1
Some Notes on Corporate Strategy
Corporate Strategy
1.
2.
3.
4.
What is strategy?
some models
mergers as strategy
unresolved issue:
is this really a field?
2
Some Notes on Corporate Strategy
Porter: What is Corporate
Strategy?
Corporate strategy, the overall plan
for a diversified company, is both
the darling and the stepchild of
contemporary management practice—
the darling because CEOs have been
obsessed with diversification since
the early 1960s, the stepchild because
almost no consensus exists about what
corporate strategy is, much less about
how a company should formulate it.
3
Some Notes on Corporate Strategy
Porter: A diversified company has
two levels of strategy: (1) business
unit (or competitive) strategy, and (2)
corporate (or company-wide) strategy.
Competitive strategy concerns how
to create competitive advantage in
each of the businesses in which a
company competes.
Corporate strategy concerns two
different questions: what businesses
the corporation should be in and how
the corporate office should manage the
array of business units.
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Some Notes on Corporate Strategy
Porter: "Corporate strategy is what
makes the corporate whole add up to
more than the sum of its business unit
parts. The track record of corporate
strategies has been dismal. I studied
the diversification records of 33 large,
prestigious U.S. companies over the
1950-1986 period and found that
most of them had divested many more
acquisitions than they had kept. The
corporate strategies of most companies
have dissipated instead of created
shareholder value."
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Some Notes on Corporate Strategy
Some Key Terminology
1. "Value Chain" (Porter): This concept
allows the firm to be disaggregated into a
vareity of strategically relevant activities which
have different economic characteristics. (See
figure below). One can use this structure to
identify those activities which have a high
potential for creating differentiation; and those
which are most important in understanding cost
behaviour.
From this analysis, different strategic courses of
action can be derived to develop differentiation
6
Some Notes on Corporate Strategy
The Value Chain
Ref. Porter
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Some Notes on Corporate Strategy
2. First-mover advantage
The notion that countries or firms which create new industries or
products first may establish a competitive advantage that makes
it hard or impossible for other countries to follow in the same
area.
The advantage is most likely to prevail in sectors of large
economies of scale, and especially in cases where the most
efficient scale represents a high proportion of the global market.
It would certainly be difficult for, say, China or Japan to enter
wide-bodied aircraft manufacture in competition with Boeing
and Airbus. The frequency with which airframe manufacture
is quoted as an example of potential first-mover advantage,
suggests it may be one of very few special cases requiring a
large supplier chain and technological depth.
It is not difficult to think of examples of other first movers - for
example, motorcycles in the UK - which have failed to sustain
an early advantage.
Source: The Economist, Dictionary of Economics
8
Some Notes on Corporate Strategy
QUESTIONS:
1. Can you think of any first movers
who have succeeded? Why?
2. Can you think of any first movers
who have failed? Why?
9
Some Notes on Corporate Strategy
3. Strategic Alliances
Linkages between firms to achieve economic
benefits not available through arms-length
market transactions, internal development or
acquisition.
Factors Promoting the Rise of Alliances
All alliances are motivated by the need for
risk reduction. Several environmental forces
have accelerated alliance formation, including
(a) sharing costs of commercializing cuttingedge technologies in research and development
intensive industries, (b) shaping or transforming
standards in fast-changing industries, (b)
pooling resources for global economies of scale
in value-adding activities, (d) speeding entry
into new markets, and (e) learning skills and
10
Some Notes on Corporate Strategy
Forms of Strategic Alliances
Alliances consist of long-term supply contracts,
licensing agreements, technology development
pacts, joint ventures, equity ownership stakes,
and cross-holding relationships. Regardless of the
specific organization design, each alliance entails
sharing knowledge among partners.
Alliances compel firms to balance cooperation
with competition. Knowledge flows can
unintentionally strengthen future competitors,
particularly if underlying technologies are
applicable across numerous products. Carefully
managed alliances enable firms to learn new skills
from multiple sources, thereby strengthening
their core competencies and strategic flexibility.
Excessive dependence on alliances can “hollow
out” the firm’s core competencies and skills.
