 37-46.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 21
TUM.SIM.MSc.SMNE.06.pptx
A company‘s past has clues for management that are critical for
success
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
?
Size
large
Red tape
Control
Autonomy
Leadership
Collaboration
Coordination
Delegation
Evolution/
growth stages
Direction
Revolution/
crisis stages
Creativity
small
young
mature
Age
Source: Greiner, L. 1972. Evolution and Revolution as Organizations Grow. Harvard Business Review, 50(4): 37-46.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 22
TUM.SIM.MSc.SMNE.06.pptx
Organizational practices during evolution in the five phases of
growth
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
Management
focus
Make & sell
Efficiency in
operations
Expansion of
market
Consolidation
of
organization
Problem
solving &
innovation
Organization
structure
Informal
Centralized &
functional
Decentralized
& geographical
Line-staff
& product
groups
Matrix of
teams
Management
style
Individualistic
& entrepreneurial
Directive
Delegative
Watchdog
Participative
Control
system
Market
results
Standards &
cost centers
Reports &
profit centers
Plans &
investment
centers
Mutual goal
setting
Management
reward
emphasis
Ownership
Salary &
merit increase
Individual
bonus
Profit sharing
& stock
options
Team bonus
Source: Greiner, L. 1972. Evolution and Revolution as Organizations Grow. Harvard Business Review, 50(4): 37-46.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 23
TUM.SIM.MSc.SMNE.06.pptx
Cisco Inc. Rapidly developed to one of the largest firms in the
world
Headcount
/Revenue
Phase 1
Phase 2
Phase 3
Phase 4/5
70000
60000
Major
organization
change
50000
40000
Major
organizational
change
30000
20000
First CEO
appointed
Organizational
change
Headcount
Revenue in $ mio.
10000
0
Year
Source: http://newsroom.cisco.com/dlls/corporate_timeline.pdf, March 15, 2009.
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 24
TUM.SIM.MSc.SMNE.06.pptx
After rapidly increasing revenue per employee, SAP AG went
through a multiple-year phase of stagnation
Revenue per
employee
(EUR thousands)
300
256 258 257
239
250
224
236
256
237 233 237 239 234
225 224
265 263*
233
201 207
200
179
154
150
119
135 135
100
Start of LEAN implementation
CAGR
8,2%
CAGR
0%
CAGR
4,1%
50
0
Year
* Rolling 4 Quarter Basis
Source: Company presentation SAP
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 25
TUM.SIM.MSc.SMNE.06.pptx
Strategies in MNEs
Agenda
6
Corporate transformation
6.1
Corporate transformation in historical perspective
6.2
Theories of corporate transformation
6.3
From SDSNE to MDMNE
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 26
TUM.SIM.MSc.SMNE.06.pptx
What changes the firm?
Environments
The firm
t-m
Events and Behavior in the
external environment
Corporate Strategies
• Investments
• Divestments
• Structural Adjustments
t0
Environments
The firm
t1
tn
time
Change
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 27
TUM.SIM.MSc.SMNE.06.pptx
Business area development of The Linde Group as a result of
Corporate Strategy
Acquisition of
Linde and The
BOC Group to
The Linde Group
Timeline of The Linde Group
Sale of MAPAG
Valves GmbH
Linde Material Handling
Linde Engineering
Linde Gas & Engineering
Linde Industrial Gases
Linde Refrigerator
1879
1907
…
1943
1958
…
Merger of Linde
Industrial Gases and
Engineering to Linde
Gas & Engineering
Diversification
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
2001 2004 2006 2007 2008
Sale of Linde
Refrigerator to
Carrier Corp.
