Understanding options for business&corporate development. Options for creating and growing value at...

Understanding options for business&corporate development.

Options for creating and growing value at the business and corporate

level, directions and methods of development, and the ability to grow

value.

Understanding business and corporate options

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Options for the business/ corporation


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John’s seminar approach

• Understanding the business as it is.

• Understanding the drivers of performance.

• Understanding the drivers of the environment.

• Understanding and evaluating the options for developing the business (ie for growing its value).


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Understanding the drivers of business performance

Understanding the business/ assessing performance

Understanding business environment/ driversof change

Understanding and evaluating options for business/ corporate development


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Coming from/ going to • We have been examining the characteristics

of the business, the drivers of business performance and the business environment.

• Our ultimate goal however is to consider the possible options for the future development of the business or corporation, to maintain or to improve its performance as a value creator.

• Options for growing value.


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Every case is different? • We have emphasised that businesses are different,

industries are different, environments are different. When it comes to options however the interesting thing is that these are quite limited.

• The options for growing the value of a simple business or a complex corporation, either a successful one or a failing one, are fairly limited.

• We can describe the options in terms of directions of development and methods of development and examine the requirements for successful development (the nature and sources of c. advantage again).


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Point of the exercise • Immediate point is about doing the exam case/ and

the BP assignment where it will be crucial to discuss convincingly the options for the case business and evaluate them as a prelude to making a choice.

• Generally this is the least well done part of the exercise. It is harder to do this part with some depth and conviction. Beware of just listing options. Look to explaining on what basis this business/ corporation could realistically undertake and create value from a particular option.

• Beware of wishful thinking.


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Team Tasks • Consider options for the business/ corporation: possible directions of development and methods • Evaluate ability to grow value at the business

unit level via product and market development, competitive advantage, co-operation, resources and capabilities creation and exploitation, innovation, reorganisation, downsizing.

• Evaluate ability to grow value via corporate options with respect to scope (increasing/ decreasing), M&A’s and divestment, and joint ventures.


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References guide • Material on this topic is found in: • Bus pol chapters 7/8 and Bus econ chapter 8. • Kees van der Heijden’s book on scenarios. • Textbooks such as Johnson& Scholes for lots more

analytical details and cases. • Also the Profit Zone by Slywotski and Morrison is good

on how some several successful businesses have done it. • Sadtler’s book ‘Breakup’ is good on unbundling option. • A lot of good ideas can be found in journals such as the

Sloan Management Review, California Management Review, Academy of Management Review, and especially the ….


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Recent HBR articles• Porter, ‘What is Strategy’ Nov. 1996• Hargadon, ‘Building an innovation factory’ May 2000• Kim, ‘Value innovation’, January 1997 • Gadiesh, ‘Profit pools’, May 1998 • Campbell, ‘Search for parenting advantage’, March 1995• Goold, ‘Synergy’, Sept. 1998 • Dell, ‘Virtual integration’, March, 1998• Singer, ‘Unbundling the corporation’, March 1999• Markides, ‘Diversify or not?’, Nov. 1997• Eccles, ‘Paying for acquisitions’, July 1999• Ventakesan, ‘Strategic sourcing’, Nov. 1992• Kim, ‘Business ideas’ ,sept. 2000• Hamel, Strategy as Revolution, 1996


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Review of position

• Understanding strategy/ strategy process

• Understanding the business as it is

• Understanding performance drivers in general

• Understanding environment and change


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Understanding strategy • In the beginning we defined business purpose in terms of

motivating and co-ordinating the search for value. So in considering options for developing the business/ corporation this should be our focus. How to take the business forward, how to ‘grow the business’, in a way that sustains and extends good performance or improves poor performance.

• Strategy is the organisation’s view of what the opportunities and threats are, how these can be exploited/ overcome, how to get things done effectively, how to take on the competition, and the risks involved. Strategy is doing the right thing, structure is doing things right.


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• Strategy is your guide to investment priorities, SIDS. Investments are the commitments you make to pursuing a particular strategic vision. A business with no clear strategy will be one with no clear investment priorities and this is a recipe for failure. Success is about developing a coherent strategy and structure to deliver sustainable value.

• In developing options remember what strategy is about:>>>>


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• Strategy is about preparing for the future (P&H)• about creating/ managing distinctive capabilities• about managing survival and success• about managing to be different• about managing the o/e interface, • about managing complexity• about managing options creation • about managing integration• about managing change• about managing convergence, • about managing competitive advantage• about managing resource allocation• about managing corporate scope.


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• Check then for the extent to which in considering options we/ you are:

• Preparing for the future, focused on performance, creating and managing caps, managing o/e interface, managing success, managing integration, managing change, managing issues, managing options, managing convergence, managing comp adv and scope, ….


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Strategy Process • Strategic decisions involve significant

commitments, are future oriented, are value oriented, take account of competitors actions, take account of environmental complexity and uncertainty, and the problems of implementation.

• Strategy is a way of defining priorities, supporting decision makers, providing co-ordination, and a statement of aspirations.

• Strategy is about understanding the world and the organisations options as a prelude to action/ commitment.


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Recall the lessons

• There are no easy recipes for success

• Strategy is a process not an event

• Strategy thinking/ making is itself a potential distinctive capability

• Expect the unexpected

• Get to know yourself, your customers, and your competitors well

• Remember what you are there for!


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Understanding the business • What do we do, how, for whom, with whom, where,

against whom, how hard, on what basis do we compete?

• Business idea: a statement of the principles on which you believe the business/ corp can succeed as a value creator, in particular your source of competitive/ corporate advantage and the unique organisational competencies required to succeed in the market against others.

• Business mission: organisational purpose and direction. A sort of statement of beliefs.

• Strengths and weaknesses: what you do well, where you are vulnerable.

• Bottom line: are we creating value or not?


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Understanding performance • What seems to matter is governance, industry/ sector,

growth strategy, and unique organisational processes and practices.

• Basically success needs a strong desire to create value allied to a high level of ability. In particular the ability to identify and exploit valuable opportunities and protect them from competitors.

• The key drivers of performance are: purpose, policies, positions, privileged assets, people, and organisational processes and practices.


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Performance lessons

• Keep to attractive industries and try to keep them attractive.

• Build and nurture distinctive assets and competencies through HRM, information management, and knowledge management.

• Build processes to effectively utilise people, information and knowledge in the pursuit of valuable opportunities.

• Focus policies on value creation.


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Understanding the environment • The potential for innovative thinking about growing value,

building new resources and capabilities, leveraging existing resources and capabilities.

• Opportunities for growing value. • Threats to existing performance, the value of existing

assets and capabilities, from environmental change. • The implications of change for the business/ corporation.

How change impacts on supply and demand. On competition and rivalry.

• Role of cost factors emphasised. • The scenario process, wind tunnelling, and the strategic

conversation.


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So

• Having understood the nature/purpose of strategy, and understood the business as it is, and the drivers of performance, and the drivers of change in the environment, we are now ready to put it together and consider and assess the options available to the business/corporation for maintaining and growing value in the future.


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Premises for options choice • Business in principle is about the on-going process

of organising and managing the search for, exploitation and protection of, opportunities to add value. There is competition for these opportunities and for the resources required to exploit them.

• Business performance is about the ability to identify and exploit attractive positions, the ability to develop competitive advantage, the ability to develop and exploit distinctive capabilities and competencies.

• Business performance is driven by the 7 p’s of ..


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• The environment in the future is uncertain and unpredictable. Strategy is to be considered in the light of the evolution of opportunities and threats, alternative scenarios, and the likelihood of changing circumstances.

• Strategy therefore is about taking the business forward, growing its value, through appropriate investments in people, organisation, products, markets, plant and equipment, R&D, marketing, brands, licences, knowledge, acquisitions, joint ventures, M&A’s, and in reorganisation.

• Thus crucial to remember that taking the business forward, growing its value, does not necessarily mean growing the business per se. It may mean, at least for a period, reorganisation and refocusing rather than growth.


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Recall McGahan 1999• Her analysis of US businesses found: • 41% were steady moderate performers • 20% were chronic under performers • 19% were sustained high performers • 10% were improving and 10% declining.• Thus for roughly 60% of businesses strategy

might be growth oriented and for the rest it is likely to be reorganisation oriented.


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Managing options • Note it is not just about finding THE option. • It is a process of building and maintaining a

portfolio of options, investing in thought experiments to aid understanding of options, learning about future capabilities and competencies, identifying and uncovering hidden constraints on the future, combining planning with opportunism.

• Good example given of how Acer developed its options by gradually building up its knowledge of markets and the required capabilities for success see Sloan management review, 1999


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A key word of warning • From Booz Allen Hamilton the US

consultants.

• ‘Before you change your strategy try to understand why the old one isn’t working’

• It may not be your strategy that is at fault! It may be the execution of the strategy. If this is so you may end up changing the wrong thing!

• BAH house journal, 2000


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Directions/methods/means for development of the business

• Usual to begin with a description of the possible directions of development and the possible methods for pursuing development of the business. A taxonomy of development. Usually in matrix form. (see BP 7.2)

• A useful start but remember this is only describing possibilities. It says nothing about the crucial issue of ability to grow value. The means for valuable development.

• The key issue is HOW value is to be created. For example it is open to any business to diversify into new areas as an option, but successful (value adding) diversification is not easy. It depends on both identifying the opportunities and having/ or creating the resources and capabilities to exploit them.

• Growth is easy, creating value is hard.


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Directions and methods

• Business Policy chap 7 uses the idea of generic strategies as the basis for discussion but I want to try to improve on this.

• Bus Econ text chap 11 focuses on scope and acquisitions which I repeat here but with some added thoughts on divestment, unbundling, outsourcing, etc so as to emphasise that strategy is about reorganisation as well as growth.


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Some distinctions • In discussing options it is useful to begin

with the following distinctions: • 1. Business unit strategy and corporate

strategy. • 2. Growth strategies and reorganisation/

retrenchment strategies. • 3. Directions of development and methods

of development.• 4. Product and market combinations as the

basis of development.


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1.Business v corporate strategy

• To do with the individual business unit (stand alone firm or division of a corporation), its products, markets, segments, horizontal development including possibly acquisition, co-operation.