11
Some Notes on Corporate Strategy
4. The experience curve
The concept that costs of production
decrease as the level of cumulative
output increases. This is also referred
to as a "learning curve."
The source was originally ascribed
to incerased labour productivity, but
has since been expanded to include
"learning by doing" at every stage of
the value chain, including marketing,
R&D and overhead costs.
Source: Blackwell Encyclopedia of Management.
12
Some Notes on Corporate Strategy
5. Core Competences/Competencies
A set of differentiated skills, complementary assets, and routines
that provide the basis for a firm’s competitive capacities and
sustainable advantage in a particular business.
The concept of core competences is associated with the
resource-based view of the firm. Rather than emphasizing (as
in traditional approaches to strategy) products and markets,
and focusing competitive analysis on product portfolios, the
resource-based approach regards firms as bundles of resources
which can be configured to provide firm-specific advantages.
Core competences are typically characterized as:
• unique to the firm
• sustainable because they are hard to imitate or to substitute
• conferring some kind of functionality to the customer (in the
case of products and some services) or to the provider (in the
case of other services)
• partly the product of learning and, hence, as incorporating tacit
as well as explicit knowledge
• generic because they are incorporated into a number of
products and/or processes
Source: Blackwell Encyclopedia of Management
13
Some Notes on Corporate Strategy
6. SWOT Analysis
PLUS
NEGATIVE
-
INTERNAL
Strengths
Weaknesses
-
EXTERNAL
Opportunities
Threats
-
14
Some Notes on Corporate Strategy
Some Models of Strategic Analysis
1.
2.
3.
4.
Boston Consulting Group
McKinsey's 7-S
Porter's 5 Forces
Porter's Clusters
15
Some Notes on Corporate Strategy
1. The Boston Consulting Group
Model
?
High
Mkt
Growth
Low
Mkt
Growth
High Mkt share
Low Mkt share
- A framework for portfolio planning in a
diversified company
16
Some Notes on Corporate Strategy
The BCG Matrix
Each business is located on a 2-dimensional
grid. One dimension represents industry
attractiveness, summarized by the real annual
rate of market growth. The other dimension
represents the business' competitive position,
summarized by its market share relative to its
largest competitor.
The strategic message is to invest in high-share
businesses in high-growth markets ("stars")
and divest low-share businesses in low-growth
markets ("dogs"). Most profit and cash is
gnerateed by "cash cows" (high share, low
growth). Much debate is about whether to
continue investing in low share businesses in
high-growth markets ("question marks").
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Some Notes on Corporate Strategy
The McKinsey 7-S Model
7 characteristic factors in a corporation
interrelated in a hub-and-spoke
18
Some Notes on Corporate Strategy
McKinsey’s primary objective in developing the 7-S framework
was to put a new spin on management style and suggest that
soft issues could and should be managed. Further, the use of the
wheel, a format borrowed from Porter, also emphasizes the idea
that a firm is the comprehensive, inextricable sum of its parts.
McKinsey made two key findings: (1) the consultants learned
that a manager’s effectiveness was determined by both the strategy and the structure of the organization, and (2) there was no
linear relationship governing these components, although they
are interdependent.
In reality, the management, structure, and strategy of an
organization are related through a complex network of seven
characteristic factors in the organization. Managers who try to
run the firm as if it were a collection of several independent
units soon learn about the spoke-and-hub concept of the wheel.
A wheel is nothing more than a collection of spokes when there
is no hub, and vice versa. Neither part alone can replicate the
functions of a wheel. Similarly, an organization without common
goals and strategy cannot function in the way it was intended.
Source: The Portable MBA by Paul A. Argenti
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Some Notes on Corporate Strategy
The McKinsey study also found that most successful
organizations, regardless of line of business, had
several practices in common:
1. Maintain a bias for action.
2. Learn from customers by staying close to them.
3. Encourage autonomy and entrepreneurship in management by management.
4. Respect contributions of all employees, especially
those traditionally undervalued.
5. Use a hands-on, highly visible management
approach.
6. Stick to the knitting.
7. Keep the organizational structure simple and staff
only as much management as is required for bare
minimum.
