TM 640: Business Strategy
Session Ten – 1 December 2009
• Corporate Strategy
The Central Issue for Senior
Management: How to Add Value
• Environmental scan at the corporate
level
• The mission of the firm
• Business segmentation
Recall: Business Strategy and Corporate Strategy
The objective of business strategy is to create a
competitive advantage for the form in one particular
business.
The objective of corporate strategy is to determine:
– what business or businesses a firm should be in
– and how these various businesses should be
managed in order to strengthen the overall position of
the company.
Definition of a
Strategic Business Unit (SBU)
• An SBU is intended to serve an external market,
not an internal one.
• An SBU should have a well-defined set of
external competitors.
• The SBU manager should have sufficient
independence in deciding the critical strategic
actions.
– If the above are true, the SBU becomes a genuine
profit center.
• An SBU does not have to be a well-defined unit
with a line manager to be legitimate
(cont.) The Central Issue for Senior
Management: How to Add Value
• Vertical Integration
Interrelationships Among Business
Units
• There are three types of possible
interrelationships:
– Tangible Interrelationships
• Corporate philosophy
• Horizontal strategy
• arising from opportunities to share activities in the value
chain.
– Intangible Interrelationships
• involving the transference of management know-how
among separate value chains. Competitor
Interrelationships, stemming from
– Competitor Interrelationships
• stemming from the existence of rivals that actually or
potentially compete with a firm in more than one
industry.
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(cont.) The Central Issue for Senior
Management: How to Add Value
The Ten Tasks of Corporate Strategy
• Strategic posture of the firm
• Portfolio management
• Organizational and managerial
infrastructure
• Human resource management of key
personnel
Source: Arnoldo
Hax
The Realities of a Truly Global
Corporation
Do you have a “value gap”?
• Multi-cultural employees
– cultural barriers, different work practices and
legal environments, varying degrees of skill
levels
• Broad spectrum of competitive environments
– number and type of competitors, different levels
of protectionism and regulatory environment
• Varying efficiency of manufacturing assets
• Varying degree of infrastructure quality
– communications and transportation
• Communications challenges
– time zones, holidays, language barriers
• Are there any businesses in the portfolio that significantly
underperform competitors?
Do you have a “value gap”? (cont)
The Profitability Matrix
• Are there any businesses that out of their start-up phase
and still losing money?
• Are there any businesses that would clearly be worth
more to someone else due to synergy or operating
economies?
• Are resources allocated to businesses in a way that
reflects their profitability potential, or do you tend to
overfund losers and underfund winners?
• Is performance measured by using average cost, asset, and debt
allocations, and an arbitrary corporate hurdle rate?
• Are any of your long-term incentives tied directly to relative stock
performance or indirectly to the drivers of shareholder value?
• Is capital spending driven mostly by capital budgeting rather than
strategic planning process?
• Is the company under-leveraged? Could the company be taken
private LBO at today’s price?
• If the company did go private in an LBO, which assets would be sold
to repay debt? How much overhead could be cut without damaging
the long-term health of the company?
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Principles of Resource Allocation
• The principle of zero-based resource
allocation
• The principle of funding strategies, not
projects
• The principle of no capital rationing
• The principle of zero tolerance for bad
growth
Mapping Activity Systems
Making Choices Using Analytical
Tools
• Financial tools are critically important, but should
not substitute for strategic thining.
• Choices must be made as a portfolio, so that
different projects are explicitly traded off against
each other.
• It may be important to consider the robustness
of a strategy: what would happen if the world
looks very, very different?
Ikea’s Activity Systems Map
• A graphical tool for expressing the link
between
– Higher-order strategic themes
– Tightly linked activities
• Useful for examining and strengthening
strategic fit
Southwest Airline’s Activity
Systems Map
Basic Activity Mapping Questions
• Is each activity consistent with the overall positioning?
– The varieties produced
– The needs served
– The type of customers accessed
• What other activities within the company improve or
detract from strategic performance?
• Are there ways to strengthen how activities and groups
of activities reinforce one another?
• Could changes in one activity eliminate the need to
perform others?
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Corporate Level Strategies
The Scope of the Firm:
Specialization vs. Integration
Concentration
Growth
Grand
Strategies
Stability
Vertical Integration
Diversification
Harvest
Defensive
Turnaround
Divestiture
Bankruptcy
Liquidation
Different Types of Vertical
Relationships
Vertical Integration
• Two directions of vertical integration
– Backward
– Forward
• Two scopes of vertical integration
– Full
– Partial
Transaction Cost Economics (TCE)
Diversification Trends Over Time
• TCE helps to describe why some firms
succeed better when vertically integrated
while others prefer market contracts.
• Primary Assumptions:
– Opportunism
– Bounded rationality
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Competitive Advantage from
Diversification
Motives for Diversification
• Growth
• Risk Reduction
• Profitability
– Attractiveness Test
– Cost-of-entry Test
– Better-off Test
Diversification and Relatedness
• Operational Relatedness
• Strategic Relatedness
– Similar strategies, procedures, and systems
applied across a multi-business organization
Portfolio Strategies
•
•
•
•
•
Market Power
Economies of Scope
Tangible Resources
Intangible Resources
Organizational Capabilities
Williamson’s Key Features of the
M-Form (Multi-Divisional Form)
1.
2.
3.
4.
Adaptation to bounded rationality
Allocation of decision making
Minimizing coordination costs
Global rather than local optimization
BCG’s Growth/Share Matrix
• A method of analyzing an organization’s
mix of businesses in terms of both
individual and collective contributions to
strategic goals
• Three Common
– BCG (Boston Consulting Group)
– GE Business Screen
– Product/Market Evolution Matrix
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Product/Market
Evolution Matrix
GE Business Screens
Strong
Average
Weak
Develop
Growth
Shakeout
Maturity
Decline
The McKinsey Restructuring
Pentagon
Bartlett and Ghoshal Management
Process Framework
Patterns of Industry
Internationalization
International Competitive
Advantage
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Determining the Location of
Activities in the Value Chain
Alternative Modes of International
Market Entry
Questions to Ask When
Determining International Entry
Mode
Competitive Advantage from a
Multi-National Strategy
• Is the firm’s competitive advantage based on firmspecific or country-specific resources?
• Is the product tradable and what are the barriers to
trade?
• Does the firm possess the full range of resources and
capabilities for establishing a competitive advantage in
the international market?
• Can the form directly appropriate the returns to its
resources?
• What transaction costs are involved?
•
•
•
•
Economies of scale
Quality and flexibility
Branding / Name recognition
Cross-subsidization
Next Classes
• Next Week – Exam II
• Strategic Plans
– Plans may be submitted electronically or on
paper.
– Plans are due the Wednesday of finals week in
order to receive a grade in the “regular” timing.
• Otherwise, you will receive an “I” to be changed when the
work is completed.
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