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Global Corporate Strategy
Published by The University of Sunderland The publisher endeavours to ensure that all its materials are free from bias or discrimination on grounds of religious or political belief, gender, race or physical ability. These course materials are produced from paper derived from sustainable forests where the replacement rate exceeds consumption. The copying, storage in any retrieval system, transmission, reproduction in any form or resale of the course materials or any part thereof without the prior written permission of the University of Sunderland is an infringement of copyright and will result in legal proceedings. © University of Sunderland 2004 Every effort has been made to trace all copyright owners of material used in this module but if any have been inadvertently overlooked, the University of Sunderland Press will be please to make the necessary arrangement at the first opportunity. These materials have been produced by the University of Sunderland Business School in conjunction with Resource Development International.
Global Corporate Strategy
How to use this workbook Introduction Unit 1 Strategy Defined and Key Concepts
Introduction Definition of Strategy Levels of Strategy Strategic Concepts Strategic Thinking Strategic Models Summary 1 2 5 7 9 12 34
Unit 2 Strategic Capability
Introduction The Different Management Perspectives Portfolio Management The Core competencies perspective Divestment Summary 37 38 39 48 51 57
Unit 3 Globalisation
Introduction What is Globalisation The Globalisation of Markets The Globalisation of Production Drivers of Globalisation The Changing Demographics of the Global Economy The Globalisation Debate: Prosperity or Impoverishment? Managing in the Global Marketplace Summary 61 61 66 68 70 73 76 78 88
Unit 4 ‘Altering the Boundary’ – Alliances and Mergers
Introduction Paradox of Competition and Co-operation Global Strategic Alliances Mergers and Acquisitions Summary 91 92 92 104 131
Unit 5 Value Management
Introduction Paradox of Profitability and Responsibility The Concept of Value Value Management What is a Value-Driven Approach Summary 133 134 134 137 141 151
Unit 6 Corporate Governance and Ethics
Introduction Corporate Governance Business Ethics Summary 155 156 173 188
Unit 7 Managing Complexity
Introduction Paradox of Control and Chaos Systems Thinking Soft Systems Methodology (SSM) Strategic Control? Summary 191 192 193 200 204 207
Unit 8 Knowledge Management
Introduction Theoretical Concepts on Knowledge Knowledge Knowledge Transfer Practical steps to promote Knowledge Management Summary 209 210 212 215 218 237
Global Corporate Strategy
Global Corporate Strategy – Contents
Unit 9 Innovation
Introduction Innovation strategies Innovation and established companies Conclusion Summary 239 240 241 248 255
Unit 10 Strategic IT and e-Business
Introduction The Link between Business and IT Strategy IT Strategy Methodology Summary References 259 260 264 275 276
discuss your ideas with other students or your colleagues. or you need answers to any questions about this workbook or how to study. This Activity icon refers to an activity where you are required to undertake a specific task. Remember. This icon shows where the Virtual Campus could be useful as a medium for discussion on the relevant topic. At various stages throughout the module you will encounter icons as outlined below which indicate what you are required to do to help you learn. These could include reading. research. If possible. evaluating. if in doubt. Try to use your own background knowledge when completing the activities and draw the best ideas and solutions you can from your work experience. This Key Point icon is included to stress the importance of a particular piece of information. This Activity Feedback icon is used to provide you with the information required to confirm and reinforce the learning outcomes of the activity. writing. It is important that you utilise these icons as together they will provide you with the underpinning knowledge required to understand concepts and theories and apply them to the business and management environment. this will make learning much more stimulating. questioning. i . analysing. ask your tutor.How to use this workbook This workbook has been designed to provide you with the course material necessary to complete Global Corporate Strategy by distance learning. etc.
However. relatively speaking. Johnson & Scholes. it is the newest area of management research. planned process The Positioning school – only a few key strategies are desirable in any given industry (generic strategy) and these are formulated by analytical processes The Entrepreneurial school – strategy is a ‘visionary’ process where an organisation is responsive to the dictating individual The Cognitive school – strategy is a mental process dependant upon what the strategy process means in the mind of the strategist (human cognition) The Learning school – strategies emerge as people / organisations come to learn about a situation as well as their organisation’s capability of dealing with it The Power school – the use of power and politics to negotiate strategies favourable to particular interests The Cultural school – strategy as a collective process of social interaction. It also indicates a wide range of divergent views on the subject.g.Global Corporate Strategy Preface Corporate Strategy is a very wide and all encompassing subject area. De Wit & Meyer. In their book Strategy Safari. The ten schools are. etc.) to appreciate the volume of material that has been written over the years. Mintzberg. Lynch. Initial work in strategy took place in the early sixties. based on the beliefs and understandings shared by the members of an organisation The Environmental school – the business environment becomes the central actor in the strategy making process – the organisation must respond to these forces 4 5 6 7 8 9 iii . One only has to look at the relative content of individual key texts in this area (e. 1 2 3 The Design school – strategy seeks to match internal capabilities to external possibilities The Planning school – strategy is a formal. Alhstrand and Lampel (1998) break down strategy theory development into ten schools of thought and this provides a thoughtful starting point for the study of this module.
and supporting evidence. subjective and ‘soft’ data process. Hence. and Lynch take a ‘linear’ view of strategy by presenting concepts ‘one after the other’. Inside-Out). Students will be expected to produce an academic and fully referenced argument seeking to define the key strategic perspectives of organisations. Discontinuous). Schools 1-3 can be seen as ‘prescriptive’. Alhstrand and Lampel use the analogy of an elephant to emphasise the holistic nature of strategy . it would be erroneous to regard these schools as being ‘separated’ or that it is right to look at these in isolation. The argument. Whereas major texts such as Johnson & Scholes. Strategy – Outside-In vs. Schools 4-10 can be seen as ‘descriptive’. · The Paradox of Deliberateness and Emergentness (Strategy Formulation – Planned vs. This approach is particularly important for this module. Generative). In these areas. Incremental). produced is key – stating an appropriate school of thought or positioning an organisation in relation to a strategic paradox is not the key issue. as a student of strategy. The ability to analyse (rather than describe) strategy and coming to a reasoned judgement is the overriding objective in assessment. Mintzberg. that is to say they are based on the belief that Corporate Strategy is a planned. On the other hand. · The Paradox of Logic and Creativity (Strategic Thinking – Rational vs. leaving the student with the tools to analyse case studies and decide for themselves the key strategic perspective for organisations. The paradoxes addressed by de Wit & Meyer (2004) are. uncertain. Indeed. Another range of key perspectives is related to your core textbook supplied with these materials. analytical hard data process. They define the opposite ends of a continuum. Each perspective is inter-mingled with one another and interacts over time. writers believe that strategy is a complex. Change – Continuous vs. However.Preface Global Corporate Strategy 10 The Configuration school – strategy making is a process of leaping from one state to another with relative stability in between All of these schools have key writers. it is the opposite.one cannot get a clear picture of ‘the elephant’ by looking at each separate part of its body. de Wit & Meyer (2004) analyse a series of ‘paradoxes’. · The Paradox of Revolution and Evolution (Strategic · The Paradox of Markets and Resources (Business Level iv . you must keep in mind ALL TEN schools. There is a range of theory and academic writing to support all of these perspectives. The ten schools can be split into two ‘types’.
One must be careful to use the word ‘organisation’.Global Corporate Strategy Preface · The Paradox of Responsiveness and Synergy (Corporate Level Strategy – Portfolio vs. ‘corporate strategy’ affects the organisation as a whole. Much can be learned from such organisations and. are only touched on where necessary. this type of module has been delivered many times in the past. International Diversity). will be pointed out in the text. in some case. If the word ‘business’ were to be used this would tend to ignore some very productive study areas in public and ‘not for profit’ organisations. Embedded Organisations). finance. However. Therefore. In other words. but in others it will be left to your own imagination and analytical ability. It would be possible to provide you with a module that deals with separate areas of an organisation individually. Individual techniques such as those employed in marketing and finance. Indeed. HRM. this would not give due credence to the fact that strategy is essentially a ‘holistic’ subject. Context – Industry Evolution vs. Once again. etc. operations. Industry Creation). · The Paradox of Profitability and Responsibility Naturally. Context – Leadership vs. Many contemporary issues in ‘strategy’ are reflected in this module. it is possible to look at marketing. many of theses dichotomies can be examined in isolation but are. similarly to the schools of thought above. for example. There are links between themes that. · The Paradox of Compliance and Choice (Industry · The Paradox of Control and Chaos (Organisational · The Paradox of Globalisation and Localisation (International Context – Global Convergence vs. corporate strategy must be examined in an ‘all embracing’ manner. v . Dynamics). as separate entities and reflect the ‘strategic’ aspects of these areas. organisations whose prime objective is not related to profitability cannot be ignored. · The Paradox of Competition and Co-operation (Network Level Strategy – Discrete vs. (Organisational Purpose – Shareholder Value vs. it is erroneous to regard each of the ten ‘themes’ as existing in isolation or in ‘silos’. Stakeholder Values). Each element of an organisation cannot be considered in isolation. That is to say. although ‘businesses’ are typically used to demonstrate key points. Core Competence). likely to be interrelated and so discussing and building an academic argument in respect of one will inevitably lead to another. This would detract from the ‘ethos’ of this module.
Preface Global Corporate Strategy Due to the nature of the subject area it is impossible to cover all aspects – simply think about how long it would take to read one of the key texts from cover to cover! The topics omitted are still important – the study time allocated to this module is not enough to cover everything. Therefore.g. the module will encourage you to analyse these issues and be able to understand why organisations do what they do and look critically at their strategic decisions. it is in your interests to read more widely than the specified reading dictates. vi . You should remember that it is a Masters level module and you will only reap the full benefits if you put in the effort. e. tutor support and contributing to remote discussion and chat via available virtual learning environments. The module will enable you to recognise and describe many different features of organisations. However. This means preparing well and fully utilizing other arrangements to enhance your learning. You should be able to recognise and understand the importance of the various aspects of strategic decision making and implementation processes.
the maturity of the company. and we shall examine the differences between them. · Evaluate the importance of strategy to a manager in an organisation. · Assess the skills required to be a strategist. Introduction The term corporate strategy can bring to mind various aspects of corporate management. managing for shareholder value. competitive advantage. Depending on the maturity of the market that a company operates within. Vision. new markets.Unit 1 Strategy Defined and Key Concepts LEARNING OUTCOMES Following the completion of this unit you should be able to: · Explain what corporate strategy is. and the key role of strategic thinking within an organisation. We shall also look at the various levels of strategy. and the corporate management culture. · Assess the holistic nature of strategy. We shall examine the role of strategic ‘models’ and how they can assist organisations in breaking down the complexity of strategic thinking. emergent or incremental. organisations adopt different approaches to strategy. strategic plans all come to mind. The approach can be classified as deliberate. moulding corporate culture. · Compare the characteristics of strategic decision making. In particular. But what exactly is strategy? In this unit we shall define strategy. we shall examine the Johnson & Scholes model. operational processes for execution. 1 . particularly as it applies to a manager. competition.
Unit 1 – Strategy Defined and Key Concepts
Global Corporate Strategy
Finally, we shall look at two case studies to understand how the key concepts of strategy apply practically within organisations.
Definition of Strategy
There is no universal definition of strategy. Strategy applies to many disparate fields such as gaming strategy, economic strategy, investment strategy, military strategy, marketing strategy and indeed corporate global strategy. Taking a conventional approach, strategy can be thought of as a long term plan of action or execution designed to achieve a particular goal, such as achieving competitive advantage for an organisation. It reflects the values, expectations and goals of those who are in power within the organisation. These logical / prescriptive ideas about strategy emanate from the ‘prescriptive’ approach as advocated by early strategic writers (see Preface and the text Strategy Safari (Mintzberg et al, 1998)). Many early writers continue to be widely quoted, e.g. Michael Porter. Many recent writers have challenged this view of strategy. The study of corporate strategy has moved on into ‘softer’ areas and these issues need to be kept in mind. Early thinking (1960s) could be said to be ‘modernist’ in view, i.e. a unitary perspective – there was a single way to perform the task of strategy. There was an idea that data (both internal and external) could be fed into an analysis machine and the answer (the strategy) could be churned out. The ‘postmodern’ view refuted this, saying that a strategist view should be ‘pluralist’, i.e. take many diverse things into account and this is evidenced by a number of writers. For example, the view of ‘planning’ as opposed to ‘emergence’ – both viewpoints are supported by a wealth of academic writing (see later discussion in this unit). However, as a starting point, we will consider some ‘prescriptive’ definitions and concepts to try to begin to appreciate the complexity of this subject.
Lessons from military strategy
Generalising strategy can be misleading, as the context is important. However, the military definition of strategy can be very helpful in the context of business, as the approach to winning in the business environment is very similar to winning a war. Success in business requires a sharp focus, and does indeed involve winning battles and gaining competitive advantage over the ‘enemy’, in this case the competitor. Military strategy is the ‘holistic’ deployment of resources in such a way that the outcome of a war is influenced. As with military strategy, it is
Global Corporate Strategy
Unit 1 – Strategy Defined and Key Concepts
vital that corporate strategy is ‘holistic’ to be successful. To achieve the corporate strategy, the whole organisation must be focused on the same corporate goals and must team, execute and win in the marketplace. As with a war, a razor sharp focus is required to win in the marketplace.
Strategic vs. tactical
An important distinction to make at this point is between the strategic and tactical. The terms feature in the military as well as in business, and it is important to understand the difference. As we have just observed, strategy must be holistic – it must involve the whole organisation and its objective is to achieve the goal (or win the ‘war’) defined by the company. Tactical measures are actions or manoeuvres carried out to win individual battles, which may eventually, after a number of battles, win the ‘war’. In the context of business, a tactical measure may, for example, involve ruthless, but short-term, price-cutting, in order to grab market-share and remove a competitor. A strategic move, on the other hand, may be an acquisition in order to move into a new market area. Tactical measures are usually short-term, whereas strategy is long-term. A series of tactical measures can help achieve the long-term strategy.
Discuss with your colleagues how a tactical action in your work context furthered the company’s strategy. In particular, how it influenced:
· Competitive position. · Market share. · Customer satisfaction. · Short-term vs. Long term profits and margins. · New opportunities.
Some definitions of business strategy that are helpful are as follows:
Unit 1 – Strategy Defined and Key Concepts
Global Corporate Strategy
‘Corporate strategy is the pattern of minor objectives, purposes or goals and essential policies or plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be’ Andrews K (1971). Page 8, Lynch. ‘Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of its resources within a changing environment, to meet the needs of markets and fulfil stakeholders' expectations.’ Page 10, Johnson and Scholes
Characteristics of business strategy are as follows:
· Sets direction and scope over the long term to achieve goals. · Designed to achieve competitive advantage. · Directs business in a changing and evolving environment. · Holistic and pervasive of the whole organisation; covering the
range and depth of its activities.
· Achieved by teaming, executing and winning in the
· Fulfills stakeholder expectations; survival as a minimum and
creation of added value as a maximum.
Read p. 1-19 of Chapter 1 and section 2.1 of the key text, De Wit, B & Meyer, R
Global Corporate Strategy
Unit 1 – Strategy Defined and Key Concepts
Levels of Strategy
Strategy can be distinguished by the levels at which it occurs. Refer to Figure 1.1.
Business Unit Strategy
Business Unit Strategy
Business Unit Strategy
Figure 1.1: Levels of corporate strategy.
· Defines the strategy for the corporation (or organisation)
as a whole, and is cascaded to business units below. of the organisation.
· Must be holistic and define the overall purpose and scope · Must be visionary in some measure. · Must ensure that the different parts of the organisation
add value to the overall strategy.
· Must meet the expectations of major stakeholders.
Business Unit strategy:
· Must be derived and be aligned with the corporate
· Must be focused on how to compete in the particular
markets or business areas for which the business unit has responsibility. business remit.
· Can be visionary and creative within the context of its
· Must define and deliver the operational processes
required to achieve the corporate and business unit strategy.
Unit 1 – Strategy Defined and Key Concepts
Global Corporate Strategy
· Must address the resource and resource development
plans to support corporate and business unit strategy.
A further level of strategy, ‘Network level strategy’, is pertinent in today’s business environment. Let us examine this in more detail. Strategic alliances or strategic networks are increasingly common in many sectors to compete effectively in the marketplace. For example, in the IT sector, gone are the days of mega-organisations that ‘play’ in every aspect of computing and micro-electronics. Increasingly, companies with different specialisations or areas of dominance cooperate to compete effectively in the marketplace. An example is that of the IBM corporation. A few years ago IBM competed in practically every aspect of computing and information technology; from hardware to disk storage to micro-electronic components to software to operating systems to applications software to IT services. Today, to be cost-effective and satisfy customer requirements for open standards and ‘best of breed’, IBM has strategic partnerships with specialist hardware suppliers and software vendors (e.g. for CRM). Another example is that of the Bluetooth alliance of companies that has brought to market wireless interconnectivity of computer devices. In such strategic alliances, the different members of the network operate as separate corporate entities but their strategy is influenced and aligned with that of the strategic network. Such networks involve not only other profit-making corporate entities, but can also involve standards bodies or advisory bodies.
Business Unit Strategy
Business Unit Strategy
Business Unit Strategy
Corporate Entity 1
Business Unit Strategy
Business Unit Strategy
Business Unit Strategy
Business Unit Strategy
Business Unit Strategy
Business Unit Strategy
Corporate Entity 2
Corporate Entity 3
Figure 1.2. Network Strategy.
exploited. There are broadly two types of strategic concepts: 7 . competencies and customers. · Ensure that strategies are consistent. Managers should: · Ensure that strategies are part of the overall corporate strategy. effective and appropriate. perhaps from your own work context. coherent. · Understand how the organisation’s advantages can be · Understand and exploit the existence of any strategic networks/alliances. · Be aware of the organisation’s resources. its corporate management culture. Did networks or strategic alliances play a role in moulding corporate strategy? Strategy and the manager Developing and deploying strategy successfully depends on managers understanding the key and high impact aspects of strategy. and market leadership goals. maturity of the market sector it operates in. These factors include the maturity of an organisation.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts ACTIVITY Think of an example. of how corporate strategy translated to business unit strategy and operational strategy. · Ensure that strategies are sustainable and supported by operational processes. · Understand the attributes of the organisation and what makes it unique/distinctive. Strategic Concepts A number of factors influence the type of strategy an organisation adopts. · Understand an organisation’s business environment. capabilities.
However. and many are withdrawing from this service altogether. If on-line shopping takes off (as they predict it will. With the exception of Tesco. is in excess of £150 a week. 8 . the market for on-line shopping is small. Waitrose/Ocado would have carved themselves a very lucrative market. but perhaps had more difficulty with examples of strategic stretch. in approximately 2-3 years time). Waitrose operates in wealthy. One example of strategic stretch is the Waitrose/Ocado partnership in the UK. It is really identifying opportunities that exist in the current environment and tailoring strategy to capitalise on it.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy · Strategic ‘Fit’: Strategic Fit is the matching of an organisation’s strategy to the environment it operates in. It is a resource-led approach with investment from the heart of the corporate centre. which makes a small profit on on-line deliveries. when an organisation pro-actively stretches its resources and competencies to create new opportunities and capitalise on them. is ACTIVITY Can you think of an example of strategic fit? Now can you think of a company that has or is adopting strategic stretch? ACTIVITY FEEDBACK You probably thought of many examples of strategic fit. which provides on-line grocery shopping and home delivery service. and investing considerable amounts to expand services. Competitive advantage is achieved by correct positioning within the existing marketplace. on the other hand. Currently. Waitrose/Ocado are also making losses currently. most companies providing this service make huge losses. · Strategic ‘Stretch’: Strategic Stretch. middle-class areas. Competitive advantage is achieved by not only meeting existing market needs but also future market needs. indeed. It means identifying resources and developing competencies to pre-empt and create new opportunities in the marketplace. they are strategically stretching themselves. They forecast a huge market opportunity in a few years to come. in the UK. on groceries. where the average weekly spend.
Strategic thinking has creativity at its heart. of course. corporate culture . Improving quality is meaningless without knowing what kind of quality is relevant in competitive terms. is that there is no easy answer. strategic thinking must dominate its entire corporate culture. setting prices and delivery schedules. just as one cannot ignore quality no matter how elegant is the strategic plan. and encourages the entire organisation to be involved. Nurturing corporate culture is useless unless the culture is aligned with a company’s approach to competing. There is a dangerous tendency today to practise single-issue management. A simplistic definition of strategic thinking is finding the answers to the following: · Where are we now? · Where do we want to go? · How do we get there? For an organisation to be successful. entrepreneurship and strategic thinking are all important.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts Strategic Thinking Where previously (in the 1970s and 1980s) the focus was on managerial skills in strategic planning. Strategic thinking cannot occur only once a year. Quality. Concern for one does not imply all these aspects of management. It cannot be a ‘one off’ or ‘once a year’ activity. The following extract from Porter (1977) is helpful in highlighting the importance of strategic thinking. be at the forefront and influence every manager’s daily actions. Strategic thinking must be ingrained. ‘There are no substitutes for strategic thinking. Moreover the information necessary for good strategic thinking is equally vital to running a business – designing marketing material. It minimises the risks associated with management power over strategy.’ Porter (1977) 9 . It should inform a company’s daily actions. Entrepreneurship unguided by a strategic perspective is much more likely to fail than succeed. according to a rigid routine. One cannot ignore strategic thinking in favour of maintaining a supportive culture. now the emphasis is on strategic thinking. The truth. manufacturing.
Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy De Wit & Meyer discuss the paradox of Logic and Creativity. in the context of strategic thinking. complexity and uncertainty prevail in making strategic decisions. · Top-down processing. Nevertheless. from the comfortable to the uncomfortable to be successful. A manager still needs to be able to think rationally and be analytical in certain circumstances. The implication is that creative (or generative) thinking is crucial to enable managers (and their organisations) to move beyond the obvious. They see strategy as a ‘wicked’ problem. Top-down processing The characteristics of top-down processing. This is often termed ‘lateral’ thinking or ‘thinking out of the box’. are: · Driven by the process of gathering detailed information from all levels. a role for ‘logic’ is still in place. B & Meyer. Thinking and Strategy Strategic thinking involves the processing of information by managers to define strategy. they are ‘bounded’ by their own rational thought and so are limited in what they can achieve. De Wit. and a review of all possible solutions. Bottom-up processing The characteristics of bottom-up processing. R Information Processing. or issue under consideration. ACTIVITY Learn more about Strategic Thinking by reading the introductory section to Chapter 2 (p 51-67) in your key textbook. ambiguity. in the context of strategic thinking. are: 10 . 1995): · Bottom-up processing. However.e. i. · Decision making is then carried out after elaborate analysis of the strategic problem. Two different modes of information processing have been described (Walsh.
· Strategies are derived from the experience of the success · Elaborate theories are rarely applied. Strategic Thinking: skills Strategic thinking has many dimensions. the majority of strategic decisions are made using top-down processing. as follows: · A strategist needs to understand issues at the functional. as strategy must be holistic and integrated across all levels. technical and unit levels. analysis of issues with that of experience. and demands a variety of skills. Creativity in strategy The following factors strengthen strategic thinking: · Relevance and realism in thinking. Simple. · A strategist needs to identify the significance of current · A good strategist needs to balance the use of · A strategist needs to be creative. Such decisions require vision. creativity as well as business realism. Another important factor in strategic decision thinking is the role of uncertainly. Through leadership companies are able to influence and guide the market with their own ideas and thereby create new opportunities. In practice. abstract rule-of-thumb approaches take precedence. Neither approach lends itself well to less routine and novel strategic decisions (such as entering a new market or bringing to market a novel product/service). What makes a market leader is how that organisation predicts future opportunities from an uncertain environment. issues and from that knowledge project strategy into the future. Uncertainties can take the form of missing information. of previous strategies. 11 . knowledge and understanding to predict the future renders competitive advantage.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts · Driven by the recall and application of theory/models to real-life situations encountered. Such uncertainties can pose risks as well as new business opportunities. data/information. but other times arises simply from the unknowable. and rely on the skills and experience of top level management.
· A critical and challenging approach. As such there is a role for strategic ‘models’ that can enable analysis.3.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy · Rigour. Strategic Models Strategic thinking is a complex area. they should be used with caution. · A varied approach to information processing. noting that theoretical models can over-simplify the practical and complex issues faced by organisations in the real world. ‘Criteria for Evaluation’. Firstly. However. From your own work experience. ACTIVITY It is good practice for strategic decisions to be evaluated against set criteria. 12 . A good list of evaluation criteria is outlined in the key textbook. De Wit. · A balance between theory and practice to cross-check validity. it is helpful to recognise that strategic thinking has three dimensions to it as shown in Figure 1. can you identify the criteria (in the form of bullet points) against which strategy can be judged. Some of which may be specific to the industry/sector in which you operate. pages 74-75. R. ACTIVITY FEEDBACK You would have come up with a number of ideas. B & Meyer.
It · Context: Concerns the business circumstances or environment in which the strategy operates or will be developed. environmental factors. determined. addresses the main actions of the proposed strategy. such as external economic. business.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts Context Content Process Strategy Figure 1.3. content and context of strategies define the scope of strategic thinking. political. · Content: The result of the strategy process is content. 13 . Similarly. think of an example of how outer context influences an organisation’s strategy. ACTIVITY Can you think of some examples of how inner context can influence strategy. changed and controlled. The process. and must be considered together as they are closely inter-related. These processes link together or interact as the strategy unfolds in what may be a changing environment. This can be the ‘inner’ context. referring to the organisational setting or corporate culture of the organisation. Or it can be the ‘outer’ context. implemented/executed. Let us look at each of these in turn: · Process: The actions or processes that support how the strategy is analysed. The dimensions of strategic thinking.
by operating companies such as PDO in Oman. In the Exxon example. IT standards and software applications) are defined by the corporate body. Processes and standards (e. More recently. ACTIVITY Can you now think of an example of how outer context influences an organisation’s strategy? ACTIVITY FEEDBACK Increasingly environmental and ethical factors strongly influence strategy. Exxon has a strong corporate focus with an emphasis on functional and product lines of structure. where the company must comply with external influences. as it is more cost-effective. In the Shell structure. such as call centre operations. but doesn’t dictate business unit-level strategy. such as India. Shell and Exxon are giant oil corporations. the corporate body defines strategy. skilled jobs. Here is another example. but nevertheless the organisation must adhere to it. Many Western companies utilise cheap factory labour from third-world countries. Raised environmental and ethical awareness has forced Western companies to pay fair wages and provide satisfactory working conditions in these countries. Shell has a structure that favours and devolves power to national or regional management. This is an example of outer context. 14 . Taiwan. However.g. Such factors are outside the control of the organisation. strategic thinking is carried out at the regional level (e.g. The corporate headquarters at The Hague does influence strategy at regional levels. have also moved to countries such as India. Brunei). Whereas. Strategy is then cascaded to the functional units. they are organised very differently.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy ACTIVITY FEEDBACK You may have thought of one or two examples of how inner context influences strategy. Company stakeholders often demand ethical and sound environmental practices. etc.
R.5-11 of the key text. De Wit.4 shows types of issues that should be considered within the strategy development phases. The overlapping nature of the phases was elaborated by Johnson and Scholes. ¯ STRATEGIC IMPLEMENTATION As the arrows indicate above. which can be grouped as follows: STRATEGIC ANALYSIS · Target Setting.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts ACTIVITY Reinforce your understanding of the dimensions of strategy by re-reading p. ¯ STRATEGIC CHOICE · Strategic formulation. In reality. Johnson & Scholes Model Johnson and Scholes developed and elaborated an approach to strategy first put forward by Argenti in 1980. 15 . Figure 1. · Strategic Appraisal. · Gap Analysis. Argenti identified the distinct phases in strategic management. the phases often overlap. Argenti suggested that strategic analysis should precede choice. B & Meyer. and choice precede implementation.
Emergent and Incremental Strategies Strategy can be described as Deliberate.4. Deliberate Strategy is the result of adopting a classic planning approach. analysis influencing choice and implementation influencing analysis and choice. In other cases. Emergent or Incremental. In certain situations implementation can lead choice and analysis – this is Emergent Strategy. with the preferred choices influencing implementation and analysis. Finding the price cuts attracts more customers. where analysis leads choice and choice leads implementation. Going back to the Johnson & Scholes Model. where one store is forced to cut prices because of fierce local competition.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy Expectations and purposes The environment Resources. competences & capabilities Strategic analysis Bases of strategic choice Strategic choice Strategic options Strategy evaluation and selection Managing strategic change Strategy implementation Resource allocation and control Organisation structure and design Figure 1. choice and implementation proceed together. Consider for example a supermarket chain. 16 . This is known as Incremental Strategy. analysis. the order in which the phases are carried out determines whether the strategy is deliberate. Deliberate. This is an example of emergent strategy. emergent or incremental. other stores in the chain copy the pattern to gain market share. Johnson & Scholes Model.
were much higher. Since then. he and his successors have created a global network of stores in 28 countries. Chapter 1 pages 6. Initially. stores were built in countries further afield where the rewards. B & Meyer. 22 February 1998. Also learn about the strategic planning perspective vs. but as greater levels of success were experienced. CASE STUDY 1 – IKEA Read the following extract about IKEA. especially on items 4 and 6 above. In all these countries the retailing concept of Ingvar 17 . either on the Virtual Campus or at your workplace. 6. De Wit. p. (Source: Johnson & Scholes. R. 1. stores were opened only in Scandinavia. Now apply what you have learned in this unit to your own work context.117 – 123 of your key textbook. emergent or incremental? From what you have learned.) In 1953. Share your thoughts on the questions above with colleagues. 4. De Wit. just four years after Ingvar Kamprad had produced his first mail order catalogue featuring locally produced furniture. he opened his first store in Almhult. 3. Solicit their input and ideas also.7 & 229 and Sunday Times. 5.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts REVIEW ACTIVITY Learn more about the above by reading the section ‘The paradox of Deliberateness and Emergentness’ in your key text. Sweden.111-116. strategic incrementalism by reading p. B & Meyer. Are you aware of your organisation’s corporate strategy? Are you aware of your business unit strategy? How is strategy formulated in your workplace? Would you describe it as deliberate. but also the risks of failure. can the strategy process be improved? If so how? What do you see as the major obstacles in your organisation to strategy development and strategy execution? How can these obstacles be removed? 2. R.
IKEA’s expansion plans envisaged only internal funding with 15% of turnover being reinvested. They all expected well styled. The 1980s saw rapid growth. it was highly coveted. huge suburban stores with plenty of parking and amenities such as cafés. A key feature of IKEA’s concept was universal customer appeal crossing national boundaries. pens and notepaper to reduce the number of sales staff required. during their visit to the store customers were supplied with tape measures. He would arrive at the office in the company Nissan Primera. He expected his executives to do likewise. restaurants. the influence of Ingvar Kamprad could still be found. so a shirt manufacturer might be employed to produce seat covers. encouraged by an economic recession. The most economical suppliers were always chosen over traditional suppliers. It also developed a number of unique elements which came to make up IKEA’s winning business formula: simple. information to assist customers make their purchase decisions was provided in a 200-page glossy catalogue. high quality Scandinavian design. and clock in just as other employees did. reasonably priced and readily available. once part of the IKEA system. IKEA benefited from changing customer attitudes. By the mid 1990s. Such prudence was extended to the company whose shares were held in trust by a Dutch charitable foundation and not traded. For example. Furthermore. However. leased equipment. and advice on how to bring production up to world quality standards. from status and designer labels to functionality. IKEA met this expectation by encouraging customers to create value for themselves by taking on certain tasks traditionally done by the manufacturer and retailer. IKEA also had 30 buying offices around the world whose prime purpose was to identify potential suppliers. In its early years it had relocated to Denmark to escape Swedish taxation. Customers came from different lifestyles: from new homeowners to business executives needing more office capacity. knock-down furniture kits that customers transported and assembled themselves. Anders Moberg became the chief executive. high quality home furnishings. for. furniture was displayed in 100 model rooms. To deliver low-cost yet high-quality products consistently. suppliers gained access to global markets. with both the products and shopping experience designed to support this appeal. global sourcing of components. Echoes of the same philosophy and style could be seen in Anders Moberg. dressed in informal clothes. IKEA had always been frugal in its approach. IKEA was 18 . and received technical assistance. When abroad he travelled on economy class air tickets and stayed in modest hotels. their overall aim being to design for low cost and ease of manufacture. for example the assembly and delivery of products to their homes. wheelchairs and even supervised child-care facilities. and sales staff were expected to involve themselves with customers only when asked.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy Kamprad remained the same: ‘to offer a wide range of furnishing items of good design and function at prices so low that the majority of people can afford to buy them’. Designers at headquarters then reviewed these to decide which would provide what for each of the products. Although the process through which acceptance to become an IKEA supplier was not easy. In the 1980s. IKEA made sure that every aspect of its business system was designed to make it easy for customers to adapt to their new role.