8. Allow core values to govern.
20
Some Notes on Corporate Strategy
Michael Porter's "Five Forces" of
Competition
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Some Notes on Corporate Strategy
Porter's Cluster Model
"Clusters are geographic concentrations of
interconnected companies, specialized suppliers, service
providers, firms in related industries, and associated
institutions in particular fields that compete but also
cooperate. Critical masses of unusual competitive
success in particular business areas, clusters are a striking
feature of virtually every national, regional, state, and
even metropolitan economy, especially those of more
economically advanced nations.
"The tendency has been to see location as diminishing
in importance. Globalization allows companies to
source capital, goods, and technology from anywhere and
to locate operations wherever it is most cost effective.
Governments are widely seen as losing their influence
over competition to global forces. This perspective does
not accord with competitive reality."
22
Some Notes on Corporate Strategy
"The cluster concept represents a new way of thinking about
national, state, and city economies, and points to new roles
for companies, governments, and other institutions striving to
enhance competitiveness. The presence of clusters suggests that
much of competitive advantage lies outside a given company or
even outside its industry, residing instead in the location of its
business units.
"The importance of clusters creates new management
agendas that are rarely recognized. Companies have a tangible
stake in the business environments where they are located
in ways that go far beyond taxes, electricity costs, and wage
rates. The health of the cluster is important to the health of the
company. A company may actually benefit from the presence of
local competitors.
"Clusters also create new roles for government.
Government’s more decisive influences are often at the
microeconomic level. Removing obstacles to the growth and
upgrading of existing and emerging clusters should be a priority.
Clusters are a driving force in increasing exports and magnets
for attracting foreign investment."
23
Some Notes on Corporate Strategy
Porter's "Diamond"
Sources of Locational Competitive
Advantage
24
Some Notes on Corporate Strategy
Example: California Wine Cluster
25
Some Notes on Corporate Strategy
Major U.S. Clusters
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Some Notes on Corporate Strategy
1. Are there any current clusters in
Southwest B.C.?
2. Are there any potential clusters in
Southwest B.C.?
GVRD employment by sector 1996
#
%
11,675
1.3%
Fishing and trapping
2,335
0.3%
Logging and forestry
2,900
0.3%
Agriculture and related
Mining, quarry and oil well
2,960
0.3%
Manufacturing
99,070
11.3%
Construction
67,560
7.7%
Transportation & Communication
80,515
9.2%
Wholesale trade
59,975
6.8%
115,810
13.2%
Retail trade
Finance, insurance & real estate
71,405
8.1%
Business service
87,530
10.0%
Government service
41,920
4.8%
Educational service
66,440
7.6%
Health & social service
89,730
10.2%
Accommodation, food & beverage
TOTAL
76,845
8.8%
876,670
100.0%
27
Some Notes on Corporate Strategy
Cluster Check List
End-product or service companies
suppliers of specialized inputs, components, machinery & services
financial institutions
firms in related industries
firms in downstream industries (I.e. channels or customers)
producers of complementary products
specialized infrastructure providers
universities
think tanks
vocational training providers
other providers of specialized training, education, information, research and technical
support
standard-setting agencies
trade associations
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Some Notes on Corporate Strategy
How About High Tech?
