Corporate Strategy and Parenting Theory (p324-334 reader)

Goold/Campbell/Alexander 1998

Summary

• Many of the business units in multibusiness companies could be viable as stand-alone entities: To justify its existence, the corporate parent must influence the businesses collectively to perform better than they would as stand-alone entities
• Parent companies compete with each other for the ownership of businesses: The objective of corporate strategy should be to add more value to the businesses in the portfolio than other rival parent organisations would
• All multibusiness organisations have inherent and pervasive tendencies to destroy value: Corporate strategies should recognise these tendencies and be designed to minimise value destruction as much as to maximise value creation
• The importance of lateral synergies in creating value in multibusiness companies has been systematically overrated: corporate parents should pay relatively more attention to other sources of value creation, in particular their ability to improve performance in each individual business as a stand-alone entitiy
• Value creation seldom occurs unless the corporate parent perceives a few large opportunitites for business performance enhancement, and develops distinctive skills, resources and influencing processes that address these opportunities: Corporate parents should focus their efforts on building special competences that fit the particular opportunities they are targeting
• Corporate centres, functions and processes designed to achieve general best practice lack sufficient focus to achieve outstanding results: They should be designed more idiosyncratically to fit with the specific opportunities targeted by the corporate level strategy
• Past measures of diversity based on conventional concepts of relatedness have proved unsatisfactory: To avoid excessive diversity, corporate parents should build their portfolios around businesses with similarities in terms of parenting needs and opportunities
• Many corporate parents are over-ambitious about the speed with which they can build new skills and understand new types of buisnesses: Good corportate strategies should maintain a balance between 'stretch' for new opportunities and 'fit' with the parent's existing skills
• Business unit boundaries and corporate reporting structures have a profound impact on both the balue creation opportunities and the value destruction risks for the corporate parent: Decisions on unit definitions and corporate structures should be determined by careful analysis of their likely impact on net value creations, not by history ambition and politics

How to assess the potential of your strategy. u5s3p52

Johnson & Scoles suggested three sets of testing critera,

• suitability - does it fit with eg the market key sucess factors and does it adequately address the problem/opportunity, is it based on resource capitalisation and does it fit your objectives/mission
• feasibility - can you do it?! are the required performance measures necessary for the strategy achievable, do you have the resource and can you cope with the reaction of your competitors to your new strategy (will your new low prices spark a price war, for example)
• acceptability - should you do it? what is the cost-benefit? What are the risks? Consider all organisational stakeholders. What is the effect of the strategy on your internal systems and procedures. Will there be knock-on effects?

These are a good set of initial tests, but Rumelt (1995) also suggests considering additional factors.

• Consistency - is the strategy consistent with the other things you do and present a consistent or inconsistent view of the organisation?  Are you sending out mixed messages? Does it create more value than it costs, and does it compete with other organisations that are also trying to adapt and prosper?
• Consonance - tricky concept - Does it create social value, eg benefit all stakeholders appropriately, is it what the market is looking for, is it acceptable to your customers or will it alienate them?
• Advantage - will it allow you to capture the value it creates? It must provide for creation/maintenance of competitive advantage from one or more of superior skills, resources or position.
• Feasibility - as above

Digging deeper into Porter's Generic Strategies u5s3p39

Sandberg(1996) claimed the model does not allow segment differentiation, meaning it didn't account for organisations that attempted different approaches in the different segments in which they operate.

Generally speaking, Mintzberg (1995) claimed 6 ways of strategic differentiation, which you might expect to mix or combine together.

• price
• image
• support
• design
• quality
• undifferentiated (or non-differentiated).

Price and image are often combined, particularly with designer brands which desire to be perceived as expensive (or cheap!) Price may be part of the image.

Mintzberg also proposed breaking down the broad/narrow market continuum into finer granularity

• unsegmented
• segmented
• niche
• customised

Can draw a matrix based on four market definitions and six strategies. A customised market strategy is likely to demand a high level of customer-support differentiation.

Generic strategies are strategies for growth. Not all strategies realise their intended objectives, and sometimes satisficing is sufficient (u5s3p44).

Where strategies fail, what can you do?

Slatter (1984) u5s3p45 suggests turnaround is possible and divesting of the struggling part of your business is not the only way to achieve this.

Sometimes companies are so successful at turnaround that they go on to outperform the market. Gringyer (1988) calls these companies "sharpbenders". Sharpbenders usually occur where the strategy includes
major changes in management
stronger financial controls
new product-market focus
improved marketing
significant reductions in production costs
improved quality and service

particularly, more sharpbenders improved marketing and reduced their production costs. Fewer pursued acquisition as a route to change. Sharpbenders managed it "because of the range and effectiveness of the measures they used and the timing of them". - eg Caterpillar .

REMEMBER - turnaround strategies only apply to organisations, not whole industry sectors. Where the sector is problematic this may be more due to environmental factors.

"Tipping point leadership" can lead to turnaround - this involves a set of four hurdles that each have to be "tipped". They are cognitive - understanding the problem, resource - being able to deal with it, motivational - wanting to deal with it, and political - dealing with opponents to your approach.