Having to cope with widely dispersed sources of components and high-volume orders made it imperative for IKEA to have an efficient system for ordering its supplies. however. believing these represented great future potential. It also restated its financial support for the Romanian furniture industry through credits which allowed new buildings with better working conditions. It was also developing new sources of supply. from 1. It believed that trade was better than aid and that it intended to continue to assist with financial and technical support and by expanding orders. entering into an agreement with a timber company to develop new wood material for furniture. The article observed that the appalling conditions in Romania flew in the face of the politically correct image of IKEA fostered by Ingvar Kamprad who regularly wrote memos to staff which started with ‘Dear IKEA family’. and aided the integration of supply and demand. the company was also facing problems. However. This was achieved through a world network of fourteen warehouses. it announced its plan to open twelve new stores a year internationally in cities such as Frankfurt. There were also plans to develop new areas of business.800 suppliers in 45 countries at prices 20-40% lower than for comparable goods. IKEA was turning its attention to new opportunities for growth. that conditions were poor and that it had provided the collateral necessary for the purchase of one factory. IKEA’s response to these issues was that it had no management responsibility for any Romanian factory. in Sweden. it had provided collateral for at least one factory to be bought from the state in 1992. IKEA was market testing. by 1998 the means of achieving low cost was receiving some critical attention. consolidation centres and transit hubs. holding down unit costs by minimising the costs of inventory and helping stores to anticipate needs and eliminate shortages. It was reported that IKEA was sourcing its goods from suppliers in eastern Europe which paid its workers poverty level wages. ‘flat packed’ housing which could be assembled by two men and a crane in a week at prices about 30% less than the going rate. reducing the need to store production runs for long periods. Although IKEA did not own any of the 25 factories which produced furniture for its stores. In 1997.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts offering a range of 12. integrating them into products and delivering them to the stores. These provided storage but also acted as logistical control points. In fact. By the end of the 1990s. there were allegations from the Federation of Wood Workers that the directors of the factory used money from IKEA and disregarded the law under which Romanian employees are entitled to be given the option of buying their own factory as a cooperative. Chicago and Roclab in Poland and to double manufacturing capacity by building up to twenty factories in eastern Europe by 2002. 19 . In partnership with a building contractor. Shanghai. However. IKEA was the subject of a hard-hitting article in the Sunday Times in February 1998. The managing director of this factory admitted that he kept a competitive edge by paying employees an average of about 20p per hour (about one-fortieth of the pay levels in Sweden). It had opened stores in eastern Europe and the one-time Soviet republics.000 items. It accepted. The article concerned the working and living conditions in Romanian furniture factories.
IKEA’s strategy was managed at different levels. Note down the characteristics of IKEA’s strategy which could be explained by the notions of: . A committee of senior executives at headquarters in Denmark was responsible for overseeing investment in new markets and stores.Strategic management as the ‘stretching’ of its capabilities. controlled at arm’s length by trust-like organisations. the latter’s shares would be jointly owned by Kamprad’s three sons. The structure was devised in an effort to ensure that the privately held organisation should not be broken up or sold off in a succession battle after Ingvar Kamprad retired. Unit 6 covers corporate ethics in more detail) 20 . and a third arm involved mainly in finance and banking. 2. Ingvar Kamprad announced that IKEA would be split into three. 3.Strategic management as ‘environmental fit’ . Questions: 1. Summarise IKEA’s corporate strategy. He also wanted to ensure that it would not be put under the sorts of external pressures for continual growth often faced by publicly quoted companies.400 suppliers by one-quarter and focusing on increased volumes with a smaller range of products and fewer suppliers. Comment on IKEA’s ethical stance (You may wish to revisit this question after you have completed Unit 6. The first two would form the core of the group. rationalising its supply chain and product range in order to cut purchasing costs by an overall average of 10%. In 1996. It had decided to implement a programme of cost savings.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy IKEA was experiencing growing competition on an international front. The company had stated the intention of cutting what had become 2. responsibility for product development and purchasing lay with IKEA of Sweden. comprising the retailing operations. Internally. an organisation holding the franchise and trademarks. and country managers tailored the presentation and marketing of products to home territories.
While not owning its manufacturing. strategic advantage could be thought of as providing higher quality value-for-money services than other providers in the public sector. essentially. · Strategic decisions affect the long-term direction of an organisation. or should it have many? For example. that IKEA was extending its product scope from furnishings into other product areas. Does (and should) the organisation concentrate on one area of activity. which were highly · Strategic decisions are likely to be concerned with the scope of an · Strategy can be seen as the matching of the activities of an organisation 21 . IKEA set out along a path which was difficult to reverse. IKEA had been successful not because it was the same as all other furniture retailers. therefore. however. it did have an in-house design capability. · Strategic decisions are normally about trying to achieve some advantage for the organisation. Over the years it had also substantially widened its geographical scope to become one of the few truly multinational retailers in the world.’ While the market for furnishings was mature. as the search for effective positioning in relation to competitors so as to achieve advantage in a market or in relation to suppliers. By the late 1990s the whole thrust of its strategy had shifted to a global scale and IKEA was facing the challenge of how to develop into the twenty-first century. Similarly. This is sometimes known as ‘the search for strategic fit. but because it was different and offered particular benefits which distinguished it from other retailers. which specified and controlled what manufacturers supplied to the company. a Scandinavian furnishing retailer. organisation’s activities. In so doing it had to consider other key issues. as with its experiments with housing. Strategic decisions are sometimes conceived of. for years IKEA had defined the boundaries of its business in terms of the type of product (‘furnishing items of good design and function’) and mode of service (large retail outlets and mail order). for example over competition. to the environment in which it operates. with little prospect of overall growth. thus attracting support and funding from government. In the 1950s and 1960s the company was. the management of IKEA had seen that the retail provision of furnishing in most countries did not meet the expectations of customers.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts CASE STUDY FEEDBACK Feedback on Question 1: These are some of the considerations on strategy and strategic decisions in the context of the IKEA case study. There were signs by the late 1990s. Customers frequently had to wait for delivery of items.
however. Customer tastes were relatively common in different countries except in specialised segments of the market: buyers wanted everyday furniture which was well designed and looked good. property and physical stock held had to rise significantly. therefore. sometimes for projects which might be seen as high risk – for example. affect its success: for example. and this had required a change in the way it serviced the market. This may have been because its prices were often lower. For example. and even to the Far East and eastern Europe. when a customer took a purchasing decision at IKEA. IKEA also knew that it faced significant differences in its markets. or the problems of long-distance control were too great to manage the operation effectively on this basis. It had. In other stores. it had found that shopping habits in the USA differed substantially from those in Europe. which affected IKEA’s fortunes. since delivery was often delayed. The size of the operation in terms of numbers of people working in it. · Strategies may require major resource changes for an organisation. Here the company recognised that local knowledge in fine-tuning the business to local needs was vital. entering new markets in times of recession. Economic conditions in the different countries in which IKEA operated did. The 22 . the growth in car ownership. established local joint ventures through franchise arrangements. while the principles of IKEA’s business idea were adhered to around the world to produce a consistent product quality and shopping experience. determined the percentage of the population which could shop at an IKEA store. for example. but it was also because. Therefore. This meant that IKEA had to understand buying habits and preferences from a much wider base. attractive though they were. By the 1990s the number of countries in which IKEA was represented was a great deal larger than in the company’s early days. where it did not make sense to try to control IKEA’s operations directly. decided that there were some markets.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy priced. particularly in less highly developed countries. however. There were wider environmental issues. The market provided another opportunity. he or she walked away with the goods. IKEA could no longer assume that its knowledge of earlier markets would necessarily apply: for example. IKEA was less susceptible to economic downturn than many of its competitors. the decision that IKEA took to develop its operations internationally had significant implications in terms of its need to obtain properties for development and access to funds by which to do this. from markets close to its Swedish home. store management had been given a greater degree of freedom to adapt to local market needs. to the USA. but which was reasonably priced. IKEA’s management had. purchase decisions were also often delayed.
This link between overall strategy and operational aspects of the organisation is important for two other reasons. shop layout and merchandising to supplier and customer relations. Indeed. may say much about the values and attitudes of those who influence strategy – the stakeholders of the organisation. Management and control structures to deal with the geographical spread of the firm had to change. but also by the values and expectations of those who have power in and around the organisation. IKEA saw the need to add to the core product range from local suppliers. Store operations needed to change too. but also because the detail of how the concept is put into effect – the strategic architecture – in terms of its logistics of buying and servicing. In IKEA the insistence on internal financing influenced long-term development and the direction of the company: the influences of the founder and chief executive remained pronounced. in the USA. It was a problem which many retailers found difficulty coping with. as opposed to a national operation. if the operational aspects of the organisation are not in line with the strategy. Whether a company is expansionist or more concerned with consolidation. strategy can be thought of as a reflection of the attitudes and beliefs of those who have most influence on the organisation. 23 . is difficult to imitate. Marketing and advertising policies needed to be reviewed by country to ensure their suitability to different customer behaviours and tastes. it is at the operational level that real strategic advantage can be achieved. · Strategic decisions are likely to affect operational decisions. then. no matter how well considered the strategy is. In some respects. then. install serviced loading bays and erect bollards to stop the shopping trolleys being taken to all parts of the car parks. it will not succeed. IKEA has been successful not only because of a good strategic concept.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts need to control a multinational enterprise. but also in terms of the extent to which resources can be obtained and controlled to develop a strategy for the future. the internationalisation of IKEA required a whole series of decisions at operational level. A major reason has been that retailers underestimate the extent to which their resource commitments rise and how the need to control them takes on quite different proportions. For example. all developed over many years. For example. need to be considered not only in terms of the extent to which the existing resource capability of the organisation is suited to opportunities. Personnel policies and practices had to be reviewed. Second. First. which are very large in the USA. The emphasis on frugality and simplicity clearly influenced the way the company operated. The strategy of an organisation is affected not only by environmental forces and resource availability. and where the boundaries are drawn for a company’s activities. also began to require skills and control systems of a different sort. Strategies. The way in which suppliers were controlled and the methods of developing and distributing stock required revision to deal with the extended distribution logistics.
for example by locating in particularly favourable markets or seeking to appeal to attractive market segments. 24 . from sourcing of products to control of stock and the immediate supply of the product to take away. both the resources and experience built up over the years had been consciously developed to service the evident opportunity in the market place. Feedback on Question 2: Decisions on whether a company takes an environment led approach (fit) or a resource based approach (stretch) is often complex. Complex: especially for multinational organisations such as IKEA with a wide range of products/services. 4. IKEA benefited from years of design experience dedicated to its operation and markets. The logistics of the operation. The product range IKEA had designed and developed was not only low cost but unique. strategy can also be seen as building on or ‘stretching’ an organisation’s resources and competencies to create opportunities or to capitalise on them. as in the case of IKEA.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy critics pointed to what they saw as a disregard for the well-being and welfare of the low-paid workers of suppliers in the name of keeping down costs. Taking a strategic fit approach means. but a service greatly appreciated by customers. Not only is it problematic to decide upon and plan change. In the case of IKEA there were the following strong influences: (i) family owned company with no shareholder/financial market influence on strategy (ii) Swedish influence. IKEA is such an example where arguments can be formed to justify both. However. trying to identify the opportunities which exist in the environment and tailoring the future strategy to capitalise on these. The conclusion from the above case study is that strategic decisions often exhibit the following characteristics: 1. Require an integrated approach: Managers have to work across cross-functional and operational boundaries. 2. it is even more problematic to implement change if the organisation’s culture is not in line with the desired future strategy. had been learned over many years and provided not only a quite distinct way of operating. not only because of its kit form but also in its style and image. They also have to manage external relationships such as with suppliers. Involve uncertainty: They often involve taking decisions about the future. reflecting Swedish values. Involve change: Strategic decisions often involve change. and come to agreements with other managers who may have different interests and priorities. which is impossible for managers to be sure about. 3. In short. distributors and customers.
709-720). In practice. irrespective of the ethical issues in the Romanian factories? · Is the local population in Romania. support and even entertainment. All three companies were asked to compete in the market. Below is the case synopsis: CASE SYNOPSIS PowerGen was vested as a British electricity generation company in 1990 as the result of the privatisation of the UK energy systems. one in which consumers are also suppliers. management. develop strategies on the basis of environmental ‘fit’ and ‘stretch’. It started to think about value in a new way. organisations such as IKEA. using its experience in the furniture market. De Wit. PowerGen: Strategy and Corporate Planning’ in your key textbook. and it is not up to them how the workers are treated. and the market was 25 . of which PowerGen was the smallest. design. but it was also an attempt to capitalise on its skills in developing kit-form products at low-cost. and IKEA itself is not so much a retailer but as a central hub for services. to create a different market opportunity. Feedback on Question 3: The issues to consider are: · Is it good business practice to achieve high profits by lowering costs. IKEA’s experiment with housing was the result of identifying a new market opportunity. B & Meyer. R (p. Is this a realistic attitude? · How should IKEA deal with public pressure and use its influence to improve working conditions and workers rights? Revisit this question after you have covered Unit 6. The previous state owned “Central Electricity Generating Board” was split into three companies. grateful for having IKEA’s contract? Or was IKEA exploiting low labour cost locations? · IKEA’s view of this is that it is a ‘sub-contract’ arrangement. It set out to reinvent value. goods.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts IKEA then ‘stretched’ its capabilities. CASE STUDY 2 – POWERGEN The next case study is case study 5. suppliers are also customers. and experimented with housing in the late 1990s.
which triggered a complete change of the strategic planning system as well. the government introduced completely new mechanisms of matching supply and demand. etc. On the other hand. When this new planning system failed to function satisfactorily in 1993. B & Meyer. That also caused the strategic planning system to be substantially revised. All market players needed to learn how to operate an energy market. only two years after the operational start of the company. · Conceive alternatives for formal planning systems. In particular it was now broadened to include a highly sophisticated scenario development module to be conducted on the business unit level. · Identify the common pitfalls of formal planning systems. · Understand possible designs of formal planning systems. government interference changed the pricing arrangements of the industry and dictated strategic directions. Along with the privatisation and liberalisation. De Wit. and the installation of new regulatory institutions. merger discussions with US partners continued on and off. it was not surprising when PowerGen started preparations for being an independent company in 1988. However. Therefore. In 1996 the company underwent again a major reorganisation. how could the company have assessed its choices in the rapidly changing environment of European energy markets in the 1990s? Now read the full case study (pages 709-720 of key textbook. without the planning support. 26 . It seemed that the planning system was always several steps behind the actual conditions of the company. the institution from which PowerGen emerged. it was substantially revised for the 1994 planning cycle. a substantial reorganisation was conducted. had strong planning instincts for fulfilling its task to supply electricity to British households and industry. already in 1992.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy opened for further new entrants as well. that a very detailed strategic planning system was installed with the help of McKinsey consultants. such as an electricity pool or the creation of a separate transmission company. where before there was only a central planning agency. R) with the following learning objectives in mind: · Understand the need for formal planning systems. As the name of CEGB implied. In 1998 PowerGen completed a major purchase of a regional energy distribution company. adjusting the company to a number of internal and external strategic developments. The corporate composition did not stabilise thereafter either.
emergent fashion. Identify four different development stages of the strategy planning system that PowerGen was using between 1990 and 1996. CASE STUDY FEEDBACK Feedback on Question 1: PowerGen’s strategy planning system developed in four different stages during the first six years of its privatisation. 3. Catalogue the key changes from one stage to the next. · Led and managed by a large. which suggest that there is also a parallel strategy formation process in place that operates in a more incremental. and which reasons are attributable to unforeseeable circumstances? What were some of the major strategy decisions that were taken at PowerGen? Speculate to what extent the results of the strategic planning system were used for making these various corporate strategy decisions. Phase I: Occurred in 1990 with strongly centralised formation and planning.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts Questions: 1. Performed in a functional structure by the commercial division. 27 . · Separated financial role within the Finance division for reviews and projection of plans. Collect the hints in the case. Process: how and when? · Deliberate formation. centralised planning team at the commercial division. 2. and focused on pool operation. functional structure of the organisation. What were the reasons for these particular changes? Which reasons are attributable to foreseeable circumstances. monopolising the strategy planning and decision making within the corporation. Context: where and by whom? · In a renewed.
· Shortened planning cycle to nine months. · Replacement of the large. · Decentralisation of (strategic) decision making and planning to the divisions. responsible for both corporate strategy development and corporate planning. supported by divisionalised financial staff and a downsized corporate planning team. and incorporated in corporate plans. · 12-month process. under responsibility of rather autonomous division directors. · Reallocation of financial planning support towards within the finance department. central planning team by business level planning staff within the divisions. Process. · Introduction of a small central strategic planning function. how and when? · Business units developed own business plans. Phase II Occurred in 1992. · Planning focused on resource implications of strategic decisions. · Diversification and early internationalisation. · Use of scenarios concerning market share. the process itself did not change too much – merely the responsibilities of making up the plans had shifted profoundly. Context: where and by whom? · From a functional structure towards three divisions with profit and cost centres. pool prices and competitor analysis for the core business. headed by empowered MDs. reviewed by divisional boards. 28 . Content: · Focus of strategy: the operation of the pool. To some extent decentralised formation and planning.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy · 5-stage planning process: business unit – aggregation – divisional plans – aggregation – corporate plan .
with a focus on regaining fit between strategy developments and financial priorities. because of regulatory intervention (introduction of capped wholesale prices) and competition (increased market share of Nuclear Electric). with increased options and widened commercial focus. · Unforeseen extended planning cycle. effectively increasing the influence of financial considerations in the planning process. · Unforeseen rift between strategic decisions and financial priorities. from meeting centrally set targets to exploring their potential. which became responsible for developing a number of scenarios showing how the market might develop. · Less detailed level of planning. Emanated from a strategy and planning process with few independent checks and balances from a financial point of view.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts Content: · Shift in business unit responsibility and culture: from expenditure limits towards operating results. Context: where and by whom? · Responsibility for the plan and for managing the corporate planning process was passed to the director of finance. and the plans that followed ‘were to be robust to those possibilities’. Reasons · Foreseen profit margins lower than forecasted. because of massive recalculations of forecasts. · Diversification (first attempts of internationalisation) and early verticalisation of the businesses required increased responsiveness at business unit level. Phase III Occurred in 1994. · Scenario development was partly delegated to business units. · Unforeseen failure of the centre to communicate (foreseen) scenario information fully. Reasons: · Devolution and introduction of an internal market. 29 .
how and when? · Strategic actions increasingly in reaction to environmental (industry dynamics and regulatory) changes. with integratedstrategic management and organisational development (skills transfer. BU strategy development to other BU staff member. 30 .Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy · Desire to eliminate divisional bureaucracy in managing the planning process. assisted by finance manager. between which common strategic management activities were increasingly co-ordinated and increasingly emergent. Process. Phase IV Occurred in 1996 with further delegation of the strategic decision-making and planning process to business units. supported by Finance Director (for corporate financial implications) and corporate strategist & planner). towards scenario development at business unit level. Context: where and by whom? · From divisional structure towards clusters of business units. in a continuous absorption of the external perspective and its impact on strategic options. · Strategy triangle between CEO (for corporate strategy. with increased scope for absorption of emergent issues into development and planning cycle. · From pre-set details towards a more gradually evolving process. · Sequenced process: first BU strategy. · Decrease in formality of process (including debating. · Horizontal co-ordination (not centralisation) between multi-units. etc. than BU planning. · Shift and separation of strategy responsibilities: BU planning process to BU finance manager. human resource planning. group MD (responsible for business unit strategy. lobbying for and formation of coalitions for strategic options and actions between corporate and business levels).). with ongoing examination of BU strategy. who managed the planning process). because of conflicts between different layers of the corporation. · Decentralisation of scenario development: from corporate scenarios as a guideline.
Organisational systems · Encouragement of planning system initiatives by BUs within a corporate context (such as the multi unit scenario development). But in the fresh market. · Introduction of bonus system. a pattern of action and reaction with environmental forces became a highly influential factor in PowerGen’s strategic behaviour. in order to create increased focus for business units’ specific circumstances. · Need for separation and autonomy of marketing and sales. Content · The highly increased impact of regulatory forces on PowerGen increasingly required a pattern of political bargaining with the environment. The move to flexible production came along with the anticipated need for flexibility in the supply of energy. · An unforeseen need for co-ordination between the different strategising activities of BU. dividing the total and allocating parts to the various generation units. PowerGen began to develop its generation capacity to better fit commercial and environmental requirements. Before the liberalisation. Development of generation power. the previous planning mechanism could easily foresee total demand on a yearly basis. · Reviews by team of BUs and corporate level. mainly due to the 31 . Instead of planning the future in detail. the demand for energy could easily alter significantly. · Five-year horizon. in anticipation of liberalisation of core markets. related to strategy process. Reasons · Increase in environmental complexity and uncertainty. · Need for even further autonomy of business units. because of diversification.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts · Differentiation among guidelines for the different businesses. Feedback on Question 2: 1. competition and new regulation. through improving the flexibility of the coal units and developing gas-fired stations. · Foreseen need for independent management of several ‘new’ businesses.
To be responsive to this new market logic. Examples include: . that the very step of introducing flexible production. including PowerGen’s. This ultimately resulted in the formulation of strategic options at PowerGen and the strategic choice of a path to growth in a still standing UK market.Commissioning of two new CHP plants. 2. that the ‘one-stop-shop’ (supplying all household’s energy needs) strategy had been pushed for by strategists as the solution for ensuring long-term profitability at PowerGen.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy new market mechanism: the wholesale pool. with construction projects in Portugal and Indonesia. it became much harder to forecast exact production demand. .International: (early stage) power station and mining acquisitions in eastern Germany and Hungary. and high growth forecasts in domestic energy related areas and increasing international demand for power on the other hand. production needed to be flexible. Kinetica. it is to be assumed. the case explicates that integration of generation and 32 . within the planning cycle. PowerGen’s moved to leverage her core competencies in other energy-related areas. . 3. the company recognised that growth in the medium and longer term would require the establishment of new income streams in other energy-related areas where its core competencies could create value. forming the basis for environmental scenarios.Downstream: formation of a joint venture with Conoco. Consequently.Upstream: acquisition of assets in the North Sea and Liverpool Bay. (EME). establishment of Combined Heat & Power (CHP). Because of the electricity pool. acquisition of East Midlands Electricity plc. and large businesses. PowerGen strategy anticipated that it would suffer an inevitable reduction in market share. In the case of the acquisition of EME. together with pressures for price reduction. however. ‘98. actually opposed the whole idea of the formalised. Probably. Also. Leveraging of core competencies. As stated in the case. both vertically and horizontally (internationalisation). Later on in the 1990s. Intended sell of PowerGen North Sea (1997/1998). The case reveals data on slow growth perspectives for PowerGen’s core industry in the UK on the one hand. further foreign direct investments in plants and projects overseas. Note. external industry assessments had come up with these insights. plans included the supply of gas to power stations. long and detailed planning process that was adapted by PowerGen in 1990. .
the strategy and planning process focused on leveraging core competencies for expansion of its business. one could argue that this sale is a direct effect of the setting of overall strategic and financial direction by the CEO. 4. from a content point of view. on different dimensions. for which the causes could obviously not be caught in strategic planning (‘strains between the two chairman’ and regulatory intervention). Feedback on Question 3: In order to cope with the limitations of the various planning processes that were effective at PowerGen during the 1990s. Over the years. The planning process became less formal and it was recognised it could not be sequential. The case reveals explicitly the causes of failure of intended mergers between PowerGen and Cinergy and Houston. in order to continue assessing possibilities in the US. 6. Merging explorations with US utility groups. One could argue that the planning process of PowerGen from 1996 successfully managed this challenge. two major US utility companies. 5. Both failures are clear cases of intended. but unrealised strategic actions. Identification of strategic issues by this division might be completely different when the strategic management function was allocated to the finance department (as in 1992). by engaging delegated business units in the strategic management process. the results of the process became increasingly dependent on coalition forming. Note. lobbying and a constant discussion between the different planning process levels of PowerGen. If the planning processes of the first and fourth phase are compared. Intended further growth of the core business required the injection of considerable capital. in the later ‘90s PowerGen’s challenge was to get individual business units to be more responsive in leveraging core competencies of PowerGen to operations in both domestic and overseas markets. for example. In fact. in later 33 . an ‘unofficial’. to some extent the planning process in itself underwent change. parallel formation process emerged. that the allocation of the strategy and planning process to the commercial division in 1990. Focus on power generation as a core business and becoming a low-cost producer on a world-class basis. might indeed have affected the strategic choices made by PowerGen.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts distribution provided necessary expertise for similar future international acquisitions. Creation of a new holding company in the US. The extent of freedom to business units in developing strategy increased significantly. Clearly. If the reorganised planning process (1996) is considered. Whereas in the early '90s all strategy development and planning activities were performed by almost a single department. Finance Director and Group MD.
rather than rigidly setting the course of action in advance. including the questioning of central purchasing of services. Scenario development too became increasingly incremental. in particular the Johnson and Scholes model. the role of the Group MD became increasingly a role of shaping the course of action by gradually blending together initiatives into a coherent pattern of actions.Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy stages entrepreneurial freedom was given to managing directors of business units. and that strategic thinking must dominate an organisation and influence its daily actions. political and environmental developments. due to the deployment of ‘robust’ strategy development. in order to continually absorb external perspectives and assess its implications for strategic options. We considered the role of models in strategic thinking. Obviously. We have noted that strategy must be holistic. especially those involved in new businesses (that formed an increasing part of the total PowerGen portfolio). market opportunities or emerging industry dynamics. inherently decreasing the extent of detail in business plans. reaction and reconsideration that increasingly determined the pattern of actions of PowerGen. students have been presented with two contextual case studies (IKEA and PowerGen) to work through. and the characteristics of good strategic decision making. Externally. 34 . Finally. Also. In fact. rather than the pure deployment of the formal planning cycle. We examined the various levels of corporate strategy. as a result of the numerous governmental interventions with great impact on strategic actions. and also considered network level strategy. The course of action. an increased amount of effort was made to manage the interface with regulatory. We have looked at the importance of strategy to a manager. The major realised strategic actions of PowerGen did not result from the planning process. but were reactions to governmental rulings. Opportunistic behaviour emerged. suggesting a parallel pattern of strategic actions alongside its planning cycle. the skills required to be a strategist. The actual strategic behaviour of PowerGen increasingly showed ‘logical incrementalism’. this level of market and environment responsiveness could not be incorporated into the formal planning cycle. increasingly relevant in today’s world. business units became free in choosing appropriate techniques as means to develop strategy. and MDs were given considerable influence over their own revenues. Summary In this module we have described what corporate strategy entails. suggest that there was indeed a parallel course alongside the formal planning process.
Chapter 2 Pages 43-87 35 . Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. Chapter 2 Pages 37-75 Ref 7.Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts To gain maximum benefit from this module. students are encouraged to apply the lessons learnt to their own work context. Chapter 1 Pages 3-37. 2. Chapter 1 Pages 4-34. Ref 10.
· Judge the role divestment has on organisational performance. To obtain optimal corporate performance. a corporation may increase or reduce the number of component businesses so as to create a more effective combination. and a greater focus has come about on developing a corporation’s core competencies. Introduction Corporate strategy is the overarching strategy that applies to a number of businesses combined within a single corporation. and it was thought that benefits could be obtained by holding a portfolio of diverse strategic business units. There must be definite and identifiable benefits from combining the businesses together in a single corporation to make corporate strategy worthwhile. This unit examines how businesses are combined to achieve superior performance. It was also felt that this approach reduced risk for the corporation. In the 1990s corporations began to see the efficiencies and benefits of focusing simply on core business. when the focus was purely on financial control.Unit 2 Strategic Capability LEARNING OUTCOMES Following the completion of this unit you should be able to: · Assess the importance of core competencies to an organisation. Portfolio management was fashionable in the 1970s and 1980s. Corporations use different management styles in achieving an optimal mix. Whichever approach is adopted. 37 . We shall also examine some case studies concerning strategic capability. We shall examine portfolio management and core competencies as two different styles. executing corporate strategy often involves acquisitions. This is more than aggregating the individual strategies of its various component businesses. mergers and divestments. · Analyse the influence synergy can have on an organisation. Corporations thus started to alter their composition in order to strengthen core competencies.
the corporation’s product/services range. generally adopt a management style based on core competencies. See Figure 2. its leadership style and management culture. many corporations try to balance responsiveness with synergy by adopting management styles that fall between the two perspectives of portfolio management and core competencies. In practice. Corporations that wish to exploit synergies between their various businesses and develop a longer-term competitive advantage. Corporations adopting this style. Nestle is an example. · Strategic planning by Core Competencies. This is sometimes termed the ‘strategic control’ perspective. Corporate Level Strategy Continuum. but fail to achieve the longer-term benefits of exploiting synergy. Canon is a good example of a corporation that carries out strategic planning based on core competencies.Unit 2 – Strategic Capability Global Corporate Strategy The Different Management Perspectives Corporations adopt different management styles in strategic planning. Portfolio management is a management style whereby financial control is performed by the corporate centre. They operated very much in line with the analogy described below – as an investor would in financial markets to maximise returns on their investment by the buying 38 . depending on the environment and business context. The Hanson group of companies is a classic example. The paradox of responsiveness and synergy can be illustrated with reference to these three companies. The two extreme positions are: · Portfolio management. but otherwise the individual businesses are de-centralised and highly autonomous. Responsiveness Corporate Level Strategy Synergy Hanson Nestle Canon Figure 2. Hanson PLC was well known in the 1970s for portfolio management in the purest sense.1.1. achieve greater responsiveness because the individual subsidiaries are autonomous.
a Xerox. Canon had the opposite strategic approach. The advantage of these companies was responsiveness to particular markets. Readings 5. in the strictest sense and at the very extreme position.3: pages 267-285. it can be said that Nestle combines the two perspectives. 39 . Hence. Campbell and Gould identify this ‘style’ of corporate strategy management as ‘Strategic Planning’. the corporate centre acts solely as an investor with financial stakes in the standalone businesses. R. Whereas it is not important to define the precise location on the continuum. and there is ‘fuzzy’ co-operation. Also read Chapter 6 on Corporate Level Strategy : pages 297-318. The corporate centre had no wish to become involved in the management of the portfolio companies but sought to control simply by financial investment.Global Corporate Strategy Unit 2 – Strategic Capability and selling of companies. Campbell and Gould identify this ‘style’ of corporate strategy management as ‘Financial Control’. the technology is completely different in a Canon copier than. Each business unit has its own characteristics and market demands. In this extreme position. passing on strategic control to them. On the other hand they maintain strong involvement in the operation of the Business Units by the application of a rigid and detailed strategic planning process managed at the corporate centre. The corporation’s main philosophy is to leverage financial control. On the one hand they manage their geographically dispersed ‘Business Units’ as remote and autonomous. for instance. See Figure 2. De Wit. They use their expertise (capability) across a diverse range of products and markets. Campbell and Gould identify this ‘style’ of corporate strategy management as ‘Strategic Control’. Their advantage came from efficient (synergistic) use of capabilities and resources. Portfolio Management In portfolio management. ACTIVITY Learn about organisations and capability building by reading the following from your key text. B & Meyer. there is very little co-ordination between the various business units.2 and 5. the technology used to develop the Canon photocopier was the same as that used for their other optical products – hence. it can be said that Nestle is a mixture of the two perspectives. For example.2. Nestle can be said to lie somewhere in between.