• To do with scope of the corporation (increasing or reducing it), vertical scope, product scope, international scope, acquisitions, joint ventures, divestment, unbundling, out-sourcing.


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2. Growth v Reorganisation• New products

• New markets

• New businesses

• New segments

• Expansion

• Vertical integration

• Diversification (related/ unrelated)&bundling.

• Internationalisation

• Acquisitions

• Fewer products/ markets/ businesses

• Fewer segments

• Contraction

• Vertical disintegration/ outsourcing

• Refocusing/ down-sizing/ unbundling wrt scope and geography.

• Divestments/ closures


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SWOT

Opportunities Threats

Strengths Go for growth/ Diversification

Exploit strength To meet threats

Weaknesses Reorgansation to build strengths for growth

Reorgansation is essential. Turnaround case


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3. Directions v methods of development

• Horizontal • Vertical • Related diversification • Unrelated

diversification • International

• Internal • External (acquisition)• Co-operation • Joint ventures • Outsourcing • Divestment


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4. Basis for development

• Products/ technologies: existing, new but related, new and unrelated.

• Markets/customers: existing, similar, new, or your self (as in vertical integration).

• This gives rise to the Ansoff matrix (BP notes chapter 6) which classifies growth/ development strategies as follows: market penetration, market development, product development, related and unrelated diversification, and vertical integration.


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ANSOFF’S MATRIX

Customers / Products and technologies markets Present New/related New/unrelated

Present Market Product development penetration

Similar Market Mark. related development div.

New Market Tec. related Conglom. development div.

Self Vertical integration


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Mark. penet.

Vert. Int.

Rel.D. Unrel. Div.

Organ-ic

Toyota/Lexus

Enron Disney Tata

Allian -ces

GM/ Saab

Acer/ TI

Disney/Info

??

M&As HSBC Merck/ Medco

Disney Vivndi


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To simplify

• We will simplify all of this by looking first at options for business development (growth and reorganisation) and then at options for corporate development (growth and reorganisation). The focus will be on ability to grow value.

• This will not cover every conceivable variation on the theme of options but will introduce all the main ideas (I hope).


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Business policy and value• How can we create more value in this business at

this time? What are our options? • We will examine first the conventional or

textbook approach to this focusing on concepts such as market attractiveness, competitive advantage and resources/ capabilities.

• Second we will look at the approach of a leading strategy consultancy (BCG).

• Third we will look at some recent views of leading strategy thinkers on ‘Value Innovation’.


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Conventional approach • Consider the two fundamental drivers of

performance: market attractiveness and comp. advantage as discussed earlier.

• Different combinations of these are possible (next slide). Your options for value creation depend on the situation you find yourself in. Thus if you are in quadrant 3 your options are rather limited. It isn’t impossible to succeed in an unattractive market but it is very difficult if you are starting from a position of weakness. You need to consider exit strategy or selling out to someone who has the ability to improve your prospects.


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Market attractiveness and competitive advantage

1. Attractive markets but no competitive advs.

? Is can we develop an advantage.

2. Attractive markets and competitive advs.

? Is how can we maintain this, maybe even extend it.

3. Unattractive markets and

no competitive advs.

? Is should we be in this

business at all.

4. Unattractive markets but

competitive advantages.

? Is can we do anything to

improve m attractiveness


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Market attractiveness• If in an ‘attractive’ market the question is

how to maintain this or improve it.

• If market is not so attractive or downright unattractive the question will be is there anything we can do to improve things.

• Thinking back to Porter’s (5 F’s) model we see there may be things that can be done.

• Such as?


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• Invest in efforts to co-operate/ collude with rivals to reduce intensity of competition.

• May involve co-operation on output to keep prices strong (cartel) or co-operation to reduce costs of advertising or R&D.

• If co-operation is problematic then promote M&A’s to reduce the number of rivals in the market and/ or to close excess capacity.

• Invest in efforts (individual/ co-operative) to discourage further entry (raise entry barriers) and to reduce impact of substitutes.

• Invest in efforts to capture more of the total value available downstream and upstream (see ‘profit pools’).


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Complementors

• If the attractiveness of your products depends on the availability of complements then consider the management of this relationship. Are you maximising the opportunities for valuable co-development of products? Are you minimising the possibility of a threat to your market by lack of availability of good complements? Or of complementors moving into your territory?


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Profit pools • Defined as all the profits earned in an industry at all points

along the value chain. (HBR, May 1998, two articles)• U Haul was very successful in the consumer truck rental

business because realised that better profits were to be had selling accessories (complements) such as insurance, packing boxes, trailer rentals, storage etc.

• Profits were poor in the core truck rental business because consumers shopped around at this point. But once a rental was agreed consumers tended to buy the whole product bundle from that business. So U Haul kept prices low to attract core business and made its profits from the rest of the package.

• Therefore, it is argued, the best profits are often not in fact in the core business where most sales are generated.


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• In the auto industry profits are as much about financial services as making and selling cars. Ford gets half its profits from financing and leasing but this is only 20% of its business!

• The authors explain how to map the industry profit pool and to consider the dynamic relationships between different parts of the pool as a method of spotting new opportunities and threats.

• Dell is given as an example of a business that carefully studies the industry profit pool in order to develop its business model. Its origin of course was in recognising that direct selling of PC’s was more profitable than just making them.

• The Anheuser Busch case is also very instructive.


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How to fight a price war• If necessary however be prepared for a price war. • Diagnosis first: understand what you are trying to

do before you start one or find out why it is happening before you respond to one.

• Actions second: Fight smart. Use complex price actions (eg bundling), Introduce new products for low price segments, Compete on quality, use exclusive deals with resellers or related providers, advertise your strategic intentions (matching, deep pockets).

• Rao et al, HBR, 2000


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Analysing the battleground• Customers, segments and their price sensitivity:

can customers readily make price comparisons, will they necessarily always switch to low price?

• Company abilities: is a price war optimal given your cost structures, competencies and capabilities, positioning?

• Competitor responses: look at cost structures, C&C, and positioning. Who will respond, how hard, how sustainable.

• Other parties: collaborators, suppliers, providers of complementary goods/services, resellers, government.


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Competitive advantage• If you have it the question is what is its nature,

what are its sources, how do you sustain it and crucially how to use it as a basis, a lever, for expanding value creating activities through market penetration, market development, and/or product development.

• If you don’t have it the question is what might provide it and is there a realistic possibility of achieving some as a basis for development?

• Thinking back to competitive advantage we see what this might involve.


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• Recall that CA concerns the ability of a business to get a sustainable edge over its competitors.

• This depends on its ability to achieve a distinctive cost or diff. advantage, or a valuable niche, which the others find hard to understand or to replicate.

• That is to be cheaper, better, newer, more innovative offerings, earlier to market, more desirable, more distinctive, more reliable, better focused, to offer a more cost effective solution for consumers (EDS, MCI), or to provide a better ‘total system’ with complementors (Wintel, Visa).

• And this means the ability to organise and manage the relevant cost and differentiation ‘drivers’.


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• The ability to do this depends in turn on the effectiveness and integration of the appropriate key business activities and processes (distinctive capabilities/ competencies) which underlie cost competitiveness, quality, innovation, speed to market, network building, and customer intimacy.

• Production, marketing, logistics, supply chain management, collaboration, branding, quality, market development, product development, and innovation.

• Which in turn depends on organisational processes and practices such as HRM, information and decision management, and relationship management.


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Discipline of market leaders • Treacy/Wiersma argue for only 3 fundamental

value creating ‘disciplines’: innovation (product leadership), closeness to customers, and operational effectiveness. Key is ‘choosing’ which discipline to follow and building the whole organisation and its resources/ activities around this discipline.

• John Kay suggests 4 fundamental bases for success: innovation, reputation, architecture (organisational effectiveness), and strategic assets. But architecture is the fundamental thing.


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Corporate architecture • Is therefore the fundamental issue. Getting

structures, organisational processes and practices, incentives, leadership, accountability, culture right. For quality, innovation, etc. Why?

• Hard to do. So hard to understand, hard to codify or make into a recipe, hard to replicate and hard to buy ‘off the shelf’.

• See my discussion of performance for more on this issue.


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Ex. Customer responsiveness• Leadership: demonstrates commitment to

customers. • Production: customisation, responsiveness,

quality. • Marketing: knowledge of customers,

communications and learning from customers.• Logistics: fast response times. • R&D: involve the customer. • HRM: train staff to put customer first. • Information systems: use to increase

responsiveness.


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EX. Quality • Leadership commitment to quality. Set goals and

create incentives. GE six sigma programme. • Production. Trace defects back to source. • Marketing. Understand customer demand for

quality and provide feedback on performance. • Logistics. Help suppliers with quality, and trace

defects back. • R&D. Design for simpler manufacture. • Information systems. Monitor costs and benefits

of quality. • HRM. Quality teams, training in TQM


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Ex. Total systems • Some of the most successful business have

arguably neither the ‘best’ products or solutions. But dominate by creating a standard along with complementors that locks-in the consumer.

• Requirements are building a value creating total system with compatible parts which is cost effective for consumers.

• Key is relationship management and complementor integration. This runs right through the member organisations.

• Hax, Sloan management review, 1999


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Building strategic flexibility • The new economy requires a new approach to organisation

it is argued. Involves, • Strong leadership, non-linear, systemic thinking. • Building dynamic core capabilities • Focus on a development of human capital • Effective use of new technology especially IT • Identifying value adding options (especially through co-

operation and collaboration)• Building new organisation structures and cultures, a

learning innovative organisation• Managing firms as asset bundles (loose-tight properties,

long-short thinking and other paradoxes) • Hitt, Academy of management, 1998


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Options if you have CA • First, make sure you understand it yourself, what

it is, what its sources are, how it works for you (your business idea).

• Second, invest in nurturing it, strengthening it, and defending it. Brands, R&D stock, HRM, info management, knowledge management, collaboration, closeness to customers.

• Third, invest in leveraging it, exploiting it more fully. Via market development and product development, M&A’s, diversification (corp. dev.).


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But remember Icarus and John Wayne

• Beware of the dangers of the Icarus paradox (examined earlier). Where you become so enamoured of your own abilities that you begin to believe you can do no wrong. DEC, Wang, ITT, P&G.