Porter's Generic Strategies - revisited

• Cost Leadership
• Differentiation
• Focus (cost & product)
• Integrated cost leadership and differentiatioin

A cost-leadership strategy means you aim to be the firm with the lowest cost-base in the broad sector or industry.
A cost-focus strategy aims for cost advantage within a specific segment
A broad-differentiation involves a differentiated product or service across  a broad range or industry
A differentiation-focus strategy aims for differentiation within a specific segment
An integrated cost-leadership/differentiation strategy involves offering a differentiated product at a relatively low price. (instead of the more usual price premium).

Cost-based strategies (Grant 2002) have 8 drivers:-

1. economies of scale and scope - sources include
• technical input-output relatioinships
• indivisibility
• specialisation
2. economies of learning
3. process technology
4. process design
5. product service design
6. capacity utulisation
7. input costs u5s3p24
• locational differences in input prices
• ownership of low-cost sources of supply
• non-union labour
• bargaining power
8. residual differences in operating efficiency

A broad cost-leadership strategy is a good fit where number 1 above is possible and product differentiation would be hard. Value chain analysis is appropriate.


Differentiation focus can be achieved through customer service relationships or product, for example. You need to provide unique benefits while minimising the additional cost across the value chain, so that additional income generated more than covers the cost of providing the unique benefits.

A differentiation focus might be appropriate where a target segment has unique needs and is willing to pay a premium for the right product or service features. BMW can be considered to operate a differentiation strategy. u5s2p27.


The increased complexity of many competive environments has led to an additional 5th "box" on the generic strategies matrix, right in the middle. This reflects recognition that it is possible to offer a differentiated product or service at the same time as operating with low costs. This is a difficult strategy to operate. It is a departure from Porter's original analysis.

The relationship between competitive and corporate strategy u5s2p12

Competitive - "how the firm competes within a particular industry or market" (Grant 2002, p24)
Corporate - "define the scope of the firm in terms of the industries and markets in which it competes" (grant again)

So, competitive is "how" and corporate is "what".



Corporate strategy sets "the basic direction for strategic actions" whereas competitive sets how that direction is followed.

Corporate deals with the interrelationships between business units, and therefore defines the scope of the organisation.

Four dimensions of scope -

Segment scope - the variety of products or services produced and buyers served
Vertical scope - the extent to which activities are performed in house.
Geographic scope - the range of regions, countries or groups of countries in which a firm competes
Industry scope - the ranges of related industries in which an org competes with a co-ordinated strategy

The greater the scope the greater the potential for competitive advantage.

Limitations of the rational planning approach (classical school) - Whittington 2001 u5s2p9

Remember - rational approach is considered too "top down" and inflexible for modern, fast-moving environments, and less conducive to more ambitious strategies based on stretch.

Think of flexibility, closeness to the customer, swiftness of decision making etc. If your competitive strategies are based on these, it is not very compatible with the rational approach. It is very similar to the waterfall approach in software development and has many of the same weaknesses. Mintzberg 1994 argues that such rigidity discourages innovation.

Don't forget the usefulness of some elements of strategic planning.

Decision making should be based on the availability of appropriate data to support that decisioin. When selecting a strategic option, justification should be clear based on the analysis phase.

Any decision should contribute to achieving the organisation's objectives - when selecting a strategic option, there should be a clear understanding of how it will help to achieve the long-term objectives of the organisation

The link between analysis and choice should be clear. It is a useful device for visualising the relationship between the different stages of the process.

Reflection on unit 5

And so now we are onto the Choose phase of Johnson & Scoles' cycle.

A reminder of the different levels of strategy

Corporate
Business
Functional

Evaluation and choice of strategic options occurs at the business strategy level - how and where the organisation will compete (competitive strategy). Heavily influenced by corporate strategy issues.

4 key areas to unit 5
- relationship between competitive and corporate strategy
- types of competitive strategies and decision making evaluation
- corporate strategy options, scope of the organisation and the role of the corporate parent
- corporate strategy options for multi-business organisations

Learning outcomes - be able to
1. Analyse the org's competitive strategy and why it has chosen to compete this way
2. Understand corporate strategy and the rationale behind your organisations decisions to pursue particular corporate or competitive strategies in its chosen industries or sectors
3. undertake an evaluation of the organisational strategic choices made, using a variety of evaluative measures to comment upon its congruence with organisational aims and objectives.

How we compete within our given industries and sectors is the focus of competitive strategy, whilst corporate strategy is about the interrelationships between businesses (business units).

These interrelationships between business or business units can have a powerful effect on competitive advantage as they could benefit from eg. shared activities.

Two key questions. What options are available, and how and why do we choose between them?

Remember it's an iterative process as organisational life is messy! Organisational decision-making processes are untidy.

If it were an interative process it would be U5s2p8:-

• Develop or define organisation’s objective
• Analysis and projection of the environment surrounding organisation (macro-economic analysis, political climate, etc.)
• Reconsider objective (and change if environment requires this)
• Develop strategy options
• Select option against likelihood of achieving objective
• Implement chosen strategy option

In a small business there may not be much of a plan other than what is in the owner/entrepeneur's head.

As these busineses need to grow they may need to develop strategic plans to help them secure additional capital for that growth.

Larger organisations, particularly those with many business units will not only have a formal business plan but also often a dedicated strategic planning process and even function or team.

It also encourages consistency in the decision making at all levels of the organisation.

end u5s2p8