Slack (available resources) . and can add value in some of the following areas: efficiency improvements.Information sharing . As we move to the right along the ‘continuum’ (see Figure 2. Corporate Centre Financial control £ SBU1 SBU2 SBU3 SBU4 SBU5 SBU6 Figure 2. collaboration/co-ordination across SBUs.1). leverage. vision.2.Real time decision making 2. provision of expertise.Learning .Co-operation of directors/managers .Synergies . mitigation of risk. the question must still be asked on whether the corporate centre adds value or destroys value.Innovative capability 40 . Those who argue the value creation case cite the following advantages: 1. Co-operation and Control: . Exploitation of: . With the parenting approach. various strategic approaches can be described that are still essentially portfolio-based.Unit 2 – Strategic Capability Global Corporate Strategy Corporations that adopt the extreme portfolio management position are well suited to diversification through acquisitions. provision of image and networks. fostering innovation. investment and competence building. But the corporate centre takes more of a ‘parenting’ role. Portfolio management and financial control. standards and performance measurements.
A Synergy Manager – enhancing value across SBUs by sharing of activities (e.. processes 3. 1. there must be a clear understanding of the corporate rationale. 2. 5.. Both the Boston Consulting Group (abbreviated as BCG) and GE/McKinsey matrices position businesses according to industry attractiveness and their relative competitive position in industry. 1980) that superior profitability derives from the structure of attractive industries. 4. A Parental Developer – Corporate Centre develops parenting competence including establishing structural and strategic control linkages. It is important right at the outset to establish the role of the corporate centre. It suggests that superior profitability comes from a superior resource position relative to competitors. Intervention in management recruitment and development Those who argue that parenting destroys value would make the case that SBUs would be better off on their own. 3. to 3 and then 4 which tends towards a more competence based strategic approach. 4. Whatever the position adopted. A Portfolio Manager – as a manager of a portfolio of investments (as above) which may include divestment of under-performing SBUs.g distribution networks). because the corporate centre creates: 1. This could be one of four types ranging from.. Additional cost Creates more bureaucracy Delays decision making Reduces responsiveness Buffers SBU from investment realities They would also argue that a powerful corporate centre leads to managerial ambition and empire building. A Restructurer – similar to 1 but managers from the corporate centre move to re-structure to create SBU ‘fitness’ by intervention. 3. Hence. Portfolio management has strong links to the views of Michael Porter (Harvard Business School. 2. Knowledge transfer (see Unit 8) and sharing of competence (see below).Global Corporate Strategy Unit 2 – Strategic Capability . acquiring under-valued assets and making them better. 41 .Common infrastructure. it can be seen that parenting strategy can be developed from 1 (portfolio management) though 2.
higher returns derive from a monopoly (100% market share). Reading 6. B & Meyer. B & Meyer. In the extreme. 299 of the key text. a corporation’s business can fall into one of four categories: 42 . however. R . R. read the following from your key text. p. having a large market share will coincide with cost benefits from large production runs and large cumulative volumes of production. relative market share and market growth Relative market share indicates a business’s market power (one source of competitive advantage) and this is equated with its ability to earn above average rates of return. De Wit.Unit 2 – Strategic Capability Global Corporate Strategy ACTIVITY Study the BCG matrix and GE business screen as shown on Figure 6. De Wit.1: pages 319 – 325 In portfolio management. What conclusions do you derive from it? ACTIVITY FEEDBACK The BCG matrix is drawn up against two orthogonal axes. The Business Portfolio ACTIVITY As an introduction to this section. which suggests that growth will be minimal or negative when a product is mature. Market growth in the BCG matrix is related to the product life-cycle concept.2. More often.
· Cash cows. Often these conglomerates consisted of a portfolio of unrelated businesses. · Question marks. depending on its market share vs. A corporation can. and deemed to be of no further use in generating cash for the corporation.Global Corporate Strategy Unit 2 – Strategic Capability · Stars. They exhibit the characteristics of high growth but low market share.3: Business portfolio.3. secure its future by combining a balanced portfolio of stars and cash cows. therefore. Portfolio management as the accepted means of managing corporate strategy coincided with the growth of diversified conglomerates in the 1970s. · Dogs. businesses with market power in a growing market are stars. growth rate characteristics.3. This is clearly depicted in Figure 2. where the management of corporate cash flows between the businesses was the sole underlying rationale. the latter to fund the former as they grow. A business is categorised as one of the above. With proper investment these can become cash cows generating significant income for the corporation. Stars usually emerge from the category of ‘question 43 . Stars Growth rate Question marks Cash cows Dogs Market share Figure 2. often followed by the divestment or liquidation of those classified as ‘dogs’. Businesses in the category of ‘Question marks’ need careful management. As we see in Figure 2. This period was accompanied by a pattern of acquisitions of unrelated businesses.
that in a perfect market it is the task of shareholders to use that information to construct a portfolio according to their own risk return profiles. they have the propensity to absorb large amounts of cash. The combining of effort leads to the creation of greater efficiency or ‘synergy’ in the use of resources. knowledge expansion and creation (see unit 8) or simply is the result of a combination of desirable economic conditions (see Unit 4). reducing the unique risk that comes from owning one business. a shareholder investing in a portfolio of stocks in the market. In particular.Unit 2 – Strategic Capability Global Corporate Strategy marks’ with proper levels of investment. described above) between autonomous SBUs. As growth slows down they become ‘dogs’. Critics of corporate portfolios submit. Unless they quickly capture market share and move into the ‘stars’ category. risk reduction by spreading investment across a portfolio of shares with different patterns of dividend payments and capital appreciation. In a perfect market it is unclear how a corporate portfolio manager can add further value for shareholders.g. The manager of a diversified corporation is not. This type of corporate behaviour still has relevance today. As such they are an important component of the business portfolio. Portfolio theory is based on the assumption of perfect markets. In situations where co-operation and co-ordination are introduced (e. a company is then ‘moving’ along the ‘responsiveness / synergy continuum’ towards a more resource based view of the company. however. It is often the case that such activity is geared towards global expansion (see Unit 3). Indeed. and a perfect market is dependent on the availability of perfect information. Anglo-American ideas of the pre-eminence of shareholder interests in corporate strategy management also led to a focus on shareholder value analysis techniques as a tool for managing diversified businesses. the role of the Parental Developer. because of their high growth characteristics they require a large injection of cash. However. however. In trying to balance stars and cows the corporate strategy manager acts like a shareholder. diversified corporations submerge information about individual businesses in less informative corporate reports and add the transaction costs of managing corporate portfolios to the costs which a shareholder has to bear. 44 . Shareholder portfolios Many of the ideas relating to portfolio management stemmed from the management of shareholder portfolios in the field of finance and economics. There is evidence of extensive merger and acquisition activity that suggests that companies remain in the market for ‘valuable’ Business Units which are quite often kept separate from the corporate centre as a portfolio company.
by identifying the fit between the opportunities arising from combining activities. Its focus and main source of success stemmed from the imposition of centralised financial control of its corporate headquarters upon its separate subsidiaries. 45 . But what is synergy in this context? The familiar expression of synergy is the effect by which ‘the whole exceeds the sum of the parts’. The UK conglomerate Hanson is a classic example. the combination of a corporation’s businesses can result in negative synergy. The achievement of the benefits from synergy is far from simple or automatic. nor are they able to. Some corporations may look to exploit only certain synergies. ACTIVITY Can you think of an example of a corporation that. and the corporation’s ability to then exploit these opportunities. Synergy needs to be created. Synergy describes a corporation’s ability to create value. e. If poorly managed. financial. technical. Not all corporations will seek to exploit all available synergies. capital assets. mass production. It requires tremendous management focus. following a merger or acquisition. focused on exploiting synergies in just one area? ACTIVITY FEEDBACK You may have come up with a number of examples. The equation ‘2+2 = 5’ is often used to demonstrate the effect. It had no interest in achieving benefits from combining the activities of its acquired businesses.Global Corporate Strategy Unit 2 – Strategic Capability Synergy in Corporations Synergy is often put forward as the justification for acquiring or merging businesses.g. Here is one.
or because combining them reduces risk/uncertainty. Having quickly recouped the purchase price by selling a number of SCM businesses for $1. These can be achieved when physical assets are under-utilised. which carry Japanese cars to the US West Coast. In an inappropriate or badly handled diversification. the negative synergy effect can be described as the sum of the parts being greater than the whole. either by running them more effectively or by selling businesses to outsiders who could. higher capacity utilisation. Such benefits may include economies of scale. Many conglomerates in the late 1980s and early 1990s have been devalued by investors to reflect such negative synergy. Imperial Group. MINI CASE STUDY Hanson had a successful strategy of acquiring UK and US quoted corporations where the value of the separate businesses exceeded the value of the corporation. or ‘2+2 = 3’.5 billion. loading up with 46 . Hanson was left with SCM’s core electronic typewriter business with a value subsequently estimated at $2 billion! Synergy and the Nature of Assets The deliberate combination of assets. improved cash flow and improved product line and mix.g. incapable of being fully utilised (e.Unit 2 – Strategic Capability Global Corporate Strategy Negative Synergy Managers should be alert to the dangers of negative synergy – the potential disadvantages and costs of a poor combination. In these instances. Smith Corona Machines (SCM) and Kidde Fire were all bought at prices considerably lower than the sum of the values that Hanson later realised from their parts. Itami quotes the example of bulk carrier vessels. value can be destroyed.3 billion. The most spectacular example of this strategy remains the acquisition in 1989 of SCM by Hanson for $1. resources and capabilities from separate businesses is a distinguishing feature of corporate strategy. Itami (1992) draws a distinction between the benefits arising from ‘physical’ and ‘invisible’ assets as follows: · Physical assets ‘Complementary’ benefits can be obtained from the simple combination of physical assets such as factories and machinery. due to seasonal cycles). rather than created.
and in innovative combinations. Using an under-utilised plant to produce another product will provide a reasonably certain payoff. Static combination benefits result from integrating two different strategies at one point in time. Using cash cow’s to fund stars may provide a secure source of finance. It aims over a period of time to change the set of resources and its capabilities in order to achieve superior performance. 47 . Complementary benefits are unlikely to be lasting sources of superior performance for a corporation. Synergy and Superior Corporate Performance An important distinction between physical and invisible assets. A recent example of synergy effect is from the IBM acquisition of the business consulting group. are capable of being used repeatedly. on the other hand. and this combination benefit is described by Itami as the ‘synergy effect’. but the strategy can be copied by competitors. in late 2002.Global Corporate Strategy Unit 2 – Strategic Capability timber from Washington and Oregon in an unrelated trade returning to Japan. or expert knowledge of the marketplace. It is hard to quantify in $ terms the value of these. Synergies are also associated with time-scales. information-based assets. because they are more likely to remain unique to the corporation. Dynamic combination benefits. on the other hand. They can be dynamic or static. technical expertise. as a powerful long-term source of superior corporate performance. lies in the difficulty competitors have in imitating invisible assets. · Invisible assets Invisible assets are assets such as corporate culture. a strong corporate or brand image. and between complementary and synergy benefits. results from integrating two different strategies across time. Invisible. PwC Consulting. It has an opportunity cost associate with it. As a result the combined consulting arm vastly increased global marketshare (compared with the sum of the individual marketshare prior to the acquisition). IBM gained strong business consulting skills from PwC. but these benefits are ultimately limited by the plant’s capacity. exploited synergies with IBM’s complementary IT competencies and strong leadership/branding.
core competencies and distinctive capability make up its strategic core. Core skills are associated with an individual. R. systems and knowledge.Unit 2 – Strategic Capability Global Corporate Strategy ACTIVITY Read the following article from your key text. protected and exploited to the full. ‘Seeking Synergies’: pages 340 – 356. An organisation’s core skills. extended. and the organisation’s combination of core competencies make up its distinctive capability. These terms are often misunderstood. The Core competencies perspective In the late 1980s there was a move away from the ready acceptance of portfolio management as the best means of managing corporate strategy. a core competence is a unique capability that affords some type of competitive advantage to the organisation. it is appropriate to look at the definitions of core skills. To determine if something is a core competence. core competencies and an organisation’s capability. Performance of vastly diversified companies deteriorated. and this was coupled with the recognition that there was a large management overhead in managing diverse portfolios. It is an organisation’s core competencies that enable it to perform more effectively than its competitors. At its simplest. “Does it give the company a unique advantage over its competitors and help make the company profitable?” The elements of the strategic core should be developed. Core competencies leading to an organisation’s distinctive capability are also likely to be persistent and not readily replicable. It corresponds to a business process. and involves a combination of skills. core competencies with a team. and offer unique advantage to the marketplace. 48 . Divestments followed and a new paradigm followed. B & Meyer. Reading 6. functions. Before we go on to examine the core competence approach.4. one has to ask the question. Corporations began to focus increasingly on core business and core competencies. De Wit.
Reading 6. They view the corporation as a collection of core competencies and core products.4: Characteristics of physical assets vs.4. Its distinctive features (in contrast to physical assets) are summarised in Figure 2.Global Corporate Strategy Unit 2 – Strategic Capability Resources Resources (physical) Held in the control of the organisation Tangible and intangible Largely independent of the organisation's members Unaffected by culture and governance structure Intellectual capital (skills. The need to focus on core competencies has never been greater. above products or services. ACTIVITY Read the following paper on core competencies by Prahalad and Hamel in your key text. rather than a portfolio of businesses 49 . De Wit. in contrast to physical assets. particularly in the ‘new knowledge-based economy’. competences and capabilities) Affects the organisation's ability to do things effectively Intangible Inherently attributable to the organisation's members Influenced by culture and governance structure Figure 2.2: pages 325. core competencies. B & Meyer. R. Increasingly. and perceived by customers as adding real value in the long term. relate to human intellectual capital. intellectual capital. Organisations adopting a core competence perspective seek to exploit its intellectual capital to the full. We shall examine this in more detail in the unit on Knowledge Management (Unit 8).333 Prahalad and Hamel have explored the role that competencies play in corporate strategy. are viewed as rendering competitive advantage. Core competencies.
select a services company.. where appropriate. 3. Core competencies provide potential access to a wide variety of markets. Now think about your competitors. Core competence competition Studies of diversification have tended to discuss corporate strategy in terms of end products and markets rather than core competencies. VIRTUAL CAMPUS Spend some time thinking about your organisation’s core competencies. global. 2.. different industries/sectors)? How do your organisation’s core competencies (as opposed to products/services) benefit your customers? How do your core competencies position you better for the future? 2. Accenture) 1.g. The results showed that there 50 .. Competencies are viewed as the root of competitiveness for the corporation across time. IT or Business Consulting Services (e.. Core competencies make a significant contribution to the perceived customer benefits of the end-product/service. e. 2 and 3 from the perspective of your competitors.. Rumelt (1974) measured the performance of seven types of diversified US corporations in the period 1949-1969. In the interests of confidentiality.. What would you consider as its core competencies? How do these competencies give access to a variety of markets (e. 3.. Core competencies should be difficult for competitors to imitate. The tests for core competencies are: 1.g.Consider questions 1. it is not necessary to name the company you have considered.Unit 2 – Strategic Capability Global Corporate Strategy defined by product-market boundaries.. If you feel that the company you work for is not suitable for this activity.g. with your colleagues on the Virtual Campus.. In what ways are your competencies (or that of your competitors) difficult to imitate? How can the organisation’s core competencies be developed further? Now share your answers.
Leadership: a leadership strategy is dependent on achieving market power within the remaining attractive segments of the industry. The endgame strategies she puts forward are: 1. Many divestments occur when subsidiary businesses show decline. 2. She believes that corporations must ‘flee or fight’ in declining industries. This strategy requires some investment. Rumelt (1994) further developed the core competencies perspective. 4.Global Corporate Strategy Unit 2 – Strategic Capability was a strong correlation between superior performance and ‘related constrained’ diversifications. Competencies are more stable and evolve more slowly than products/services. Divestment As we have seen achieving superior corporate performance often results in divestments – that is. those business that ‘draw on the same common core skill. and controlling the process of decline in the business’s favour. Divestments may occur when corporate synergies no longer exist. Corporate span: core competencies span businesses and products within a corporation. But is divestment always the correct response to failing businesses? Decline: Divestment or Recovery? Kathy Harrigan (1988) views declining industries as opportunities for endgame strategies. The power of the core competence approach is that it provides a coherent view of how superior corporate performance can be achieved. and captures the dynamic nature of strategy. That is. allows for the importance of the strategic actions of managers. Learning-by-doing: Competencies are gained and enhanced by use. Competitive locus: product-market competition is merely the superficial expression of a deeper competition over competencies. The expectation 51 . under-utilised corporate assets can be better deployed elsewhere or core competencies can not be enhanced by leverage across the corporation. and established four key components of core competence competition as follows: 1. strength or resource’ performed better. 3. Temporal dominance: products/services are only the momentary expression of core competencies. the sale or disposal of one or more of a corporation’s activities.
Sharpbenders rarely pursue acquisitions as a route to change. 1984) have shown that successful recovery or turnaround of declining businesses is possible. Studies of such companies have shown that sharpbenders succeeded because of the effectiveness of the measures (as listed above) and timing of them. Quick sale: a corporation should seek a quick sale when it is likely to realise greatest value from a weak competitive position in an unfavourable market. Harvest: harvesting assumes that value can be returned to a corporation from a business by continuing to run it to extract as much cash as possible. ‘Make or buy’ tests are crucial: can the activity be more 52 . 2. 4. a corporation should seriously consider whether it should divest that activity. The strengthening of core competencies is a major driver in corporate strategies. Niche: niche strategies depend on the existence of defensible market segments. · Significant reductions in production costs. or where demand is likely to persist longer (or at high levels) than in the rest of the sector. corporations rarely seek divestment of activities that enhance its core competencies. the strengthening of core competencies is often a driver for acquisitions. Other studies (notably Slatter. as other competitors leave the industry. the rationales for divestment have changed. If an activity or business does not involve a core competence. In such a strategy the business would focus on a niche where it is competitively strong.Unit 2 – Strategic Capability Global Corporate Strategy is that. · Improved marketing. so the profitability of the firm improves. Further investment is not expected: the objective is to realise the maximum cash from the business. · Improved quality and service. Indeed. · New product-market focus. Companies that achieve a sharp and sustained improvement in performance are termed ‘sharpbenders’. 3. They invariably achieve turnaround by taking one or more of the following measures: · Major changes in management. · Stronger financial control. As such. Divestment and Core Competencies As portfolio theory has become less influential.
Its profits have increased steadily over the past four years at a time when most Japanese companies have struggled to cut their losses. Rohm is a manufacturer of highly specialised integrated circuits based in Kyoto. NHS patient records and data services. Rohm’s recurring 53 . financial institutions.g. or by outside ‘Outsourcing’ is a divestment strategy which recognises that improved effectiveness might come from buying in non-core competencies. etc. energy companies and banks have outsourced their IT activities to the likes of EDS. Logica.Global Corporate Strategy Unit 2 – Strategic Capability efficiently carried out partners/contractors. ACTIVITY FEEDBACK You may have thought of a number of examples. e. More recently. IBM. This case explores the Japanese company Rohm which has stood out not only for its strong performance in a depressed market but also for its defiance of traditional Japanese corporate behaviour. massive cost savings. which has delivered. CASE STUDY Rohm. Even as the Japanese economy has been battered by one of the worst recessions in memory. Many oil companies. Japan – strategy in a medium-sized Japanese company surviving in a difficult environment. or will deliver. ACTIVITY Can you think of some high-profile example of outsourcing. some Japanese companies have bucked the national trend. the UK government is divesting aspects of its state activities to private companies. resources and expertise of companies for whom the activity is core business. A corporation’s effectiveness can be significantly improved by the superior skills. army logistics. within a corporation.
‘I never fight battles I cannot win’. the director in charge of overseas sales. not only in order to ensure it can make profits out of small-lot customised products but to ensure that it can make its products quickly and reliably. Some chip parts made by the company are priced at less than Yl. From that time on. The company even develops its own manufacturing facilities. such as the memory chips which have been huge profit-earners for the likes of Toshiba and NEC. Rohm has been able to put in this remarkable performance by maintaining the entrepreneurial spirit of its founder and a rigorous focus on profitable niche markets. Rohm has focused its energies on products that slipped through the net of the large electronics companies. or nearly one-third of sales at Y335. Mr Hatta believes that being based in Kyoto has helped the company.Unit 2 – Strategic Capability Global Corporate Strategy profits in the year to March 1998 came to Y110. such as customised chip parts. explains Nobuo Hatta. Rohm does not employ a seniority-based system of promotion and hires as many as 20 to 30% of its employees in mid-career.6 billion it made in 1994. not in his garage but in the family bathroom. 54 . His first successful product was a miniature resistor he invented. Rohm has been happy to stick to niche markets where it can offer unique products. at 16.8% in the year ended March 1998. Rather than pursue mass volume businesses.5%. To that end the company has adopted policies that are almost diametrically opposed to those that have ruled most large. Also in defiance of traditional Japanese business practice. Although profits were expected to be flat in 1998. he says. This means that even if they sell a million of them it only generates Yl million in income. Rohm is able to make a profit on these products because it can produce them quickly. reliably and at low cost. Rohm intended to increase its recurring income to sales ratio to 33. has steadfastly adhered. Mr Sato declares. Its return on equity. At the time most of the large electronics companies were making only large resistors to put into the large radios. Rohm’s strength is its company policy of focusing its resources on products that stand out and that it can differentiate from those of its competitors. Mr Sato started the company 40 years ago after giving up his dream of becoming a professional pianist. It is a policy to which Rohm’s founder and president. ‘Western Japan is far away from bureaucrats and politicians in the central government so we have been able to focus on business’.9 billion and a fivefold increase from the Y21. But then the transistor boom hit and Rohm found itself ahead of the game on miniature transistors.1% in 1999 from 32. well-established electronics companies in Japan. Kenichiro Sato. Like many of its successful neighbours. That concentration on core skills has shielded Rohm from the devastating effects of both the bubble economy and the downturn in semiconductor prices.1 billion (US$917 million). would be the envy of many blue-chip Japanese companies for whom return on equity has tended to be a single-digit figure.
which has had an impact on every company in that country.’ In its focus on core skills. he notes. Note: Kansai is the western Japanese province that includes Kyoto. 3. Feedback on Question 1: · The obvious area is the downturn in the Japanese economy over this period. Toyota and Canon. Rohm may sound more like a US company than a company based in one of Japan’s most tradition-bound cities. believes that the Japanese emphasis on taking a long-term approach to things is one strength that provides Japan with an advantage over the USA. Questions: 1. What were the main aspects of the environment affecting Rohm over the last four years? What strategies did Rohm adopt in order to survive and grow? To what extent are they more appropriate to medium-sized companies. ‘We believe the model we provide is based on the best of both worlds’. Mr Hatta says. who spent some years in the USA. But Mr Hatta. CASE STUDY FEEDBACK The case explores the strategies of a Japanese company that has taken a very different approach to some more well-known Japanese companies like Sony. It raises the strategic issues of how small companies grow and how they survive when there is an economic downturn.Global Corporate Strategy Unit 2 – Strategic Capability ‘There is also a feeling among Kansai people that they would rather be big fish in a small pond’. 2. its pursuit of profits rather than market share and its emphasis on employee performance over seniority and lifetime employment. · Additional pressure from specific competitive pressures in the Japanese electronics industry which has been particularly badly hit by a world-wide drop in prices for semi-conductors – note that this is not something specific to Japan. ‘Many Kyoto companies have something they can claim is number one in the world. rather than the large Japanese electronics giants such as Toshiba and NEC? Summarise the key points that identify Rohms strategic perspectives. 55 .
It was not enough just to identify the special market opportunity: Rohm still had to perform better than any potential competitors. the strategy went further. Thus it would be over-simplistic to draw the lesson that small companies can only be involved in niche markets. the strategy focused on ‘customised’ rather than mass produced products. However. the different path is not just about finding a niche but also exploiting it. Such strategies have an obvious attraction for smaller companies when competing against the larger electronics giants. at least for a while. the company set out to dominate the niche into which it had chosen to enter. It is the competitive advantage that is the key to the success of Rohm. Its chosen strategy was therefore to avoid head-on competition with the leaders by finding niche markets that would not be attractive to the larger companies. It was therefore aware of its capabilities as an organisation. smaller companies should avoid attacking major competitors. However. perhaps a strong alliance with another company or whatever. However. Rohm deliberately set out to produce products for its chosen niches that were reliable. The smaller enterprise should wait until it has some form of sustainable competitive advantage: perhaps a new technology or patent. the success of the Japanese car company Toyota. the difficulties of finding an attractive niche and then exploiting the opportunity in that niche are not to be underestimated. which had come from being a small national producer in the early 1950s to the third largest car company in the world by the mid-1990s. Rohm had little choice in following a niche approach. Feedback on Question 3: · Given the small size of the company compared to the industry giants. then they would never grow. This has relied on the classic strategic approach of examining what competitors are doing and then doing something that is different. · Rohm’s view was explained in the case by Mr.g. In other words. low cost and available quickly. However. this conventional wisdom can be challenged. Rohm is correct in suggesting that. Satto who declared: ‘I never fight battles I cannot win. e. If this were the case. and consequently its competencies within the groups of people working for the company – a core competence approach as opposed to a ‘market driven’ environmental approach.’ By this he meant that smaller companies need to avoid taking on the large companies head-on. Nevertheless. rather than its size. Looking at it another way.Unit 2 – Strategic Capability Global Corporate Strategy Feedback on Question 2: Rohm decided that it would never be able to compete with the large basic electronics companies in terms of costs and prices. 56 .
In particular the portfolio management and core competencies perspectives. REVIEW ACTIVITY In the earlier Virtual Campus activity you were asked to think about what your organisation’s core competencies are. consult a broad spectrum of senior managers and identify what the core competencies are. 57 . Summary In this unit we have looked at the different styles in corporate strategic management.Global Corporate Strategy Unit 2 – Strategic Capability · However. Identify any references to core competencies. This allowed him and the company to survive and prosper in bad times as well as good. · Rohm had a different approach to product development. size is an advantage to Rohm. Now verify this by reading your organisation’s mission statement. To gain maximum benefit from this module. Larger. 2. the company is nimble enough to be responsive (to customised markets) whereas still being ‘synergistic’ (relying on core competence). it can gain the benefits of both extremes of the paradox. Applying DeWit & Meyer’s paradox of Responsiveness and Synergy. Does the official view (from mission statement or management team) on core competencies match your original view? If there is ambiguity. a radically different way of rewarding his managers and a different company culture that went well beyond the conventional. Now test your own department/business unit against the core competencies. Because of high overhead costs it is probably not profitable for them to try to compete with smaller companies like Rohm. We have also examined the influence of synergy on a corporation’s strategic decisions. 1. If this is absent in the mission statement. Hence. what steps can be taken to ensure that the organisation as a whole is clear on its core competencies. We have seen how this recent trend has led to outsourcing. students are encouraged to apply the lessons learnt to their own work context. more cumbersome organisations will find it more difficult to respond to changes in the niche markets. We have looked at the role of divestments and the increasing focus on core products and core competencies.
Elaborate. describe what sort of organisation can benefit from your department’s capabilities. could you further strengthen your position via an acquisition. Chapter 4 – Pages 149-193 Ref 13. you may wish to anonymise it. Chapter 6 – Pages 226-241 Ref 7. · If there is a good match. 2. 3. (Given the confidential nature of this information. Chapter 1 – Pages 3-24 58 .Unit 2 – Strategic Capability Global Corporate Strategy · If you feel there is a poor match. ) Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. Ref 10.
and their meaning is not well understood. globalisation involves radical change. We shall consider the changing nature of multinational enterprises.Unit 3 Globalisation LEARNING OUTCOMES Following the completion of this unit you should be able to: · Evaluate the impact drivers for change have on organisations. Introduction The phenomenon of globalisation is accelerating in pace. Sometimes these terms are used synonymously. the rise of non-US multinationals. Globalisation presents opportunities but also poses challenges for the management of highly distributed worldwide organisations. In this 59 . ‘global productisation’ and ‘global branding’ are widely used. We shall consider the globalisation of markets and the globalisation of production. and now increasingly a growth in mini-multinationals. ‘global corporations’. · Assess the implications of globalisation for business. What is Globalisation The concepts of ‘globalisation’. But what exactly is globalisation? In this unit we shall consider exactly what globalisation is. ‘global markets’. Globalisation has received much publicity in recent years – both positive and promoted by large global corporations and organisations such as the WTO. For corporations. In particular. · Propose solutions for managers working in a global environment. ‘global strategies’. ‘global production’. but also negative coverage from the anti-globalisation movement highlighting some of the issues. Finally we shall look at two case studies concerning Globalisation. We shall consider some of these issues.
A fundamental shift has been occurring in the world economy. The emerging global economy raises a multitude of issues for businesses. The International Context. De Wit. the variance dimension: · Homogeneity around the world. There has been a move away from a world in which national economies were relatively isolated from each other by barriers to cross-border trade / investment. 2. We have been moving toward a world in which national economies are merging into an interdependent global economic system. the spatial dimension: · Broadest possible international scope. pages 534-556 in your key text. · Process of declining international variety. 3. B & Meyer. International Integration. International Similarity. International Scope. the linkages dimension: · World is viewed as one tightly linked system. we shall briefly look at the evolution of globalisation and what it actually means. There are broadly three elements to globalisation: 1. drive down their costs and boost their profits. Global companies operate in the main markets of the world. culture and business systems. · Process of international expansion on a world-wide scale. language and by national differences in government regulation. commonly referred to as globalisation. time zones. It creates opportunities for businesses to expand their revenues. R. The rate at which this shift is occurring has been accelerating and is set to continue to do so. and do so in an integrated and co-ordinated way. by distance.Unit 3 – Globalisation Global Corporate Strategy section. While the global economy creates opportunities such as this for new 60 . · Process of increasing international interconnectedness. Globalisation is the phenomenon by which industries transform themselves from multi-national to global competitive structures. ACTIVITY As an introduction to this section read Chapter 10.