29
Some Notes on Corporate Strategy
(year)
30
Some Notes on Corporate Strategy
SIC = standard industrial classification
code (now replaced by NAICS
or North American Industrial
Classification System)
31
Some Notes on Corporate Strategy
GDP by industry - BC - 1998 (million $)
INDUSTRY
SIC
Manufacturing
Industries
$789.6
3192 Construction and Mining Machinery
3211 Aircraft and Aircraft Parts Industry
confidential
$99.7
3359 Other Communication and Electrical Equipment
$116.9
3361 Electronic Computing and Peripheral Equipment
$186.0
Electrical Industrial Equipment Group
337 group
3711 Industrial Inorganic Chemicals
3911 Indicating, Recording & Controlling Instruments
Other High Technology Manufacturing
Service
Industries
$52.8
confidential
$54.7
$249.9
$1,887.7
772 Computer And Related Services
$794.4
77523 Engineering Services
$711.8
77593 Scientific and Technical Services
$291.3
868 Medical and other Health Laboratories
High Technology
Sector Total
BC Industrial
Aggregate
High Technology
as % of Total
$90.3
$2,677.3
$96,216.4
2.8%
32
Some Notes on Corporate Strategy
Hi-Tech Average Weekly Earnings (including overtime) - 1999 - BC (million $)
INDUSTRY
SIC
Manufacturing
Industries
$860
3211 Aircraft and Aircraft Parts Industry
335 Communication and Other Electronic Equipment
336 Office, Store and Business Machines
$820
$890
$1,040
3372 Electrical switchgear and protective equipment
$1,040
3379 Other electrical industrial equipment industries
$1,040
3911 Indicating, Recording & Controlling Instruments Industry
$620
3912 Other instruments and related products industry
$620
3192 Construction, Mining Machinery & Materials Handling Equipment
$830
3194 Turbine and Mechanical Power Transmission Equipment
$830
3199 Other Machinery and Equipment Industries, NEC
$830
37 group Chemical and chemical products group
3 group Other manufacturing group
Service Industries
772 Computer And Related Services
$720
$830
$870
$900
7752 Engineering Services
$880
7759 Scientific and Technical Services
$880
868 Medical and other Health Laboratories
$640
High Technology
Sector Total
$870
BC Industrial
Aggregate
$630
33
Some Notes on Corporate Strategy
Hi-Tech Average Weekly Earnings (including overtime) - 1999 - BC
(million $)
INDUSTRY
SIC
Manufacturing
Industries
$860
Aircraft and Aircraft Parts Industry
$820
335
Communication and Other Electronic Equipment
$890
336
Office, Store and Business Machines
$1,040
3372
Electrical switchgear and protective equipment
$1,040
3379
Other electrical industrial equipment industries
$1,040
3911
Indicating, Recording & Controlling Instruments Industry
$620
3912
Other instruments and related products industry
$620
3192
Construction, Mining Machinery & Materials Handling Equipment
$830
3194
Turbine and Mechanical Power Transmission Equipment
$830
3199
Other Machinery and Equipment Industries, NEC
$830
Chemical and chemical products group
$720
Other manufacturing group
$830
3211
37 group
3 group
Service
Industries
$870
Computer And Related Services
$900
7752
Engineering Services
$880
7759
Scientific and Technical Services
$880
Medical and other Health Laboratories
$640
772
868
High
Technology
Sector
Total
$870
34
Some Notes on Corporate Strategy
B.C.
35
Some Notes on Corporate Strategy
Mergers as Corporate Strategy
3 types of mergers:
1. horizontal - between 2 firms in the
same business
2. vertical - between 2 firms that are
suppliers or customers of one another
3. conglomerate - between 2 firms in
totally different industries
36
Some Notes on Corporate Strategy
Merger evaluation matrix
HORIZONTAL
PRO
Increase in allocative efficiency due to economies
of scale
CON
Anti-competitive effects
VERTICAL
May increase security of
Potential anti-competisupply or markets for partive effects
ticipant companies; easier to
transfer assets
CONGLOMERATE
Risk reduction through
diversification; economies
of scope
No anti-competitive
effects. However, risk
of poor fit; rent-seeking
through financial manipulation (Buffett); some
concern over potential
political power (Garten)
37
Some Notes on Corporate Strategy
Excerpts from "Mega-Mergers, Mega-Influence," By JEFFREY GARTEN,
Dean of the Yale School of Management, New York Times, October 26, 1999
In just the past few years corporate giants have
emerged across all industries. Citibank and
Travelers, Bank of America and Nationsbank,
and Deutsche Bank and Bankers Trust are
among the major mergers that have reshaped
banking. In other industries, Daimler-Benz
has linked up with Chrysler; AT&T with
Mediaone; British Petroleum with Amoco;
Aetna with Prudential Health. Still awaiting
regulatory approval are some of the biggest
combinations of all, including those between
Exxon and Mobil, MCI Worldcom and Sprint,
and Viacom and CBS.
The big problem is not with how these
businesses are affecting competition, but with
the inability of our political system to respond
to potential problems resulting from economic
globalization. Business leaders understandably
operate on a global stage, while government
leaders act in a way that fails to recognize the
new global economy.
