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Strategic Choices
1. The influence of corporate strategy on an organisation a) Explore the relationship between a corporate parent and its business units.[2] Corporate parenting looks at the relationship between head office and individual business units. The nature of strategic choices for corporate strategy After making an assessment of the strategic position, decisions have to be made about which strategies to pursue. Strategic choices have to be made at the corporate, business and functional strategy levels. At the corporate strategy level, the strategic decision process is to: establish which businesses the entity is in at the moment make choices about which businesses it should be in, and decide what needs to be done to get there. The directors and senior management therefore decide the businesses in which the entity should exit, and which it should enter, during the next few years. Portfolio of businesses Large companies are usually organised as groups, with: parent company, whose management is responsible for the group as a whole, and a strategic business units, organised as groups of subsidiary companies (or as a single subsidiary) whose management is responsible for the business performance of the strategic business unit (SBU). A strategic business unit is a part of an organisation for which there is a distinct external market for goods and services. As a general rule, different strategies and marketing approaches will be needed for each SBU. Sometimes SBUs are obviously very different, for example a company selling both ethical pharmaceuticals (where doctors prescriptions are needed) and cosmetics. Sometimes, SBUs are harder to distinguish, for example selling the same products to both consumer and business markets. Each SBU can be seen as a separate business. All the SBUs within a group are a portfolio of businesses. The strategic choice about which businesses the group should be in involves making decisions about: 1. which SBUs to retain 2. which to shut down or dispose of, and 3. which new SBUs to establish or acquire. Who makes the strategy choices? The directors and senior management at head office may take strategic decisions in a large business organisation centrally. Alternatively, strategic decision-making may be delegated to managers at a lower level within the organisation. Management of operating divisions or strategic business units (SBUs) may have the authority to formulate and implement strategy for their own division or SBU. When authority for decision making is delegated, there is usually a need to make sure that decisions taken locally by divisional managers are consistent with the strategic objectives of the organisation as a whole. Head office should therefore (usually) exercise either a controlling or a co-ordinating role.
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The corporate parent controls the extent of product and market diversification undertaken by the organisation as a whole. Diversity of products and market may be advantageous for three reasons. 1. Economies of scope may arise in several forms of synergy 2. Corporate management skills may be extendible 3. Cross-subsidy may enhance market power Economies of scope - may arise from the greater use of under-utilised resources. These benefits are often referred to as synergy and can take several forms. Marketing synergy - sales staff, warehousing, distribution channels Operating synergy - bulk purchases, spread of fixed costs Investment synergy - fixed assets, working capital, research Management synergy - transferred to new operations However, there are three questionable reasons that may be given tojustify a policy of diversification; 1. Response to environmental change may be a cover for protecting the interests of top management and may lead to ill-considered acquisitions. 2. Risk spreading is valid for owner managed businesses, but shareholders in large public companies can diversify their own portfolios 3. Powerful shareholder expectations, especially demands for growth, can lead to inappropriate diversification.
Related diversification Is development beyond current products and markets but within the capabilities or value network of the organisation. There are two types of related diversification: vertical integration horizontal diversification (sometimes known as concentric diversification).
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Unrelated/conglomerate diversification Is development of products or services byond the current capabilities or value network of the organisation. Which means that the new product-market area is not related in any way to the entitys existing products / markets. The aim of conglomerate diversification is to build a portfolio of different businesses. The reasoning behind this strategy might be as follows. Diversification reduces risk. Some businesses might perform badly, but others will perform well. Taking the businesses as a diversified portfolio, the overall risk should be less than if the entity focused on just one business. However, this view is rejected by some business analysts, who argue that shareholders can themselves reduce risk if they want to, by spreading their investments in shares over different companies in different industry sectors. For a company in car manufacturing, diversifying into supermarkets is unlikely to be popular with shareholders who have carefully constructed a portfolio that suits their needs. Diversification will save costs and generate synergy. (Synergy is the idea that 2+2 = 5.) But synergy can only occur if costs can be saved (for example by economies of scale) or there is some other beneficial linkage between the companies. However, if the companies are truly unrelated then it is not easy to see how synergy can be created. Purchases, manufacturing, customers and management will all be radically different.