• And remember the gunfighter syndrome. The greater your success the greater the kudos for the person who brings you down. Other teams seem to play harder against the champions. Bill Gates watch out, Linux is in town!


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Levers for growth? • Technology: developing new/ better product offerings

based on your product technology or production technology.

• Customers: developing range of products/ services for a particular type of customers. Skiers, drivers, computer users, over 50’s, teenagers, hospitals, airports, hotels, schools.

• Functions: developing range of products/ services to meet particular customer needs. Lighting, household cleaners, financial services, printing, packaging, security, insurance, convenience foods.

• Intangibles: such as brands, reputation, networks, supply chain organisation.


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M/P development • Increase market penetration, pursue market widening (new

customers), market deepening (selling more to existing customers).

• Improve pricing policies and promotion efforts. Advertising/sales effectiveness.

• Develop the product (upgrading) in ways that allow you to maintain/ improve margins. Look at Sony with TV’s, videos, cameras, music centres etc.

• Look for product add-ons. Can you capture more value by selling something else with the product such as financial services, breakdown insurance and repair contracts, upgrades. Consumer needs are complex! Your product offering must reflect this. If your total package is valuable to the consumer it could be valuable for you.


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Thus • I bought a PC from Dell last year using an on-line ‘build your own

PC’ interface, PLUS a printer, a scanner, a joy-stick, a sound system, software, insurance&repair contracts, internet access, delivery and set up, advice-line access, Zip discs, games, etc.

• Why did I buy this whole package from Dell? Reputation, ability to specify precise requirements, newest technology, good price, the convenience of bundling and on-line shopping, security, value for money.

• What Dell spotted was that it is not enough simply to design and assemble good well priced PC’s. You must get closer to the customer, understand their needs and concerns, and provide a total package to solve consumer problems and deal with anxieties about technology, repairs, set-up, compatibility, obsolescence, specification, up-gradability, guarantees, and vitally the longevity of seller.

• Compare this with Compaq and HP.


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Segmentation options • Growth (or reorganisation) could be based on

improved understanding/exploitation of customer segments. Either identifying those segments which are most profitable or identifying emerging new segments or by considering a change of segments.

• However simply finding a neat way to describe customer groups is not sufficient. What is needed are promising segments which you can actually aim to serve as or more successfully than someone else.


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Mass customisation option • Has the era of mass customisation arrived yet? This

is an attempt to join up the benefits of mass production/supply push (Fordism) with the benefits of customisation/demand pull whereby production is pulled by customer specific orders (Dellism?).

• According to McKinsey, not yet. The economics of such a model are not yet in place for products such as autos. The capabilities required are considerable. Close customer interaction, production process flexibility, supply and delivery logistics.

• McKinsey Quarterly, 2001


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Co-opting customer competence• In the new economy customers can be more active players

in value creation. This involves co-opting the customer into the network of collaborators involved.

• Active dialogue of equals: customers can be used for ideas, testing, problem solving.

• Mobilising customer communities: e-word of mouth made Netscape, Amazon, eBay, Yahoo into valuable brands.

• Using customer diversity to co-create personalized experiences rather than just products.

• Shaping customer expectations: learning from whilst educating customers.

• Prahalad, HBR , 2000


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Market space not share• What really matters is maximising your share of

consumers spending (market space) not specific product market share.

• Seeking to ensure longevity (loyalty), depth, breadth, and diversity of spending.

• BP for example seeks to sell customers ‘energy solutions’ not just oil. Unilever no longer just sells cleaning products but markets cleaning services/ solutions. Lego embraced the possibility of computer games which had threatened its traditional business. Virgin offers a comprehensive door to door service not just a flight. Ford is no longer just about ‘pushing the metal’ but total product/ service packages.

• Vandermere, Sloan management review, 2000


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Competing for the future • Competition is for the best ‘share of opportunities’

in emerging/ evolving markets, not just market share in existing markets. Competition is about gaining a deeper understanding of change drivers and how to shape the emerging market towards your own strengths. Competition is to acquire and develop the necessary resources, capabilities, competencies and partners.

• P&H, on the future


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M&A’s • Successful companies will have opps to acquire

competitors. • First because funds should be available. • Second because they should be able to sell the

deal on the basis of using their superior skills and knowledge to squeeze more value from the acquired business.

• Third because competitors may see this as preferable to being pushed out of business. Indeed they may even invite the acquisition.


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Constraints• Costs of m/p development and promotion. • Market penetration efforts might spark a price war. • Market widening/ deepening (export for example) and

product promotion can be expensive/risky. • Product improvements can be expensive and will only be

worthwhile if consumers actually value them. Even Sony can get this wrong sometimes. Waterproof CD players?

• Defining and serving the ‘market space’ may not be so easy.

• Getting the product/service bundle right can take a lot of trials.

• A-T actions against M&A’s possible.


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But if you haven’t• Then the options are necessarily tougher. • First you need to consider what is causing poor

performance and what it might take to improve it in your business/ market. What seem to be the key factors for success?

• Production costs, quality, speed to market, responsiveness to consumer tastes, reliability, distinctiveness? This shouldn’t be too hard to work out by studying more successful businesses.

• Then you must consider realistically your chances of reversing the causes of poor performance and catching up with the more successful businesses.


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• For example what would it take to achieve a better cost profile, or higher quality, or more distinctive products, or be more responsive to consumer tastes?

• Note that this does not necessarily mean following the same business model of the successful businesses and competing head to head with them.

• It is more likely to mean developing a distinctive model (see later under value innovation) which exploits opps they have missed (segmentation?) whilst playing to any strengths you might have and exploiting any weaknesses they have. How did Toyota conquer the West? How did Nokia take on the telecom giants? CNN in broadcasting.


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• This process should identify the sort of capabilities/competencies that might be necessary for success and you then have to ask:

• 1. Can our existing capabilties/competencies be upgraded/ developed to meet our needs?

• 2. Can we acquire the resources and build the necessary competencies in a realistic time frame?

• 3. Can we build an organisation which creates a strong focus on value and integrates and exploits these competencies as they develop?

• Essentially can we find a workable business idea?


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Constraints • This is a demanding thing to do well. To come from behind in the

competitive race. Very few businesses rise from mediocrity to greatness (Collins says fewer than 1%).

• Being realistic does not come naturally to people. It requires great honesty and courage in facing up to weaknesses and realistically appraising the prospects for improvement.

• Some businesses are happy to be mediocre. • Acquiring resources (or other businesses) will be a problem.

Capital doesn’t easily flow to poor performers, and neither do good people.

• Wishful thinking: thinking you can simply diversify your way out of failure or merge with other failures to create a success.

• It may be necessary to retreat in order to advance. But retreat is hard. Downsizing meets resistance.

• But the biggest constraint is likely to be time. Time to decide, to build and to implement. Danger of ‘time-compression diseconomies’ arises.


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Requirements

• Leaders who know the business well. • Who choose and motivate people well, and

get rid of under performers. • Who understand what drives performance in

their sectors and decide what the business might be good at and focus on this.

• Who focus on getting the simple things right• Collins, Good to Great, 2001


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Organisational failure • Consultants BAH reckon most failure stems from

implementation problems not strategies. • The key is aligning the individuals behaviour and

decisions to the organisations goals. Organisational architecture. This is difficult, therefore getting it wrong is common and getting it right is a source of advantage.

• Explore how the organisation as it is might be damaging implementation and causing failure.


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Four options for getting out of trouble• Sell the business• Wind it down/ close it. • Enhance short term- performance with

quick fixes.• Value recovery plan: identify and exploit

any existing capabilities and market positions, develop a business model for the growth of profits.

• Price Waterhouse Cooper


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Value recovery process • Stabilise the business

• Search for and analyse operational improvements and strategic options.

• Implement new strategy and strengthen operations, finances, and align organisation structures.

• PWC cont.


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Options in a recession• Get to know the customers even better. • Keep marketing spend up or seek to improve its impact

(bangs per buck). • Adjust product portfolios to suit the consumers search for

better value. • Support distributors and complementors. • Adapt pricing tactics but beware of price wars. • Focus on maintaining market share perhaps by acquiring

weaker competitors. • Stick to your core values. • Try to minimise the damage of retrenchment on your

distinctive competencies and capabilities. • Get prepared for the rebound.


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Beware of expensive fixes• Especially IT. PA consultants research into IT investment

around the world shows that:

• A. It is expensive and tempting in the new economy to see it as a panacea.

• B. It isn’t. Evidence suggests it is difficult to make IT investments pay off. Only 40% of businesses had confidence it would pay off for them.

• In practice however PA reckon a much smaller proportion of projects actually add any value!

• Look at all the firms that jumped on the e-commerce bandwagon recently in the vain search for easy growth.

• Increasing value with IT, PA, 2001


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Consultants approach (BCG) • This builds on the simple fact (discussed earlier)

that profitability depends on the effectiveness of sales (P/S or margins) times the effectiveness of assets in generating sales (S/A).

• Therefore we can consider options for development with respect to 3 things:

• Building margins.• Improving asset productivity. • Growing sales revenues. • See BCG: annual report on top companies.


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Improving margins • Improved pricing strategy. Careful segmentation

and price discrimination. • Careful thought about pricing options: is the

priority better margins or building (protecting) share? Pricing for margins works best if market growth is slow, current returns are poor, your share is high, competitors react quickly to attempts to build share.

• Improved cost management. Better understanding of the cost drivers in the business sector.

• Reduce waste, reduce complexity, improve design, reduce time, process innovation, relocation?


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Improving asset productivity

• Inventory management.

• Receivables management.

• Closure and disposal of redundant or underused assets.

• Improved utilisation of existing assets.

• Careful evaluation of all new asset acquisitions, especially specialised assets.


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Growing revenues

• Market widening especially geographical roll-outs of successful products.

• Market deepening. • Market segmentation, • Product improvements, extensions, add-ons

and distinctiveness (for which consumers are willing to pay).

• Transfer of competencies to new businesses (takes us into corporate strategy).


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BCG on Nokia • A top performer in world terms driven in

particular by excellent asset productivity. • It divested all non mobile phone interests and

reinvented itself in the mid-1990’s. • Strong sales growth was driven by focusing

resources on fastest growing segments of telecoms market, deepening and widening.

• It trebled its margins by introducing new products continuously and reaping scale economies and learning effects and careful cost management.