time
Sale of Linde Material
Handling to KKR /
Goldman Sachs
Focus
Chapter 6 | 28
TUM.SIM.MSc.SMNE.06.pptx
Corporate strategy is transformation from being a SDSNE to
becoming a MDMNE
Corporate growth along product/regional area dimension
Product
areas
n
1
Multi-division
single nation
(MDSNE‘s)
Multi-division
multinational
(MDMNE‘s)
Single division,
single nation
(SDSNE‘s)
Single-division
multinational
(SDMNE‘s)
1
n
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Regional
areas
Chapter 6 | 29
TUM.SIM.MSc.SMNE.06.pptx
Samsung developed from a SDSNE to a MDSNE and later
expanded into different regions
Corporate growth of Samsung
Lee Byung-chull
1938
Foundation
1953-87 Diversification into new businesses
• Insurance and financial services
• Construction and real estate
• Shipbuilding
• Electronics
• …
1993
1994
1995
1996
Begins production in China
Acquisition of German subsidiary
Offices in Japan and Germany
Factories in China and Mexico
Offices in USA, Europe, China and
Singapore
Three new plants in Texas, USA
Lee Kun-hee
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 30
TUM.SIM.MSc.SMNE.06.pptx
Maersk is a Danish company that initially focused on shipping
and ship building
Corporate growth of Maersk (I/III)
Maersk
Foundation:
Founder:
Revenue (2013):
Profit (2013):
Employees (2013):
1904, in Denmark
A.P. Moller
6,352.0 m€
506.3 m€
89,000
Denmark
Size:
Inhabitants:
GDP:
Exports:
Member of:
43,094 km2
5.63 mi.
US$ 333.2 bi.
56% of GDP
EU, UN, OECD, WTO
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 31
TUM.SIM.MSc.SMNE.06.pptx
In the first half of Maersk‘s company history the focus is on
expansion into new countries
Corporate growth of Maersk (II/III)
Maersk Oil
Maersk shipyards
Maersk Line
1904
…
…
1914
1924
•
Extension of regional scope:
Maersk Line
•
First significant extension of product scope:
1962 Maersk Oil
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
1934
1944
1954
1964 time
Chapter 6 | 32
TUM.SIM.MSc.SMNE.06.pptx
In the second half of Maersk‘s company history the focus is on
diversification into different businesses as well as refocussing
Corporate growth of Maersk (III/III)
APM Terminals*
Mercantile (today: DAMCO)
Maersk Drilling*
Maersk Air
Dansk Supermarked
Maersk Oil*
Odense Steel Shipyard
Maersk Line*
1904
1918
1962
1964
1969
…
1972
Diversification
1977
2001
2005
2007
2013 time
Focus
* Core businesses
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 33
TUM.SIM.MSc.SMNE.06.pptx
Microsoft began as a software development company, but
emerged as an international conglomerate in the IT sector
Corporate growth of Microsoft (I/II)
Beginnings
Founded in:
Founded by:
Revenue (1976):
Profit (1976):
Employees (1978):
1975, USA
Bill Gates, Paul Allen
US$ 104,216
US$ 22,496
11
Today
Headquartered in:
Managed by:
Revenue (2013/14):
Profit (2013/14):
Employees (2013/14):
Redmond, USA
Satya Nadella
US$ 86.83 bn.
US$ 22.07 bn.
128,076
…
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 34
TUM.SIM.MSc.SMNE.06.pptx
Right from its start Microsoft began to diversify as well as to
internationalize
Corporate growth of Microsoft (II/II)
# of
products
1975:
1985:
1995:
75
50
2005:
2010:
25
0
0
25 25
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
50
50
75
75 100
100
125
# of countries
Chapter 6 | 35
TUM.SIM.MSc.SMNE.06.pptx
Companies transform via different paths from SDSNEs to
MDMNEs
Corporate growth along product/regional area dimension
Product
areas
n
1
Multi-division
single nation
(MDSNE‘s)
Multi-division
multinational
(MDMNE‘s)
Single division,
single nation
(SDSNE‘s)
Single-division
multinational
(SDMNE‘s)
1
n
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Regional
areas
Chapter 6 | 36
TUM.SIM.MSc.SMNE.06.pptx
Strategies in MNEs
Agenda
6
Corporate transformation
6.1
Corporate transformation in historical perspective
6.2
Theories of corporate transformation
6.3
From SDSNE to MDMNE
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 37
TUM.SIM.MSc.SMNE.06.pptx
Learnings
Prof. Dr. Thomas Hutzschenreuter
Chair of Strategic and International Management
Technical University of Munich
Chapter 6 | 38