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Corporate strategies for international business can be analysed into three different categories: international scale operations international diversity globalisation. International scale operations A company might decide to sell a standard product in many different countries. To do this, it needs to establish operations on an international scale. Production plants might be established in selected countries, each serving a different region of the world. The purpose of selecting a centralised production location in each part of the world is to benefit from economies of scale, by producing the standardised products in large quantities. The products are then distributed to different countries in the region and sold. International scale operations therefore seek to obtain a cost-minimising balance between production costs and distribution costs. The operations are usually managed and controlled from a head office in the companys country of origin. International diversity A strategy of international diversity is also called multi-domestic strategy. With this type of strategy, the company recognises the differences in customer needs in each different country, and bases its strategy on the view that most or all value-adding activities must be located in the country where the target national market is located. In each country, the product is adapted to suit the unique requirements of the local customers. It is even possible that the companys products will be sold under different brand names in each country, and the group does not attempt to obtain global recognition for a single global brand name. Globalisation A globalisation strategy is similar to an international scale operations strategy, selling a single product under
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- market attractiveness - competitive advantages? - risks (political; business, currency) - legal/regulatory factors
3) Mode of Entry?
d) Discuss a range of ways that the corporate parent can create and destroy organisational value.[2] Corporate parents do not generally have direct contact with customers or suppliers but instead their main function is to manage the business units within the organisation. The issue for corporate parents whether they: add value to the organisation and give business units advantages that they would not otherwise have add cost and so destroy the value that the business units have created. Ways of adding value There are a number of ways in which the corporate parent can add value. By providing resources which the business units would not otherwise have access to, such as investment and expertise in different markets. By providing access to central services such as information technology and human resources that can be made available more cheaply on an organisationwide basis due to economies of scale. By providing access to markets, suppliers and sources of finance that would not be available to individual units. By improving performance through monitoring performance against targets and taking corrective action. Sharing expertise, knowledge and training across business units. Facilitating cooperation and collaboration between business units. Providing strategic direction to the business and clarity of purpose to business units and external stakeholders
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recommend this - the use of the product life cycle should be used first when answering questions that call for the analysis of product portfolios. However, it has been traditionally used for this purpose - mentioning JS&W's reservations could earn extra point.
- The two by two matrix classifies businesses, divisions or products according to the present market share and the future growth of that market. - Growth is seen as the best measure of market attractiveness. - Market share is seen to be a good indicator of competitive strength. - The money value of sales is indicated by the relative size of the circle.
Interpretation of the matrix The portfolio should be balanced, with cash cows providing finance for start and question marks; and a minimum of dogs. Stars - require capital expenditure in excess of the cash they generate, in order to maintain their market, but promise position in their position in their competitive growth market, but promise high returns in the future. Strategy: build Cash Cows - in due course, stars will become cash cows. Cash cows need very little capital expenditure, since mature markets are likely to be quite stable, and they generate high levels of cash income. Cash cows can be used to finance the stars. Strategy: hold or harvest if weak.
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Criticisms of the BCG matrix The matrix uses only two measures. The matrix encourages companies to adopt holding strategies. The matrix implies only those with large market shares should remain. The matrix implies that the most profitable markets are those with high growth Not all dogs should be condemned.
Classifies activities in terms of their popularity and the resources available for them. This is a matrix for the analysis of services provided by the public sector. This might be applied at the level of local or national government, or an executive agency with a portfolio of services. The axes are an assessment of service efficiency and public attractiveness: naturally, political support for a service or oganisation depends to a great extent on the extent to which the public need an appreciate it. Public sector stars perform well and are likely to well-funded at the moment. They are also attractive to the public and meet a strong public need. Public sector
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The Shell directional policy matrix is another portfolio model. It can also be called the attractiveness matrix. Like the BCG matrix, the directional policy matrix is used to place products or business units in a grid. It is a 3 3 matrix. This allows products to be treated with a more graduated approach than the 2 2 BCG matrix.