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Remember however

• The BCG type approach is simply spelling out the necessary requirements for growing value. This is useful but remember it doesn’t tell you how to build the organisational capabilities to achieve it. This is the really important part and also the more difficult part. It may be that if a business needs BCG or McKinsey to delineate these simple options it may not have the capabilities to implement them effectively.


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Value innovation (VI) • More radical approach recently associated with

big names such as Porter (HBR, 1996), Prahalad&Hamel (HBR 1996, Sloan MR, 1998), Kim and Mauborgne (Sloan MR, 1999 and HBR, 2000), Markides (BSReview, 1999), Tucker (J of Business Strategy, 2001) and Hargadon&Sutton (HBR, 2000).

• Web site on innovation: diamondcluster.com• On past experience I suspect this will become

textbook conventional wisdom.


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Porter on VI • Operational effectiveness is important but it is not enough.

You need to do something different or do things differently to achieve success.

• Strategy is about finding a way of being different. Choosing a different set of activities to deliver a unique value proposition. It is about perceiving new market possibilities and new combinations of activities to serve them. (Dell, Amazon, Starbucks, McDonalds).

• Strategy is the creation of a unique value position involving the use of a different combination of activities from those of rivals. Performance depends on the activity system as a whole not the effectiveness of the separate parts. This (the fit between parts) is what others will find hard to replicate and is thus sustainable.


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P&H on VI • Value innovation is the capacity to re-conceive the existing

industry model in a way that creates new value for customers and wrong-foots competitors.

• Note, if you don’t do it your competitors might or a new entrant might. So beware.

• The objective is to maximise your share of industry wealth creation. IBM once had 46% and it fell to 14% because others re-conceived the industry it dominated. It saw its job as making and marketing big computer systems to big business and government. The others reconceived it as IT: spreadsheets, word processing, data bases, games, communications. Personal computing.


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• Other examples quoted are Nike, Compaq, Amgen, Home Depot, Gap, Intel, and Wal Mart.

• Conventional strategy approaches have no idea about where the bold new ideas come from and thus is unlikely to be the source of exceptional performance (only 4% of businesses they reckon are exceptional).

• Question is then how can you find such strategies? Stop thinking about crafting ‘the strategy’ they argue and start thinking about creating organisational conditions (architecture) which will promote value innovation.

• Encourage the creation of new insights and the chances of acting on them.

• The business of strategic management is to help in the emergence of innovative strategies, to compete for the future, not to ‘plan’ the future.


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Routes to industry revolution • Radically improving the value equation (HP printers)• Separating function and form (seeing new functions in

old forms, such as credit card makers)• Achieving joy of use (Trader Joe’s)• Pushing the bounds of universality (single use camera)• Serving demand for individuality (personal fitted jeans)• Increasing accessibility (telephone banking)• Rescaling the industry (SCI funeral service)• Compressing the supply change (disintermediation, as

Wal Mart)• Driving convergence (blurring the boundaries of

markets as in telecoms)


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What would help this? • New voices. The process should be pluralistic and

participative. • New conversations. Across organisational

boundaries and beyond the organisation. • New passions. Encourage a passion for change

and innovation. • New perspectives. New ways of looking at

yourself, customers, competitors, opportunities. • New experiments. Experiment in the market and

seek to learn from it. There is a lot you can only learn from doing.


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K&M on VI • Strategy must focus on creating new markets not on beating the

competition. Successful companies do not focus on the competition but on making competitors irrelevant by providing buyers with a quantum leap in value.

• Value innovators use the consumer as the reference point not the competition. Innovation is driven not by the technology but by customer value.

• VI ask: are we offering consumers radically superior value? Are our prices accessible to the mass of buyers in the market?

• VI uses target pricing to build volume and target costing to ensure good margins.

• Examples: Wal Mart, Ikea, CNN, Kinepolis, SAP, Starbucks, Enron.

• Emphasis of these companies is not on patentable ideas but on the combination and arrangement of elements attractive to consumers.


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K&M on VI Building blocks of strategy

Conventional Value innovation

Competition Beat the competition

Make it irrelevant

Customers Retain existing and find new

Target the mass of buyers

Capabilities Leverage existing

Develop new/ use partnerships


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Questions for value innovators • Does the business challenge the inevitability of

industry conditions? • Does the business focus on domination by

advancing customer value?• Is management prepared to start anew? • Does the business search for key value ideas that

can unlock a mass market even if some existing customers are lost?

• Does the business think in terms total customer solutions even if this pushes it beyond traditional offerings?


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Organising for VI

• Small autonomous units or teams focusing on a product or business goal.

• Team members from diverse backgrounds and perspectives to promote creativity.

• Encouraging a willingness to share knowledge and ideas and to co-operate.

• Developing fair process which engages people in decision making, explains decisions, and establishes clear expectations.


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K&M on testing new ideas• What determines the success of a new business

idea?. Based on research into 100+ businesses with a good track record.

• Involves using 3 analytical tools. • 1. The buyer utility map. • 2. The price corridor of the mass. • 3. The business model guide • In addition they consider overcoming ‘adoption’

hurdles to the new ideas • HBR, 2000


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Buyer utility map • Testing the likelihood that customers will be

attracted to the new offering• This involves outlining all the levers that can be

pulled to deliver utility to customers.• It identifies six stages of the ‘buyer experience

cycle’ (purchase, use, maintenance, etc) and six ‘utility levers’ (simplicity, convenience, solutions, image, etc) giving a 36 map.

• Examples are given of how Dell, Starbucks, Philips identified opportunities in on the map.


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The price corridor of the mass• Identifies the ‘strategic’ price that could unlock

the biggest group of customers. • Key is to reach a mass market quickly to amortise

development costs and leave as little room as possible for imitators.

• Involves two stages: identifying the price corridor of the mass and then finding a price in this ‘bandwidth’ which will discourage imitators. Thus if the idea is patentable you can set a higher price. If it isn’t then you can’t.

• Examples Schwab, Quicken, and Megaplex.


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Business model guide • A framework for figuring out how the firm can

deliver the new offering at the targeted price. • A series of questions designed to get managers to

questions of cost targets, the required capabilities, partnership possibilities, acquisition of capabilities, pricing models to create the best profit opportunities.

• Examples of Swatch, SAP.


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Adoption hurdles • Resistance both inside and outside the

business to the new ideas and how to deal with them.

• Employee resistance. • Business partners.• General public. • Examples SAP, Morgan Stanley, Monsanto.


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Hargadon and Sutton on VI • They call it knowledge brokering: businesses

which intermediate between otherwise disconnected pools of ideas. There is a knowledge brokering cycle involving four practices:

• Capturing good ideas. • Keeping ideas alive by passing them around and

playing with them. • Imagining new uses for old ideas by plugging

them into new contexts. • Testing promising new concepts to learn about

commercial potential.


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• The original ‘innovation factory’ was Thomas Edison’s Menlo Park laboratory from which General Electric arose.

• IDEO founded in 1978 has given rise to thousands of new products for various companies (Palm V, Twist and go cups).

• Idealab in California specialises in internet ideas. • Business needs to change how it thinks about

innovation. It is all about the right sort of people and the right sort of incentives and culture for fresh thinking and experimenting.

• See also ‘Edison in the boardroom’ (Wiley, 2001)


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Markides on VI • Simple principles of breakthrough strategies:• Choose a unique strategic position (who/what/how

questions answered clearly). • Generate options/ ideas, the more the better. • Question the firm’s implicit assumptions and beliefs. • Create a culture of innovative thinking/ allow for errors. • Make clear choices, you can’t do everything. • Think holistically, focus on the big picture as well as the

details, strategic integration. • Seek environmental fit without loss of flexibility. • Create the appropriate organisational support systems. • No strategy remains unique for ever.


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Tucker on VI• Some ways to search for imaginative new business models. • Opportunities in market re-positioning: more for more, less

for less, same for less etc. • Opportunities in customer outsourcing. Accountants into

general consultancy.• Opportunities from rethinking the accepted way of serving

customers. Dentists moved from cavities to cosmetics. • Opportunities to reinvent the model. Progressive insurance

reinvented auto insurance in the US. • Rethink the pathways to the customer. Avon cosmetics,

Dell, eBay


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Slywotsky and Morrison on VI• Business re-inventors have a different logic. They

begin with what is important to the consumer and look to see what they need to do to provide it profitably. The profit zone.

• Great business design is the product of superior knowledge and strategic imagination.

• Identify 22 different successful approaches associated with these re-inventors (some below).

• The Profit Zone, 1997


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Some examples • Customer solutions: GE, ABB, HP.

Deepening the market by understanding the customer’s problems and selling solutions as well as products.

• Product pyramiding: Swatch, Mattel. Filling the product space from the low end to the top of the market, making it hard for new entrants to get in at the low end, so protecting the high end. US car makers failed to do it and let the Japanese in.


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• Multi component systems: Coca Cola, Starbucks. Where the market segments into more and less profitable components, such as for CC, grocery (poor), fountain (good), vending (excellent). CC uses the grocery market to maintain its brand but fights hard for share in vending to maximise profits.

• Profit multipliers: Disney. Packaging the same product in different forms. Films, videos, theatre,books, clothes, theme-parks,tie-ins, and so on.


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• Blockbuster profits: in industries such as pharmaceuticals and movies the key activity is project based. The new drug or the next movie. Up front development costs are immense but not every project can be a winner so the secret of success is raising the success rate by focus and tight project management. Drug companies such as Merck focus on particular areas: ulcers, asthma.

• After sale profit: in some markets selling the product isn’t profitable but financing and servicing and replacement which brings in the money. GE is a master at this, Ford&GM do it also.


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• Installed base: Microsoft. Xerox. Gillette. Create an extensive installed base as a foundation for selling follow up products and add-ons.

• Sequenced specialisation: EDS. Mastering the requirements a specific sector such as health and building a strong base before moving on to other sectors such as insurance, banking, travel, and so on.

• Source: The Profit Zone (Slywotsky).


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Ability to V Innovate? • Summing up on the ability to VI. • P&H suggest some ideas for encouraging the

development of v innovation in organisations. New voices etc.

• K&M suggest how to organise for v innovation and in particular how to deal with adoption hurdles.