For example. perhaps. i. managers now routinely have to decide how best to expand into a foreign market.Global Corporate Strategy Unit 3 – Globalisation entrepreneurs and established businesses around the world. to their home market? Managers have to decide how to customise their product offerings. KEY POINT Globalisation is the phenomenon by which industries transform themselves from multi-national to global competitive structures It refers to the shift toward a more integrated and interdependent world economy and has two main components: · The globalisation of markets. managers have to decide how best to deal with the threat posed by efficient foreign competitors entering their home marketplace. and government regulations. human resource practices and business strategies to deal with national differences in culture. business practices. it also gives rise to challenges and threats that yesterday’s business managers did not have to deal with.e. Global Convergence vs. · The globalisation of production. International Diversity De Wit & Meyer propose that a paradox exists between the pressure to act globally and locally. producing locally to sell locally? · Should they produce in a third country where the cost of production is favourable and export from that base to other foreign markets and. 61 . a continuum can be said to exist with one extreme being Globalisation and the other being Localisation. language. marketing policies. · Should they export to that market from their home base? · Should they invest in production facilities in that market. In addition.
g. Unit 6: section on Value Management Point to note: Many companies are relocating to other countries to save costs. A further example has been Dyson who switched their production to Malaysia saving 25% on production costs. is this simply good business and in accordance with the principle espoused by Milton Friedman who stated that the only responsibility a company has is to its owners. High Micro chips Automobile Military aircraft Pharmaceuticals Globalisation forces Bulk chemicals Civil aircraft Telecommunication services Retail banking Food retailing Low Low Localisation forces High Figure 3. Local responsiveness grid for various sectors.Unit 3 – Globalisation Global Corporate Strategy ACTIVITY This topic links with subjects that are to be covered in other units.1: Global integration vs. a customer backlash resulted in a 5% reduction in the number of vacuums sold. The explanation for this was to spend the money on R&D and to keep the company afloat. ahead of studing the units in detail. At this point briefly scan the following sections. However. localisation. e. However. Nike and Ikea. Business success in the international context is increasingly a case of finding the right balance between the forces of globalisation vs. Classic examples of this have been in call centres. Unit 7: section on Ethics Point to note: Similar behaviour by major companies has seen them fall foul of globalisation protestors who see such behaviour as exploitative. This balance varies depending on the industry you operate 62 .
the issues concerning globalisation are: · The extent to which an organisation has a global strategy. management team and resource base.g. if you are a food retailer. Cultural factors e. localisation bears little meaning.1. The factor that works against globalisation is the localisation push. structure. regulations Figure 3. Meso and Macro levels The issues concerning globalisation can be viewed at the micro.g. for a company. For example.2. At the micro level. See Figure 3. Globalisation at the Micro. tastes. attitudes.Global Corporate Strategy Unit 3 – Globalisation in. culture. if you a microchip manufacturer. ‘one size fits all’ in the global marketplace. networks Legal factors e. Localisation push has four main categories.g. localisation forces are significant and cannot be ignored. workforce. 63 . standards. communications Commercial factors Localisation e. the demand for flexibility to deliver customer-oriented products/services rapidly and in close geographical proximity to the customer. cultural. commercial. customisation. However. social practices Technical factors e. technical and legal. See Figure 3.2: Localisation push factors. e-business. customer responsiveness. meso and macro levels.g.
institutional and organisational convergence. e. At the macro level. for businesses. At the meso level. · On markets again. · The globalisation of one product or activity does not necessarily entail the globalisation of others. the issues concern markets and industries. There has also been a notable expansion in the services sector at the expense of manufacturing. trade and foreign direct investment. The Globalisation of Markets The globalisation of markets refers to the merging of historically distinct and separate national markets into one global marketplace. the growing ease of worldwide product flows. de-industrialisation of major powers. · Political realities constraining or encouraging · Dynamics of technological. globalisation. employment. consumer electronics. the emergence of a set of producers Major changes from globalisation at the meso level include the more even distribution of Foreign Direct Investment (FDI). productivity. the issues concern: · The debate on whether the economies of the world are experiencing a converging trend. automobile. as follows: · On markets. the growing similarity of customer demand globally.g.Unit 3 – Globalisation Global Corporate Strategy · Globalisation of specific products and value-adding activities. acquisitions and strategic alliances. · On industries. and waves of cross-border mergers. foreign currency markets competing on a worldwide basis.g. · Consequences of international integration in terms of growth. financial debt of developing nations and the division of the world into trading blocks. The tastes and preferences of consumers in different nations are beginning to 64 . for the world’s economies. crude oil. Major changes impacting the economies include the complexity and interconnectedness of the world economy. e.
Caterpillar and Komatsu. and Nintendo and Sega. e. ACTIVITY Read the following article on the globalisation of markets from your key text. McDonald’s hamburgers. As rivals follow rivals around the world. However.g. B & Meyer. This type of firm is more than just a benefactor of this trend. De Wit. e. product features and operating practices be customised to best match conditions in a country. and increasingly homogenous. e. they are helping to create a global market. Boeing and Airbus. distribution channels and culturally embedded value systems. Ford and Toyota. Coca-Cola’s and Pepsi. global marketplace.Global Corporate Strategy Unit 3 – Globalisation converge on some global norm. ACTIVITY Can you think of products that simply cannot be standardised for the worldwide market? Or products for which marketing attempts at global standardisation have failed? 65 .g. R. diversity is replaced by greater uniformity. consumer tastes and preferences. thereby helping to create a global market. By offering a standardised product world-wide. Significant differences still exist between national markets. the same firms frequently confront each other as competitors in nation after nation. These differences frequently require that marketing strategies.1: pages 557-561 In many global markets. Thus. these multinational enterprises emerge as important drivers of the convergence of different national markets into a single. Reading 10. it is important to understand that national markets are not giving way to the global market in all sectors of the economy. they are also instrumental in facilitating it.g.
2: pages 562-569 The Globalisation of Production The globalisation of production refers to the tendency among firms to source goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labour. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airliners based in that country.Unit 3 – Globalisation Global Corporate Strategy ACTIVITY FEEDBACK You may have thought of a number of examples ranging from differing tastes in cars (North America vs. Europe) to foods. Latin Americans prefer a bitter taste. The result of having a global web of suppliers is a better final product.. read the following article in your key text. three suppliers in Italy manufacture wing flaps. and so on. as a follow-on to the above activity. companies hope to lower their overall cost structure and / or improve the quality or functionality of their product offering. doors. 66 . which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival. a supplier in Singapore makes the doors for the nose landing gear. Airbus. MINI CASE STUDY The Boeing 777 aeroplane contains 132. Eight Japanese suppliers make parts for the fuselage. where tastes vary vastly from continent to continent.500 major component parts that are produced around the world by 545 suppliers. Reading 10. R. One example is that of coffee. energy. thereby allowing them to compete more effectively. B & Meyer. Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at performing their particular activity. and wings. land and capital). and Americans can only ‘tolerate’ weak blends. Now. So. Europeans like strong blends. Nescafe markets different variations under the same brand to different countries. that critically examines the notion that success in international markets requires adoption of global products and brands. By doing so. De Wit. for example.
there is an increased level of globalisation of markets and production. Nevertheless. ACTIVITY Can you think of an example of globalised production that has yielded enormous cost and other business benefits? ACTIVITY FEEDBACK There are many examples of corporations outsourcing specific activities (e. For example. This is particularly so in the IT sector. this is not the panacea it sounds. These firms. This achieves ‘round-the-clock’ productivity. There is also another aspect – the distributed globalisation of production. it is important not to emphasise the globalisation of production too much.g. US). It is still difficult for firms to achieve optimal dispersion of their production activities to locations around the globe. other aspects in India and yet others in South America. many financial institutions have outsourced their call centres to India. but also ‘round-the-clock’ productivity enables corporations to achieve aggressive time-lines. Companies such as IBM run projects where aspects of the same software is developed in China. These are some of the management challenges of globalisation which we shall examine later in this unit. where companies are increasingly distributing the ‘production’ of software across geographies.Global Corporate Strategy Unit 3 – Globalisation As with markets. call centres) to one country. and such practices require strong management control. standards and robust IT and communication infrastructures. barriers to foreign direct investment. The whole system may then be integrated in yet another country (e. There are challenges with such globally distributed production. Modern firms are playing a key role in this and increase globalisation by their actions. However. Effectively work is being carried out throughout the 24-hour clock. This is due to formal and informal barriers to trade between countries.g. Not only do huge cost savings result from cheaper professional rates from non-Western countries. are merely responding in an efficient manner to changing conditions in their operating environment. 67 . transportation costs and issues associated with economic and political risk. however.
This goal was enshrined in the treaty known as the General Agreement on Tariffs and Trade (GATT). Information Technology and telecommunications Perhaps the single most important innovation has been development of the microprocessor. The Role of Technological Change The lowering of trade barriers made globalisation of markets and production a possibility. As of January 1. the advanced industrial nations of the West committed themselves to removing barriers to the free flow of goods. · Technological change. Over the past 30 years. particularly the dramatic developments in recent years in communications.330 such treaties in the world involving 162 countries. Microprocessors. the explosive emergence of the Internet and World Wide Web. services and capital has occurred since World War II. Telecommunications is creating a global audience. low-cost computing. In addition to reducing trade barriers. The desire to facilitate FDI has also been reflected in a dramatic increase in the number of bilateral investment treaties designed to protect and promote investment between two countries. optical fibre and wireless 68 . information processing and transportation technologies. services and capital between nations. the world has seen major advances in communications. The microprocessor also underlies many recent advances in telecommunications technology. Technological change has made it a reality. there were 1. Transport is creating a global village.Unit 3 – Globalisation Global Corporate Strategy Drivers of Globalisation Two main factors seem to underlie the trend toward greater globalisation: · A decline in barriers to the free flow of goods. 1997. information processing and transportation technology including. a threefold increase in five years. global communications have been revolutionised by developments in satellite. vastly increasing the amount of information that can be processed by individuals and firms. Declining Trade and Investment Barriers After World War II. many countries have also been progressively removing restrictions to Foreign Direct Investment (FDI). Since World War II. most recently. which enabled the explosive growth of high-power.
possible the most critical factor.5 billion in 1997. From virtually nothing in 1994. transmit and decode the vast amount of information. and time zones. The American defense institutions were largely instrumental for the rise of standards and protocols in communications. This has led to open and interoperable applications. The cost of microprocessors continues to fall. messaging and IT. It rolls back some of the constraints of location. has effectively shrunk the globe. These developments have accelerated the pace towards globalisation in many sectors of the global economy. The Web allows businesses. Viewed globally. Transportation technology In addition to developments in communications technology. As this happens. and now the Internet and the World Wide Web. which lowers the costs of co-ordinating and controlling a global organisation. both small and large. heterogeneous computer systems (from India to Beijing to Europe to US) are able to communicate seamlessly and securely. The advent of commercial jet travel. the value of Web-based transactions hit $7.Global Corporate Strategy Unit 3 – Globalisation technologies. The emergence of standards in IT has made our world inter-connected through high-speed computers. the most important are probably the development of commercial jet aircraft and super-freighters and the introduction of containerisation. These technologies rely on the microprocessor to encode. scale. to expand their global presence at a lower cost than ever before. several major innovations in transportation technology have occurred since World War II. the costs of global communications are plummeting. 69 . In economic terms. An important factor and. The Internet and World Wide Web The phenomenal recent growth of the Internet and the World Wide Web has now developed into the information backbone of a global economy. that predicts that the power of microprocessor technology doubles and its cost of production halves every 18 months). the Web is emerging as a great equaliser. Included in this expanding volume of Web-based electronic commerce (e-commerce) is a growing percentage of cross-border transactions. contributing to globalisation has been the Information Technology revolution. by reducing the time needed to get from one location to another. IT infrastructures are now essential pre-requisites for modern global corporations. Through the adoption of standards. while their power increases (a phenomenon known as Moore’s Law. which simplifies trans-shipment from one mode of transport to another.
financial planning. thereby helping to create global markets. its production planning. a world-wide communications network is now essential for international businesses.000 inquiry terminals and 140 mainframe computers. on a global scale. let us look at the implications of technological change for the globalisation of markets. low-cost jet travel has resulted in the mass movement of people between countries. Low cost transportation has made it more economical to ship products around the world. as a result of the technological innovations. The system consists of more than 300 remote job-entry terminals. At the same time. has approximately 50 plants in 19 countries. marketing. e. further facilitating the globalisation of production. customer service and personnel management. 8. As noted earlier. Secondly. MINI CASE STUDY Texas Instruments (TI). In any society. the US electronics firm. The system enables managers of TI’s world-wide operations to send vast amounts of information to each other instantaneously and to co-ordinate the firm’s different plants and activities. global communications networks and global media are creating a world-wide culture. In addition. television. 70 . we must expect the evolution of something akin to a global culture. This makes it possible for a firm to manage a globally dispersed production system.g. Due to containerisation. As global media develop. A satellite-based communications system allows TI to co-ordinate. the media are primary conveyers of culture. This has reduced the cultural distance between countries and is bringing about some convergence of consumer tastes and preferences. Plus. technological innovations have also facilitated the globalisation of markets. cost accounting. the real costs of information processing and communication have fallen dramatically in the past two decades.Unit 3 – Globalisation Global Corporate Strategy Implications of technological change for globalisation Firstly. Low-cost global communications networks such as the World Wide Web are helping to create electronic global marketplaces. In addition to the globalisation of production. let us examine the implications of technological change for the globalisation of production. the transportation costs associated with the globalisation of production have declined.
45% Table 3.1. Changing World Output and Trade (Source: Export data from World Trade Organisation. International Trade Trends and Statistics. 1996 20. World Output data from CIA Factbook).6% 7.7% 6.3% 6. As late as the 1960s.81% 2. · The dominance of large. · Roughly half the globe.3% 1. 71 .7% 11. 1996.76% 9.3% 5.2% 3.5% 3.46% 4. Refer to Table 3.8% 8. was off-limits to Western international businesses.3% 4.5% 3.7% Share of World Exports. Country United States Japan Germany France United Kingdom Italy Canada China South Korea Share of World Output.76% 3. · US dominance in world foreign direct investment. multinational US firms on the international business scene. for example.9% 5.4% 3% NA NA Share of World Output. All four of these qualities either have changed or are now changing rapidly.94% 4.2% 1. 1963 40.8% 3.Global Corporate Strategy Unit 3 – Globalisation The Changing Demographics of the Global Economy Hand in hand with the trend toward globalisation has been a fairly dramatic change in the demographics of the global economy over the past 30 years or so.5% 9. 1997 12. the following four facts described the demographics of the global economy: · US dominance in the world economy and world trade picture.85% 2. the centrally planned economies of the Communist world.1 for the changes in world output and trade.
made sense. Reading 10. Toyota executives believed that an increasingly strong Japanese yen would price Japanese automobile exports out of foreign markets.Unit 3 – Globalisation Global Corporate Strategy ACTIVITY Read the following article from your key text. Thailand. Indonesia. Toyota also undertook these investments to head off growing political pressures in the United States and Europe to restrict Japanese automobile exports into those markets. Poland). R. Brazil) and Eastern Europe (e.g. Despite this. as will that of several other important emerging economies in Latin America (e. Germany. their powerful growth may continue over the long run.g. India. production in the most important foreign markets. Japan and the United States.3. a further relative decline in the share of world output and world exports for long-established developed nations seems likely. In 1997 and 1998 the dynamic economies of the Asian Pacific region were hit by a serious financial crisis that threatened to slow their economic growth rates for several years. Germany and a number of newly industrialised countries such as South Korea and China have taken a larger share of world exports. rapidly increased its investment in automobile production facilities in the United States and Britain during the late 1980s and early 1990s. De Wit. Therefore. and a commensurate decline in the share enjoyed by rich industrialised countries such as Britain. pages 569-577 Changes in Foreign Direct Investment Over the past thirty years. US dominance in export markets has waned as Japan. Most forecasts now predict a rapid rise in the share of world output from developing nations such as China. South Korea and Brazil. 72 . the Japanese automobile company. ‘The Competitive Advantage of Nations’. MINI CASE STUDY – Toyota Toyota. Thus. B & Meyer. as opposed to exports from Japan.
whereas the 1997 figures are based on the largest 500 firms). is Accenture Consulting – a highly focused business consulting firm with a global presence.8 percent of the largest multinationals. however. and great influence – indeed setting the pace for much of the globalisation paradigm. An example in point.5 percent of the world’s 260 largest multinationals were US firms. 48. Toyota. The Rise of Mini-Multinationals Another trend in international business has been the growth of medium-sized and small multinationals (mini-multinationals). Looking to the future.Global Corporate Strategy Unit 3 – Globalisation The Changing Nature of Multinational Enterprise A multi-national enterprise is any business that has productive activities in two or more countries. 73 . particularly Japanese multinationals such as the Sony Corporation. to a lesser extent. In 1973. there have been two notable trends in the demographics of the multinational enterprise: 1. British) firms in the global marketplace. etc. The Rise of Non-US multi-nationals There has been a notable rise in non-US multinationals. US firms accounted for 32.2 percent. while the large number of British multinationals reflected that country’s industrial dominance in the early decades of the 20th century.4 percent.5 percent of the world’s largest multinationals at the time. they illustrate the trend. France was a distant third with 8. many medium-sized and small businesses are becoming increasingly involved in international trade and investment. complex multinational corporations with operations that span the globe. Although most international trade and investment is still conducted by large firms. followed closely by Japan with 25. Since the 1960s. the growth of new multinational enterprises from the world’s developing nations is inevitable. When people think of international businesses they tend to think of large. By 1997. Indeed companies such as the Tata conglomerate in India are already multi-national players. and have activities ranging from IT to cars to heavy engineering. Although the two sets of figures are not strictly comparable (the 1973 figures are based on the largest 260 firms. The large number of US multinationals reflected US economic dominance in the three decades after World War II. The globalisation of the world economy together with Japan’s rise to the top rank of economic powers have resulted in a relative decline in the dominance of US (and. The second-largest source country was Great Britain. with 18. Japan accounted for only 3. 2. These mini-multinationals often operate in specialist areas and are increasingly powerful.4 percent of the world’s 500 largest multinationals.
Their implications for international businesses may be just as profound as the collapse of communism in Eastern Europe. foreign investment is welcomed and the region’s economies are growing rapidly.Unit 3 – Globalisation Global Corporate Strategy The Changing World Order Between 1989 and 1991. They viewed Western international businesses as instruments of imperialist domination. For example. they restricted direct investment by foreign firms. China’s new firms are proving to be very capable competitors. On the other hand. a series of remarkable democratic revolutions swept the communist world. both as a market for exports and as a site for foreign direct investment The Globalisation Debate: Prosperity or Impoverishment? Globalisation continues to be an emotive issue. many of the former communist nations of Europe and Asia have now adopted free market economics. The potential consequences for Western international business are enormous. Now all this seems to be changing. Accordingly.2 billion people. Thus. Throughout most of Latin America. the oil industry. They promote the view that international trade and investment is driving the global economy towards greater prosperity. the changes in China are creating both opportunities and threats for established international businesses. more quiet revolutions have been occurring in China and Latin America. Many influential economists. companies that 74 . For decades many Latin American countries were ruled by dictators. China represents a huge and largely untapped market. debt and inflation are down. We see evidence of this already. has been opened up and many foreign companies operate licences there now. Following the political changes. the poorly managed economies of Latin America were characterised by low growth. Many of these proponents are business leaders from global companies. In addition. With a population of 1. in the former Soviet Union. These countries which were previously closed to Western international businesses. Also. These changes have increased the attractiveness of Latin America. high debt and hyperinflation. now present a host of export and investment opportunities. all of which discouraged investment by international businesses. governments are selling state-owned enterprises to private investors. and that globalisation will stimulate economic growth and help create jobs in all countries that choose to participate in the global trading system. and they could take global market share away from Western and Japanese enterprises. politicians and business leaders promote the shift towards a more integrated and interdependent global economy.
political and environmental consequences. Some of these companies (e. Falling trade barriers can allow firms to move their manufacturing activities offshore to countries where wage rates are much lower.southcentre. falling barriers to international trade actually destroy manufacturing jobs in wealthy advanced economies such as the United States and United Kingdom. e. Impact on jobs and incomes One frequently voiced concern is that far from creating jobs. Labour Policies and the Environment A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities to less developed 75 . Leaving aside the social and ethical issues that we have illuded to above.org www. while importing goods that they cannot produce as efficiently. 2. Supporters of globalisation argue that the benefits outweigh the costs. Nike) have become front-line targets of critics who blame globalisation for a variety of ethical and social issues. refer to the following websites: The website of the World Trade Organisation (WTO) for pro-globalisation viewpoints: www.Global Corporate Strategy Unit 3 – Globalisation are agents of globalisation – companies that have the most to gain from globalisation. there are a number of other criticisms of the impact of globalisation: 1. as you will have noted from the previous student activity. encroachment on human rights.g. Starbucks. ACTIVITY To read the arguments for and against globalisation.wto. They argue that free trade results in countries specialising in the production of those goods and services that they can produce most efficiently. etc. global warming. exploitation of labour in poor countries.org There is no doubt that globalisation has deep social.org For anti-globalisation viewpoints refer to the following websites: www.g.wtowatch. Globalisation is challenged on grounds that it widens the gap between the rich and the poor. pollution.
Elaborate. While there may be a few exceptions. So for instance. It can be perceived that un-elected bureaucrats are now able to impose policies on the democratically elected governments of nation-states. economic power is shifting away from national governments and toward supranational organisations such as the World Trade Organisation. 3. the vast majority of enterprises are committed to ethical behaviour. Managing in the Global Marketplace As organisations increasingly engage in cross-border trade and investment. In this manner. managers need to recognise that the task of managing an international business differs from that of managing a purely domestic 76 .Unit 3 – Globalisation Global Corporate Strategy countries. UK and US) have lost out in this sector. VIRTUAL CAMPUS Globalisation on the one hand can have a levelling-down effect. whereas developing countries such as India have benefited. From your organisation’s viewpoint and also geographical viewpoint. call centres) there is a view that Western countries (e. Assess whether your viewpoint has changed.g. National Sovereignty A final concern is that in today’s increasingly interdependent global economy. in the outsourcing context (e. thereby undermining the sovereignty of those states. the national state’s ability to control its own destiny is being limited. Now look at the opposing views (posted on the Virtual Campus) and try to understand their perspective from a rational viewpoint.g. the European Union and the United Nations. and on the other hand a levelling-up effect. identify on the Virtual Campus whether globalisation has had a levelling-up or levelling-down effect. Supporters of free trade argue that firms are not the amoral organisations that critics suggest. They would be unlikely to move production offshore just so they could pump more pollution into the atmosphere or exploit labour. Countries that lack adequate regulations to protect labour and the environment from abuse by the unscrupulous. Adhering to labour and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace compared with firms based in developing nations that do not have to comply with such regulations.
A lack of appreciation of these country differences has led to the failure of many American companies in expanding into foreign territories. economic systems. Let us examine some of the differences and complexities: 1. 2. A manager in an international business is confronted with a range of issues that the manager in a domestic business never faces. Also the appropriate mode for entering a particular foreign country must be chosen as it has major implications for the long-term health of the firm. Is it best to. Many of these differences are very profound and enduring. Compliance with international trading and investment rules Conducting business transactions across national borders requires understanding the rules governing the international trading and investment system. political systems. monitor and control its globally dispersed production activities. legal systems and levels of economic development.Global Corporate Strategy Unit 3 – Globalisation business in many ways. Managers in an international business must also deal with government restrictions on international trade and investment and find ways to work within the limits imposed by specific governmental interventions. A business must decide where in the world to site its production activities to minimise costs and to maximise value added. · Export its product to the foreign country? · Allow a local company to produce its product under licence in that country? · Enter into a joint venture with a local firm to produce its product in that country? that country? · Set up a wholly owned subsidiary to serve the market in 4. 77 . Countries differ in their cultures. Complexity of international and distributed businesses A further way in which international business differs from domestic business is the greater complexity of managing an international and distributed business. Choice of markets to compete in Decisions about which foreign markets to enter and which to avoid must be made. managing in the global marketplace requires an understanding and appreciation of the simple fact that countries are different. Then it must decide how best to co-ordinate. 3. Country differences At the most fundamental level.
Global organisations generally have four types of differentiated management roles: · Global business managers. that local variations will be required to comply with local issues. Complexity of a global organisational structure Global organisations. · Country managers. Processes must cover decision making. expert knowledge on opportunities. responsibility for strategy. Since currency exchange rates vary in response to changing economic conditions. De Wit. the management roles are quite different and require higher calibre managers. In particular. pages 577-586 78 . Operational processes A much greater degree of operational co-ordination is required to achieve global leverage and efficiency. sanctions. resource allocation. overall organisational leadership. inevitably require more complex. local employment laws. however. An efficient IT and communications infrastructure is also a pre-requisite to support such operational processes. A firm that adopts a wrong policy can lose large amounts of money. Many of these operational processes will be e-business processes. R.g. policies enacted. responsibility for new · Corporate managers. Global organisations require robust operational processes and standards to support inter-working. Cross-border transactions and currency risk Cross-border transactions require that money be converted from the firm’s home currency into a foreign currency. customer relationships. Reading 10. an international business must develop policies for dealing with exchange rate movements.Unit 3 – Globalisation Global Corporate Strategy 5. matrix organisational structures. knowledge management and sharing of intellectual capital. It should be recognised. 6. B & Meyer. e.4. rewards. ACTIVITY Read the following article from your key text. · Functional managers. developments and knowledge sharing and leverage across the global company. 7. threats and competitive landscape in local geography. intellectual capital reuse. and vice versa. management escalation and control. ‘Transnational Management’.
000 bikes a year from our European factory. I expect the proportion of Taiwanese bikes to decline over the next few years as we switch production away from Asia. Japan. Through the global design approach we aim to pool many different concepts – the people in China 79 . Mr Antony Lo. within the context of an international approach. We started manufacturing in the Netherlands because of the attractive market in Europe. however. we expect to decide on this around year 2000. but designed in the USA and made in the Netherlands – a global company. In the early 1990s we introduced up to three new products every year. The main reason for transferring some production from the Far East to the Netherlands is to increase flexibility. Developing new products is as important as manufacturing. Forty five of the designers are in Taiwan. We sell bikes in several thousand variations. the rest are based in China. The biggest markets are in Europe and the US.Global Corporate Strategy Unit 3 – Globalisation CASE STUDY 1 – GLOBALISATION AT GIANT BICYCLES Giant Bicycles are Taiwanese owned. the US and the Netherlands. We spend 2% of our annual sales on design. we don’t have any choice – we have to be a global company. Worldwide. 93% outside Taiwan. About three-quarters of the products we sell around the world are the same – but for the remaining 25% we give our regional people freedom to specify products they think will appeal locally. but we envisage this climbing threefold by early next century. Today. According to Mr Lo: “Because of the small market for bicycles in Taiwan. Having a production base next to the market means that we should be able to satisfy our customers better. One of our strengths is the ability to introduce regional product lines. Bicycles are as much a fashion item as a piece of machinery.000 bikes in 1997. where we expected to sell more than 400.5 million bikes for our company – including bikes produced by a joint venture in China. that figure has grown to between five and ten reflecting increased demands by customers. this will not affect overall costs too much. Fashions are changing quickly and market trends must be followed closely. we will be making just 100. We are considering opening another plant in the US. To start with. The Giant Bicycles Company is based in Taiwan and is one of the world’s biggest bicycle manufacturers with annual sales of around US$400 million. which account for just over half our sales. This case reports on an interview with the chief executive. about the company’s global strategy. we have 65 designers and development engineers. Wage costs in the Netherlands are 60% higher than in Taiwan but because we should get better productivity in Europe. That’s out of a demand for bikes in Europe of about 15 million annually. Our Taiwan plant makes about 1 million bikes a year out of a total 2.
they make the job of a cyclist easier. What benefits does the company gain from its global strategy? And what have been the problems? The opening paragraph of the case states that Giant Bicycles is a ‘global’ company." Questions: 1. Our designers can talk on the phone and swop ideas using computer-aided design. In addition. Do you agree with the statement within the definitions explored in the lecture? 2. And when the battery runs out. while in the US they are more likely to be working on variants of mountain bikes. In Taiwan. One of the developments we are particularly enthusiastic about is electric battery-powered bikes. They will also learn a little about the increased complexity and costs of international operations and selling. There’s an increasing environmental need for such machines to reduce traffic congestion.Unit 3 – Globalisation Global Corporate Strategy and Japan concentrate on commuting bikes. CASE STUDY FEEDBACK This short case summarises many of the reasons for global expansion and the problems that then arise. some aspects of the company’s international development remain essentially obscure. At the same time. We expected to sell around 2000 in the first year with considerably more afterwards. Other companies possessing economies of scale and scope will also be attracted by the arguments concerning the increased scale of international operations and the ability to recover the costs of research and development across an increased sales volume. but they get together twice a year in Taiwan to review their work. the details will probably vary with each company and its type of business. particularly in Europe. working on new materials such as carbon fibre to reduce the weight of the frame. which we have been selling from mid-1998. in any event. However. During normal travel they should have a range of about 40km. Other medium-sized companies that have reached maturity of sales in their home markets will look with interest at the achievement of Giant Bicycles so far. few details are given on this in the case and. How did they start internationally? 80 . Bicycles operate in a relatively mature market without the benefit of special. the designers in the Netherlands contribute ideas from the European racing bike tradition. even unique technologies or patents to provide the basis for global expansion. we try to incorporate all of the ideas. The common language we use is English. it’s not a huge problem – all you have to do is pedal home.
· R&D costs spread over much wider base of sales than just Taiwan. · International similarity of demand (standardised products). seeing the globe as a single market). e. Feedback on Question 2: In this unit we established three main definitions of ‘global’: · Geographical coverage (broad international scope). Problems include: · Complexity and cost of co-ordination across many countries: this is not fully explained in the case.Global Corporate Strategy Unit 3 – Globalisation Why did they pick Europe rather than the USA? (The high usage of bicycles in Holland makes it clear why they would pick this market within Europe. Thus other medium-sized companies can learn something from Giant Bicycles but the full case for international expansion remains unclear. · Higher sales than would be possible in Taiwan alone. With the above definitions in mind. one could consider a range of issues. · Ability to keep in contact with different market trends and latest designs.) How did they cope with the great geographical distances and the selling task in their chosen country? And so on. · Higher wage costs in some countries. Netherlands. 81 .g. e. Netherlands. · Interconnectedness of the world (increased linkages between countries. Feedback on Question 1: Benefits include: · Global economies of scale in production: reduced costs of some items. · Giant bicycles are commonplace around the world – from children’s mountain bikes to professional cyclists in the Tour de France (geographical coverage). · Higher costs of producing local variations.g. · Production from high-efficiency workforces. rather than a standardised product.
Travelers had considerable investment banking. its corporate banking activities and its consumer banking activities. · 75/25 split of localised / standardised products – is this therefore a global company? Should it be 100% to be regarded as global? (standardised products) · Centralised R&D facilities (but with designers out in the field to gain knowledge of local markets and fashion trends) – again a dichotomy. which always had an international focus. thus increasing economies of scale and reducing management complexity. although its investment banking and asset management business had some foreign exposure. however. over half of which came from activities in the world’s emerging economies. including checking accounts. Travelers’ insurance operations were almost exclusively domestic in their focus. The corporate banking side of Citicorp focused on providing a wide range of financial services to 20. Citicorp joined forces with Travelers Group in the autumn of 1998. (increased linkages between countries) · Would a truly global company have one factory. and global reach. The combined group has revenues of close to $50 billion. was the rapid growth of Citicorp’s global consumer banking business. Asia) (geographical coverage). In addition. Citicorp had two main legs to its business. This business. (standardised products) · Are Giant exploiting increased technological advancement in transport & communications by having two production facilities? This needs to be balanced with increased complexity of running 2 factories. USA. Citicorp was one of the world’s most global banks. retail brokerage and asset management operations. assets in excess of $700 billion. credit cards and 82 .Unit 3 – Globalisation Global Corporate Strategy · Presence in major economic blocks (Europe.0 billion in 1997. Before the merger. generated revenues of $8. Travelers Group was the largest property-casualty and life insurance business in the United States. The consumer banking business focuses on providing basic financial services to individuals. (seeing the globe as a single market) CASE STUDY 2 – CITIGROUP: BUILDING A GLOBAL FINANCIAL SERVICES GIANT In the largest merger ever in the financial services business. What captured the attention of many observers.000 corporations in 75 emerging economies and 22 developed economies.