Here is some of the fallout. Mega-banks
like Citigroup or the new Bank of America have
become too big to fail. Were they to falter, they
could take the entire global financial system
down with them.
Many mega-companies could be beyond
the law, too. Their deep pockets can buy teams
of lawyers that can stymie prosecutors for years.
And if they lose in court, they can afford to pay
huge fines without damaging their operations.
Moreover, no one should be surprised
that mega-companies navigate our scandously
porous campaign financing system to influence
tax policy, environmental standards, Social
Security financing and other issues of national
policy. Yes, companies have always lobbied,
but these huge corporations often have more
pull. Because there are fewer of them, their
influence can be more focused, and in some
cases, the country may be highly dependent on
their survival.
For example, corporate giants can have
enormous le ver age when they focus on
America’s foreign and trade policy. Defense
contractors like Lockheed Martin, itself a
result of a merger of two big firms, were able
to exert ex traor di nar i ly powerful force to
influence legislation that approved enlarging
NATO, a move that opened up new markets
for American weapons sales to Poland and the
Czech Republic.
Companies like Boeing, which not long ago
acquired McDonnell Douglas, have expanded
their already formidable influence on trade
policy toward countries like China. Boeing
is now the only American commercial aircraft
manufacturer.
Corporations like Exxon-Mobil will
negotiate with oil-producing countries almost
as equals, conducting the most powerful private
diplomacy since the 19th century, when the
British East India Company wielded nearsovereign influence in Asia.
But sooner or later — perhaps starting with
the next serious economic downturn — the
United States will have to confront one of
the great challenges of our times: How does a
sovereign nation govern itself effectively when
38
Some Notes on Corporate Strategy
Excerpts from BERKSHIRE HATHAWAY INC. 1998 ANNUAL REPORT,
Chairman’s Letter (Copyright © 1999 By Warren E. Buffett)
When it comes to restructurings
and merger accounting, many
man age ments pur pose ful ly
work at manipulating numbers
and deceiving investors.
Many major corporations
still play things straight, but
a sig nif i cant and growing
number of oth er wise highgrade man ag ers have come
to the view that it’s okay to
manipulate earnings to satisfy
what they believe are Wall
Street’s desires.
These managers start with
the assumption, all too common,
that their job at all times is to
encourage the highest stock
price possible (a premise with
which we adamantly disagree).
When operations don’t produce
the result hoped for, these
CEOs resort to unadmirable
accounting stratagems. These
either manufacture the desired
“earnings” or set the stage for
them in the future.
Managements
now
fre quent ly use merg ers to
dis hon est ly rearrange the
value of assets and liabilities
in ways that will allow them to
both smooth and swell future
earnings.
In a landmark speech
last September, Arthur Levitt
[chairman of the U.S. SEC]
called for an end to “earnings
man age ment.” He correctly
observed, “Too many corporate
managers, auditors and analysts
are participants in a game of
nods and winks.” And then
he laid on a real indictment:
“Managing may be giving way
39
Some Notes on Corporate Strategy
U.S. Mergers & Divestitures
(billion $)
40
Some Notes on Corporate Strategy
U.S. MERGERS AND ACQUISITIONS OF U.S. COMPANIES
- 1996
#
$ million
2,670
$556,308
Telecommunications
58
$77,815
$1,342
Electric, gas, water distribution
41
$40,355
$984
7%
Radio & television broadcasting stations
178
$32,065
$180
6%
Business services
263
$28,633
$109
5%
51
$28,266
$554
5%
Total activity
Transportation and shipping (except air)
%
avg value
100%
14%
Oil and gas; petroleum refining
138
$26,018
$189
5%
Commercial banks, bank holding companies
185
$21,259
$115
4%
Measuring, medical, photo equip; clocks
92
$21,065
$229
4%
Aerospace and aircraft