• All seems to come down to organisational architecture and culture again. Getting structures right to encourage the search for and effective implementation of innovative strategies.


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E-strategy options • Giving away your product (Netscape)!

• Link and leverage (Amazon).

• Understanding the power of networks and exploiting network effects (Sun Micros).

• Be prepared to adapt constantly.

• Use psychological warfare to keep competitors off balance, eg vapour-ware.

• Credit Suisse equity research


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Atomising option

• In the ‘new economy’ the winner takes all so: • Focus everything on a well defined narrow market

niche or sliver where you have the best chance of achieving rapid dominance. Do not spread your bets. You do not have to be an industry giant to dominate the best niches. In fact the giants are at a disadvantage. Msoft, Intel, and Nokia examples.

• McKinsey Research


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Hyper-competition options • D’Aveni argues that under conditions of ‘hyper-competition’

you must seek:• A vision for disruption through Superior understanding of

dynamics of change. • To build capabilities for Speed and Surprise to achieve

market disruption. • To change the rules of the game, send out strong Signals of

Strategic intent, undertake Simultaneous and Sequential thrusts to shape the direction of the competitive process.

• Disruption as a means not an end, the idea being to undermine the competition before it undermines you, to create opportunities to Seize the initiative. Requires?

• A will to dominate, a radical departure, non-cooperation, and competing aggressively.


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Simple rules: the easy option? • In turbulent markets firms need strategic flexibility but this

can be disciplined by the application of an appropriate simple clear rule(s). For example:

• Boundary rules: strictly define the sort of opportunities to be pursued by the business (Miramax).

• Priority rules: define a basis for ranking acceptable opportunities such as how to allocates production capacity (Intel).

• Timing rules: such as Nortel’s rules for product development (must be less than 18 months).

• See also ‘Rules according to neutron Jack’ slide. • Eisenhardt&Sull, HBR, Jan. 2001 for more.


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Hi-tec venture options • Mercer consulting research into hi tec ventures shows

that they are on average quite unstable, rise rapidly and fade quickly (3 years cycle now).

• Success for these innovators depends on moving downstream by for ex:

• Focusing on the installed base rather than new sales for ex by upgrades and follow on services .

• Understanding and enhancing the customer’s economics and craft solutions.

• Using intangible assets to forge tighter customer relations. GE leases its engines, maintains them, charges by the hour giving airlines more predictable costs. IBM also saved itself by doing this.


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Options for growing start-ups • SCALE/ DUPLICATE/ GRANULATE• Scaling up: doing more of what you are good at

(Netscape). • Duplicating: repeating the business model

geographically (IKEA).• Granulating: focus on selective cells (SAP). • Essential requirement is organisational learning.

The ability to acquire and apply the required knowledge for expansion. There may even be a sequential logic involving moves from scaling, to duplication and granulation as happened to SAP.

• Krogh et al, SMR, 2001


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Principles of smart R&D• A value creation culture.• Generating alternatives. • Continual learning. • Embracing uncertainty. • Outside in strategic perspective.• Systems thinking. • Open information flow.• Alignment and empowerment.• Disciplined decision making. • Matheson, Smart Organisations, Harvard, 2001


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Questions to consider• Are enough good ideas emerging from the strategy

process? • Are you missing opportunities you regret?• Are you missing opportunities to exploit your assets,

especially your knowledge capital? • Has planning become an updating exercise?• Are your strategic plans really about tactics?• Are you proactive or reactive?• Are you satisfied with feedback from planning?• Are your spending decisions really driven by the plan?• Have you really understood the future of your markets?• McKinsey, Creative destruction, 2001


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Corporate strategy and value • GROWTH: The possibility of creating value

through increasing complexity: Creating multi-business (or multi-national) corporations. Can increasing scope (div/vi) add value? What about internationalisation? The concept of synergy. Can acquisitions add value? Can joint ventures add value? About efficient boundaries for the business. On what basis is value added? That is where do we expect the added value to come from in corporate growth?


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Corporate strategy and value • REORGANISATION: The possibility of

creating value by reducing the complexity of multi business corps, reducing business scope, reducing geographical scope, reducing vertical integration.

• Unbundling complex corporations, break-ups, de-merging, divestments, outsourcing, and value creation.

• Where will the extra value come from? • NB. The fact that value might arise in both

directions is not necessarily a contradiction!


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Corporate strategy/growth • Today big business is complex: multi product,

multi plant and multi national. • How does complexity add value? Why might a

complex corporation be more valuable than the sum of its independent businesses standing alone?

• What is the efficient boundary of a corporation? • What determines the move from simplicity

(specialised world) to complexity (and back again)?

• What is the evidence on success?


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Desire and ability

• Business policy texts provide lots of convenient lists (see Busecon notes for an example) and these show it is possible to think of lots of possible reasons for extending scope. But some of these motives are suspect (see False Gods) and they tend to concern the desire to diversify rather than considering the ability to diversify successfully (ie create value).


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False gods• Suspect motives for extending scope:• Growth: Growth per se is not the purpose of a business

organisation. What is? Growth without value or at the expense of value is pointless, inefficient, empire building

• Risk reduction: Sounds good. The idea of mixing two or more businesses with poorly correlated income streams to produce a nice steady income stream. So what? Is it necessarily sensible?

• Balanced portfolios: The once influential BCG idea that there is some virtue in having a ‘balanced portfolio’ of businesses which allows managers to move resources from cash absorbers to cash generators (see your Buspol notes on portfolios).


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The value of complexity?• Complexity might work to add value if being part of a

complex organisation allows business units either higher revenues or lower costs than individual businesses could achieve standing alone.

• That is it allows the business unit to establish an advantage not otherwise available to it.

• Could a unit of a diversified org. achieve higher prices/ revenues based on the effect of the parents brand or its reputation or financial skills or whatever? Perhaps.

• But did it help Sony sell PC’s or movies? Does belonging to Unilever help the margarine business to sell more at higher prices? Or P&G’s soap powder sales?

• There is a lack of convincing evidence on this.


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Costs and complexity • So what about the cost side? • Are there potential economies of scope? • Where C(x and y) < C(x) + C(y)• Where the cost of producing both margarine and

soap, or banking and insurance services, in the same corp. is less than doing each separately.

• Seems a more likely scenario. Based on the idea of synergy between separate activities or increased asset utilisation (leverage).


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• Synergy is the idea that the sum is greater than the parts: that 2+2= 5.

• It might arise for example when two businesses are able to share valuable resources such as marketing expertise or logistics or technological information in a way that reduces overall costs.

• Asset utilisation is the idea that tangible/ intangible resources and capabilities developed over time such as R&D outputs, knowledge of customers, reputation, logistic skills, technical capabilities, can be more fully utilised (leveraged) by sharing them with other businesses.

• Knowledge capital is said to be particularly under utilised in many businesses.


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However • We need to be careful. If a firm has ‘spare’

resources it could in theory just wrap them up and sell them to someone else to capitalise on their value. For example licensing other businesses to exploit your technologies or letting other businesses share your facilities. So only when it is difficult to do this, or less profitable, should spare resources/ under utilised assets lead to diversification (complexity). This will depend on the nature of the spare resources of course.


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Also • Synergy requires both a suitable opportunity to be

identified and the desire/ability to make things happen. Synergy isn’t spontaneous.

• Same with leveraging corporate assets into new areas. You need to identify the opportunity for leveraging and work hard to apply existing assets to provide an edge in a new area. Many companies may have assets which could be levered in this way but lack the desire and/ or the ability to get on with it.


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Sony seeks serious synergies• Sony businesses include a wide range of consumer

electronics, computers, games, music and movies.

• Synergies come from common technologies, distribution channels, common brand, knowledge transfers, supply chain, and it is argued from ensuring the availability of titles for new hardware formats such as mini-discs.

• Recently it has decided to focus centrally managed corporate R&D on digital technology which is crucial to many of its divisions so that it can: achieve economies of scale in development, ensure speedy diffusion of new ideas across the whole range of its products, and maximise learning opportunities.


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What is more • Remember that since D increases complexity it is

possible that it might produce diseconomies of scope at some point.

• Head office bureaucracy/overheads and interference slowing decision making.

• Lack of focus/ loss of specialisation• Top management get stretched or out of touch with

businesses. • Information gets distorted and influence costs rise.


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Useful test • A useful test for a complex corporation is to ask if

a particular business is worth more with the corporate parent or as an independent business or as part of another organisation.

• The answer may be surprising. Many giant complex corporations, when pushed, will admit that some, even many, of their businesses would do better on their own. So why don’t they sell them?

• Part of GE’s success story was that it constantly asked this question and acted on the answers.


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Example of Unilever • Unilever, a very complex corporation, examined

itself 10 years ago and asked 2 questions. • What are the critical success factors in business X

and can the U corporate centre help to develop these?

• Is there an opportunity to improve value in business X that the corporate centre can help the business to achieve (cost cutting, logistics)?

• If yes to both, (detergents) then focus on these businesses.

• If not, (animal feed) then consider why these businesses are in the group.


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Vertical scope • Vertical Integration is a special form of complexity

involving a corporation integrating 2 or more separable specialised stages of the production process.

• Oil companies often combine exploration, extraction, storage, transportation, refining, petro- chemicals, distribution and retailing.

• All in principle specialised businesses. Can such complexity create value? Why are there not distinct specialist producers buying and selling to one another through competitive markets? Achieving the benefits of specialisation, avoiding the costs of complexity. Good question!


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Vertical Integration• It is easy to see that there may often be benefits

from close co-operation and collaboration between the various stages of production. Computer companies need a steady supply of high quality chips, oil refineries need assured supplies of feedstock, steel production is cheaper if the process is continuous between stages. Producers at any stage may wish to avoid total dependence on outside suppliers (or customers).

• The question is: Is VI the only viable way of achieving the desired benefits? The economies of Vertical scope? Maybe/ maybe not. It depends on many considerations.


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• Market contracts could in principle be conceived and good co-operation developed between independent specialists as indeed is the case for many/ most producers: Toyota, despite JIT methods, Dell, Nike, CC and its bottlers.

• Dell refers to its approach as ‘virtual integration’. • But market contracting isn’t free. There are

transaction costs (Busecon ch. 4) to consider. • These concern the costs of using markets and

contracting.They arise from search costs, negotiation costs, contracting costs, monitoring costs, re-negotiation costs, enforcement costs.