As a result. however. For the past 20 years. To take advantage of this opportunity. positioning the bank as the Coca-Cola or McDonald’s of financial services. car loan and investments (and insurance). Until recently. a credit card and perhaps a loan for college. Citigroup is today the largest credit card issuer in Asia and Latin American. Vietnam and the biggest potential prize of them all. the world-wide movement toward greater deregulation of financial services allowed Citigroup to set up consumer banking operations in countries that only a decade ago did not allow foreign banks into their markets. As for political forces. With the merger with Travelers.200 retail branches and generated revenues of $15 billion. under the terms of a deal brokered by the World Trade Organisation in December 1997. the company will be able to push this concept further than ever. In the rapidly growing economies of many developing nations. Travelers needed a global retail distribution system. the barriers to cross-border trade and investment in financial services were such that this would have been difficult. Citigroup is targeting the emerging middle classes. included all developed nations and many developing nations.Global Corporate Strategy Unit 3 – Globalisation personal loans. economic and political forces strongly favour such a strategy. As they accumulate wealth. Examples in the fast-growing Asian region include India. insurance and securities markets to foreign competition. The merger talks were initiated by Travelers' CEO. Reed believes that global demographic. The basic belief underpinning Reed’s consumer banking strategy is that people everywhere have the same financial needs—needs that broaden as they pass through various life stages and levels of affluence. However. Reed has been on a quest to establish “Citicorp” as a global brand. The deal. The deal would allow insurance companies such as Travelers to sell their products in foreign markets for the first time. Indonesia. whose needs for consumer banking services and insurance are rising with their affluence. At the outset customers need the basics—a checking account. Citicorp aimed to provide these services to customers around the globe in a standardised fashion. John Reed (Reed is now co-CEO of Travelers. the central strategy of Citicorp has been to build just such a distribution channel. customers add a mortgage. In 1997 this business served 50 million consumers in 56 countries through a global network of 1. Weill felt it was important for Travelers to start selling its insurance products in foreign countries. This world view got Citicorp into many developing economies years ahead of its slowly awakening rivals. 83 . with 7 million cards issued in Asia and 9 million in Latin America. which was scheduled to take effect on March 1. Given the rapid globalisation of the world economy. in much the same way as McDonald’s provides the same basic menu of fast food to consumers everywhere. In the developed world. over 100 countries agreed to open their banking. Sandy Weill. Taiwan. ageing populations are buying more financial services. which is where Citicorp came in. 1999. The architect of Citicorp’s global retail banking strategy was its longtime CEO. portfolio management and estate planning become priorities. a position he shares with Weill). China. cross-selling insurance products and asset management services through its global retail distribution system. Japan. As they mature financially.
less obvious to customers. in Citigroup’s fast-growing European credit card business. Questions: 1. 4. is Citigroup’s emphasis on the uniformity of a range of back-office systems throughout its branches. What is the rationale for the merger between Travelers and Citicorp? How will this merger create value for (a) the stockholders of Citigroup and (b) the customers of Citigroup’s global retail bank? In 1997 the World Trade Organisation brokered an agreement to liberalise cross-border trade and investment in global financial services. the idea is to give the company’s mobile customers the same retail experience everywhere in the world. all credit cards are manufactured in Nevada.200 retail locations. Citigroup has also taken advantage of its global reach to centralise certain aspects of its operations to realise savings from economies of scale. and data processing is done in South Dakota. This has found its most visible expression in the so-called model branch. mutual fund investments and so on. Another element of standardisation. 3. Originally designed in Chile and refined in Athens.” By the end of 1997 this model branch was in place at 600 of Citicorp’s 1. For example.Unit 3 – Globalisation Global Corporate Strategy A key element of Citigroup’s global strategy for its consumer bank is the standardisation of operations around the globe. credit card operations are limited to marketing people and two staff units. Hill 84 . Reference: Chapter 1 – International Business in the Global Marketplace (2000) by Charles W.L. printing and mailing are done in the Netherlands. What will be the impact of this deal on competition in national markets? What would you expect to see occur? Does the 1997 WTO agreement represent an opportunity for Citigroup or a threat? How is Citigroup trying to build a global retail brand in financial services? What assumptions is this strategy based on? Do you think the assumptions and strategy make sense? 2. According to Citigroup. Within each country. customer service and collections. from the greeter by the door to the standard blue sign overhead to the ATM machine to the gilded doorway through which the retail-elite “Citi-Gold” customers pass to meet with their “personal financial executives. this emphasis on uniformity makes it much easier for the company to roll out branches in a new market. and it is being rapidly introduced elsewhere. including the systems to manage checking and savings accounts.
e. Feedback on Question 4: Standardisation of everything such as: · Cross selling of products to all customers (regardless of wealth). the stockholders would experience an increase in value in share price and dividend. car industry). · It is a ‘merger of equals’ – a graph within the case study in unit 4 in the module guide shows the convergence of the share prices of both companies.g. more turnover would be generated – hence. · Perhaps waves of merger/acquisition/alliance activity across borders (link to Unit 4) as financial companies try to gain access to the new markets. · Citicorp have established a global network of branches and Travelers Group’s products would be sold in these branches. for no increase in fixed costs. i. 85 . · Standard livery of banks. · The companies have complementary resources. Feedback on Question 2: · An increase in global competition with major world players competing in the newly liberated countries – moving from country to country (e. for example insurance. Feedback on Question 3: · An opportunity due to Citicorp’s core capability in overseas expansion into developing markets · Also a threat due to increased competition (as in first bullet point on feedback to question 2 above).Global Corporate Strategy Unit 3 – Globalisation CASE STUDY FEEDBACK Feedback on Question 1: The reasons for the merger are quite clear. · Customers would be able to access a wider range of products at the same location. Products of the two companies are generally mutually exclusive.
· Globalised product implies a global strategy and.g. therefore.Unit 3 – Globalisation Global Corporate Strategy · Staff uniforms. Finally. law. culture? · The company openly try to attract ‘wealthier’ customers. will you not require a ‘personal’ service? · Is it necessary (in considering Global Integration / Local Responsiveness Grid) to have a ‘global’ product in Financial Services? Summary In this unit we have considered the impact of globalisation on multinational enterprises. the changing world order and the implications for businesses from the globalisation phenomenon. Does it make sense? · What about ‘localisation’ issues. e. · Also (not mentioned in case) standardised training and staff development. decreases cost due to ‘homogenised’ product. we have looked at the particular challenges faced by managers when managing in the global marketplace. If you have lots of money. We have considered the drivers of globalisation. · Creation of global ‘brand’ is positive. We have looked at the definition of globalisation. 86 . · Standards of service the same globally. We have also touched on the globalisation debate considering the opposing views. and have considered the different dimensions – globalisation of markets and globalisation of production. · World travelers want the same service wherever they go. Assumptions based upon: · Standard service designed is acceptable to customers.
4. Imagine that your organisation is reviewing its strategy. Global competition. Chapter 19 pages 689-731 87 . 2. You have to carry out the necessary research and prepare a paper (in no more than 1000 words). 2. markets.Global Corporate Strategy Unit 3 – Globalisation REVIEW ACTIVITY Consider the following situation. Ref 13. operations and management processes. Your paper should address the following: 1. 3. Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. Chapter 2 pages 29-43 Ref 10. Your current global capability. A SWOT analysis in the context of globalisation. and that you have been seconded by the team to focus and report on the ‘impact of globalisation’. The impact globalisation has had on your organisation with respect to production (including supply chain).
Consolidation through mergers and acquisitions is rife in many industries. is necessary. In this unit we shall look at some of the terminology used in the context of M&A. the two vehicles through which many organisations aim to globalise. · Analyse strategy for forming and making alliances work in a global environment. In this unit we shall look at strategic alliances. Mergers and Acquisition (abbreviated as M&A) activity has grown in pace since the 1990s. · Explain the terminology associated with business combinations. · Propose a process for the successful integration of different organisations.Unit 4 ‘Altering the Boundary’ – Alliances and Mergers LEARNING OUTCOMES Following the completion of this unit you should be able to: · Evaluate available options for global expansion. cross-border alliances. We shall then assess the factors that give rise to successful mergers and acquisitions. and mergers and acquisitions. and briefly consider an integration process. There is a recognition that to compete effectively in the global market. Introduction Globalisation and the advent of the new economy. This has also led to a rise in global strategic alliances. as corporations seek to increase their global reach and competitiveness. · Assess the factors which influence success or failure of M&A activity. We shall then look at some of the drivers for M&A activity and potential benefits. 89 . sometimes with competitors. has led to big changes in today’s business landscape.
firms can build alliances that benefit both partners. but they often include market access. However. (1) (2) The decision of which foreign markets to enter. However. Hewlett Packard can been seen as being in a highly competitive environment with Canon in many locations around the world. the airline industry. The motives for entering strategic alliances are varied. Companies that follow the traditional view of neo-classical economics are said to follow the d iscrete organisation perspective and as such see competition as a natural state of affairs and see themselves as independent entities competing with others in a hostile environment. but are also seen to collaborate with them in other initiatives elsewhere. The alternative view is one of the em bed d ed organisation perspective where some companies see collaboration and partnership as the predominant way of working. e.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy Paradox of Competition and Co-operation De Wit and Meyer present this paradox by defining the extreme cases. some companies follow both perspectives at the same time depending on the economic and market conditions in a global context. e. e. and on what scale The choice of entry method 90 . or alternatively as a cynical approach to distort competition in a market. The UK Competition Commission. We will now examine collaborative arrangements in more detail.g. Decisions regarding Strategic Alliances are influenced by three closely related topics. However.g. Of course. most of the principles apply to domestic alliance arrangements also. Co-operation is seen as weakness on the one hand. when to enter them.g. governments legislate to prevent this happening. The biggest danger is that a company will give away more to its ally than it receives. Global Strategic Alliances Strategic alliances refer to co-operative agreements between potential or actual competitors. if companies A and B collaborate in order to destroy competitor C. Many companies follow this perspective as a matter of preference or are forced along this path by the industry in which they operate. For example. In this unit we shall focus mainly on strategic alliances between firms from different countries.
KEY POINT The term ‘strategic alliance’ refers to an arrangement. generally between actual or potential competitors. De Wit. 91 . technology. of missing infrastructure. B & Meyer. ACTIVITY See how collaboration with competitors can result in a win-win scenario by reading p. What are the objectives of International Strategic Alliances? Preece put forward a framework that examined the reasons for alliances.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers (3) The role of strategic alliances. · Leaning – to replace value-chain activities or fill in parts · Leveraging – to integrate operations of partners to create scope and / or size advantages. Read p. to co-operate.g. Any firm contemplating foreign expansion must first decide which foreign markets to enter. in you key textbook. Reading 7. De Wit. · Linking – to create closer links with suppliers and · Leaping – to pursue a radically new area of endeavour. R. e. · Locking out – to reduce competitive pressure from non partners and maintain existing competitive position. B & Meyer. customers. This is related to knowledge management techniques (see Unit 8). 388-396. in your key textbook.1. The 6 ‘Ls’ gave a range of reasons that a company may wish to enter into such arrangements as follows: · Learning – to acquire needed know how. R. This choice should be driven by an assessment of relative long-term growth and profit potential. Reading 7. and the timing and scale of entry. 383-387. market access. to see how companies like Sun Microsystems have been able to achieve high market growth by working with (and effectively managing) a web of alliances.2.
. the costs and risks associated with doing business in a foreign country are typically lower in economically advanced and politically stable democratic nations and they are greater in less developed and politically unstable nations. B & Meyer. to learn more about how companies in strategic alliances co-operate together. China and India). ACTIVITY Read p. costs and risks associated with doing business in that country.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy An alliance can involve two or more companies. The long-term economic benefits of doing business in a country depend on. De Wit. · The size of the market (in terms of demographics). low living standards may provide limited purchasing power and a relatively small market when measured in economic terms. Companies in a strategic alliance co-operate by sharing capabilities to enhance their competitive edge and creating new business opportunities. Another issue is considering the value a business can create in a foreign market. While some markets are very large when measured by numbers of consumers (e. and co-ordinate their strategies to work as a team. · The likely future wealth of consumers. Which Foreign Markets? All countries do not hold the same potential for a firm contemplating foreign expansion. If a business can offer a product that has not been widely available in that market the value of that product to consumers is likely to be much greater. 92 . · The present wealth (purchasing power) of consumers in that market.g. In addition. The attractiveness of a country depends on balancing the benefits. R. 359 – 382 (Network level strategy) in your key textbook. Companies in an alliance will retain their own strategic autonomy.
· Exporting. thereby driving them out of the market. Scale of entry and strategic commitment Entering a market on a large scale involves the commitment of significant resources. A late entrant may benefit by learning from the mistakes made by others.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Timing of entry Entry is early when a business enters a foreign market before other foreign firms and late when it enters after other international businesses have already established themselves. Major commitment to an overseas market can limit the company’s strategic flexibility. with a long-term impact. giving the early entrant a cost advantage over later entrants. known as first-mover advantages. Options are. · Turnkey Projects. · Pre-empting rivals and capturing demand by establishing a strong brand name. · Enabling price cutting below the higher cost structure of later entrants. products or services. · Create switching costs that tie customers into your The disadvantage in entering a foreign market before other international businesses is that pioneering costs may be incurred. These are costs that an early entrant has to bear that a later entrant can avoid. There are the following advantages associated with entering a market early. Balanced against large-scale entry are the benefits of a small-scale entry. It is a decisions that is difficult to reverse. It is a major strategic commitment. 93 . Small-scale entry can be seen as a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter. · Building sales volume in a country. Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market. Entry Methods The choice of method for entering a foreign market is another major issue.
· Tariff barriers can make exporting uneconomical. Each of these options has advantages and disadvantages. the client is handed the “key” to a plant that is ready for full operation. Foreign agents often carry the products of competing firms and so have divided loyalties. Let us now examine each of the entry methods. economic risks. the contractor agrees to handle every detail of the project for the client. Exporting Advantages · Avoids the substantial costs of establishing operations · Helps a firm achieve location economies. By (particularly so for manufacturing) in the host country. Turnkey projects are most common in the chemical. trade barriers and corporate strategy. The optimal entry method varies from situation to situation depending on a variety of factors including transport costs. · Franchising. · Problems arise if a company delegates its marketing activities in each country to a local agent. · Wholly owned subsidiaries. · Joint Ventures.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy · Licensing. This is a means of exporting process technology to other countries. Turnkey projects In a turnkey project. the firm may realise substantial scale economies from its global sales volume. Disadvantages · Exporting may not be appropriate if there are lower-cost locations for manufacturing the product abroad. political risks. particularly for bulk products · High transport costs can make exporting uneconomical. At completion of the contract. manufacturing the product in a centralised location and exporting it to other national markets. petroleum refining and metal refining 94 . including the training of operating personnel. pharmaceutical.
the risk of nationalisation or of economic collapse). Western firms that sold oil refining technology to Middle East countries now find themselves competing with these firms in the world oil market competitive advantage to potential and/or actual competitors. a longer-term investment might expose the firm to unacceptable political and/or economic risks (e. designs. established a joint venture with Fuji Photo that is known as Fuji-Xerox. In the Fuji-Xerox case. formulas. MINI CASE STUDY To enter the Japanese market. Intangible property includes patents. and it has 95 . · A turnkey strategy can also be less risky than conventional FDI. inventions. Disadvantages · The firm will have acquired no long-term skills. In return the licensor receives a royalty fee from the licensee. experience and customer relationships in the foreign country. The strategy is particularly useful where Foreign Direct Investment (FDI) is limited by host-government regulations. and obtain good economic returns. Advantages of which use complex. refining petroleum). copyrights and trademarks.g.g. processes.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers industries. In return. inventor of the photocopier. Xerox. the licence was originally granted for 10 years. In a country with unstable political and economic environments.g. Xerox then licensed its xerographic know-how to Fuji-Xerox. expensive production · The ability to assemble and run a technologically complex process (e. · A turnkey project may inadvertently create a competitor. Fuji-Xerox paid Xerox a royalty fee equal to 5 percent of the net sales revenue that Fuji-Xerox earned from the sales of photocopiers based on Xerox’s patented know-how. all technologies. · Selling technology through a turnkey project is selling Licensing A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period. e.
· Licensing is often used when a firm wishes to participate · Licensing is frequently used when a firm possesses some Disadvantages · Licensing does not give a firm the tight control over manufacturing. know-how to foreign companies. The licensing agreement between Xerox and Fuji-Xerox also limited Fuji-Xerox’s direct sales to the Asian Pacific region (although Fuji-Xerox does supply Xerox with photocopiers that are sold in North America under the Xerox label). co-ordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. and a firm can quickly lose control over its technology by licensing it.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy been renegotiated and extended several times since. licensing limits a firm’s ability to do this. · Competing in a global market may require a firm to · There is a risk associated with licensing technological 96 . intangible property that might have business applications. software components). in a foreign market but is prohibited from doing so by barriers to investment. marketing and strategy that is required for realising experience curve and location economies. Advantages · The licensee meets most of the costs associated with sales. Licensing typically involves each licensee setting up its own production operations. but it does not want to develop those applications itself (e. By its nature.g. · Licensing can be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market. Most firms wish to maintain control over how their know-how is used. Technological know-how constitutes the basis of many multinational firms’ competitive advantage. Hence the firm does not bear the development costs and risks associated with opening a foreign market.
Franchising is basically a specialised form of licensing in which the franchiser not only sells intangible property to the franchisee (normally a trademark).g. A more significant disadvantage of franchising is quality control. the franchisee typically assumes those costs and risks. As with licensing. Instead.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers MINI CASE STUDY RCA Corporation once licensed its colour TV technology to Japanese firms including Matsushita and Sony. which amounts to some percentage of the franchisee’s revenues. McDonald’s establishes a ‘master franchisee’ in many countries. This can be overcome by setting up a subsidiary in each country (wholly owned company or joint venture). Disadvantages The disadvantages are less than licensing. Now the Japanese firms have a bigger share of the US market than the RCA brand Franchising Franchising is similar to licensing but involves longer-term commitments. The Japanese firms quickly assimilated the technology. But franchising may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another. The franchiser will also often assist in running the business on an ongoing basis. The firm is relieved of many of the costs and risks of opening a foreign market on its own. Using a franchising strategy. This creates a good incentive for the franchisee to build profitable operation as quickly as possible. Since franchising is used mainly by service companies. improved on it and used it to enter the US market. the franchiser typically receives a royalty payment. Franchising is used mainly by service firms. experience curve and location economies are less of an issue. McDonald’s is a good example of a firm using a franchising strategy. The foundation of franchising is that the firm’s brand name conveys a message about the quality of the firm’s product. e. The subsidiary assumes the rights and obligations to establish franchises throughout the particular country or region. Further examples are Kentucky Fried Chicken and Hilton International. a service firm can build up a global presence quickly and at a relatively low cost and risk. 97 . but also insists that the franchisee agree to abide by strict rules as to how it does business. Advantages The advantages of franchising as an entry method are very similar to those of licensing.
political considerations make joint Disadvantages · As with licensing. However. who may have some influence on host-government policy. ventures the only feasible entry method.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy Joint Ventures A joint venture means establishing a firm that is jointly owned by two or more otherwise independent firms. · A joint venture does not give a firm the tight control over subsidiaries that it might need to realise experience curve or location economies. language. some firms have sought joint ventures in which they have a majority share and tighter control. Advantages · Benefits from a local partner’s knowledge of the host country’s competitive conditions. culture. and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be. joint venture agreements can be constructed to minimise this risk. was set up as a joint venture between Xerox and Fuji Photo. Fuji-Xerox. Research suggests joint ventures with local partners face a low risk of being subject to nationalisation or other forms of government interference. political systems and business systems. This can be achieved either by setting up a new operation in that country. for example. or by acquiring an established firm and using that firm to promote its products. · In many countries. Establishing a joint venture with a foreign firm has long been a popular method for entering a new market. a firm might gain by sharing these costs and/or risks with a local partner. The most typical joint venture is a 50/50 venture. · The shared ownership arrangement can lead to conflicts Wholly Owned Subsidiaries In a wholly owned subsidiary the firm owns 100 percent of the stock. However. have a vested interest in speaking out against nationalisation or government interference. This appears to be because local equity partners. 98 . a joint venture risks giving control of technology to a partner. · If development costs and/or risks of opening a foreign market are high.
g. 2. The success of an alliance seems to be a function of following three main factors: 1. acquisitions raise additional problems. marrying divergent corporate cultures. Making Alliances Work The failure rate for international strategic alliances is quite high. using profits from one country to support competitive attacks in another). However. · Tight control over operations in different countries that is · A wholly owned subsidiary may be required if a firm is Disadvantages · Generally this is the most costly method of serving a foreign market. The risks associated with learning to do business in a new culture are less if the firm acquires an established host-country enterprise. Partner selection Alliance structure Alliance management Let us look at these in turn.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Advantages · When a firm’s competitive advantage is based on technological competence.e. a wholly owned subsidiary arrangement reduces the risk of losing control over that competence. e. Firms doing this must bear the full costs and risks of setting up overseas operations. 3. 99 . necessary for engaging in global strategic co-ordination is maintained (i. A recent study of 49 international strategic alliances found that 66% ran into serious managerial and financial troubles within two years of their formation and 33% were ultimately rated as failures by the parties involved. trying to realise location and experience curve economies (as firms pursuing global and trans-national strategies try to do).
The following assessments are pertinent in this regard: · Is there a strategic fit? · Is there a capabilities fit? · Is there an organisational fit? · Is there a cultural fit? A good partner. sharing the costs and risks of new-product development. skills and technologies that the other covets. ‘shrink-wrapped’. IPR protection. whether market access. or gaining access to critical core competencies.g. Alliance Structure Having selected a partner. e. firms with reputations for “fair play” make the best allies. For example. · Helps the firm achieve its strategic goals. the relationship will most likely fail. two firms approach an alliance with radically different agendas. agreement to guard against the risk of opportunism by a partner. e. · Contractual safeguards can be written into an alliance · Both parties to an alliance can agree in advance to swap 100 . Therefore. the alliance should be structured so that the firm’s risks of giving too much away to the partner are reduced to an acceptable level. · Shares the firm’s vision for the purpose of the alliance. The partner must have capabilities that the firm lacks and that it values.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy Partner selection The partner selection process must consider whether a potential partnership is viable and whether it actually adds value. in the case of software applications. thereby ensuring a chance for equitable gain. ‘black box’ packaging. If · Is unlikely to try to exploit the alliance for its own ends. Cross-licensing agreements are one way to achieve this. to steal the firm’s technological know-how while giving little in return. · Alliances can be designed to make it difficult (if not impossible) to transfer technology not meant to be transferred.g.
R. in your key textbook De Wit. 402-409. · Learning from Partners. The resulting friendships help build trust and facilitate harmonious relations between the two firms. engine valves and steering gears for sale to Japanese-owned auto assembly plants in the United States. building interpersonal relationships between the firms’ managers. TRW protects itself against the possibility that the Japanese companies are entering into the alliances merely as a means of gaining access to the North American market to compete with TRW in its home market Alliance Management Many alliances fail because the issues concerning the management of the alliance have been underestimated. Reading 7. a firm must try to learn from its Reference: Internatio nal Business in the Glo bal Mark etp lace (2000) by Charles W. TRW has clauses in each of its alliance contracts that bar the Japanese firms from competing with TRW to supply US-owned auto companies with component parts. 101 . · Building Trust . has three strategic alliances with large Japanese auto component suppliers to produce seat belts.4. Hill ACTIVITY As further background to this section read p. partner and then apply the knowledge within its own organisation. ‘How to make strategic alliances work’. By doing this.L. · Managing cultural differences.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers · The risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partner in advance. MINI CASE STUDY TRW Inc. B & Meyer.. The key issues include. Personal relationships also foster an informal management network.
1 and 4. These arise from uncertainties about the value of the target company’s assets and liabilities and unanticipated challenges in integrating the target to achieve planned synergies. improved target management. The big advantage of M&A. in the pharmaceutical industry (Glaxo Smith Kline and Beechams). approximately 50% of all M&A combinations do not create value for the acquiring firm’s shareholders. Growth is generally viewed as vital to the well-being of a firm. access to global market. in banking and in telecoms.com/ Select ‘Alliances’ under the Function menu on the home page. in comparison to strategic alliances and internal expansion.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy ACTIVITY For up-to-date articles and thinking on alliances go to the McKinsey Quarterly website: http://www. is rife in many mature industries. and many articles can be accessed free of charge) Mergers and Acquisitions Mergers and acquisitions (or ‘business combinations’) have become a significant source of economic activity in the world economy totalling $3. M&A and internal expansion. We have seen the emergence of mega-mergers in the oil industry (Chevron. economies of scope. However. tax benefits or the availability of low cost financing for financially constrained targets. as a result of these risks. Consolidation. 102 .mckinseyquarterly. it poses serious financial and cultural risks. By mergers and acquisitions. is that it gives companies ready market access. However. Texaco). (Registration to this site is free. through mergers and acquisitions.2 for a comparison of risks for the options of strategic alliances. mergers and acquisitions can pose serious risks for acquiring firms. in the context of global expansion. corporations seek to create economic value through economies of scale.4 trillion in 1999. particularly in new geographies. Recent studies indicate that. See Figures 4.
Global Corporate Strategy
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
High Financial vs. Cultural risk M&A
Internet development Low Low Financial risk High
Figure 4.1: Financial vs. Cultural risk for expansion options.
M&A – If this fails, as there is a permanence to the transaction, it risks putting the whole organisation in trouble. Alliances – agreements can apportion financial risks between partners, but the rewards are also shared. Internal Development (organic) – there is a level of flexibility to the amount of money invested – this can be gradual and re-appraised over time.
High M&A Market failure vs. Cultural risk
Low Low Market-entry risk
Internet development High
Figure 4.1: Market failure vs. Cultural risk for expansion options.
M&A – there is a finality to this linkage of companies and so the cultural risk is large. However, this should be balanced against a low risk of market entry as the purchase normally relates to a package which is established and proven in the market.
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Global Corporate Strategy
Alliances – there is a level of optionality to these – the ‘package’ may be unproven but when partners work together they should reduce the risk. Internal Development – there is a low cultural risk as it is their own culture (organic growth). However, an unproven package and a lack of relevant experience leads to high market entry risk.
A merger is defined as the joining of two or more companies to form a single legal entity. Generally, the assets of the smaller company are merged into those of the larger, surviving company and shareholders of the target company are either bought out or become shareholders in the acquiring corporation. A merger usually requires approval by the shareholders of both the acquiring corporation and the target entity. There are several types of merger:
· Horizontal mergers involve two firms operating in the
same kind of business. and operations.
· Vertical mergers involve different stages of production · Conglomerate mergers involve firms engaged in
unrelated business activity.
An acquisition is the purchase of more than 50% of the voting shares of one firm by another. Following the acquisition the two companies can continue as separate legal entities, with the acquiring company referred to as the parent company and the target as a subsidiary. The parent company can be termed a Holding Company. Acquisitions are sometimes described as ‘mergers’ to be politically correct. This is especially so in the early stages of a merger.
Identify examples of a horizontal merger, a vertical merger and a conglomerate merger. In this context, you may use acquisition synonymously with merger. Identify the benefits resulting from the merger/acquisition.
Global Corporate Strategy
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Here are a few examples.......... IBM Corporation/PwC Consulting: The merger (or in reality, acquisition) of PwC Consulting by IBM Corporation in 2002 is often thought of as a horizontal merger, but is more accurately a vertical merger. Although both companies overlapped in a significant part of their business (IT services and consulting), it could be argued that IBM had little business consulting skills – an area of high value and top of the value chain in services contracts. By acquiring PwC Consulting, IBM gained first-class and global business consulting skills and also PwC’s existing lucrative contracts. PwC gained the IBM brand, as well as access to the breadth of IBM’s product and IT skills to facilitate the implementation and delivery of projects following a consulting engagement. HSBC/Midland Bank, UK The acquisition of the UK’s Midland Bank by HSBC is an example of a horizontal merger. The acquisition gave the HSBC bank a significant UK presence. BP/Amoco/Arco: The merger of BP, Amoco and Arco was a billion-dollar horizontal merger. The driver for the merger was the search for economies of scale. Following consolidation and completion of the integration phase, huge cost savings have been achieved in capital-intensive areas such as refining, and exploration and production activities. Cost savings have also been achieved in aligning their respective IT strategies and having a common IT and centralised services infrastructure. SONY/Columbia: In the late 1980s SONY acquired Columbia Pictures in the US for $3.4 billion. This is an example of a conglomerate merger, pursued for purposes of diversification by SONY. Columbia operated in a totally different business sector. However, the management at SONY felt there were synergies to be exploited between SONY’s highly profitable VCR manufacturing business and Columbia’s film-making business. Columbia is still part of Sony’s business, but the integration of Columbia into Sony was plagued with several problems. In practice, there were huge differences between running a hardware manufacturing company and a film studio. These issues were further compounded by enormous organisational and cultural differences between the two companies.
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Global Corporate Strategy
There are a number of other terms associated with ‘M&A’ activity.
Leveraged buy-outs (LBOs) involve the purchase of the entire public stock interest of a firm, or division of a firm, financed primarily with debt.
Management buy-out (abbreviated as MBO)
If the transaction is by management, it is referred to as a management buy-out (MBO). If the shares are owned exclusively by the acquiring party, rather than third-party investors, the transaction is called ‘going private’ and its shares are no longer publicly traded.
Joint ventures involve the joining together of two or more firms in a project or enterprise. In these cases, equity participation and control are decided by mutual agreement.
Sell-offs are considered the opposite of mergers and acquisitions. The two major types of sell-offs are spin-offs and divestitures.
· In a Spin-off, a separate new legal entity is formed with
its shares distributed to existing shareholders of the parent company in the same proportions as in the parent company. the firm to an outside party with cash or equivalent consideration received by the divesting firm.
· In contrast, Divestitures involve the sale of a portion of
Can you think of examples of other M&A related transactions, and identify the possible motivation for the transaction and benefits (if any).
Global Corporate Strategy
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Here are a few examples. Joint Venture: The Airbus consortium, established in 1970, is an example of a successful Joint Venture. The European consortium of French, German and later, Spanish and U.K. companies was established, as it became clear that only by co-operating would European aircraft manufacturers be able to compete effectively with the U.S. giants. By overcoming national divides, sharing development costs, collaborating in the interests of a greater market share and even agreeing a common set of measurements and a common language, Airbus changed the face of the business and brought airlines, passengers and crews the benefits of real competition. In 2001, thirty years after its creation, Airbus formally became a single integrated company. The European Aeronautic Defence and Space Company (EADS), (resulting from the merger between Aerospatiale Matra SA of France, Daimler Chrysler Aerospace AG of Germany and Construcciones Aeronauticas SA of Spain), and BAE SYSTEMS of the UK, transferred all of their Airbus-related assets to the newly incorporated company. In exchange, they became shareholders in Airbus with an 80 per cent and 20 per cent stake. Spin Off: MOBILE phone giant mmO2, was part of British Telecom until it was spun-off in 2001. The spinoff was the result of the breakup of the BT monopoly. Today, mmO2 is Europe’s sixth-largest mobile network operator. As well as its core UK market called O2, the group runs mobile services in Germany and Ireland, and has a joint venture with supermarket giant Tesco. It has just posted its financial results, with maiden pre-tax profits of £95 million. Divestiture: Perhaps the most famous example of a divestiture is the divestiture of the Telecoms giant AT&T, from Bell Labs. The divestiture was forced by the US Department of Justice following an anti-trust suit against Bell Labs for illegal actions to perpetuate a monopoly in telephone service and equipment. The United States woke up on January 1, 1984 to discover that its telephones worked just as they had the day before. But AT&T started the day a new company, having been divested from Bell Labs. Of the $149.5 billion in assets it had the day before, it retained $34 billion. Of its 1,009,000 employees it retained 373,000. Success required the most drastic change in corporate culture ever undertaken by a major American corporation. The old AT&T – the Bell System – as a regulated monopoly had been largely insulated from market pressures for most of its history. Its culture venerated service, technological excellence, reliability and innovation within a non-competitive, internally-driven
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy framework of taking however much time and money it took to get things done right. Push factors arise from stakeholders who may have concerns about the company’s strategic direction or its management. · A firm may be able to acquire certain desirable assets at a lower cost by combining with another firm than it could if it purchased the assets directly. When the market value of a company’s common stock is below its book value (or. Why do companies pursue external expansion. and view an acquisition or a merger as a solution. ‘Pull’ factors arise from companies making strategic moves to increase marketshare or increase shareholder value. car manufacturing. in competition with others who sought to fill the same customers’ needs. The list. M&A Activity Drivers for M&A activity M&A activity is rife in many industry sectors today. The new AT&T had to learn how to find out and deliver what its customers wanted. below the replacement value of the firm’s net assets) or its potential future earnings (PE ratio) is below the 108 . does indicate the principal reasons for external expansion through M&A activities. when its customers wanted it. although not exhaustive. There are ‘push’ and ‘pull’ factors driving M&A activity. through mergers and acquisitions. IT services. telecoms. oil exploration & production. e.g. try to identify some of the drivers for M&A activities. ACTIVITY From what you have learnt so far. over internal growth? ACTIVITY FEEDBACK Here are some of the drivers. Although AT&T had great technological and personnel strengths upon which to build. pharmaceuticals. the transition proved far more complex than anyone imagined in 1984. more important. finance & banking.