10
$19,628
$1,963
4%
Insurance
86
$15,266
$178
3%
Electronic and electrical equipment
59
$14,296
$242
3%
135
$13,991
$104
3%
73
$12,974
$178
2%
122
$11,077
$91
2%
Prepackaged software
84
$9,951
$118
2%
Drugs
27
$9,437
$350
2%
Chemicals and allied products
33
$9,208
$279
2%
Hotels and casinos
Investment & commodity firms, dealers, exchanges
Real estate, mortgage bankers and brokers
Mining
17
$6,797
$400
1%
Repair services
13
$6,763
$520
1%
Communications equipment
33
$6,580
$199
1%
Transportation equipment
28
$6,495
$232
1%
8
$5,497
$687
1%
34
$5,393
$159
1%
Food and kindred products
Printing, publishing, and allied services
Sanitary services
27
$4,890
$181
1%
Wholesale trade—durable goods
86
$4,783
$56
1%
Metal and metal products
66
$4,307
$65
1%
Retail trade—general merchandise and apparel
19
$4,178
$220
1%
Machinery
49
$3,763
$77
1%
Computer and office equipment
39
$3,643
$93
1%
Wood products, furniture, and fixtures
20
$3,243
$162
1%
Agriculture, forestry, and fishing
16
$3,140
$196
1%
17
$2,507
$147
0.5%
15
$2,329
$155
0.4%
1
$2,251
$2,251
0.4%
Amusement and recreation services
41
$1,756
$43
0.3%
Textile and apparel products
19
$1,342
$71
0.2%
Construction firms
18
$1,284
$71
0.2%
7
$936
$134
0.2%
0.2%
Motion picture production and distribution
Paper and allied products
Holding companies, except banks
Stone, clay, glass and concrete products
Advertising services
14
$844
$60
Personal services
5
$715
$143
0.1%
Public administration
3
$408
$136
0.1%
Air transportation and shipping
2
$264
$132
0.05%
Tobacco products
2
$200
$100
0.04%
Other financial
2
$19
$9
0.003%
41
Some Notes on Corporate Strategy
U.S. MERGERS AND ACQUISITIONS TOP 10
$ million
1996
Total activity
Telecommunications
$618,499
1994
Total activity
$358,718
$79,302
Drugs
Electric, gas, water distribution
$49,927
Commercial banks, bank holding
companies
$26,419
$23,629
Business services
$34,177
Food and kindred products
$19,451
Radio & television broadcasting stations
$32,580
Insurance
$18,175
Oil and gas; petroleum refining
$30,271
Business services
$16,702
Transportation and shipping (except
air)
$28,873
Radio & television broadcasting
stations
$15,064
Measuring, medical, photo equip;
clocks
$22,260
Health services
$14,760
Commercial banks, bank holding
companies
$21,328
Oil and gas; petroleum refining
$14,545
Aerospace and aircraft
$19,628
Telecommunications
$14,129
Insurance
$16,346
Investment & commodity firms,
dealers, exchanges
$13,996
1992
Total activity
Commercial banks
$125,308
$16,390
1990
TOTAL
services
$172,319
$32,746
Electric, gas, water distribution
$6,904
finance, insurance, real estate
$28,142
Radio and television broadcasting
$6,585
Transportation and public utilities
$19,838
Food and kindred products
$6,407
Chemicals and allied products
$15,612
Security and commodity brokers
$5,760
Mining
$11,646
Oil and gas and petroleum refining
$5,418
Food and kindred products
$9,246
Savings and loans
$5,305
retail trade
$7,373
Insurance
$5,169
Electrical and electronic equipment
$6,381
Wholesale
$4,595
Industrial machinery, computer
equipment
$5,978
Chemicals and allied products
$4,572
Paper and allied products
$5,682
42
Some Notes on Corporate Strategy
Some Recent Big Mergers
RECENT LARGE MERGERS
AND ACQUISITIONS
PARTIES
DATE
PRICE
STATUS
(billion $)
AOL
Time-Warner
2000
$182 Completed
MCI
Sprint
1999
$130
Pfizer
Warner-Lambert
2000
$90 Contested
Glaxo Wellcome
SmithKline Beecham
2000
$78
The Travelers
Citcorp
1998
$70 Completed
SBC
Ameritech
1998
$62 Completed
Bank of America
NationsBank
1998
$60 Completed
JDS Uniphase
E-Tek Dynamics
2000
$55
Daimler-Benz
Chrysler
1998
$39 Completed
Chevron
Texaco
2000
$36
World Com
MCI
1998
$37 Completed
BP
Amoco-ARCO
1999
$29 Contested
Boeing
McDonnell Douglas
1997
$16 Completed
El Paso Energy
Coastal Corp
2000
$15
Telefonica SA
Telecommunicacoes de Sao Paulo
2000
$10
Taiwan Semiconductor
Worldwide Semiconductor
2000
$6
France Telecom
Global One
2000
$4
Telfonica SA
Telefonica de Argentina
2000
$4
Telewest Communications
Flextech
2000
$4
Source: www.securitiesdata.com
43