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• Sometimes the balance of considerations work to favour formal integration of stages and sometimes they favour leaving it to market contracts. Sometimes it will be a close call.

• Few auto producers feel the need to make their own steel or tyres or paint, Intel does not produce PC’s, and paper producers don’t usually get involved in publishing.

• But sometimes V integration is seen as a good way to do things and we get complex VI companies say in the electricity industry or in paper-forestry or in aluminium production (Alcan). Auto producers usually produce their own engines (but plane makers don’t).


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Role of specialised assets • Sometimes production requires the costly development of

highly specialised assets with little value beyond the intended use. Say pressing bodies for Toyota cars.

• Both the supplier and buyer become mutually dependent here but both also risk opportunistic behaviour. Each risks the other trying to extract better terms after the agreement than before. Trying to appropriate more of the value available. Toyota could try to push the previously agreed price down, the supplier could try to push it up.

• Therefore VI may be required to facilitate adequate investments in such specialised assets if opportunistic behaviour is a possibility.


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Constraints• Costs of managing complexity. British brewers

have traditionally been highly integrated but found that managing a process business AND a service business AND a property business too much.

• Lock in. Unilever found itself locked in to its own high cost supplier of food oils when lower cost producers appeared.

• Increases exposure to the vagaries of a single final market such a beer drinkers.


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Porter’s research • Large scale empirical study of US corps. 50/86.

Summarised in Busecon notes. • Identified 4 basic approaches to diversification, two of

which were doubtful and two potentially valuable. • Portfolio management (G&W, ITT), unrelated

diversifiers, autonomous units, centralised financial controls/ monitoring.

• Restructurers (Hanson, BTR), acquire and fire. Asset redeployers. Active restructuring to release value.

• Doubtful about both of these. Sometimes they work but generally fail to add value. Unrelated diversifiers, conglomerates now generally ‘at a discount’.


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Porter cont. • Transferring skills (3M, Pepsi, GE), the ability

to transfer expertise/ knowledge across related value chains. Having production or logistical skills built up in one area which can be leveraged to provide an edge (a comp adv) in a new area.

• Sharing activities (P&G, GE), such as a sales force (soap powder and nappies), R&D labs (Hitachi), distribution network (Unilever), supply chain (Sony), management training (GE).


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Gospel of St Michael • Related, internally generated diversification is a

superior value proposition compared with unrelated, acquisition driven, diversification.

• For more on the evidence see busecon notes or Perman and Scouller.

• There is a lot more to Porter’s analysis (he emphasises that ‘mere similarity’ of businesses isn’t enough and he describes common mistakes) but essentially he is saying that successful diversification arises from finding ways of developing and exploiting existing resources and capabilities more fully.


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Profit from the core • More recently a ten year study of 2000 businesses

by Bain Co. found that diversification away from the core business in general fails to deliver value.

• Success comes from building competitive advantage and market power in a well defined core area (compare Treacy/ Wiersma text).

• Three factors in successful growth: exploit core to the full, expand into logically adjacent areas, pre-emptive redefinition of the core in response to market turbulence.

• For guidelines see profitfromthecore.com


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Defining the ‘core’• Identify the following assets: • Your potentially best customers. • Your most distinctive strategic capabilities.• Your most important product offerings. • Your most important channels. • Other critical strategic assets such as patents,

brands, networks. • The core business is the set of products, customers,

capabilities, channels, and geographies that that promises the greatest competitive advantages.


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Key questions about the core • What is the clearly defined profitable core of this business and is it

gaining or losing strength?• What defines the boundaries of this business and how are these

shifting?• Are there new competitive threats to the core?• Are we achieving the max.potential from the core?• Identify the set of potential ‘ajacencies’ to the core.• What is our ‘belief’ about the future of this sector/• Should we be looking inside, next to, or outside our core for

growth opportunities?• Is turbulence changing the fundamentals of the sector? How? Are

we monitoring this properly?• Do we have enablers and inhibitors of growth in good balance?• Remember the more opportunities you seize the more your

opportunity set multiplies (said who?).


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Questions to consider

• What distinctive skills, capabilities, knowledge, do we have (an audit)?

• Are we fully exploiting them?

• Could we capitalise on them best by selling or renting them to others?

• Could we use them to get an edge in another type of business?


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Diversification and competencies• Honda: Engine design/development. From motorcycles to

cars, lawnmowers, generators. • Gillette: Brand marketing. From shaving products to

toiletries and deodorants. • McDonalds: Site selection. Standardisation. Franchising.

From burgers to fish, pizza, salads. From California to the world.

• Sony: Product development. Miniaturisation skills. Brand. Supply chain. From radios to consumer electronics and content.

• Toyota: Manufacturing/ engineering, supply chain, and quality. From Japan to the world.

• NEC: Technology. Telecoms, office automation, computers.


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Final thoughts on D • Complexity exists because it can add value. • The efficient boundary is where it no longer adds

value. • D makes sense when it is expected to add value.

If things don’t work out then:• Reversing the process (unbundling, divestment)

might also make sense (see below). • Some industries have more D firms than others.

Why?


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M&A’s

• A means not a direction. Overlaps D but they are not synonymous. Hugely popular in UK and US, becoming so elsewhere. A key distinction is between agreed and contested deals. Questions to consider:

• Why do firms acquire/ merge?

• Do M&A’s make sense economically?

• Should firms acquire?


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Why acquire?

• Many reasons can be listed (H, V, D, I growth) but again the issue is not simply the motivation but the ability to add value from acquisitions. Ability to ensure that:

• V(x+y) > V(x) + V(y).

• How might this be achieved? What does it suggest about motivation if M&A’s seem not to add value?


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Routes to value • Busecon text consider 4 possible routes to value

using a two way classification system based on firm efficiency and stock market efficiency.

• SYNERGY: (Glaxo-SKB) • EFFICENCY: (Hanson approach). • OPPORTUNISTIC: (AOL -Time Warner?)• MIXED (?)


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Routes to value

Stock Assu

Market med

Efficient Inefficient

Firms Efficient Synergy Opport.

Assumed Inefficient Efficiency Mixed


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On Routes • Opportunism assumes the ‘overvalued’ business is

correct in its beliefs about the market and can act quickly.

• Efficiency routes should not lead to permanent marriages or complex empires. Strategy should be ‘buy, improve, unbundle, divest at a profit, repeat the trick’.

• Some people would have to have a special talent for spotting under-performers which can be improved OR relatively undervalued businesses. This is possible but not likely to be unique. And this means…..?


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• So there is much suspicion about some of these routes (see Porter and others).

• Synergy seems the most realistic possibility although less glamorous and harder work.

• Horizontal mergers could increase prices through exercise of market power or lower costs through scale effects (development costs in autos/ jet engines) or reduce costs of rivalry.

• Vertical/ diversifying mergers could produce transactional economies or economies of scope.

• EX: Glaxo-SKB talk about big improvements in R&D productivity and knowledge transfers.


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Synergy magic? • AOL-Time Warner is a major diversified business

built by acquisition. Its movie division has produced the Harry Potter movie. Its music division did the sound track. Time publications have made the movie front page news. AOL web sites have promoted it.

• ‘We use the platforms to promote the movie and the movie to promote the platforms’ says AOL-TW boss. But the question remains, do you need the very complex AOL-TW to achieve these synergies?

• Economist report, Nov. 2001


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Varieties of M&A’s • Recent research identifies 5 distinct varieties of of motives

in the recent world M&A boom.• 1. To deal with overcapacity in mature sectors.

(Daimler/Chrysler)• 2. To ‘roll-up’competitors in geographically fragmented

industries.(Banc One)• 3. To extend into new products/ or markets. (GE)• 4. As a substitute for R&D. (Cisco/ Msoft)• 5. To exploit eroding industry boundaries by reinventing

an industry. (ATT)• Properly understanding your purpose therefore is a key to

success in M&A’s because requirements differ.• Bower, HBR, 2001


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EVIDENCE • Do M&A’s actually create value? • Many different approaches to answering this

question. The different research methodologies outlined in your buspol notes. Large number of independent studies by economists and consultants using different samples and different time frames.

• Yet there is an unusual consensus on the answer. On average value is not created! The acquiring firm does not become more valuable.

• Example: Mercer consulting found 57% of 300 major acquirers in the US under performed their industry subsequently.


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Why M&A’s fail? • One reason is that the acquisition premium (AP)

paid by the acquirer is too high. To add value the following must happen:

• V(x+y)>V(x)+V(y)+est.gain – (V(y) +AP)• Basically the realised benefits (NPV of) must

exceed the premium paid if the acquirer is to profit.

• AP’s can be anywhere from 10% to 200% or more. Nestle paid twice the market value for Rowntree, as did World Com for MCI.

• Known in the business as the winner’s curse.


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• Another reason is that managers fail to evaluate M&A’s properly, negotiate terms poorly, and

• Fail to manage acquisitions effectively to realise the synergy gains promised.

• Who says? McKinsey, KPMG, PA, Mercer consultants who know a thing or two about these things.

• Note this doesn’t mean economists&consultants are against M&A’s just that the evidence suggests caution is needed. Far from solving your problems M&A’s may add to them.


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McKinsey on failure• Too many companies lose their ‘revenue

momentum’ after acquisition. That is sales growth slows down. Plus staff were distracted and customers unsettled.

• Revenue effects of M&A’s are more important in success/failure than cost impacts but the latter gets the attention.

• Successful acquirers build on 3 strengths: a focus on revenue benefits, meticulous merger process discipline, ambitious performance cultures.


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You may well ask• If this is so why are M&A’s so popular? • Good question. I suggest some answers in your

busecon course. • Managerial hubris, or demonstration of prowess • Mistakes • Wishful thinking • Just too easy to do• We may not live in a value driven world.

Managers may prefer growth to value.


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One rationale for M&A’s • One rationale offered recently is that acquired and

acquiring companies may both benefit from the organisational ‘challenges’ which follow a merger but that this takes a long time to show results!

• Studies of companies which avoided growth by acquisition in Holland showed that they lacked the regular challenges of acquiring (related) companies and so they missed out on learning opportunities and suffered creeping paralysis.