This partial ownership may cause managers to work less vigorously than otherwise and/or consume more perquisites (also known as “perks’. If the net income for the combined companies after merger exceeds the sum of the net incomes prior to the merger. · A firm that is concerned about its sources of raw materials. agency problems. · Another ‘push’ driver from stakeholders results from. club memberships) because the majority of the owners bear most of the cost. e. · Another driver for horizontal mergers. then it will have a greater share of the market.If the managers have a stake in the business. dependencies upstream or end-product markets might acquire other firms in the supply chain. the Mercedes merge with the Chrysler corporation increased marketshare for the merged company in the US. e.g. These are vertical mergers.g. thus doing what is best for all shareholders. what is termed. but expenditures on maintenance and replacement parts may increase.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers sector average. For example. · A firm that has suffered losses and has a tax-loss carry forward may be a valuable merger candidate to a company that is generating taxable income.The threat of a takeover may mitigate the agency problem by substituting for the need of individual shareholders to monitor the managers. and are often undertaken to limit risk. There are two theories that emerge from the agency problem: .” · A firm may be able to achieve greater economies of scale by merging with another firm. During a recession. expenditures for capital equipment may slow down. is that it will result in increased market share. If a company acquires one of its competitors. a capital equipment manufacturer might achieve steadier earnings by expanding into the replacement parts business. synergy is said to exist. the losses may be deductible from the profitable company’s taxable income and hence lower the combined company’s income tax payments. An agency problem arises when managers or agents acting on behalf of the shareholders have a limited equity stake in the company. in particular. This was 109 . lavish trips. If the two companies merge. · A firm may desire to diversify its product lines and businesses in an attempt to reduce its business risk by smoothing out cyclical movements in its earnings. they will do what is best for the company. this is particularly true in the case of a horizontal merger. the company frequently becomes a “takeover candidate. expense accounts. .
Negotiations or tendering activity may involve the dissemination of new information or lead the market to judge that the bidders have superior information. many of the drivers noted above (under the previous Activity Feedback) are potential benefits. that absolutely anyone (resulting from an M&A activity) could do better. and transfer of general management capability. · Another source of improvement can be from what is 110 . For example: 1. One of the key benefits that shareholders often look for is in sharper management. Management efficiencies can arise from: · Management rationalisation. So in addition to the obvious benefits such as lower unit costs and stronger purchasing power. · Differentiated efficiency. Hence. This simply puts forward the view that when management is not performing or is inept in some absolute sense. The revaluation arises as a result of new information generated during negotiations. 2.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy the principal driver for Mercedes who had limited marketshare in the US. after firm A acquires firm B. for the revaluation of the ownership of shares to occur. The theory behind differentiated efficiency is as follows: If the management of firm A is more efficient than the management of firm B. Management may be stimulated to implement a higher-valued operating strategy. some of the drivers do turn into benefits. termed Inefficient Management theory. The market may then re-value previously “undervalued” shares. the efficiency of firm B is brought up to the level of efficiency of firm A. Revaluation It is not uncommon during merger negotiations or joint venture planning. Potential benefits of M&A In successful and well managed mergers and acquisitions. There is also the perception that the increased marketshare will give rise to market dominance thus enabling increased profitability. shareholder value often increases. Efficiency represents the real gain in merging businesses.
controls.3. political issues and regulatory policy (competition policy.750 1. External factors include monetary policy.250 1.500 1. · Relative values of the two companies. in response to external factors – see Figure 4. · Funding. 111 . a number of factors must come together. announced deals. Factors affecting M&A activity can be categorised as external and internal. $bn United states Britain. Factors affecting M&A activity In order to successfully complete an M&A transaction. general economic activity. Here we go again? Global M&A*.000 750 500 250 0 95 96 97 98 99 2000 01 02 03 04** Source: Dealogic * By country of target ** To Feb 17th annualised Figure 4.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers · Deployment of better management systems.3: Recent waves of global M&A activities. · A conducive economic environment. France and Germany Rest of the world Japan 1. Global M&A activities tend to occur in waves. · Corporate will (the company’s goals and strategy). planning and budgeting. foreign investment policy).
(An acquisition was deemed successful if it earned its cost of equity capital or better on funds invested in the acquisition program. typically a peak is a time when company valuations are low.e.) If the successes and failures are probed further by looking at the rates by type of acquisition. The predominant influence at any one peak or trough may differ. The internal factors (e. company makes a public offer to the shareholders of a target company). 61% were failures. The pre-acquisition process includes the following: · How companies make the M&A decision (including target selection). management capabilities. while the shareholders of the acquiring company receive 4%. generally speaking.g. etc. · The average return (around the time of the announcement) to shareholders of the acquired company is 20% while the average return to the acquiring company is 0%. type of product. 1994 and Balmer & Dinnie. There are a number of reasons for the failure of acquisitions (McKinsey. stocks are out of favour (valuations are low) and well-funded companies can buy others at a good price. Therefore. statistics suggest high failure rates of mergers and acquisitions. 112 . However. Jensen and Ruback (1983) summarised results from mergers and acquisitions over a period of eleven years. interest rates are low and bank financing is available. 23% were successes and 16% unknown. Why do Mergers Succeed or Fail? Studies of M&A suggest that the probability of increasing shareholders’ wealth via M&A is low. Success or failure arises from the quality of the pre-acqusition and post-acquisition processes. the acquired company’s shareholders receive an average return of 30%. Combining the internal and external factors results in an M&A cycle. a In an analysis conducted by McKinsey consultants (1994) of 116 acquisition programs undertaken between 1972 and 1983.) vary from company to company and from industry to industry. a company acquiring another company in a related business has a greater chance of success than one acquiring a company in an unrelated business. · Where a tender offer for take-over has occurred (i. 1999). when interest rates are high.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy Monetary policy affects M&A activity because.
and pose further management challenges for successful execution and post-merger integration.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers · Due diligence. · Negotiation of the deal.and post-acquisition phases. local accounting standards may not be compatible with international standards. giving a success rate of 50%. The slightly higher success rate may be simply because most cross-border acquisitions are horizontal (i. 113 . The complexities arise in both the pre. What are some of the challenges for cross-border M&A activities. due diligence and valuation are particularly complex.e. suffer from the problem of unreliable marketing and strategic information. Despite the compounded problems of cross-border M&A. John Kitching (in 1973) looking at cross-border acquisitions in Europe. and the due diligence may not be entirely accurate in this respect. cross-border M&A activity is on the rise. The post-acquisition process is about how the integration is managed. if anything. studies focusing just on cross-border M&As suggest that the success rate is no worse than domestic. Political and nationalistic attitudes may also make an unbiased assessment difficult. Emerging markets. At the pre-acquisition phase. Furthermore. found that 25% were straight failures and 25% not worth doing. How would you expect the success rate for cross-border acquisitions to differ from the overall figures quoted above? ACTIVITY FEEDBACK Cross-border M&A are more complex. This is considered the most important source of success or failure. slightly better. · The value creation logic (how is it valued?). ACTIVITY With the increase in globalisation. A further study by McKinsey focusing just on cross-border M&As found a 57% rate of success. in particular. in core business) and all studies show that horizontal acquisitions tend to be more successful than others. and. and a push to achieve marketshare quickly in foreign markets. transition management and integration management are the biggest challenges because of the geographical distribution. In the post-acquisition phase.
the acquirer may find it all too easy to bid up the price beyond the limits of reasonable valuations. 3. .Inadequate recognition of the impact of leadership . company will experience. . and this disruption may cause damage to the value of the business. maintained or enhanced during the merger process. . difficult and during this time. Reputations can be damaged.Dominant players give little attention to cultural issues.Acquirers are over optimistic in their assumptions. issues during M&A process. particularly at the outset. Corporate identity and corporate communication issues are not properly managed: .Undue attention is given to short-term financial and legal issues. . 4.Consultants are brought in too late.Poor post-acquisition integration. and suppliers can easily be disrupted during the process. Integration can be 2.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy Listed below are many of the common reasons for failure in M&A: 1.Over-estimation of the synergies that the merged . 114 .” can sometimes lead acquirers to overpay. a market rebounding from a cyclical slump or a company “turning around.Simply that the acquiring company overbids. Potential conflict between individual and corporate objectives is not given sufficient recognition and isn’t managed.Unresolved ‘naming’ issues. at the expense of communication. This happens for a variety of reasons: .Integrated identity and communication structures are rarely in place early in the M&A process. relationships with customers. employees. Failure to secure good will of a wide range of stakeholder groups in both companies. 5. . . In the heat of the deal. Acquirers pay too much. Assumptions. such as rapid growth continuing indefinitely.
the share price of the target will increase. company statements. It is also important that managers evaluate their own company. It is important during the pre-acquisition phase that employees maintain the secrecy of the deal. political. FT article under Comments & Analysis on 14 June 2004. in late 2003. These criteria allow managers to eliminate those companies which do 2. However. McKinsey suggests that a list of “knock-out criteria” be developed. dealing a blow to Oracle and even IBM. Research this failed merger attempt (Internet. Public companies. Now carry out the following on the Virtual Campus: 1. Microsoft group: put forward to SAP management the benefits of the merger to SAP. etc). Could Microsoft have handled it better. Once this is done. other issues). and understand the industry structure. potentially killing the deal. Management of the pre-acquisition phase. If the merger had been successful it would have made Microsoft a dominant force in the enterprise software market. Consider the various SAP stakeholders in putting forward the benefits. If the secrecy is not maintained and there are rumours of a take-over attempt. Screen candidates. (This Virtual Campus activity also interlocks with the units on Innovation and Strategic IT & e-business) Successful execution of M&A McKinsey suggests a five-step program for successful mergers and acquisitions: 1. understand its strengths and weaknesses. 3. divisions of companies. 115 . the German software giant. Both groups: analyse why the merger went wrong (cultural. and privately held companies should be considered when developing a list of potential targets. In this step. Now divide yourselves into two groups.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers VIRTUAL CAMPUS Microsoft revealed recently that it tried to buy SAP. and the others the SAP hat. SAP group: counter the Microsoft proposals. Those with last name beginning A-M should wear the Microsoft hat. then managers can begin to identify the value-adding approach that will work best for their company. the merger attempt failed. where appropriate. 2.
The value gain is the combined value less the value of the acquiring company. (“LoJack and the MicroLogic Alliance”) on Pages 818-826 of your key text.acquisition value to the acquirer . respectively. 5. De Wit & Meyer. McKinsey noted that most acquirers destroy rather than create value after the acquisition.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy not “fit” with their own company (i. Post-acquisition.value of the target to the existing owners and other potential buyers . A negotiation strategy is established by considering the following factors: 4.) 3. Prior to being acquired. CASE STUDY 1 – Lojack and the Micrologic Alliance The next case study is case study 13. Negotiate.” The value of realistic synergies must then be added while taking into account how long it will take to capture them.e. The transaction costs for doing the deal are then subtracted. In determining the value to the acquirer. Management of post-merger integration. Below is the case synopsis: The case describes the rise and development of the LoJack Corporation (NASDAQ: LOJN).financial condition of the existing owners and other potential acquirers . too small. The result is the value of the combined post-merger company.potential impact of anti-take-over provisions. 24% of the companies studied were performing better than the industry average and another 53% were performing better than 75% of their industry average. A key point in this part of the process is for the acquiring company to decide on a maximum reservation price and to stick to it. . too big. The objective for the acquiring company should be to pay only marginally more than the value to the next highest bidder and an amount that is less than the value to the acquirer. Valuation. McKinsey suggests that the value of the acquiring company be added to the value of the target company “as is. availability. the acknowledged global leader in stolen vehicle recovery 116 .strategy and motivation of the existing owners and other potential acquirers . these percentages dropped to 10% and 15%.
The management of the LoJack Corporation is committed to a growth strategy of geographic expansion of its historically successful system. examining the issue of continuing value creation if the relationship between LoJack and MicroLogic is pursued. But as time progressed. LoJack separated somewhat. designed the entire system and worked with various government agencies to obtain the appropriate approvals. in-house people were hired to do a lot of the work formerly handled by MicroLogic and eventually the LoJack Corporation ended up doing much of their own work. The key issue for LoJack is now whether it should revise its strategy. while MicroLogic has changed its strategy and is now committed to entering a new marketplace with its own products and services. as well as the difference between indirect and direct horizontal co-operation (link to Introduction of Chapter 7). · The spectrum of relational arrangements between market and hierarchy. The company was founded in 1978 by former Navy pilot Bill Reagan. tracking and recovering stolen vehicles. can be used to understand the following key points: · Differences between horizontal and vertical alliances. Lojack and the MicroLogic Alliance. Lacking the specific knowledge and technical skills for his concept to materialise. a product development firm which specialised in developing electronics products for others. De Wit & Meyer. conceived a unique patented system. Therefore. The challenge presented in this case has to do with a defining moment in the alliance.4 of your key text. grasp this opportunity and build on what had been a very successful alliance. LoJack is asked to join and supply both marketing capability and capital to finance Micro Logic’s expansion.1-7. this case can be used to understand the differences between horizontal and vertical alliances. headquartered in Westwood. Leonard Zyistra) This case. a contract was signed for MicroLogic to manufacture the police tracking computers. It made MicroLogic the technical backbone of LoJack and hence. who unable to sleep one night. used in conjunction with Chapter 7 and Readings 7. The LoJack management team needs to determine whether the new alliance with MicroLogic would leverage to the utmost LoJacks’ strengths and whether this alliance would again be successful. this product development firm became a significant ally and an instrumental partner in the success of LoJack.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers technology. The stolen vehicle recovery system (hereafter: SVR-system) needed the approval of the Federal Communications Commission (FCC) as well as the support of law enforcement agencies (and often 117 . The LoJack – MicroLogic relationship is an example of an upstream vertical (supplier) alliance. given MicroLogic’s new strategy. with the exception of brand new design work or work on the base software that MicroLogic designed originally. Bill Reagan turned to MicroLogic. Massachusetts. When everything was in place. MicroLogic helped refine the LoJack product specifications. Points to Highlight (extracted from Teaching Note 13. designed to assist law enforcement personnel in locating. or whether it should seek new strategic partners and move forward on its own.
4.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy executive and legislative bodies). they are forced to recognise that a new alliance also has inherent disadvantages. · The disadvantages of strategic alliances. However. it is tempting to engage in a second alliance. You may wish to identify these using this case (link to Introduction. The original LoJack – MicroLogic alliance was primarily intended to develop the necessary base software and equipment and to obtain FCC approved technology for the SVR system. This allows for a discussion on the various relational arrangements that can be implemented and the different levels of inter-organisational dependence that they entail (link to Introduction and Reading 7. The main challenge for LoJack in the case is whether. · The paradox of competition and co-operation. applying flexibility in the relationship to continue to balance the two conflicting forces (link to all). and knowing and trusting each other so well. illustrates how alliances combine competitive and cooperative behaviour. Dyer. After the success of the first alliance between LoJack and MicroLogic.1. The partners in the LoJack-alliance experience a shift of focus when their relationship matures. In order for the LoJack system to be manufactured and find its way to the customer. This allows for a discussion on the variety of objectives that can be pursued by means of alliance (link to all sections of Chapter 7). the objectives of each partner to continue the alliance are different now. As time progressed. · The objectives of strategic alliances. therefore. ‘as it was neither interesting for MicroLogic nor cost effective for LoJack to continue to have MicroLogic do “standard stuff. they hired in-house people and took over the mundane. it should renew this 118 . LoJack and MicroLogic had to define the business ecosystem in which it would flourish and design several relational arrangements. MicroLogic used to be the technical backbone of the LoJack corporation. after a successful alliance with MicroLogic for years. LoJack separated somewhat. James Moore). Financial institutions and insurance companies were involved in designing joint offerings. Licensees in countries outside the United States would use the stolen vehicle recovery system technology.3. Kale and Singh). providing a high margin add-on to any car sale. With a change in the strategic intentions of the two. Doz and Prahalad and Reading 7. Car dealerships would sell the system as an option. day to day tasks of MicroLogic. given the different strategies of the partners. Hamel. Motorola was asked to manufacture the police tracking computers and had to agree to a long-term payment plan. This case. · Discrete and embedded organisation perspectives. Reading 7. determining the level of co-operation they wished to pursue.
founder and president of MicroLogic. 3. but the question is. this view would be in line with the discrete organisation perspective. which specialised in developing electronics products for others. Be Wit.` · MicroLogic.2 to draw the relations. a number of issues should be taken into consideration as well. were also tempted to explore new market opportunities on the basis of the stolen vehicle recovery technology. When the original founder of LoJack.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers relationship. the MicroLogic new market entry could be more successful and rewarding. met for the first time with Sheldon Apsell. it was still a small product development firm. power positions and arrangements exist between LoJack corporation and the actors? Do you think the arrangements between LoJack and MicroLogic changed their competitive advantage over time? What advice would you give the LoJack management team on the joint venture proposal by MicroLogic to join them in introducing a new monitoring and maintenance system for construction equipment? 2. With only a hand-shake to 119 . Bill Reagan. Both parties however. from a (shareholder) value creation perspective. (i) Which are the relational actors relevant to the technical and commercial success of the Stolen Vehicle Recovery System? (ii)Which relational objectives. This view would be in line with the embedded organisation perspective (link to all). such as the opportunity to leverage some of LoJacks’ strengths or the fact that. Both parties had become more independent over time and had benefited from this growing independence. They could go separate ways. CASE STUDY FEEDBACK Feedback on Question 1: Part i In the case quite a number of actors are mentioned. had they become independent enough to be successful without the old alliance partner? To answer this question in an affirmative way. B & Meyer. Reagan and Apsell immediately hit it off. R (2004)). (See textbook. However. each playing an instrumental role in the success of the SVR-System. Apply Figure 7. Questions: 1. each pursuing their own strategic direction.
(Upstream vertical relation) · Car Dealership: Marketing and sales of the LoJack system took place via a distribution network.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy consummate the deal. (Downstream vertical relation) · Motorola: Was asked to manufacture the police tracking computers and had to agree to a long-term payment plan. in exchange the police will support the system. designed the entire system. establishing that the radio frequency used by the system would not interfere with other radio communications. however. dependencies and alliance objectives between LoJack and MicroLogic changed over time. giving the LoJack system a unique selling point. claiming to have stolen vehicle recovery features similar to those of the LoJack system. (Indirect horizontal relation) · Competitors: There were many. first the law enforcement agency (and often executive and legislative bodies) had to be persuaded to support the system. None. Car dealerships would sell the system as an option. MicroLogic helped refine the product specifications. (Regulatory actor) · Financial institutions and insurance companies: Complementors were involved in designing joint offerings with financing schemes that included the purchase of the LoJack system and discounts for the car insurance premium. (Downstream vertical relation and political actor) · FCC. LoJack offered the devices for free. (Direct horizontal relation) Part ii · Arrangements and power positions: The relational arrangements. worked with various governments agencies to obtain the appropriate approval and performed the required fieldwork to prove to the FCC that the assigned radio frequency would not interfere with that assigned to a television channel. as the companies grew and 120 . Being a regulatory actor. providing a high margin add-on to any car sale. (Upstream vertical relation) · Local police: Were using the ‘Police Tracking System’ that allowed police to locate the stolen car. were operated or actively monitored by law enforcement agencies. a contract was finally signed for MicroLogic to manufacture the police tracking computers. Later on it was also engaged in developing and manufacturing the third generation of the LoJack system. With everything in place. Very often. the stolen vehicle recovery system needed the approval of the Federal Communications Commission (FCC).
Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers their relationship matured. while the equity-based part places MicroLogic in the situation where it has an entrepreneurial incentive. When the cooperation matured. And when there had been conflict at the lower level of the organisations. However. in return for its initial contribution. A contract was signed for MicroLogic to manufacture the police tracking computers. LoJack started hiring a former MicroLogic engineer for instance. and there to pitch in when LoJack staff needed help. as it had been the objective to develop new technology required for the SVR-System. constituting advantages of hierarchy. it did not impair the cooperation because of the strong relationship at the top where corrective action was taken before things got completely out of hand. it became more and more ‘business like’ with more written documents and formal contracts because there were more people involved.000 shares of LoJack. MicroLogic was no longer involved in all the technical decisions and LoJack had its own technical staff. Although the inter-firm relationship was still trusting. However. Conducive to spurring risk-taking. Over time. also labor and entrepreneurship – it had embraced the initial idea of Reagan and had been willing to risk as much as LoJack – as it was still not certain that the product would become a success. The MicroLogic role changed also and the companies became far more independent. The alliance also proved 121 . one could add. MicroLogic had difficulty meeting some of the initial specifications of the product. one could say that it became more linking-oriented. innovation and change. · Relational objectives and factors: MicroLogic provided LoJack technology and. Nor could MicroLogic bank on the fact that it would be asked by LoJack to become its first-tier supplier. As Sheldon Apsell of MicroLogic had put it sometime: ‘LoJack should take over the mundane. The direction of the project was altered and Motorola was engaged. where LoJack is focusing on marketing and sales. Legitimacy played an important role in the alliance. day to day tasks. the contracts will organise procedures and routines at MicroLogic to manufacture the computer. MicroLogic received a total of $350. This worked like the benefits of the market. while MicroLogic focuses on manufacturing and technology development in the area of tracking and positioning. The intent of these. it had become more ‘business like’ with more written documents and formal contracts. The alliance can therefore be seen as a nice example of co-specialisation. This co-specialisation had progressed to the point where LoJack hired a MicroLogic engineer. At first. while the relationship was still trusting. as it was neither cost effective for LoJack nor interesting for MicroLogic to do standard stuff. The initial phase of the cooperation can be described as learning-oriented. Later on. MicroLogic and LoJack had entered into a joint venture to develop the third generation of the LoJack system. MicroLogic was still involved in the long term technology strategy.000 and 90. This type of arrangement between LoJack and MicroLogic can be described as that of a bilateral combination of Equity-based and contractual arrangements.
ensuring it became not entirely dependent of MicroLogic. On the one hand. 122 . After a number of false starts. So MicroLogic was independent to the extent that it did not infringe the patent (limitations) and LoJack was dependent but able to steer the product specifications (influence). For LoJack. Analysing how MicroLogic had changed its strategy and finding itself in the situation as described above. but in essence remained a product development firm. it could also be argued that the relationship initially was based on unbalanced dependence in favour of MicroLogic. it needed LoJack to supply capital and marketing capability. Feedback on Question 2: While the cooperation between LoJack and MicroLogic evolved over time. it could be viewed that this relationship was still in balance. Cash flow would soon be inadequate to support further development and marketing. Without that. the technology was key to the success of the system and hence to its value proposition. LoJack had ordered Motorola to manufacture other parts. Meanwhile. Although LoJack was resource dependent on MicroLogic to develop and test the technology at the beginning of their relationship. Moreover. the management finally settled on an information service business which would initially provide information about the location and operating parameters of expensive construction equipment. Alternatively. MicroLogic had self funded the product development. rail cars and trailers. MicroLogic shifted its strategic focus and decided that the company should develop and market its own products. The system would produce standard reports or use sophisticated mapping software to produce easily understandable graphic information that could be communicated to personal computers. would lead to the conclusion that the company had been successful in developing concepts for new markets. developed for the LoJack system. it narrowed the window of opportunity for capturing a large enough share of the market to make implementation worthwhile. MicroLogic viewed this activity with mixed feelings. To introduce a new concept successfully. MicroLogic could not do anything with the concept or the technology. Up to this point. as we do not know the alternatives available to Bill Reagan back in 1978. excitement in the industry about such a system validated MicroLogic’s concept and educated potential customers. The original tracking and positioning technology. the competitive landscape was changing. Other potential market segments to be attacked after construction equipment included other mobile high-value assets such as vehicle fleets. formed the backbone. testing and marketing of the new business while continuing to operate the traditional business. Many more companies were entering the construction equipment asset management marketplace. for MicroLogic it was just one contract. Additional capital and marketing capability were essential if MicroLogic was going to be the market leader. because ultimately it was LoJack which held the patent of the system. Their relationship can therefore be described as balanced interdependence.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy strong on flexibility and the ability to adapt to changing circumstances when early predictions did not come out. This situation we recognise from the start of their alliance. On the other hand. MicroLogic’s decision to change the essence of the organisation had brought marketing and sales of the original product development business to a halt. However.
and long term revenues and the 2. brand awareness and distribution muscle. Alternatively. by selling equipment at break-even or a very small profit. All this could be leveraged in the mobile asset management-market. exploring new geographic markets and improved marketing and strengthened sales force. broadening its commercial capabilities. reputation. But all in all. therefore. its competitive edge was no longer the same as it had been when the first LoJack system was introduced to the market. considering MicroLogic’s changed strategy to develop and market its own products. The cost of hardware had been dropping fast and improvements in technology such as GPS had encouraged new entrants that also offered total asset management capabilities.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers For LoJack. This could be done in a joint venture with MicroLogic. LoJack has three major issues that it should contemplate: 1. The success of this third generation system would allow LoJack to enter the highly competitive market for stolen vehicle recovery. 123 . is the compatibility in objectives not only temporary and predominantly focused on obtaining the LoJack’s venture capital? Will the concept that was developed by MicroLogic for the construction equipment asset marketplace be competitive enough? Will it secure the alliance to capture a large enough share of the market to make investment and implementation worthwhile? Considering that other major competitors were well positioned in the consolidation and outsourcing trends and given the business model that MicroLogic wanted to employ (short term revenues. 3. thought that there might be even greater opportunities in leveraging LoJack’s connections with law enforcement agencies. it can be concluded that its competitive advantage had changed. Will the new alliance leverage to the utmost LoJacks’s strengths or is its marketing capability only of limited use in this new marketplace? Also. While expansion of the LoJack System into new geographic areas and markets with improved marketing efforts and strengthening the sales force was a logical growth strategy. LoJack management. the development of a new generation LoJack system was necessary to reduce the cost of the hardware and improve efficiency of the installation process. Feedback on Question 3: Basically. LoJack was also exploring cellular and satellite technologies to enhance its opportunities in this market. but also with a new partner or may be go it alone. Analysing this opportunity for LoJack and comparing it with the company in the late '70s. starting with construction equipment. things developed also in a different way. Will further development of the third generation LoJack system. become profitable enough in the long run and create sustained shareholder value or should a new marketplace be sought? Considering the highly competitive market for stolen vehicle recovery with more and more pressure on margins and distribution channels. LoJack management hoped that they could stay in this market with its new unit that would be compatible for application in a non-powered environment at a pricing attractive to the industry.
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Global Corporate Strategy
majority of profits from monthly fees plus individual charges for special services).
CASE STUDY 2 – CITIGROUP
Merger Brief – The Economist, 26th August 2000 First among equals This merger brief shows why true mergers of equals are rare. The union of Citicorp and Travelers, initially equal partners, became a takeover as one of its co-chief executives took sole command IT WAS the most extraordinary merger ever, or so it seemed back in April 1998. The marriage of two financial-services giants, Citicorp and Travelers, was the biggest to date, with a combined market capitalisation of $84 billion on the day it was announced. The vision behind it was just as large: the newly created Citigroup would be an entirely new sort of global business, a financial-services supermarket selling every financial product under the sun to individual, corporate and government customers in every corner of the earth. As if that were not enough, the marriage was structured as a genuine “merger of equals” – a phrase often used, but usually only to soothe the ego of the boss of a company that is being taken over. In this case, every effort was made to ensure that both sides really were equal partners, starting at the top, with the bosses of the two merging firms becoming co-chairman and co-chief executive. But the omens were bad. Announcing the merger, Sandy Weill (of Travelers) quipped that he was used to “sharing power and responsibility as I’ve been married to my wife for 43 years”. This metaphor may have jarred on John Reed, who had divorced in 1991 and married a stewardess on the Citi corporate jet. Barely 15 months after the deal was done, the two co-heads agreed, under pressure from shareholders, to separate their roles. Divorce followed in April this year, when Mr. Reed retired, at the request of the board, leaving Mr. Weill as lone chief executive. For the moment, Citigroup is an undeniable success: in the first quarter of 2000, it was the world’s most profitable company. But the power struggle at the top delayed integration and discouraged “cross-selling” the financial products of one part of the merged firm to customers of another, one of the key goals of the merger strategy. It has also prevented the emergence of a strong Internet strategy.
Global Corporate Strategy
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Mr. Weill admits only that “we have taken longer to get places than we might have.” In fact, the costs may have been greater than that implies, not least in missed opportunities. Citigroup’s management is now dominated by people from Travelers. The loss of the Citibank talent may yet cause problems, especially outside America. The stellar performance hoped for by the stockmarket may not happen. Citi and Travelers came to the altar with different experiences of mergers. In the 1990s Citi, which traces its origins back to 1812, went from near bankruptcy to being the leading global consumer bank. But big mergers were not central to this success. Indeed, the mergers it undertook went badly – notably the acquisition of Quotron, a securities data firm. By contrast, a knack for acquisitions enabled Mr. Weill to build up Shearson Loeb Rhodes, a brokerage, which he merged with American Express in 1981. He quit in 1985, after falling out with James Robinson, the boss of Amex, thereby learning a valuable lesson: do not be the junior partner in a merger. In 1986, he bought Commercial Credit, a small consumer-lending firm, which through mergers became Travelers, an insurance and brokerage conglomerate. And even as the merger with Citi was announced, the recently acquired Salomon Brothers investment bank was still being integrated with Travelers’ Smith Barney. In June 1998, Mr. Weill added a stake in and a joint venture with Nikko Securities, a Japanese stockbroker. Mr. Weill’s merger technique was based on having a clear strategy – including cutting fat out of under-managed businesses – and implementing it fast. He tried to minimise cancerous uncertainty by selecting the management team to run the merged businesses as soon as possible, usually on merit and loyalty to him. Yet integrating Citigroup was never going to be straightforward. Citibank was not flabby or under-managed – or, at least, did not see itself that way. It was possible that the merger would be called off by regulators, a danger that fostered hesitancy over integration. In the event, the Citigroup merger helped secure the scrapping of America’s Glass-Steagall Act, which had separated commercial banks, insurers and investment banks. But above all loomed the problem of this being a genuine merger of equals. Two heads better than one? The to-be-merged company quickly adopted a “Noah’s Ark” approach to top management- everything in twos. As well as Messrs Weill and Reed, half the new board’s members came from Citibank and half from Travelers. The global consumer business was headed by Bob Lipp (Travelers), and William Campbell (Citi). The global corporate and investment banks had three heads – Victor Menezes (Citi), Deryck Maughan (Salomon Smith Barney) and Jamie Dimon (Travelers), long regarded as Mr. Weill’s heir apparent. As a result, every decision became a lengthy philosophical discussion. This partly reflected the personalities of the two co-chief executives. Mr. Reed is the sort who loves to discuss management with academics. A loner in leadership, he tended to invite people into his inner management circle only to
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Global Corporate Strategy
expel them soon after. Mr. Weill is guided more by gut instinct than by briefing papers, and relies on a small group of loyal managers. Indecision at the top soon led to trouble in the global corporate and investment bank: Travelers’ Salomon Smith Barney investment bank, plus Citi’s corporate relationship bank. Integration had been half-hearted: SSB’s well-paid investment bankers regarded their new colleagues as stuffy corporate folk. Staff in the Citi operation were proud of the 1,500 leading global firms that were their main customers, and looked down on traders at Salomon, with their lower-grade corporate-bond clients. They wanted their services to continue under the Citi brand, not to be switched to SSB. They were aghast at the huge losses run up by Salomon during the financial-market crisis in 1998. Meanwhile, Salomon itself resented Mr. Weill’s decision to close its American bond-arbitrage operation only a few months after buying the firm. Things came to a head in late October 1998 at a weekend of golf and spouses in West Virginia, where senior executives complained about how the merger was proceeding. Scuffles broke out. The two leaders reacted with unusual decisiveness. A week later, a new management team was appointed. Mr. Dimon left the company, his ambition having reportedly annoyed Mr. Weill. Mr. Menezes was joined as co-head of global corporate and investment banking by Michael Carpenter, a Weill loyalist. The pair at once set about fully integrating the two businesses, selecting a new top management team and identifying a dozen big issues that needed urgent action. In July, after Citi’s biggest shareholder, Prince Alwaleed bin Talal of Saudi Arabia, fretted in public about the relationship between the firm’s co-heads, Mr. Weill took charge of day-to-day operations. Mr. Reed was left with strategy. In October 1999, Robert Rubin, a former Treasury secretary and co-head of Goldman Sachs, was appointed to the “office of the chairman”, apparently to broker peace between the two bosses. By now, the tensions at the top were public. Mr. Reed had told the Academy of Management that, although the “wisdom of the merger is even more compelling” than when it began, it “is not 100% clear to me that it will necessarily be successful”. He drew telling comparisons with step-parenting. “Sandy and I both have the problem that our ‘children’ look up to us as they never did before, and reject the other parent with equal vigour, saying ‘Sandy wouldn’t want to do this, so what do I care about what John wants?”’ The reality was that Sandy’s children were increasingly winning the top jobs, and John’s were quitting in droves. Citigroup was rapidly becoming Mr. Weill’s creature. One top-notch Travelers person did leave, however: Heidi Miller, Citi’s chief finance officer, quit for Priceline, an e-commerce firm. Mr. Weill blamed her departure on irritation with Mr. Reed. But that was the last straw: the board asked Mr. Reed, 61, to retire. The 67-year-old Mr. Weill became sole boss, supported by Mr. Rubin. All Mr. Reed salvaged was a promise (which few now believe) that Mr. Weill would go within two years, and that the search would begin for a successor. Mr. Weill soon completed his domination of Citi. In July, the last of the post-merger top-job splits ended. Mr. Carpenter became sole head of the
Global Corporate Strategy
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
global corporate and investment bank; Mr. Menezes, the last remaining Citibanker at the top, was packed off to head corporate and consumer banking in emerging markets. Mr. Lipp, another Weill loyalist and head of consumer banking, joined the office of the chairman, with a brief to co-ordinate cross-selling. As for cross-selling, the vision that ostensibly motivated the merger, this has worked better in some parts of Before and after the merged company than in Citigroup Citicorp others. The greatest success has Travellers been achieved where it was least expected – in corporate and Employees Net profit '000 $bn investment banking. Wall Street 10 180 analysts initially hated the decision to axe Mr. Dimon and 160 to promote Mr. Carpenter. In 8 the event, it proved inspired. 140 Aided by the link with Nikko 120 Securities and a merger with 6 Schroders, a British investment 100 bank, in January 2000, the now Schroders Salomon Smith 80 4 Barney has moved from being a 60 middle-ranking firm to the brink of – or even into – the so-called 40 2 “bulge bracket” of top global investment banks. 20
1997 1999 0 1997 1999 0
Mr. Carpenter says his business was involved in some 300 transactions during 1999 that both Citi and Salomon folk agree could not have been done without each other, and that the firm is now in the top four in every product category, in every geographical region of the world. This may be stretching it – SSSB is still not a first-tier adviser on mergers and acquisitions, for example, though it is gaining on rivals such as Goldman Sachs and Morgan Stanley by using its huge balance sheet to offer corporate clients credit lines during mergers.