Some Notes on Corporate Strategy
44
Some Notes on Corporate Strategy
Porter's 4 Concepts of Corporate
Strategy
1.Portfolio Management
2. Restructuring
3. Tranferring skills
4. Sharing activities
Porter's conclusion: only #3 and #4 are sound
and even they depend on good industry structure
and implementation
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Some Notes on Corporate Strategy
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Some Notes on Corporate Strategy
Excerpts from: "How mergers go wrong"
Jul 20th 2000. From The Economist print edition
A stream of studies has shown that corporate mergers have even
higher failure rates than the liaisons of Hollywood stars. One
report by KPMG, a consultancy, concluded that over half of them
had destroyed shareholder value, and a further third had made
no difference. Yet over the past two years, companies around the
globe have jumped into bed with each other on an unprecedented
scale. In 1999, the worldwide value of mergers and acquisitions
rose by over a third to more than $3.4 trillion.
Most of the mergers we have looked at were defensive, meaning
that they were initiated in part because the companies involved
were under threat. Sometimes, the threat was a change in the
size or nature of a particular market. Occasionally the threat lay
in that buzzword of today, globalisation, and its concomitant demand for greater scale. Or the threat may have come from another predator.
When a company merges to escape a threat, it often imports its
problems into the marriage.
As important as the need for clear vision and due diligence before
a merger is a clear strategy after it. As every employee knows
full well, mergers tend to mean job losses. No sooner is the announcement out than the most marketable and valuable members
of staff send out their resumés.
Without leadership from its top manager, a company that is being
bought can all too often feel like a defeated army in an occupied
land, and will wage guerrilla warfare against a deal.
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Some Notes on Corporate Strategy
Some Recent High-Visibility Merger
Disasters
BMW-Rover
Daimler-Chrysler
Compaq-Digital
AT&T-NCR
Mattel-Learning Company
Hypobank-Bayerische Vereinsbank
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Some Notes on Corporate Strategy
Is bigger always better?
One reaction:
November 10, 2000: British
Telecommunications to split into 2
companies
November 1, 2000: Worldcom
announces plan to split into two
Oct 26, 2000: AT&T to break itself
into 4 businesses
49
Some Notes on Corporate Strategy
Consider some additional evidence:
"The Dubious Logic of Global Megamergers"
Ghemawat, Pankaj; Ghadar, Fariborz; HBR, 7/1/2000
"The almost universal belief among executives today is that
bigger is better: companies are entering into huge, pricey crossborder mergers at an unprecedented rate. Common wisdom
is that industries will become more concentrated as they
become more global. In this article, the authors debunk the
myth of increased concentration; the perceived links between
the globalization of an industry and the concentration of that
industry are weak. Empirical research shows that global—or
globalizing—industries have actually been marked by steady
decreases in concentration since World War II. The authors
present the biases that managers often have about consolidation
and offer alternative strategies to pursuing the big M&A
deal. There are better, more profitable ways of dealing with
globalization than relentless expansion, they say. Those
strategies include buying up cast-off assets from merging
rivals; focusing more on domestic or regional growth rather
than on global expansion; taking advantage of merging rivals’
weakened market position during integration and launching an
aggressive marketing campaign; and building alliances with
other companies rather than buying them up."
50
Some Notes on Corporate Strategy
So, what really is strategic
management?
51
Some Notes on Corporate Strategy
Opening paragraph by Mintzberg, Ahlstrand
and Lampel, 1998.