• Some growth by acquisition is therefore valuable the researchers argue, but not too much.

• Academy of management journal, 2001


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Current example: oil • Big oil has been getting even bigger. Exxon has tied up

with with Mobil, Chevron is taking over Texaco, Total-Fina-Elf have merged, and BP-Amoco and so on. The argument is about synergies. There seems to big savings available and the promise of less competition also.

• But the real reason the stock market is showing its approval of size has to do with the increasing difficulty and expense of exploration. The stakes are getting higher and only giant, financially strong, companies can play the game nowadays or so it is argued. It is also said that upstream activities, actually pumping oil from the well, is potentially the most profitable part of the industry but also the riskiest.


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Current example: GE/ Honeywell• Announced on 24th October 2000 one of the largest

proposed (but never in fact consummated) acquisitions ever by the ultra successful and ultra acquisitive GE of Honeywell for 43 billion US dollars.

• GE has a very good record for picking acquisitions and for integrating them and squeezing value out of them.Despite this the stock market’s initial response was that this could be an acquisition too far. Even by GE standards this was a huge deal. Honeywell shares had been doing badly despite the fact it has been ‘in play’ for some time.

• GE argued it had identified 1.5 billion US dollars in immediate ‘synergies’ with lots more to come. But integrating such a large complex business into an already giant complex business would be problematic.


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H-P and Compaq

• Proposed merger announced in September 2001. • Problem is the slow-down in the PC industry. • Aim is to generate savings and reduce

competition. And to become biggest player in the sector (currently Dell).

• Market reaction suggests it is misconceived. Two weakening businesses do not necessarily make a strong one.


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Contrasts • Contrast the recent choices of Ford/GM/Chrysler

with Toyota. • The US companies have been active acquirers and

dealmakers in the 1990’s. • Toyota hasn’t although it had the resources and a

choice of willing victims. It focused spending on R&D, development, efficiency, international production, and some strategic alliances.

• Who has done best at achieving profitable growth?


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Constraints on M&A’s First you need to be able to finance the deal.You need access to cash or

you need a share price that is doing well compared to the target (GE has both). NB it is not only the cost of the victim, but also the costs involved in the acquiring process.

• Second you obviously need a suitable target which might even agree to the takeover (Honeywell hasn’t fought back, in fact GE is seen as a white knight). If not you need to be prepared for an expensive bidding contest.

• Third you need to watch out for the Anti-Trust people (D of J in the US, CC in the UK). The EC stopped GE-Honeywell.

• Fourth it needs to be accepted practice. Agreed mergers happen in Japan but contested takeovers are not acceptable practice. Hitachi couldn’t consider bidding for Sony. And there is simply no chance that GE could bid for Sony (yet).


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To conclude • M&A’s can add value and can be a useful

means of growth. • But on average they seem not to add value. • Firms should be careful to make sure the

sums add up and that they don’t fall victim to the winners curse.

• And they should focus more on post merger integration (the boring bit) not the thrill of the chase.


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International scope• This is another dimension of increasing complexity. But

the principles remain the same. Can broadening scope geographically create more value? Can international acquisitions add value?

• Again the answer is yes, of course it can. But it isn’t necessarily simple. Costs and benefits.

• A business developed in one country can find an opportunity to grow value in another. It may be able to achieve scale or scope economies. The competencies and capabilities built in one country may be transferable to another such that it gets an edge in the new market. Having learned to make autos in the US made it relatively easy for Ford to grow into Europe and beat local businesses. Of course there were alternatives for Ford.


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Current example: Japanese companies

• In the past (1980’s) Japanese companies went abroad in search of local markets, cheaper labour, and opportunities to diversify (especially in the US).

• More recently (late 1990’s) it is said Japanese companies are going abroad again but this time in search of new technologies and management methods. According to Bain consultants research they are now seeking to upgrade their core businesses. Tepco a Japanese power company has bought into America to learn how to live in a deregulated environment. Hitachi and NTT are looking for software companies and Internet expertise.

• Source: Economist report, October 2000


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Question

• But the key question is why didn’t Ford sell its expertise or licence its methods to local producers. Why did it take the risks of stretching itself by internationalisation?

• Why can’t Tepco or Hitachi use markets to acquire what they need to know?

• Thinking about this helps us understand the issues involved.


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Singapore Air • Pursued international scope in recent years

through deals with ANZ and Virgin Atlantic.

• Share price fell by 25% in year to September 2001, and then fell sharply after the NY bombing. Now worth half what it was a year ago. Investments now seen as liabilities.

• FT 25th Sept. 2001


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Joint ventures/ alliances• Where two or more businesses share resources and activities as

part of a strategy. Increasingly popular for various reasons but especially because of increasing complexity of many industries like telecoms and IT. It is difficult to build efficient complex organisations to match requirements and the alternative is alliances. IBM reckoned to be involved in over 1,000!

• Some see jv’s as buying options for development when the world is so uncertain that you are not sure which way to move.

• Spectrum from loose relationships and networks to more formal contractual relations such as subcontracting (as in Japanese keiretsu) and licensing, to tighter relationships in joint ventures and consortia.


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Cont. • Joint ventures: say 2 independent businesses set

up a jointly owned third business, for example a UK/China venture.

• Consortia is where a larger number of companies come together to pursue a particular objective such as the European Airbus or R&D consortia in US/ Japan.

• Increasing importance nowadays is in facilitating technological convergence and standard setting in fast evolving markets


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Value? • Can joint ventures add value. Of course they can. Given a

suitable opportunity a partnership between companies which can bring different resources/ capabilities to the venture (British technology-Chinese market access) can make good sense.

• However don’t forget the costs and risks involved. Transactional costs again. The costs of searching for partners, negotiating with them, making contracts, monitoring the contract, and enforcing the contract can be expensive. There is room for opportunistic behaviour. Say one side has to make a major commitment to the venture which is hard to recover. The other side could try to improve its own position by threatening to renege. Or your partner might simply be interested in accessing your technology for little in return. Or could misrepresent their own skills and abilities.


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Trust • The problem with all such arrangements is

building trust. As is generally true co-operation is valuable but it is subject to problems. For example the common problem in co-operative ventures of free riding. For example joining an R&D consortia as a way of keeping tabs on competitors but keeping your own best researchers out of it.

• There is substantive evidence that when partners have low trust and attempt tight control of the venture that it fails to produce results.


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Competitive advantage

• Research suggests that a company which develops an expertise in organising and managing joint ventures, and a good reputation as a partner, can achieve advantages which others find hard to imitate or duplicate. Alliances are complex socio-political contracts (relational contracts like marriage) and o/m them is as much an art as a science. Trust is a valuable commodity but a complex one. The skills involved may be rare and thus very valuable.


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When alliances make sense• Successful cases (about half) in the following four

situations. • Alliances for change in highly uncertain

environments. • Alliances for growth, especially new business

development.• Multi-partner alliances (paradoxically).• Alliances with simple, flexible, and clear deal

structures. • McKinsey research, 2000.


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Current example: Intel/ Rambus• Intel teamed up with Rambus in 1996. Intel gambled

hugely on the venture which in fact became a nightmare. The idea was that Rambus was promising faster memory chips capable of keeping up with Intel’s ever faster processors. Rambus could have become the standard and Intel backed it with money and reputation. But it ran into production and marketing and legal problems and failed to convince PC makers that the technology was worth it. An expensive venture Intel now admits. In future it will stay in control of ‘gateway’ technologies itself.

• Check out the recently announced SingTel and Bharti joint venture.


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Renault-Volvo • Another alliance that went very badly wrong was

the attempted tie up of Renault and Volvo in 1989. The differences in culture between the two businesses and weak position of Volvo which Renault tried to exploit lead to the collapse of the alliance after a few years and major loss of shareholder value.

• Detailed analysis in Journal of financial economics, 1999


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Japanese case

• The Japanese business system is famous for its dependence on inter-firm co-operative networks.

• An examination of the structure, dynamics, and performance of these networks, with important lessons, is:

• F.J.Richter, ‘The Art of Japanese Inter-firm Networks’, IBP, NY, 2000


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Corporate strategy/reorganisation

• Not all corporations can grow all of the time. The basic thrust of business may be to grow value but at times most businesses have to take stock and undergo a period of change and reorganisation. This may be because:

• The corporation has become too complex with consequent diseconomies of scope (ATT at present).

• The corporation faces a complex changing environment that requires a change in direction (IBM in the 1990’s).

• The corporation realises that it controls businesses to which it cannot expect to contribute in the search for value (Unilever example).

• Thus we get unbundling, outsourcing, and divestment.


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Unbundling/ de-merging • This is a process of breaking up complex businesses into

smaller, more focussed, independent businesses. Could be 2 parts or 5 parts. De-merger is another term and spin-off is also used for this process. Process is called refocusing.

• Some unbundling is driven by A-T actions such as the famous Rockefeller Standard Oil company many years ago and perhaps Microsoft soon.

• But more often nowadays it is driven by the belief that the corporation has become too complex and the expectation that it would be more valuable as separate businesses. Called ‘releasing’ value.

• A less dramatic form is divestment (sell off) of a division, or a management buyout of a division, that no longer fits.


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Value in unbundling? • Intention is to create more value, that is • V(x) + V (y) > V (x+y) . How so? • First of all it cuts out the costs of the corporate centre and

the diseconomies of scope pointed to earlier. In some complex businesses there may be no economies of scope anyway so head office is simply a deadweight loss.

• Second it allows the stock market greater information about the different parts of a corporation and makes valuation more efficient. When ICI unbundled itself into chemicals and pharmaceuticals the latter was re-valued substantially because its true potential was now apparent.

• Third, each business is now more visible and the people running it are more exposed. Can’t hide behind the group or be cross subsidised by profitable parts.


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Complications • Evidence in UK/US suggests it works. • However there are complications to look out for. Most

important are tax problems. Corporate tax systems vary of course but in many countries the tax system seems to make unbundling complicated whilst it makes bundling relatively simple.

• Also of course the corporate centre is unlikely to want to do itself out of business and this means unbundling often requires a hostile takeover. But hostile takeovers are expensive and the process can soak up the unbundling benefits. Some people have done it well such as Hanson in the UK.