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Industry attractiveness. One side of the grid represents the attractiveness of the business sector or market. Indicators of market attractiveness include: Profitability Growth prospects Strength of competition Market size PESTEL issues (opportunities and threats in the business environment) Customer and supplier pressure Entry barriers Business risk Industry attractiveness is labelled Low, Medium, and High. Competitive strength. The other side of the grid represents business sector or market strength compared to the competition. Indicators of competitive strength include: Market share Managerial ability Low cost base Successful innovation Strong finance Know-how Brand The companys position in the business sector, which is categorised as Strong, Average or Weak The strategic decision about what to do with the product in the future is guided by the position of the product in the grid. Using the directional policy matrix The matrix can be used as a guide to the direction of future strategy. A strategy of immediate withdrawal from the market is indicated only when the industry or sector attractiveness is low and the entity has a weak position in themarket. A strategy of phased withdrawal may be appropriate to maintain the entitys reputation with customers. Presumably, the product or business is not cash negative, which means that there is no need for immediate withdrawal. However, it would be inappropriate to invest further in these products or business sectors. When an entity has a strong position in its market, its strategy should be based on maintaining or improving its position. However, if future prospects for the business sector are poor, the entity should probably treat its product as a cash cow.
A more sophisticated directional policy matrix has been developed by General Electric, McKinsey and Shell. As can be seen in the diagram right, the matrix has four
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The Ashridge portfolio display, or parenting matrix, developed by Campbell, Goold and Alexander, focuses on the benefits that corporate parents can bring to business units and whether they are likely to add or destroy value (as discussed earlier). The matrix considers two particular questions. 1) How good is the match between perceived parenting opportunities and the parents skills? 2) How good is the match between the CSFs of the business units and the skills and resources that the parent can bring? The Ashridge Portfolio Display matrix can be used to assess the role of the parent company in the strategic management of the business units in the group.
If a parent company becomes involved in the management of the business unit, it might add value, through improvements in operating efficiency, providing synergies, building competences in the business unit, providing expertise, managing risks at a group level (e.g. financial risk management) and providing corporate vision. However, a parent might also create harm and destroy value by adding costs with no benefits, and creating extra bureaucracy and delay. The matrix is based on the view that there is degree of fit between a parent company and a business unit (subsidiary). When the fit is high, the parent company understands the business unit well. There is also a degree of opportunity for a parent company to add value to a business unit. Heartland business units. These are SBUs to which the parent can add value without any danger of doing harm to
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Routes 1 and 2 are price based strategies. 1 = no frills Commodity like products and services. Very price sensitive customers. Simple products and services where innovation is quickly imitated price is a key competitive weapon. Costs are kept low because the product/ service is very basic. 2 = low price Aim for a low price without sacrificing perceived quality or benefits. In the long run, the low price strategy must be supported by a low cost base. Route 3 is cross between cost/differentiation 3 = hybrid strategy Achieves differentiation, but also keeps prices down. This implies high volumes or some other way
Routes 4 and 5 are differentiation strategies. 4 = differentiation Offering better products and services at higher selling prices. Products and services need to be targeted carefully if customers are going to be willing to pay a premium price. 5 = focused differentiation Offering high perceived benefits at high prices. Often this approach relies on powerful branding. New ventures often start with focused strategies, but then become less focused as they grow and need to address new markets. Routes 6 - 7 are fail strategies 6, 7, 8 = failure strategies Ordinary products and services being sold at high prices. Can only work if there is a protected monopoly.