"We are the blind people and strategy formation
is our elephant. Since no one has had the vision
to see the entire beast, everyone has grabbed
hold of some part or other and “railed on in
utter ignorance” about the rest. We certainly do
not get an elephant by adding up its parts. An
elephant is more than that. Yet to comprehend
the whole we also need to understand the parts.
The next ten chapters describe ten parts of
our strategy-formation beast. Each forms one
“school of thought.”
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Some Notes on Corporate Strategy
The "10 Schools"
•
•
•
•
•
•
•
•
•
•
The Design School
The Planning School
The Positioning School
The Entrepreneurial School
The Cognitive School
The Learning School
The Power School
The Cultural School
The Environmental School
The Configuration School
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Some Notes on Corporate Strategy
The 10 Schools of Strategy
# School
Strategy Formation as:
1 Design
a process of conception
2 Planning
a formal process
3 Positioning
an analytical process
4 Entrepreneurial
a visionary process
5 Cognitive
as a mental process
6 Learning
an emergent process
PRESCRIPTIVE
SCHOOLS
DESCRIPTIVE
SCHOOLS
7 Power
a process of negotiation
8 Cultural
a collective process
9 Environmental
a reactive process
INTEGRATIVE
SCHOOL
10 Configuration
a process of transformation
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Some Notes on Corporate Strategy
Mintzberg et al., 10 Schools of Strategic Management
SCHOOL
Pro/Des
ESSENCE
TECHNIQUES
PEOPLE
1 Design
Prescriptive
seeks to attain a fit between internal capabilities and external possibilities
SWOT analysis
Christensen et al.
(HBS)
2 Planning
Prescriptive
take the SWOT model, divide it into neatly delineated steps, articulate each of those with lots of checklists & techniques, and give
special attention to the setting of objectives on the front end and the
elaboration of budgets & operating plans on the back end
Planning hierarchies
Ansoff; SRI, etc.
3 Positioning
Prescriptive
only a few key strategies - as positions in the economic marketplace
- are desirable in any given industry; ones that can be defended
against existing and future competitors. There are a limited number
of basic or generic strategies; e.g., cost leadership, product differentiation and market scope
BCG growth-share
matrix; experience
curve
Porter, BCG
4 Entrepreneurial
Descriptive
the key concept is the leader’s vision
5 Cognitive
Descriptive
2 forms: (1) positivist - treats the processing & structuring of
knowledge as an effort to produce some kind of objective representation of the world; (2) subjective - where strategy is some kind of
interpretation of the world.
understanding and
removing biases in
decision making
Simon
6 Learning
Descriptive
strategy emerges as people, acting alone or collectively, come to
learn about a situation as well as their organization’s capability of
dealing with it. Eventually they converge on patterns of behaviour
that work
incrementalism
Lindblom, Quinn
7 Power
Descriptive
strategy formation is characterized as an overt process of influence,
emphasizing the use of power and politics to negotiate strategies favourable to particular interests. Two forms: (1) micro - use of power
inside the organization; (2) macro - use of power by the organization
coalition building,
bargaining, negotiating and jockeying
for position
Allison
8 Cultural
Descriptive
Five propositions: (1) strategy is a process of social interaction,
based on shared beliefs; (2) people acquire these beliefs through
acculturation; (3) these beliefs are often tacit or nonverbal; (4)
strategy is therefore perspective rather than positions; (5) culture
encourages the status quo
9 Environmental
Descriptive
the organization is considered passive, something that spends its
time reacting to an environment that sets the agenda. Differences
in organizations are explained by environmental characteristics such
as stability, complexity, market diversity and hostility.
Integrative
describes the relative stability of strategy within given states, interrupted by occasional and rather dramatic leaps (or transformations)
to new ones
10 Configuration
Schumpeter
inspired by Japanese
corporate culture
Mintzberg
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Some Notes on Corporate Strategy
Returning to the question:
do we have a field where there is a
coherent and relatively consistent
body of theory which (a) describes the
world of corporate strategy, and (b)
precribes certain strategic actions?
OR
is this a discipline still in its formative
stages?