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Current example: ATT • ATT the US telecoms giant announced a major break up

(or spin out) in 2000. ATT had been pursuing an aggressive growth strategy in the late 1990’s after major reorganisation in 1995 but all this had failed to impress the markets and another major reorganisation was seen as essential given the increasing complexity of the business, rapidly changing technology, and rapidly increasing competition for what had once been a national monopoly.

• ATT was to divide into four separate businesses: ATT Broadband, ATT Wireless, ATT Consumer, and ATT Business. (Recently the break up was put on hold.)

• For a case study analysis of a big business break-up process see HBR March 1995.


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The future? • Recent argument of McKinsey researchers is that many

businesses now consist of three distinct businesses:

• A customer relations business, a product development business, and an infrastructure business.

• The economic character of these is different (scale is important in infrastructure, speed in innovation, and so on) and their underlying culture is different (one is creative, one is cost driven, one is about service).

• This causes problems when they are bundled into the same organisation. Look at Amazon. So consider unbundling them say McKinsey into separate businesses.

• This is already happening in for example pharmaceuticals.


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Outsourcing • All businesses integrate a variety of functions

(R&D, marketing, production, design,…) and some businesses integrate over 2 or more distinct stages of production (ie they are vertically integrated). The question is what is the efficient boundary? What is best done inside rather than outside?

• Outsourcing is about this issue. What is the optimal bundle of activities for the firm? What activities should the firm undertake?


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• Business has increasingly been asking the question, what is best done inside the firm and what is best done by outside suppliers or service providers. IT services for example.

• The motivation for outsourcing is that a specialist supplier can focus on that activity and achieve scale and other cost/ quality benefits. The specialist can better keep up with changes in the business and adapt faster. The specialist may be better motivated to innovate than an in house supplier.

• But of course there are disadvantages to consider. Loss of control over key inputs or processes, transactions costs, loss of learning opportunities, over dependence on others, so it is about balancing costs and benefits. Most firms are happy for specialists to take care of their advertising but not their R&D. Auto producers outsource seats but not engines? Why?


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Examples • Japanese auto firms are famously less integrated than US/

European firms. Much more was outsourced. US/E firms learned the lesson and started to outsource more. Some have called this the ‘hollowing out’ of the corporation.

• BP outsourced all accounting functions to Andersen and cut costs by 40%!

• Many US telecoms operators outsource customer care activities.

• US company called Monorail Computers does only design work, everything else is outsourced. Nike produces no shoes at all! It is a design and marketing company.

• This has given rise to the term ‘virtual corporation’.


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Network orchestrators

• McKinsey term for companies such as Cisco, e-Bay, Palm, and Schwab which go ‘beyond’ outsourcing to close&detailed supply chain collaboration/ orchestration to deliver complex products/ services.

• Because they own less capital and leverage that of partners and collaborators they have been exceptional performers.

• McKinsey research, 2001


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Limitations • The rise and fall of Cisco and the perils of

outsourcing. Cisco was a paragon of outsourcing but got things wrong on two occasions!

• First in the upturn it couldn’t get enough components and was held back.

• Then in the downturn it had unwanted outsourcing capacity and inflexible contracts.

• Outsourcing therefore doesn’t necessarily eliminate the risks of the business cycle.

• Strategy&Business, 2001


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Reviewing the corp. portfolio• Over the years consultants and strategists have

come up with a variety of ways of analysing and reviewing the portfolio of complex corporations. Some of these are described in your BP notes chap. 6. The question raised is what is the appropriate portfolio? The one we have or a different one? Just like a shareholder.

• Boston Consulting Group (BCG), GE-McKinsey etc. I add Prahalad-Hamel for a different approach.


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BCG growth share matrix • The most famous of all although not necessarily the most

sensible.

• The corporation is split into distinct SBU’s. We then assess these according to:

• 1. Relative market share (yours relative to largest rival).

• 2. Industry growth prospects ( v average growth prospects).

• Each business is then placed in a matrix with its relative size indicated by the size of the circle used.

• Businesses are then classified accordingly as Stars, Dogs, Cash Cows, and Question marks.


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• Stars have high shares in fast growing sectors.

• Dogs have low shares of low growth sectors.

• Cash cows have high shares but in low growth areas.

• Question marks have in fast growth areas but have a low relative share.

• Implications concern how best to allocate corporate resources.

• Dump the dogs.

• Support the stars (from cash cows).

• Query the question marks.

• Milk the cash cows.


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Weaknesses. • Too simplistic and naïve. (see BP notes) • For example you can’t always milk your cash

cows that easily. Autos might look like a cash cow for Ford but isn’t. The demands of the industry for funds is great despite its relative maturity.

• And in any case why is a balanced portfolio relevant? What is important for the businesses in your portfolio is whether they are more valuable inside the corporation than out. Being able to milk one to support another is not really relevant.


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GE-McKinsey • Extends the BCG approach to take more factors into

account when assessing industry attractiveness (5 forces) and relative competitive position of the SBU. It is a variation on the SWOT approach earlier.

• It divides the businesses up according to the appropriate strategy: growth, stability, or defensive. (see BP)

• Criticism is again that it treats the corporation as separate businesses and fails to consider the sources of value in having a portfolio of businesses at all. That is it ignores the possibility of synergy gains or shared resources/ capabilities. It diverts attention away from the key issue: what is the net added value of complexity?

• It is about managing what you have instead of asking what is the point of having it at all.


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Prahalad and Hamel • There is more to complex corporations than just

portfolio management. P&H argue for looking at the corporation as a portfolio of competencies rather than businesses. You then consider how these might be developed to sustain existing businesses and leveraged to develop new businesses. It seems a much more dynamic approach than business portfolio management.

• They suggest a matrix as follows.


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Premier plus: what new CC’s will we need to sustain our existing positions in 5/10 years?

Mega-oppos: what new CC’s would we need to participate in the most exiting new markets?

Fill in the blanks: what can we do to improve our current positions by better use of existing CC’s?

White spaces: what new products or services could we provide by more creative use of existing CC’s?


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Assessment/ evaluation of options • We have outlined the various options facing

the business/ corporation in terms of directions/ methods of development. There will generally be more than one option available. The issue is on what basis might we consider the alternatives available? This is not something that all strategy texts give enough attention to. Those that do tend to look at one or more of the following criteria. (See also BP ch 8 for checklists)


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Criteria

• Acceptability

• Feasibility

• Implementability

• Suitability

• Integration


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Acceptability • To shareholders and other stakeholders. • In particular will this strategy make the business

more valuable than it otherwise would be? If not why would we do it?

• But also likely to consider, is it acceptable to our bankers (risk a concern), our employees (jobs a concern), our managers (promotion prospects and human capital a concern), our suppliers and partners. A strategy that doesn’t have the backing of managers and employees will face problems.


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Commitments • An important question will concern the level of

commitments being made to a particular strategy. • What is the size of the likely commitments? What

are the risks involved? To what degree are the costs involved sunk (un-recoverable) costs?

• Need we make this commitment now or can we wait for a clearer picture to emerge? Can we ‘take out’ an option on the option involving less commitment now but the right to go for it later?

• Does this commitment ‘bet the company’? (Pilkington and the float glass process, Nokia and mobile phones).


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Feasibility • Can we actually achieve this strategy in the time available?

Are we being realistic or is there a lot of wishful thinking going on? A reality check. The devil’s advocate.

• Where will the extra value come from? For example in a takeover or a de-merger.

• What opportunity do we believe exists for extra value? • Do we really have the capabilities to exploit and sustain

this opportunity for value (market penetration say)? • What are the key areas of vulnerability? What are the key

dependencies and can we manage them? • What makes us the business best able to exploit these

opportunities?


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Implementability• As observed before never forget the strategy has to

be implemented in practice. • Does the business have the capabilities/ experience

needed to implement this strategy. A business which hasn’t used acquisitions or joint v’s before or operated overseas before would need to consider this carefully. Learning is expensive.

• Have the strategists involved the implementers in the strategy process to ensure that implementation problems are raised as the strategy is developed?

• Of course this itself might cause other problems if the implementers are too conservative.


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Implementation and structure• Recall the arguments in the strategy file of

McKinsey/ Marakon et al. and the conclusions of our analysis of performance drivers.

• Strategy is structure is implementation. • Effective structures for effective implementation

is are more important than strategy per se. • Strategy they say is about building organisations

which can adapt to circumstances and which can influence those circumstances. It is all about effective learning and the ability to test and learn about new business models.


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Suitability • Is it an appropriate strategy for this business at this time?

Does it play to our strengths and avoid our weaknesses?

• Is it an appropriate strategy for the environment we foresee developing?

• Is it the best strategy for the business and the environment? Have we really considered the alternatives or are we looking too narrowly or failing to consider alternatives because they appear too radical or too threatening.

• Is there evidence that this sort of strategy works for this sort of business at this stage of its development?


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Scenarios • An approach to considering options for

development is to examine them in the light of 2 or more likely scenarios for the future.

• Also called wind tunnelling. • One option might look very good on the basis of

one particular future but poor on another. Another option might be reasonably good on both scenarios. If there are no reasons for expecting one scenario to be more likely than the other then the best option may be the one that is reasonably good in both worlds.


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The default option • An important option to remember to consider is

the ‘do nothing’ or default option. • This is because you should consider change

options not only in the light of existing performance but also in the light of expected future performance if you choose the do nothing option. Doing nothing is unlikely to maintain current success or overcome failure. So performance is likely to worsen over time.

• It is then a question of finding an option that beats the do nothing outcome across different scenarios.


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Integration • Andersen consultants research (2000) stresses the

need for strategic integration or alignment. • They are referring here to overall coherence of the

strategy, the fit amongst strategic purpose, market positioning (product/ market focus), and execution capabilities.

• They go further in terms of providing a detailed checklist to help in creating alignment and integration. See CMR, Spring 2000.

• The Balanced Scorecard approach is also a good example of how this might be done in practice.


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Assessment processes• Investment appraisal techniques for specific

relatively easy to quantify commitments (an acquisition).

• Cost benefit analysis for more complex, harder to quantify, options (outsourcing).

• Shareholder value analysis (SVA) as in BP. • Sensitivity analysis, examining the ‘what if’

questions. • Financial simulation modelling.• Stakeholder reaction analysis.

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