3 LEVELS OF STRATEGY Corporate level Determine overall scope of the organisationAdd value to the different business unitsMeet expectations of stakeholdersBusiness level (SBU)How to compete successfully in particular marketsOperationalHow different parts of organisation deliver strategy
4 Three levels of the strategy 1. level: The corporate levelAt this level the fundamental task is to develop a balanced portfolio of businesses which will achieve the goals of the corporation and satisfy its stakeholders.2. level: The strategic business unit level (SBU)At this level the business, or set of activities is given and the major task for strategic planner at this level is for business to succeed against competitors and also satisfy corporate success criteria.3. level: The functional level:At this level the major task is to provide an appropriate functional strategies ( finance and accounting, marketing, R+D, production, personnel) for SBU or corporate level strategy.
5 Strategic Business Unit (SBU) A strategic business unit (SBU) is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU
6 Definition of strategic business units The SBUs are the natural ‘grouping’ of part of a corporation.The SBU has a range of related products/services which has similar technologies and production processes.The products/services are sold in similar or related market segments.The production/services are sold against a well-defined set of competitors.An SBU is managed by an SBU manager, largely as an independent unit.The SBU has its own set of goals and strategies.Each SBU in a particular organization should be able to operate independently of any other SBU.
7 What is the portfolio stratregy? From viewpoint of strategic management the corporations are collections of different “product-market-consumer-resource packages”. These are the SBU’s. We can describe the sum of SBU’s, as portfolio.The portfolio analysis:Combines the assessment of business position with market attractiveness evaluation, which emerges from external analysis in general and market analysis, in particular.Includes multiple SBU’s in the same analysis and addresses the SBU investment decision - which organizational units should receive resources, which should have resource withheld , and which should be resource generators.Offers baseline recommendations concerning the investment strategies for each SBU based on an assessment of business position and market attractiveness.
8 Corporate Portfolio Management Portfolio balanceMarketsOrganisation’s needsAttractiveness of business unitsProfitabilityGrowth ratesPortfolio ‘fit’Synergies between business unitsSynergies with corporate parent
11 Strategic implication of the BCG matrix The strategies for the overall portfolio products are concerned with the issue of balance, I.e. is the portfolio of products balanced internally in terms of the following?Are there a sufficient number of „cash cows” to support those other products in the portfolio which are at stages of their lifecycles when they are require cash?Are there „questions-marks” which have resonable prospects of becoming future stars and which do not , at present, constitute a disproportionate drain on current cash flow?Are there an appropriate number of „stars” which will provide sufficient cash generation when the current cash cows are no longer able to fulfill this role?Are there any „dogs” and if so why?
12 How to do a portfolio analysis? Construct a summary of the industry and competitive environment of each business units.Appraising the strength and competitive position of each business unit. Understanding how each business unit ranks against its rivals on the key factors for competitive success.Identifying the external opportunities, threats and strategic issues peculiar to each business units.Determining how much corporate financial support is needed to fund each unit’s business strategy and what corporate skills and resources could be deployed to boots the competitive strength of various business units.Comparing the relative attractiveness of the businesses in the corporate portfolio. Compare the businesses on various historical and projected performance measures - sale growth, profit margin, return on investment, and the like.Checking the corporate portfolio to ascertain whether the mix of businesses is adequately “balanced”
13 The Industry Life Cycle Industry SalesIntroduction Growth Maturity DeclineTimeDrivers of industry evolution :demand growthcreation and diffusion of knowledge
14 Assumptions and limitations of BCG The use of highs and lows to make just four categories is too simplistic.The link between market share and profitability isn’t necessarily strong. Low-share businesses can be profitable, too (and vica versa.)Growth rate only one aspect of industry attractiveness. High-growth market may not always be the best for every business unit or product line.It considers the product line or business unit only relation to one competitor: the market leader. It misses small competitors with fast-growing market share.Market share is only one aspect of overall competitive position.