Source: Company Reports
The potential for cross-selling was supposedly greatest in consumer finance. Citi’s strong global brand provided a superb platform for selling Travelers and Salomon Smith Barney products through its branch network, which spans over 100 countries, and to Citi’s 42m credit-card account-holders (more than any other credit-card provider). But cross-selling is something that many financial institutions, across the globe, have attempted, with little success. Citi claims a few modest achievements. Some wealthy Salomon Smith Barney customers have been given 100% mortgages by Citibank, secured against their brokerage accounts. Salomon Smith Barney mutual funds have been sold to Citibank branch customers. Within months of the merger announcement,
Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Global Corporate Strategy
Travelers annuities were selling in the Citibank branch network, and now generate revenues of $750m a year. Travelers has now “pre-underwritten” all of Citi’s credit-card customers, and whenever somebody with an attractive risk profile calls to discuss his credit card – there are 80m such calls a year – he is invited to buy a Travelers home or car insurance policy. Travelers says that sales by this channel have minimal incremental cost, making them particularly profitable. It now sells almost 5,000 policies a month, and expects $200m in premiums by 2002 (6% of current revenues). Travelers has started to expand abroad, primarily in emerging markets rather than in the already highly competitive continental European market. Once only a domestic American insurer, Travelers now expects to win the lion’s share of the $400m a year in commissions currently earned by the global Citibank branch network from selling competitors’ products. According to Mr. Weill, integration in the corporate and investment-banking business happened faster than in retail because it had to. “If we’d gone slower, we would have lost a lot of people." There have been huge technology challenges, such as incompatible computer systems. Citi remains confident that retail cross-selling will bear more fruit, but progress has been slow. It has been hard to integrate systems, and business units have warred over which brands to cross-sell and which to ditch.
The value of a deal Share prices, October 8th 1998 = 100
300 250 200 150
1996 Source: Primark Datastream
Adding to the frustration has been the group’s muddled Internet strategy. Mr. Reed, who took sole charge of it in July 1999, believed that Citi’s Internet potential would best be fulfilled by developing from scratch an entirely self-contained, state-of-the-art online retail financial-services provider. More
and the paradox of co-operation and competition. Reed’s vision. But he has yet to show that he can fix and expand an already successful global giant. where the group expects its main growth. Since Mr. strategic alliances and mergers and acquisitions (M&A). Mr. with both profits and the share price soaring. cut costs and made under-managed assets sweat. “This isn’t Sandy’s deal. This caution may be a mistake. it has been downgraded to a sort of incubator. Weill could take Citi into the Internet age. Now. Asked in June whether Mr. But the Travelers people who now lead Citibank lack experience in overseas markets. He is not going to personally design the Internet company that is going to do this. and transformed the way people used their bank. New managers from Travelers have instilled a more aggressive sales culture in Citibank branches.Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers than $500m was spent developing “e-Citi” – a classic example of the big-bang innovation strategy pursued by Mr. Firstly we considered the role of strategic alliances. and was resented by Citi’s established businesses.” Mr. E-Citi attracted few customers. Reed’s boldness might eventually have brought rewards – as did his huge spending on ATMs. Reed’s retirement. Citigroup has prospered. which initially meant huge losses. Mr. in Citi branches. Reed decades earlier when he installed thousands of ATMs. and 1400 of its employees have been despatched to other Citigroup brand businesses. Despite the infighting. Weill has. We noted the advantages arising from 129 . Summary In this unit we have considered the options available for global expansion. Reed said. 4. has gone. What are the problems that have become apparent after the merger? What impact have these problems had on the core competences of the newly formed organisation? How do you think the company could have overcome these problems? Do you think this merger has been successful? 3. ownership of Internet strategy is left with the top executives in individual businesses. Citibank’s institutional memory. Mr. as usual. Questions: 1. which gave some protection from bad lending decisions. So has Mr. strategic mishaps and delays in integration. 2. Weill is skilled at fixing and then expanding under-managed companies.
and then read p. and other M&A related transactions.334 (Reading 6. We saw how M&A can give ready-access to markets. We then considered mergers and acquisitions. R. Chapter 14 Pages 337-357 *Highly recommended 130 . Noting the high rate of failure of M&A. Chapter 8 Pages 166-195. B & Meyer. Chapter 7 Pages 151-174. Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1.Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy pooled resources. know-how and management capability. strategic interdependence. what is the best recipe for assimilation? · Does the acquiring company impose its culture on the acquired company? · Is there sometimes merit in preserving intact the culture and working practices of the acquired company? · How can the right balance be struck between the need for organisational autonomy vs. we identified some of the common pitfalls of M&A. Prepare your responses to the above. know-how and shared risk. and finally concluded with the McKinsey five-step program for successful mergers and acquisitions. 2. but also noted that there can be conflicting goals and there is the potential loss of know-how. Ref 4*. Chapter 16 Pages 374-407 Ref 13. REVIEW ACTIVITY We have noted that one of the main pitfalls in M&A is the integration phase. When a company acquires another.3) in the key textbook De Wit. We looked at some of the drivers for M&A activity.
Whichever business context you operate in. value should be determined by your key stakeholders. Two case studies are also presented to highlight the issues. and particularly in the knowledge-based economy. · Debate the validity of adopting a value driven approach. in the area of new and emerging technologies. We shall look at current thinking with regard to the creation of value and consider the merits of a corporation adopting a value-driven approach. Economists think of value in quantitative terms. In this unit we shall look at the concept of value from a stakeholder’s perspective. There is now the recognition that what was thought to be true about valuation is. Traditional approaches can. Shareholders think of future potential. Introduction The term value can bring to mind different things. · Explain the principles relating to EVA and its impact on strategy. Increasingly. 131 . in fact. Increasingly executives and managers are overhauling their understanding of shareholder value. the key stakeholders are the company’s shareholders. in a strict monetary context. be misleading in certain contexts – particularly in the knowledge-based economy. in fact. · Assess strategy from a value creation perspective. It can mean one thing in the public sector and have a different focus in the private sector.Unit 5 Value Management LEARNING OUTCOMES Following the completion of this unit you should be able to: · Analyse the concept of value from a stakeholder’s perspective. In commercial organisations. there is an emphasis on intangible and intellectual capital assets. only situationally true.
Does a company seek to satisfy the needs of as many stakeholders as possible in conducting its business.Unit 5 – Value Management Global Corporate Strategy Paradox of Profitability and Responsibility It is important for companies to understand their purpose in business. value is very difficult to define and quantify. ACTIVITY Consider the definition of ‘Value’ in the context of an organisation. or more importantly. value-added. and Ben and Jerry’s. regardless of the organisation type. or is it duty bound to maximise its profits in favour of the owners? It costs money to be socially conscious! This unit looks at the ‘shareholder’ extreme of de Wit’s paradox continuum. Draw up a list of the different aspects of the word ‘value’. The Concept of ‘Value’ What is ‘value’? What does it mean in relation to business. ACTIVITY FEEDBACK Your list may have included some of the following: · Value for Money. 132 . · Shareholder Value. to strategy? Value as a concept means something different to private and public organisations. e. Unit 6 will examine the opposite end by exploring Corporate Governance and Ethics. However.g. Is it to maximise profit for the owners (a shareholder value approach) or is it to meet the requirements of society at large (a stakeholders values approach)? Examples of such companies are Body Shop.
· Value Cycles. range and position power of Stakeholders interested in an organisation’s strategic choice is greater. performance indicators. · Value Management. · Value System. In this unit we shall focus our attention mainly on commercial organisations. However. Many of the developments in management practices and theories in the public sector (e. the emphasis on value concepts can be different in the public and private sectors. However we shall now briefly look at some of the differences between the private and public sectors in relation to value.g. · Stakeholder Value. typically in a political arena.Global Corporate Strategy Unit 5 – Value Management · Value Chain. value should be judged by the organisation’s key stakeholders. the acceptability to stakeholders of strategic choice is probably of greater significance in the public sector than in the commercial sector. Overall. Public Sector Strategic management is. The overarching need is for public bodies (e. the notion of competition for a public organisation is usually concerned with competition for scarce resource inputs. competitive tendering) have been used to attempt to introduce competition to encourage improvements in value for money. health service organisations) to demonstrate Value for Money in outputs.g. the role of ‘ideology’ in strategy development in the public sector is probably greater than that in a commercial organisation. Stakeholder Value Whether in the private sector or public sector. We shall look at some of these concepts in more detail in this unit. changes to internal markets. The measurement of value to stakeholders in the public sector is difficult to quantify. local government. This is because the type. because it is essentially a perception by the stakeholder of the ‘value for money’ in the service they have received. just as important to the public sector as it is to commercial entities. 133 . For example. central government. of course. Therefore.
upstream with suppliers and downstream with distributors and customers. For this reason. must be taken into account. the internal linkages that exist within the boundaries of an organisation. This raises the issues of Value Management – how can a company manage itself (strategically) to maximise shareholder value? In addition to that. companies try to avoid shareholder dissatisfaction and regard shareholders as key stakeholders. all managerial actions should be carried out only when they can add value to the company. This overall picture of value to an organisation can be termed the Value System. The ‘value system’ is therefore better for that company. to fully understand the concept of value. how can shareholder value be measured? 134 . If shareholders become disenchanted with a company and sell their shares in sufficient quantities. particularly those with several business units. Theoretically. The ultimate consequence of this is that the market capitalisation (the value of the company on the stock market) falls to such a level that the company finds it more difficult to borrow money or may be taken over by another organisation who buys up a majority of the shares. This is logical as the shareholders own the company and employees have traditionally answered to the owners. have very complex value chains and systems making strategic analysis difficult and time consuming.e. This introduces the concept of the Value Chain in an organisation. For example. Some organisations. Value chains and systems can establish significant competitive advantage. the value system can be different from company to company depending upon their strategic choice. two competing firms with equivalent internal value chains can be differentiated in terms of value by better suppliers and/or distributors. the law of supply and demand dictates that the share price will fall. Key Stakeholders It could be argued that the key stakeholders to any commercial organisation are the shareholders (particularly where the company is publicly owned). linkages to the entire supply chain.Unit 5 – Value Management Global Corporate Strategy Private Sector Stakeholder value is a critical factor for strategy and management in the private sector. Clearly. All employees have a ‘fiduciary’ duty to preserve and build upon the owner’s investment in the firm. The key work in this area of strategy was carried out by Michael E Porter in 1985 and 1990. In addition to this. i.
Why is sensitivity to stock price now a critical lever for managing the future? There is an increasing recognition that the market. What is value? Business models and definitions of value that worked well until the early 1990s. and indeed employees at large. ACTIVITY As background to the next sections. Increasingly companies are adopting a value cycle approach. But any measure of shareholder value must include the following considerations: · Cash flow. need to view their company from the outside in. Decisions which add value to a company. operational or financial risks are reduced or when greater efficiencies are produced. Value chains and value cycles are pertinent in this discussion. Return on Capital Employed (ROCE). B & Meyer. Reading 11. over time. This has led to the recognition that management. Creation of Value Value is added to a firm when profits increase. A value chain is seen to deliver value to the customer. Many forward-looking companies view their key customers as critical partners in setting business direction. R. 135 . Various ratios and tools have been introduced into business for analysing financial statements. represents a brutally honest evaluator of performance.1.g. value of the share holdings or both. To achieve this. e. value-based corporations are increasingly basing compensation packages on value-based parameters. Value-based corporations place customers at the heart of their business (the view from the outside in). De Wit. add value to the shareholders – either in the form of dividends.Global Corporate Strategy Unit 5 – Value Management Value Management How do companies adopt strategies to deliver shareholder value. are now being challenged. p. 610-615 in your key text. ‘Shareholder value and corporate purpose’. learn about the shareholder value approach by reading. They need to act like long-term shareholders themselves. as opposed to the traditional value chain approach. whereas a value cycle approach views the process as an interaction with the customers. and feel the pressure from the marketplace in order to deploy assets and adopt strategies wisely.
Cash is fact” Economic Value Added (EVA) Corporations adopting value-based management principles are increasingly using a measure called Economic Value Added. And that means having the right culture. EVA is used as a measure of value. However. It should be emphasised that EVA is NOT a strategy – it is a measure of performance. Alfred Rappaport. then you are ahead. Corporate functions must be informed by value-based thinking – planning. · Markets are too competitive for companies to create such value by accident. · ‘Net present value’. When implemented properly. performance measurement. it is a very popular tool and is used widely by major companies – to even suggest that it will be used has been know to increase share price overnight! EVA is the difference between the Return o n Cap ital Em p lo yed and the Co st o f Cap ital Em p lo yed by a company. 136 . said “Profit is an opinion. but flawed. commonly shortened as EVA. EVA is a tool for measuring performance. incentive compensation and corporate communication. capital allocation. it is a powerful way to promote shareholder value. The move towards value-based management in large companies is based on two assumptions: · The main aim of any business in a market economy is to maximise shareholder value.Unit 5 – Value Management Global Corporate Strategy · ‘Time value’ of cash. The same logic applies with a company. · Opportunity cost of capital. If your house has risen in value by 10% and your mortgage is only costing 6%. and is used as a key parameter in promoting shareholder value within management ranks and employees at large. and especially if tied to management compensation. As one of the great proponents of the Shareholder Value philosophy. systems and processes in place so managers make decisions in ways that deliver better returns to shareholders. If it gets more out of its capital than it is paying for it then it is adding value. The strategies a company uses are geared to increasing EVA so as to demonstrate to markets that they use capital efficiently. A simple. operating budgets. analogy is to compare the annual cost of your mortgage with the annual increase in value of your house. They must plan for it.
” SPX witnessed dramatic improvements in asset efficiency. cash and net working capital) plus the present (in other words. the company ushered in a series of actions designed to reverse its poor performance. and the way we do business. the company focused its operating units on quality and operating excellence. While accountants (in P&Ls) recognise only out-of-pocket costs. It is profit as economists define it. The company’s 1995 annual report proclaimed: “One of the most important of these actions has been the decision to move ahead as quickly as possible to implement EVA. It was a chronic underperformer in the early 1990s. This approach is especially useful for executives one or two levels below top management who have little direct influence over share price and for whom stock options are less effective. The value of any business must equal its net assets (the sum of fixed assets. Within five years of implementation it was selling for $180. so too do share prices. EVA recognises all capital costs.700 managers were in the programme. As the company explained in its 1998 annual report: “EVA is the foundation of everything we do. with low profits and a languishing share price. 4. inventories were cut by 15 per cent. with a positive effect on the share price. Therefore. Within a year. When EVA was implemented. including the o p p o rtunity cost of shareholder funds. such as the interest paid to bankers. CASE STUDY – SPX SPX is a large US auto parts and industrial products company. In the year after adopting EVA. SPX’s share price was under $16. It is a common language. discounted) value of future EVAs. a mindset. combined with 137 . but not the accounting profit seen in a corporate profit and loss account. After John Blystone took over as chief executive in 1995. Such efficiencies. Senior managers were put on an EVA bonus plan. as stock market expectations of corporate EVA increase. One such unit began a next-day delivery policy that helped it to achieve market leadership. To improve performance. and by the end of the following year. By 1999. including non-executive directors. despite higher sales. a dramatic improvement in performance was evident. Companies can therefore use EVA targets to motivate managers to deliver the financial results the stock market wants. Both are measured net of operating expenses but they differ in the treatment of capital costs. SPX was transformed into an EVA company.” Formal adoption took place at the end of 1995. What makes this company’s experience instructive is that it was able to create a culture that put value creation at the centre of management systems. Their compensation and bonus schemes can be tied to specific financial objectives and can be cascaded down to employees all the way down the company.Global Corporate Strategy Unit 5 – Value Management What is EVA EVA is a measure of profit.
Growth of Value Management Concepts Value Management concepts are becoming more widespread on the back of a number of developments. In particular. caused a 12. driven by the globalisation of capital markets. Companies are responding to a changing corporate environment. SPX divested several businesses that were profitable. but EVA-based compensation systems create stronger incentives for managers to seek such opportunities. EVA’s most important contribution to the turnaround was its central role in management compensation. 138 . but whether they are motivated to do so. The actions taken by SPX to improve performance were neither unusual nor dramatic. cash and working capital.Unit 5 – Value Management Global Corporate Strategy sourcing initiatives. multiplied by net assets. it is discounted back. well-managed companies have always done this. equals EVA: EVA = (RONA – WACC) x NET ASSETS How does EVA relate to the value of a company? The value of a company is defined as: Value of Company = Net Assets + Present Value of future EVAs The net assets are the sum of all fixed assets. The key lesson to be learned from SPX is not whether managers are capable of delivering superior performance. Note the EVA component is the present value of future EVAs.5% improvement in operating profit in 1997 (the second year after EVA was implemented). The difference between RONA and the WACC. or the “EVA spread”. and therefore should be sold. Of course. · Greater competition for capital. but strategic reviews revealed the businesses were worth more to others. When operating profit is divided by net assets. it yields a measure called Return On Net Assets (RONA). with capital costs equal to net assets multiplied by the weighted-average cost of capital (or WACC). How is EVA calculated? EVA is after-tax operating profit minus capital costs.
A successful implementation must: · Take account of all stakeholders. the What is a Value-Driven Approach What sort of things do ‘value driven’ companies have to do to design and implement value management? Methodology: · Take a long term rather than short term perspective. the influence of institutional investors. · Take a company specific rather than a ‘generalised’ approach. Implementation: If a company fails to involve all parties then the value management strategy will meet with resistance and delays. in particular.Global Corporate Strategy Unit 5 – Value Management · The growing trend towards ‘professional’ shareholders and. Mistakes made in one or all of the following areas can lead to inaccuracies in management information and can have a serious effect on the overriding goal of value management – that is. 139 . · Be in full consultation with employees. to improve corporate control. If reward systems to employees and shareholders are rigidly maintained for historical reasons and not reviewed in the light of a value management approach. · The emergence of a market for ‘corporate control’ i. high potential for company acquisitions.e. Reward Systems: · Implement effective compensation and incentive schemes. · Review traditional dividend policy. · Use suitable performance measurement targets in planning and control. the introduction of a value driven strategy is done ‘half-heartedly’.
Unit 5 – Value Management Global Corporate Strategy ACTIVITY Value innovation is said to be the essence of strategy in the knowledge economy. a company specific approach must be adopted.1 summarises the essential components. the company needs to verify that they are actually creating value for 140 . A good approach is to leverage general value management tools. Let us examine each in turn: Identify value performance and value drivers It is clearly essential for a company to be able to assess their value and measure progress to identify their Value Performance. but to adapt to your specific industry and fine tune for company specific factors. Figure 5. value innovation and the knowledge economy’ in your key textbook. R. Company Specific Approach To be successful in deploying value-management.1. Learn more about this by reading ‘Strategy. B & Meyer.2. De Wit. In other words. A company-specific approach to value-management. General value-management tools (select suitable tools) Valuation models Cost of capital calculations Portfolio management Controlling tools Industry specific factors (adapt to industry) Company specific factors (fine-tune for company) Company specific strategy Industry-specific success factors Specific tools Tailored implementation + Opportunities and threats Structure and dynamics of industry Value drivers Product cycles Success factors + Value system/corporate philosophy and policy Strategy Organisation/structures Production processes Resources = Figure 5. Components of a value-driven approach The components of a value-driven approach are summarised in Figure 5.
the purchaser acquires the right to future cash flows. which identifies and evaluates key value drivers. Step 5: Inform stakeholders and develop investor relations Step 1: Identify value performance and value drivers Step 4: Adapt compensation systems Increase shareholder value Step 2: Implement value creation programmes Step 3: Extend management and control systems Figure 5.2. In adopting a Value Management strategy. discounted back to the present value. the method of corporate valuation must be ‘Discounted Cash Flow’ (DCF) which sees the value of a company as being the sum of the cash flows it will earn in the future. This develops a tool for Sensitivity Analysis. but preferably ten years. 141 . which should reflect a forecast horizon of at least five. Each strategic business unit (SBU) should be calculated separately with a summarising routine to reflect overall portfolio value. Refer back to Unit 2 for a review of the portfolio management approach to strategy. This reflects the fact that on the purchase of a company. The whole process is based on careful Business Planning. Implement value creation programmes Having laid the foundation for value management by establishing a financial model it is necessary to develop or expand a portfolio of value creating business units. This can be achieved by creating a computer based financial model containing all of the key value management variables.Global Corporate Strategy Unit 5 – Value Management their stakeholders. Value drivers can be identified by using the above computer based financial model by changing core assumptions and observing the impact on shareholder value. Components of a value driven approach.
The ‘Stars’ in the value portfolio are those businesses that create shareholder value by. the following questions can be answered.g. has this unit achieved critical mass? E. Value portfolio chart. · Sustained cash flow growth achieved by engaging in activities in attractive industries.3. · Optimisation / Discontinuation / Sale of the ‘dogs’. financial assets. · Further growth or holding strategy with no strategic investment for the ‘stars’. property. · Optimised management of investments (intangible assets. Managing for Value 1999. 142 . would this unit not be better off in someone else's hands? SBU 2 SBU 8 High "Dogs" Cirecle diameter = capital employed SBU 6 Low Strategic fit with corporate vision Figure 5. for example.g. can profitability be maintained without further investment? SBU 1 Pursue further growth E. The portfolio distinguishes between stars and dogs. Ref: Stefan Botzel & Andreas Schwilling.g. or by attaining an excellent competitive position.g. From this.3. plant and machinery. This represents the results of the analysis carried out above for each SBU. what growth options are available? "Stars" Deviation from riskadjusted market returns SBU 7 Sell SBU 4 Optimise or discontinue SBU 3 E. · How is a particular SBU to be positioned into the value portfolio? · What actions are needed to increase the Value of the portfolio? + Retain without strategic investment E. See Figure 5.Unit 5 – Value Management Global Corporate Strategy A value portfolio chart plotting potential market returns (adjusted for risk) against strategic ‘fit’ with corporate vision is recommended. have all efficiency enhancement options been exhausted? E.g. working capital) and how they are financed (cost of capital).
· The ‘mix’ of capital allocated to each SBU could be Let us now deal with each ‘window’ of the value portfolio in turn. · The goal of corporate strategy should be to position core businesses in this window. (Clearly value is created only when return > cost). 143 .Global Corporate Strategy Unit 5 – Value Management · Consistent risk management. but still create value. ‘Stars’ that fit the corporate vision: · Cash producers and value drivers. changed. · ‘Dogs’ should only be retained until transformed into value creating ‘Stars’ or sold off. which will be developed by each individual company. personal satisfaction. · Growth should be promoted. Strategic management Analysing the value portfolio must be combined with the strategic management of the company. · Only SBUs which yield shareholder value should be retained in the portfolio. etc. ‘Stars’ that DO NOT fit the corporate vision · May be non-core or niche markets. The position on the ‘y’ axis is determined by considering the comparison between return on investment with the cost of capital. The position on the ‘x’ axis is determined by a pragmatic scoring system. new ventures. not emotive. alliances. · Consistency is vital – decisions must be based on hard figures produced by value management. The ‘Dogs’ do exactly the opposite. · If the portfolio cannot guarantee to generate the target level of value creation then the company needs to restructure through acquisitions. · Capitalisation on areas of competence. · Funding will need to be allocated to maintain and / or improve the company’s position.
· Focus on risks attached to the poor corporate ‘fit’. In summary. · Increase Margins. a value creation strategy must seek to: · Increase Revenues. such SBUs should be sold. · Possibly look to sell to harmonise corporate vision. ‘Dogs’ that DO NOT fit the corporate vision · These SBUs destroy value. · Money to be invested only if the returns are above cost of capital.Cost of capital is too high · Strategically. · A forward looking approach based on future cash flows. · A focus on cash flows rather than numbers in financial statements. · Possibly adapt corporate strategy to remain attractive to the market and adopt a growth strategy.Low cash flow due to thin margins. need to be optimised or run down. . ‘Dogs’ that fit the corporate vision · These SBUs destroy value because of. · Generally. · Minimise the cost of capital through Financial Engineering. · Optimise Investments.Investment has been excessive or inappropriate . to lay a solid foundation for successful growth strategies. Extend management and control systems A uniform system of planning and measuring business success that makes the creation and destruction of value transparent must be established based upon. 144 .Unit 5 – Value Management Global Corporate Strategy · SBUs retained but without further investment. low sales growth .
a sales growth of. · Combined forms. competitive position. higher sales target appears realistic. · Corporate value could still be destroyed despite this high figure – the investment needed to achieve this growth would may not bring in sufficient returns to cover the cost of capital. Examples of this are.Global Corporate Strategy Unit 5 – Value Management · A view which acknowledges the time value of money. For example. The variety of value based incentive schemes possible means that a scheme can be devised for any level of management – it doesn’t have to be the same across the whole company. say. Artificial Participation Models: · Bonuses. 10% is not a valid strategic goal (as far as VM is concerned) because. Value management dictates that increasing the value of the company in its SBUs is the single most important measure. Management control processes and communication systems must be clearly defined and capable of being used as a basis for a Value Based Compensation System. The principle is simple – managers' salaries should be linked to value generation for shareholders. sales growth and results. Management reports must be ‘recipient based’ and include value measurements. · Reflection of the risk faced by different SBUs in capital rates. · 10% may not be enough if value creation based on a Adapt compensation schemes Compensation systems are a key factor in value based company management. 145 . Genuine Participation Models: · Stocks. · Stock options. Strategic Planning and Control European countries tend to base strategic planning upon traditional metrics such as market share. · Convertible bonds.
The bank allows for a negative bonus. Share price increases when these expectations are exceeded. The bonus earned in any year is the sum of the target bonus plus a fixed percentage of excess EVA improvement (which can be positive or negative). If manager and shareholder interests are to be aligned. This insight yields the first principle of EVA-linked compensation: the key performance measure is not EVA itself. part of the bonuses they earn in the current year might be forfeited. the value of debt and equity) equals net assets plus the present value of future EVAs. This bonus is credited to a bonus bank. Otherwise. This is the second basic principle of EVA-linked compensation. Remember that the value of the company (that is. As a result. The bonus bank component adds a critical dimension to the scheme by extending managerial planning horizons beyond the short term. is paid if the target level of EVA improvement derived from the company’s share price is earned.Unit 5 – Value Management Global Corporate Strategy EVA bonus plans don’t just motivate managers to think about current EVA. This practice forces managers to think not only about what they need to do in the short term to boost performance but also what they must do to increase it in future years. management pay should more closely resemble payouts received by owners. companies must first set targets based on market expectations. Value-creating investments might be avoided because their immediate effects on EVA are negative. up to the target bonus. usually stated as a percentage of salary. a target bonus. but excess improvement. not just the current period. The figure above shows how such an approach can work. the bonus bank provides medium-term incentives for value creation. To derive this measure. rather than the current year bonus earned. This means that the market capitalisation of a company’s shares is based on expectations of future EVA performance. The solution is to give managers a direct economic stake in future EVA. When the bonus bank is negative (which is possible if under performance is great enough). wiping out at least a portion of EVA bonuses earned in previous years. The EVA interval determines the sensitivity of the bonus earned to excess EVA improvement. and the bonus bank balance. If they did. the payout rule for the bonus bank is the full bonus bank balance (if positive). but there is also a downside. Typically. Note. no bonus is paid. In other words. and is chosen by senior managers based on the degree of upside potential and downside risk they wish to inject into the plan. plus one-third of the bank balance in excess of the target bonus. managers would focus entirely on short-term performance at the expense of the future. that the payout is not capped. however. Then. in addition to the short-term incentives 146 . there is no ceiling on the EVA bonus. determines the payout.
The share price has gone from a low of $11 at the end of 1995 to a high of $36 at year-end 1997. Outstanding accounts receivable (that is. CASE STUDY – Herman Miller In 1995. Inventories across the country reduced by 24% or $17. resulting in better decisions for customers and general business.5 billion. As one observer explains: “When they went on EVA and began focusing on capital costs like receivables. The 13% operating margin is much improved from five years ago with scope for further improvement. sales have increased 38%. sales moved from $1 billion to $1. They implemented EVA as a measurement and management tool. the money owed by customers) have been reduced 22% from 55 days in 1995 to 43 days at the end of 1997. The economy was strong. EVA is the backbone of the company-wide incentive and bonus system. EVA was $40 million – an increase of nearly 300% over the $10 million generated in 1996. So the board set a new debt to capital ratio of 30% to 35% and $100 million was raised in a private placement. not the accountants. Miller’s business has grown and people have grown in their commitment and contribution. Herman Miller has valued employee participation since company inception nearly 75 years ago. Employing the same amount of capital as in 1995. The results weren’t showing up on the bottom line and so the company decided that a tool was needed to help focus their efforts. EVA analysis demonstrated that debt capital was cheaper than equity capital.2 million from 1995. EVA analysis enables the company to identify waste in both costs and use of capital. In 1997. Over the past two years. the total square footage of building space has been reduced by more than 15%. great products and talented employees. At the same time. a US office furniture manufacturer. had a rich history and culture. The cut in receivables is especially interesting because the impetus for this came from operating managers. the furniture industry was growing and sales were growing at a fast rate. EVA was seen to build on that historic strength. In 1997. Using EVA. But something was missing. allowing employee-owners to better understand the impact of their actions.Global Corporate Strategy Unit 5 – Value Management from annual payouts. Herman Miller. Stock options add to the EVA bonus plan by providing long-term incentives. $110 million was returned to shareholders in share repurchases and dividends. Miller employees in the divisions attacked the late payment problem on their own and discovered that the cause of overdue 147 .