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Note that an organisation can have identified several strategic business units (SBUs). A SBU is a part of an organisation for which there is a distinct external market. Different strategies can be adopted for different SBUs. For example, Toyota and Lexus (part of Toyota) operate as separate SBUs with different strategies. Some fashion businesses successfully separate their exclusive ranges of clothing from their diffusion lines.
b) Advise on how price-based strategies, differentiation and lock-in can help an organisation sustain its competitive advantage.[3] Price based strategies Sustaining competitive advantage through low prices can be achieved by: Accepting and tolerating reduced margins (i.e. prices have been reduced but costs stay relatively high). The margin per unit will be low, but overall profitability might be acceptable if volumes are high enough. Reducing costs (the margin is good even at low prices). Efficiency, experience, siting production in low cost economies. Winning a price war. This will be a short term strategy aimed at forcing competitors out of the market. Once there are fewer competitors, the longer term strategy can be reviewed. Focus on specific market segments where low prices are very important. Better profits from other areas of the business can help to fund low margins in this segment. Differentiation based strategies Sustaining competitive advantage through high quality can be achieved by: Reinvesting in continual research, development and the constant improvement in products and services. Making imitation difficult. For example, unique resources and capabilities. Reinvestment can help to create these assets. Difficulties in the transfer of resources and competences. This is more difficult to achieve in people based industries as employees can change jobs taking with them valuable skills and knowledge. Brand is an important asset to impede the transfer of resources and competences. Switching costs create another barrier to transfer where it is too expensive and troublesome for a customer to switch suppliers. Lockin Strategy A lock-in strategy is another approach to gaining and keeping competitive advantage. The idea of lock-in is that when a customer has made an initial decision to purchase a companys product, it is committed to making more purchases from the same company in the future. The customer is locked in to the supplier and the suppliers products. Lock-in strategies are fairly common in the IT industry. Microsoft has successfully locked in many customers to its software products. Customers would find it difficult to switch to personal computers that do not have a Microsoft operating system or do not include some of the widely-used application packages such as Word and Excel. Apple Computers adopted a lock-in strategy for digital downloading of music from the internet. Its iTunes service cannot (currently) be used on non-Apple MP3 players or on most mobile telephones.
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Market penetration strategy With a market penetration strategy, an entity seeks to sell more of its current products in its existing markets. This strategy is a sensible choice in a market that is growing fast. With fast growth, all the companies competing in the same market can expect to benefit from the rising sales demand. A market penetration strategy is more difficult to implement when the market has reached maturity, or is growing
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OPPORTUNITIE
External Factors
(O) (T)
THREATS
(ST)
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Management
Money
Manpower
Markets
Materials
Makeup
An important aspect of strategy evaluation is the financial assessment. Will the strategy provide a satisfactory return on investment? Is the risk acceptable for the level of expected return? What will be the expected costs and benefits of the strategy? How will it affect profitability? What effect is the strategy likely to have on the share price? Egs. Feasible: A company with strong cash balances acquires a competitor for cash.
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Profitability analysis - techniques include forecast ROCE, payback period and NPV, all of which you should be familiar with. These methods should not be overemphasised. (i) They are developed for assessing projects where cash flows are predictable. This is unlikely to be easy with wider strategies. (ii) There may be intangible costs and benefits associated with a strategy, such as an enhanced product range or image or a lostt of market share. Cost-benefit analysis is probably more appropriate for dealing with such development. See below . (iii) Shareholder value analysis has the potential to provide a more realistic assessment of overall strategy than traditional financial measures such as NPV and forecast ROCE. This is because its emphasis on value management and understanding the organisation's system of value drivers requires managers to take an integrated view of current and potential future strategies and their overall effects. Cost-benefit analysis May be an appropriate approach to acceptability where intangible effects are important, which is particularly the case in the public sector. This type of analysis attempts to put a monetary value on intangibles such as safety and amenity so that the impact of a strategy on all parties may be assessed. There are several other aspects of acceptability.
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