15 Indicators of SBU Strength and Market Attractiveness
17 Strategy Guidelines Based on Directional Policy Matrix
18 Corporate Level and International Strategy Product and geographical diversityRelated and unrelated diversificationAttractions of international marketsMultidomestic and global strategiesEffect of product and geographical diversity on performanceCorporate parentingPortfolio management
21 Reasons for Diversification (1) Value creationEfficiency gains from applying existing resources/capabilities to new markets/productsEconomies of scopeBenefits of synergyApplying corporate managerial capabilities to new markets/products/servicesDominant logicIncreased market power from diverse product/service rangeCross subsidyPossible monopoly in long-run
22 Reasons for Diversification (2) Less obvious value creationIn response to environmental changeTo defend existing valueOr straying too far from dominant logic?To spread risk across range of businessesInvestors can diversify more effectively?Important for private businessesIn response to expectations of powerful stakeholdersPressure from financial analysts to produce constant growth
23 Reasons for International Diversity Market-basedExploit cultural/ geographic differencesGlobalisation of markets & competitionCash in on differences in cultureFollowing customersAdministrative differencesBypass limitations in home marketSpecific geographical/ economic differencesUtilise strategic capabilitiesEconomic benefitsBroaden market sizeEconomies of scaleInternationalise value-adding activitiesStabilisation of earnings across marketsEnhance knowledge
25 Entry Modes (1) Exporting Advantages JV/Alliance Advantages No operations in host countryShared investment riskEconomies of scaleComplementary resourcesInternet access for small firmsPossible government conditionExporting DisadvantagesJV/Alliance DisadvantagesNo benefit from location advantages of hostDifficult to select and agree with partnerLimited local knowledgeManaging relationshipDependence on intermediariesLoss of competitive advantage through imitationExposure to trade barriersLimits integration/coordination of activities across countriesTransportation costsSlow response to customers
26 Entry Modes (2) Licensing Advantages FDI Advantages Contractually agreed incomeControl of resources/capabilitiesLimit financial/economic riskIntegration/coordination of activities across countriesAcquisitions – rapid entryGreenfield – state of art and government financeLicensing DisadvantagesFDI DisadvantagesDifficult to select and agree with partnerSubstantial investment – financial exposureLoss of competitive advantage through imitationProblems of integration/ coordination of acquisitionsLimits benefit from location advantages of hostGreenfield – time consuming and unpredictable cost
27 International Strategies IssuesGlobal-localCentralised/decentralisedGeneric StrategiesMulti-domesticValue adding activities located in national marketsProducts/services adapted to local requirementsGlobalStandardised productsProduced in centralised location
28 Value-Adding Corporate Parents Envisioning Strategic IntentCentral Services and ResourcesFocusClarity to external stakeholdersClarity to business unitsInvestmentScale advantagesTransferable management capabilitiesIntervention at Business LevelExpertiseMonitor performanceAction to improve performanceChallenge/develop strategic ambitionsCoaching/trainingDevelop strategic capabilitiesAchieve synergiesProvide expertise/servicesKnowledge creation/sharingLeverageBrokering linkages/accessing external networks
29 Value-Destroying Corporate Parents BureaucracyAdds costHinders responsivenessBuffer from realityFinancial safety netDiversity and sizeLack of clarity on overall visionManagerial ambitionEmpire building
30 Corporate Rationales Parental developers Synergy managers SBUs below potential (‘parenting opportunity’)Relevant central resourcesSuitable portfolioShare resources/skillsIdentify bases for sharingIdentify benefitsAcquire assetsDivest assetsLow strategic role in SBUStrategic requirementsCompetences used to create value in SBUsSynergyAgent for financial marketsLimited SBU value creationLogicParental developersSynergy managersPortfolio managersUnderstand SBUs (‘feel’)Effective linkagesSBUs autonomousSBU performance-based incentivesCollaborative SBUsCorporate staff as integratorsOvercome resistance to sharingCorporate-based incentivesAutonomous SBUsSmall, low cost corporate staffOrganisational requirements
31 Bases of strategic choice Corporate purpose and aspirationsOwnershipMission and strategic intentScope and diversityThe global dimensionBases of SBU strategyAchieving competitive advantagePrice-based strategiesDifferentiation strategiesFocus strategiesEnhancing SBU strategy: corporate parentingPortfolio managementFinancial strategyThe role of the corporate parentThe parenting matrix