Inform stakeholders. Annual Reports are more indirect whereas meetings and presentations are direct communication tools. If returns are poor. they may sell their shares and invest in something more profitable. if common manufacturing facilities or sales staff serve multiple business units. matrix organisations tend to derive fewer benefits because of the difficulty of establishing accountability. a one off exercise.g. e. This suggests that companies with autonomous business units benefit more than companies that operate as one large unit. but some are more likely to benefit than others. For example. What does “Investor Relations” mean? Investors will only be interested in a company if it promises to be a good investment. In fact. The result: improvements in EVA and customer satisfaction. Therefore. Another difference between successful and unsuccessful users is that the former rely on strong managerial wealth incentives tied to business 148 . develop investor relations Of all stakeholders. Is EVA Appropriate? All companies can benefit from the shareholder value perspective and the value-creating incentives offered by EVA. and if these units are not forced to “buy” this capacity. Also. investment accountability. Communication tools may be split into direct and indirect with varying degrees of importance to investors. Companies with substantial shared resources are less likely to benefit from EVA. It is a long term process of positive opinion building. EVA measurement and management incentives can be undermined. about 10-15% of a company’s value development can be ascribed to the influence of professional investor relations. the investors are the ones who probably play the most important role. It is not.Unit 5 – Value Management Global Corporate Strategy receivables was incomplete orders. however. So the ‘Millerites’ got receivables down by speeding up production of missing items and making sure shipments were complete as well as on time. An important part of EVA is that it can provide value creation incentives for divisional managers. a company must put a value on itself so that an informed decision can be taken. When an order arrived missing a piece or two. the customer would withhold all payments until the last items arrived. not just for top executives. This is the essence of investor relations.
but recognise that the strongest incentives for divisional managers come from measures based on divisional performance. But when EVA is at the centre of a company’s performance measurement system. whereas in unsuccessful users. probably because of low tolerance for differences in business unit compensation. In other words. the CEO may not have realised what he or she signed up for. and it is no substitute for sound corporate strategies. Another feature of successful users is that they try to establish and maintain accountability for business unit heads. The latter tend to place heavier emphasis on stock options. We have looked at EVA as a measure of value. We have also looked at the components of a value-driven approach. they override the bonus plan. or substitute for sound corporate strategies. Without accountability. and when management bonuses are linked. requires that these managers stay put for extended periods. they are more likely to do so in ways that deliver superior returns for shareholders. the chief executive is an enthusiastic advocate. EVA is no panacea. in the form of a bonus bank. job tenure for business unit managers is short. As a result. what it means to different stakeholders. Successful EVA companies use stock options. We have considered the characteristics of companies for which the shareholder value perspective and value-creation incentives offered by EVA is most likely to succeed. We 149 .Global Corporate Strategy Unit 5 – Value Management unit performance. Or perhaps there was a failure to appreciate the effort needed for full implementation. The effect is that when managers make important decisions. In unsuccessful adopters. in turn. & Schw illing A Summary In this unit we have looked at the concept of value. plays a critical role in ensuring the EVA bonus plan forces managers to think beyond the current year. Deferred compensation. there is no long-term accountability. and have seen how EVA is influencing the management philosophy of value-based companies. deferred compensation is not possible. Reference m anaging fo r Value (1999) by Bo tzel S. Unsuccessful users are also more inclined to exercise discretion in paying managers. implementation is erratic. We have noted that EVA is no panacea. This difference is crucial because if managers move around. not corporate measures such as stock price. and how our ideas of value and its measurement are changing. alignment between the interests of managers and shareholders improves. This. Maybe the CEO thought EVA was what the markets wanted. In successful EVA users.
saw the collapse of many dot.com period – specifically with regard to e-business.Unit 5 – Value Management Global Corporate Strategy have looked at two case studies where EVA has made a significant impact.com companies the net assets were very low. The lesson from the crash is that there are no shortcuts in business. many of the dot. What went wrong? 1. the “e” in e-business came to stand for “easy”.com stocks crashed. The year 2000.com shares. For most dot. but the valuation of the second component (EVA) was extremely high – unrealistically high. Identify the hallmarks of their success REVIEW ACTIVITY FEEDBACK Here is some feedback on the first part of the question. The valuation of a company has two equally important components. as well as the present value of future EVAs. and many of the dot.com period.com period and on what premise these valuations were made. Comment on its market valuation during the dot. The dot. Consider what went wrong. easy money. Spend some time researching the company. Find out about its strategy. easy 150 . For many dot. e-business seemed be to overturning established relationships. In effect. some cynics go as far as to say that some market analysts materially benefited from this deception (an area of on-going investigation). Based on nothing more than a website. companies with no earnings and no prospects of operating in the black were awarded market valuations that exceeded many of the world’s most respected companies. Net assets.coms. The EVA situation resolved itself over time. Market analysts egged on the hysteria. 2.coms invaded every sector of commerce. and attacking long-established price points. during the dot.com mania. What are the lessons to be learned? Now identify a survivor from the dot. and there seemed to be an unsustainable wave of dot. REVIEW ACTIVITY In the late 1990s high-tech stocks soared in value. Business metrics like profit and cash flow went out of the window.com management were guilty of hyping the worth of future EVAs. Unrealism and hysteria took over the market. however.
Chapter 6 pages 212-226 Ref 4. In addition to future potential (and by future potential is meant realistic future EVA) profits and cash flow do matter. easy life. 2. Ref 10*. profitability in the not-too-distant future.Global Corporate Strategy Unit 5 – Value Management success. Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. A real business is serious work and must have a realistic business plan for break-even and profitability thereafter. 3. Chapter 13 pages 327-335 Ref 15 *Highly recommended 151 .
political and environmental issues. But stakeholder responsibility must also be a part of organisational purpose. Furthermore. See Figure 6. Introduction Globalisation has heightened the awareness of social responsibility. such as Enron. and guided by value management principles.Unit 6 Corporate Governance and Ethics LEARNING OUTCOMES Following the completion of this unit you should be able to: · Assess the advantages and disadvantages of an ethical approach in organisations. What is clear is that companies can no longer pay lip-service to good corporate governance and business ethics. have led to an increased focus on corporate governance and the tightening of accounting procedures. Profitability cannot be the sole corporate driver. Worldcom and Parmalat. · Appreciate the attributes of an ethical organisation. customers and the community) at large. suppliers. Profitability will always be driven by the shareholder view.1. · Explain the attributes of good corporate governance. recent high-profile corporate scandals. Undoubtedly. there is a paradox between profitability and stakeholder responsibility. 153 . Stakeholder responsibility must be guided by good corporate governance and business ethics. Stakeholder responsibility is not just responsibility to the shareholders. There has been much debate about its adverse impact on social. · Develop the principle of global corporate governance by examining recent UK developments in this area. but to the stakeholders (including employees.
profitability can indeed be adversely affected by the apparent lack of social responsibility. showing good standards of corporate governance. Corporate governance came to the fore in the early 1980s in the United States during extensive corporate take-over activity. These measures were seen by some shareholders. e. roles of shareholders. shareholders began to take a greater interest in their investments. role of directors. Shell found this to their great cost with the Brent Spar episode where Shell appeared to go against their own stated ecological and environmental stance. particularly in relation to the boards of companies listed on a stock exchange. that in today’s business/political environment with very powerful lobby groups. In this unit we shall look at the area of corporate governance. investors who invest for the longer term may expect the company to be profitable and also behave ethically. numerous company boards began to introduce protective practices to ward off undesirable take-over bids. company performance. We shall look at the benefits arising from adopting strong ethical principles. profitability and responsibility are not always paradoxical. as acting against their best interest.g. Also. 154 . individual performance. We shall then consider the area of business ethics. and examine recent developments in the UK relating to this. corporate governance was born. Out of this. Accordingly.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy Profitability Organisational purpose Responsibility Shareholder value perspective Value management principles Shareholder value perspective Corporate governance and ethics Figure 6. Perceiving little support from their institutional shareholders. especially public pension funds. however. Governance is at the heart of the role that all boards of directors play. The range of issues is varied.1: Paradox of profitability and responsibility It should be noted. and look at the factors that set apart a highly ethical organisation. Corporate Governance The term ‘corporate governance’ has been used in a variety of contexts.
Global Corporate Strategy
Unit 6 – Corporate Governance and Ethics
As mentioned in the introduction, there is undoubtedly a paradox between profitability and stakeholder responsibility. Conflicting demands, between economic profitability and social responsibility, are placed on a company by its shareholders, employees, suppliers, customers, governments and communities.
How does a company achieve its organisational purpose by balancing the often conflicting demands of profitability and stakeholder responsibility? Learn about this and the paradox of profitability and responsibility by reading the following: 1. 2. p. 590-609 of Chapter 11 in your key text, De Wit, B & Meyer, R. p. 616-638, Readings 11.2-11.4, in your key text, De Wit, B & Meyer, R.
The problems associated with the split between shareholders and company directors were first raised by Berle and Means, in their 1932 book, The Mo d ern Co rp o ratio n and Private Pro p erty . The issue of the ‘agency problem’ was highlighted, i.e. the tension created when the directors running the company were not the major shareholders. In the 1980s, institutional (professional) shareholders were much more likely to address these issues and debate possible solutions. Corporate activity is under a more intensive media spotlight today. Board decisions are more public and annual meetings can be high-profile as shareholder activists raise questions about board decisions. In the UK, the corporate governance debate started to receive emphasis due to several high-profile corporate failures such as Polly Peck and Coloroll. World-wide, and in the last three years, there have been further dramatic and spectacular failures including Enron, Worldcom and Parmalat. Directors were seen as acting against the shareholders’ interests and in dereliction of their duties to the company. As a result of failures such as the ones mentioned, investors are willing to pay a premium for companies with good corporate governance. To understand the workings of governance ‘systems’, it is important to be able to identify the different types that exist globally. Often, governance systems are developed from tradition and ideology. In recent years, it has become more difficult to generalise about the different types of system. For example, there is possibly a trend in central Europe to move towards a more ‘Anglo Saxon’ approach. The different types of governance system are;
Unit 6 – Corporate Governance and Ethics
Global Corporate Strategy
The Anglo Saxon Model (e.g. in the UK, USA and Australia) which is a single tier structure and often reflects a widespread number of small shareholders alongside large investment houses who are intermediaries owning shares on behalf of investors. This limits the power of the individual shareholder and heightens that of organisations such as pension funds. This can lead to a short term approach as investors seek to obtain a quick return on investment. The European Model (e.g. Germany) comprises a two tier structure where the upper tier is supervisory over the lower tier. Share ownership is normally in the hands of institutions who use protective mechanisms such as preference shares. This system has strengths and weaknesses. The two tier system is seen as a ‘counterbalance’ to management power where the single tier is dominated by senior management. However, whereas the system has long term views, it suffers from slower decision making and a lack of flexibility. The Asian Model (e.g. Japan) is single tier but ownership is very different to the Anglo Saxon model. Banks and other companies own most of the shares. Hence the larger companies hold shares in each other and co-operate very closely (known as a ‘kieretsu’). Composition of boards is heavily in favour of executive managers. In fact, it is in effect the top layer of management. Accordingly, the share ownership patterns can lead to weak accountability and secretive governance procedures.
Average % 30 28 26 24 Brazil 22 20 18 •0 Latin America Source: McKinsey Asia Continental Europe Anglo-Saxon Mexico Argentina Chile Korea Italy Taiwan Japan Germany France Spain Switzerland US UK
Venezuela Columbia Indonesia Thailand Malaysia
Figure 6.2: Average premiums investors would be willing to pay for a well-governed company
Global Corporate Strategy
Unit 6 – Corporate Governance and Ethics
Figure 6.2 suggests that investors are willing to pay more for shares where the perception is that the companies are ‘governed’ in a sound and ethical way. It can be seen as a measure of perceived ‘ethical’ governance. Scrutiny in the area of governance (as we shall see in the next sections) has led to the establishment of strategic principles relating to corporate governance. These include:
· Selection and conduct of senior officers, and their
relationship with stakeholders.
· Responsible use of power assigned to senior officers. · Responsible conduct in relation to information relayed to
· Further checks by way of appointment of non-executive
directors who have no commercial interest in the company. simple rules.
· Focus on principles of conduct rather than hiding behind · Equitable distribution amongst stakeholders of the value
of assets generated by the company.
Key developments in the UK
Let us now examine key developments in the UK relating to corporate governance.
The Cadbury Committee
In the aftermath of these cases, a committee, chaired by Sir Adrian Cadbury, was formed in 1991 to examine the financial aspects of corporate governance in publicly quoted UK companies. The subsequent Cadbury Report, The Financial Aspects of Corporate Governance, published in December 1992, focused the corporate governance debate in four main areas:
· The responsibilities of directors for reviewing and
reporting on performance to shareholders.
· The case for establishing audit committees. · The principal responsibilities of auditors. · The links between shareholders, boards of directors and
Unit 6 – Corporate Governance and Ethics
Global Corporate Strategy
The report contained a Code of Best Practice, most of which was adopted as part of the London Stock Exchange’s Listing Rules for all quoted companies. The report states that “Corporate governance is the system by which companies are directed and controlled.” Whereas the corporate governance debate in the US had focused on shareholder rights, the emphasis in the UK was on structure and processes. Despite the report’s own definitions, the aspects of governance relating to control dominated the debate in the UK and added little to the issues of best performance.
The Greenbury Committee
The Cadbury Report focused on financial governance. Following a series of highly publicised large pay awards to directors, notably in the privatised utilities, a committee was set up to examine directors’ remuneration, chaired by Sir Richard Greenbury. The committee reported in July 1996 and again produced a Code of Best Practice that focused primarily on listed companies. Remuneration packages appear to many as one of the most obvious means by which the interests of the directors can be aligned with those of the shareholders. The Code made a series of recommendations on the role of remuneration committees, disclosure of directors’ remuneration and provisions for approval of long-term incentive schemes, corporate remuneration policy, the length of directors’ service contracts and the compensation paid to directors when these contracts come to an end. As with Cadbury, many of the recommendations have since become part of the Stock Exchange’s Listing Rules requirements. The focus was again on the systems and structures which could control directors, ensuring that, as far as possible, their interests were aligned with those of the shareholders. Both Cadbury and Greenbury, therefore, focused most of their work on the elements of the debate relating to accountability, not enterprise.
The Hampel Committee
The latest report on corporate governance in the UK, the Hampel Report, from the Committee on Corporate Governance chaired by Sir Ronnie Hampel, attempts to address the distinction head on: The directors’ relationship with the shareholders is different in kind from their relationship with other stakeholder interests. The shareholders elect the directors. As the [Confederation of British Industry] put it in their evidence to us, the directors are responsible for relations with stakeholders; but they are accountable to the shareholders.
Global Corporate Strategy
Unit 6 – Corporate Governance and Ethics
The report has identified the friction created when talking of accountability and business prosperity; The importance of corporate governance lies in its contribution both to business prosperity and to accountability. In the UK the latter has pre-occupied much public debate over the past few years. We would wish to see the balance corrected (Final Report from the Committee on Corporate Governance, 1998) This raises the question, ‘what is the difference between accountability and responsibility’? Some have used these words as being synonymous. However, their distinct meaning is important in developing the issues relating to governance.
The Combined Code
In June 1998, the London Stock Exchange published the Principles of Good Governance and Code of Best Practice (‘the Combined Code’) which embraces the work of the Cadbury, Greenbury and Hampel Committees and became effective in respect of accounting periods ending on or after 31 December 1998. The Combined Code established fourteen Principles of Good Governance and forty five Best Practice provisions, upon which, companies were required to state their compliance throughout their accounting period The 1998 Combined Code has since been superseded by a version published in July 2003. The July 2003 Combined Code became effective for reporting periods on or after 1 November 2003.
Read the latest version of the Combined Code on the following website: http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf
The Higgs Review
For non-executive directors, a boardroom seat had been seen as providing a comfortable sinecure ahead of retirement. Most boards of large companies comprised the ageing great and good in the City, often retired executives. Clubby consensus, rather than challenges to management, was the order of the day. Some of that culture still lingers.
dti. Mr Higgs’ package of reforms will see non-executives take a much more active role and become far more accountable in carrying out their duties. This proposal. independent or otherwise. receiving additional remuneration apart from a director’s fee.uk/cld/non_exec_review/pdfs/higgsreport. The concern is that if the senior non-executive holds separate discussions with shareholders it could lead to mixed messages emerging from the board. the boardroom remains largely a preserve of ageing white men. more than anything else in the review. Mr Higgs is at pains to point out that senior non-executives will not be champions of shareholder interests but will be more a “listening post”. playing a pivotal role and potentially holding the balance of power. and the report was published in January 2003. The changes will represent a fundamental shift in the boardroom. ACTIVITY Read the Summary and Recommendations section of the Higgs Review from the following website: http://www. or appear to affect. and participation in the company’s share option or pension scheme.pdf As the Higgs review makes clear. has concerned business. will be required to be independent at the time of his nomination but it is assumed he will “go native”. The review also recommends that a senior independent director be appointed to act as a conduit for shareholders to raise issues if they are not resolved through the chairman or through the chief executive. They will attend meetings with 160 . family ties. This goes far beyond previous requirements that a third of the board be non-executives. the director’s judgement.” Factors that could affect independence include employment with the company in the past five years.gov. The review says: “A non-executive is considered independent when the board determines that the director is independent and there are no relationships which could affect. The power of executives on the board will be balanced by independent non-executives providing a check on management.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy The Higgs Review was commissioned by the Chancellor and the Secretary of Sate for Industry to review the role and effectiveness of non-exec directors. given the time spent working closely with the management. having a material business relationship in the past three years. At least half the board will comprise independent non-executives. The chairman.
The Smith Report The report says that a Company Audit Committee’s primary role is to ensure the integrity of the company’s financial reporting." The Smith report says at least three independent non-execs should serve on the audit committee. No limit has been set for the number of roles that non-executives can hold. annual re-election of non-executives is appropriate. ”If the audit committee is drawn into a line of questioning about the handling of a controversial issue. Non-executive directors should normally be expected to serve a tenure of two three-year terms. possibly as an auditor or company finance director. largely only to listen to shareholder concerns. After nine years. In addition. The other members should have a degree of financial literacy. Mr Higgs recommends a more formal. “If things are going seriously wrong the committee may have no alternative but to explore the issues exhaustively. together with recent and relevant financial expertise. it cannot let go until it is satisfied with the answers. they could be a contact point for shareholders. These include requiring the chief executive not becoming chairman. Non-executive directors also should meet at least once a year without the chairman or other executive directors present. No individual should chair more than one large company nor should a full-time executive take on more than one non-executive role. although a longer term would be appropriate in exceptional circumstances. 161 . The Smith report will lead to revisions to the best practice code on corporate governance for listed companies. Research by the review showed that 48% of non-executive directors were recruited through personal contact with a board. if problems arise with a chairman and chief executive. It says at least one member should ideally have a professional accounting qualification. and suggests that they should get extra pay to reflect the importance of their work. transparent recruitment process. though individuals should make sure they have enough time to fulfil their duties. and warns it must be prepared if necessary to take an adversarial approach with management. Other measures ensure that boards do not become bound by personalities or tradition. and after 10 years on a board a non-executive is not considered independent. To widen the gene pool of talent in the boardroom.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics shareholders.
The direction and management of the business should take in account the impact on other stakeholders such as employees. The Role of Corporate Governance The UK’s National Association of Pension Funds (NAPF) suggest in their report. Where w ere the d irecto rs? To ro nto Sto ck Exchange (1994) This definition retains Cadbury’s systems focus. the board of directors and management.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy Director Accountability Placing accountability at the heart of corporate governance inevitably led the general debate on the issues of to whom are directors accountable. Developing the Cadbury definition of corporate governance a similar committee set up in Canada suggested a wider definition: ‘Corporate governance’ means the process and structure used to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value. “It is the board’s responsibility to ensure good governance and to account to shareholders for their record in this regard. but suggests that the structures and processes chosen by directors must take into account parties other than shareholders. encouraging boards to drive businesses forward in the long-term interests of the shareholders. · Enterprise. control. The process and structure define the division of power and establish mechanisms for achieving accountability among shareholders. Go o d Co rp o rate Go vernance (1996). ensuring that accounting and other statutory concerns are addressed. customers. which includes ensuring the financial viability of the business. suppliers and communities. that corporate governance should concentrate on two issues: · Board integrity . Ensuring good governance NAPF highlights another element of corporate governance. ensuring shareholder value. At the centre of the issue is the role of the board of directors – direction.” 162 .
if the board is to be the guardian of good governance. All of the elements of the governance debate highlighted above are reflected in these tasks.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics Bringing together many of the themes raised in the corporate governance field. in essence. 163 . This definition implies that. · Delegation to management. · Setting strategy and structure. as proposed by Hampel. · Exercising responsibility to shareholders and other interested parties. are many and varied. mission and values. a more appropriate starting point for defining corporate governance may be the role of the board. corporate governance should highlight the corporate responsibilities of a board of directors. Individual directors must be aware of the role they play in determining the company’s future and in setting the strategy and structure to meet desired objectives. as stated at the beginning. Stand ard s fo r the Bo ard (1995) states that: The key purpose of the board is to ensure the company’s prosperity by collectively directing its affairs and meeting the legitimate interests of the shareholders and other interested parties. Perhaps a new definition might be: Corporate governance focuses the board on its key purpose: to ensure the company’s prosperity by collectively directing its affairs and meeting the legitimate interests of the shareholders and other interested parties. It must account to shareholders for its record in this regard. However. The report highlights four key tasks for the board: · Establishing vision. and distinguish the directors’ role from those of shareholders and managers. They must also be aware of the issues raised under the guise of corporate governance which. the Institute of Directors’ report.
involved such obvious conflicts of interest with Enron officers. boards will fall short of their leadership mandate. as the representative of the stockholders and the source of managerial authority.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy CASE STUDY: Enron Here is an article from FT. Enron’s deceptive accounting practices were so convoluted. Why did the Enron board fail. which is to protect the corporation’s stockholders from abuses by managers. But board actions depend on individual board members’ skills. The board. or they may prolong their employment against the interests of shareholders. and what does that failure tell us about possible reforms that could improve corporate governance? One idea that has been popular among some is the need for board “independence”. Managers may redirect funds for themselves and their friends. they may shirk their duties. is supposed to prevent such abuse. Dec 06.com site. as corporate stockholding in such large entities became fragmented and detached from management. Adolf Berle and Gardiner Means identified these potential conflicts of interest. Calomiris Enron and other high-profile scandals have highlighted problems with corporate governance.com on the Enron scandal. Montrone Professor of Finance and Economics at Columbia University’s Graduate School of Business. Calomiris is the Paul M. The Board Game FT. Its members failed to perform their primary task. Independent board members – that is. a Professor of International and Public Affairs at Columbia’s School of International and Public Affairs. Stockholders’ interests were not automatically aligned with those of managers. board members who are not involved in company 164 . and occurred on such a scale. diligence and willingness to oppose management. but rather the ill-gotten gains from being able to operate in conflict with stockholders’ objectives. that one can only marvel at the failure of the Enron board and audit committee to detect and prevent such abuse. managers can extract “control rents” – value that does not represent an appropriate market reward for their actions. With the dawn of the modern large-scale corporation in the second industrial revolution of the late nineteenth century. In their 1932 classic on corporate governance. Without all three ingredients. 2002 By Charles W. there came a new potential for managerial abuse. In modern parlance. Enron and other corporate scandals have crippled market confidence in US corporate governance. and Chairman of the Board of Greater Atlantic Financial Corporation. How can boards be actively encouraged to challenge managers? Charles W.
Enron’s board was almost entirely “independent”. 1. Evidence is mixed on the question of whether the independence of directors improves corporate governance. if board members and managers both own sufficiently large amounts of stock. the proportions are 55 per cent and 61 per cent. but not necessarily willing. In both the US and UK. Yet they and their colleagues seem to have been asleep at the switch. where legal protections are relatively strong. the median insider ownership share of the largest 150 corporations is 1 per cent. they are chosen because of their name recognition. the age of board members (younger is better). and Wendy Gramm. How can we establish a process for selecting and rewarding board members that will place stockholders’ interests above those of managers? Here. but that effective independence (measured by the board’s ability to restrain executive compensation) is influenced by a variety of other board attributes. The key to effective board leadership is establishing a process that selects board members who have both the ability and the incentive to be dogged pursuers of the stockholders’ interest. and whether the independent member was chosen by the chief executive (which reduces effectiveness). There are three approaches to ensuring such a process of board selection. the conflict of interest between managers and stockholders may be largely overcome by the direct incentives of board members to protect their own wealth. where legal protections of stockholders are weak. or the technical knowledge to perform adequate audits. It included chair Robert Jaedicke. Concentration of ownership First.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics management – should be able to exert more effective oversight since they are disinterested parties. and they have strong incentives to discipline managers to pursue value maximisation. Recent studies suggest that board independence may matter. the number of boards on which board members serve (fewer is better). when the scale of manufacturing production was relatively small. In France and Germany. not because they have either the time or the inclination to discipline management. And their very independence may be compromised if their seat on the board depends on continuing management support. as it often does. The positions of board members with sufficiently large stockholdings are secure. A 2002 study found that countries with the weakest legal protections for outsider stockholders also saw the greatest concentration of stock in the hands of insiders. perhaps. former Chair of the Commodity Futures Trading Commission. a professor of accounting and dean of Stanford Business School. Independent board members are busy people. economics teaches us that incentives are as important as skills. ownership and 165 . During the first industrial revolution of the early nineteenth century. Able. including the size of the board (smaller is better). and composed largely of highly skilled and experienced corporate managers.
which will limit corporate growth opportunities. If many corporations have natural economies of scale that warrant global reach. although its use in the US was much more limited in its scope. Those benefits transcend the obvious social gains from portfolio diversification. Intermediaries A second approach to aligning the incentives of board members and stockholders is to rely on third-party intermediaries to aggregate the voting power of stockholders and thus provide a formidable counterweight to incumbent managers. Managerial opportunism was constrained by the direct oversight of investors with a material vested interest in the value of the company. the supply of billionaires is somewhat limited. those lucky billionaires may lack the skills that are needed to best guide the corporations. has restrained populist impulses in public policy toward corporations. nationwide universal banks that combined lending. they will pay less for corporate stock and require much higher managerial compensation if they must hold such an undiversified portfolio. The best managers typically don’t begin life as billionaires. Historically. for example. prospered together. disclosure and governance regulation. which encourages growth-oriented tax and regulatory policies. they suffer from extreme lack of diversification. In Germany. universal banks retained authority over stockholders’ proxies and thus controlled boards of directors of their industrial clients.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy management were typically closely aligned. Banks operated like industrial credit co-operatives for their board members. Germany and the US both used this approach to corporate governance. and spurred constructive reforms of accounting. financed by deposits. by underwriting stock offerings that were placed in the internal networks of accounts managed by those universal banks. They did so first with credit. underwriting and trust account management in a novel way were able to support growing industrial companies. The booming “investor class” in the US in recent decades. it will be hard to staff all of them with billionaires. there are enormous social benefits from broad public participation in stock ownership. during the second industrial revolution. later in the company’s life cycle. deposit-taking. along with their outside investors. Naomi Lamoreaux’s study of the period shows that industrial insiders also leveraged their equity financing by using banks that they controlled to sponsor industrial growth. especially in a modern industrial economy. but. Finally. Consequently. 166 . And. Also. When owner-managers and directors hold most or all of their wealth in the stock of one company. Through their management of trust accounts. But concentration of ownership in the hands of insiders can be very costly. and include the political economy benefits that come from a broad alignment of interests between large corporations and the public. and companies and banks. Because the same group of people owned and controlled the industrial borrowers and the banks. 2. interests were closely aligned.
In the US. Morgan’s famous network of partners who held seats on various boards of directors – was a very limited phenomenon reserved for the largest. The role of intermediaries in controlling corporate boards took a third form in postwar Japan. and its authority came from the network of influential stockholders that relied on its advice and corporate governance skills.P. rather than through public underwriting of equity to finance new investments.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics Scholars have argued that the relationships between German universal banks and client companies. but rather by their small size and regional isolation. Despite its benefits. especially in new product areas that required large minimum efficient scale of operation (such as electricity generation). as part of the keiretsu system. Thus. in fact. and forced the separation of commercial and investment banking. Those regulations constrained the role of banks in financing industrial growth by large-scale corporations during the second industrial revolution. banking regulations limited the geographic scope of banks. As the scale and geographic scope of industry increased. banks and suppliers. that was not true of pre-First World War Germany. many US academics were writing paeans to the virtue of Japanese corporate governance. and even though its role in the economy was quite limited. both directly and through other companies in which they owned interests. They were better able to finance their growth and to weather financial storms than their competitors.P. which usually became “Morgan companies” as the result of consolidations of mature companies. and acted as an effective check on managers. Research by Bradford DeLong and others argues that corporate chief executives who “wore the Morgan collar” wore it proudly and to great effect. Yet the postwar history of Germany and the past decade in Japan suggest that concentrating stockholder influence by means of universal banks and main 167 . Commercial banks were also constrained from participating in underwriting. not a stock. Main banks of keiretsus controlled blocks of a client company’s shares. praising the high level of managerial turnover and the fact that bank-sponsored corporate governance helped companies economise on the costs of external finance. which made it hard for them to operate German-style networks for the sale of shares or the aggregation of voting rights. Although postwar Germany has been known for its reliance on debt as the main source of external finance. US-style “finance capitalism” – typified by J. By 1990. permitted industries to access external finance easily and thus grow rapidly. Morgan’s role was typically as a reorganiser or a bond. Morgan’s brand of finance capitalism was too much for populist US sentiment against the concentration of power. industry outgrew banks. not by law prior to 1933. and bankers turned mainly to commercial finance. established companies. and therefore also the scale of banks. and the discipline over management provided by bankers. underwriter. in which a company surrounds itself with a permanent structure of subsidiaries. Successive acts of legislation constrained investment bankers’ abilities to establish control through networks of skilled partners acting as disciplinarian board directors. J. equity finance was much larger a proportion of industrial funding there than in the US prior to the First World War.
Poland is an interesting case of a country that. The policy lesson seems to be that vigorous antitrust policy toward the financial sector should be pursued in order to ensure the continuing benefits of good corporate governance that concentration of control through intermediaries permits. or in spurring innovation and new industrial growth. Further. the fund managers’ rewards are small and indirect. the universal bank or the Japanese main bank? So far. The largest German banks used their network of trust accounts to engineer mutual control over their own stocks. The history of Japanese and German financial systems suggests that financial system concentration during the later stage of industrialisation may offset the benefits of corporate discipline that result from the concentration of stockholder power in those intermediaries during earlier stages of development. but most commentators view these influences as weak and unreliable. the efforts of fund managers to discipline portfolio companies’ managers would be rewarded by their account holders. as a group. in the US. To what extent can intermediaries such as pension funds and mutual funds substitute for the Morgan collar. more than 50 per cent of any one large bank’s stock. Authorities there saw the desirability of concentrating some voting power for any portfolio company in the hands of a small number of intermediaries. Another is the change in the role of German banks in the postwar era. during privatisation. consciously designed its network of institutional investors to improve corporate governance in newly privatised companies. and legal and regulatory risks to fund managers limit their incentives to own concentrated blocks of shares or to join boards of directors. they have played a limited role. confined to increased asset inflows into funds in response to corporate profits. In a perfect world. They control. There is some evidence that institutional investor holdings of stock can improve corporate governance. That is especially true when banking systems become non-competitive.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy bank-controlled keiretsus may also hinder corporate governance. in the postwar era.to large-scale enterprises and to help 168 . Franklin Edwards and Glenn Hubbard point out that legal impediments limit the amount of institutional ownership in any one company. fund managers’ incentives to discipline companies may be weak and regulation of their fee structures discourages shareholder activism. Thus. Poland created 15 National Investment Funds (NIFs) to own 60 per cent of the shares in 512 medium. But regulation effectively prevents setting mutual fund and pension fund managers’ fees to rise with profits. The role of the Japanese bank system in resisting corporate reform over the past decade is one case. compared to the role they played prior to the First World War. The managers of a highly concentrated and non-competitive banking system may collude to feather their own nests at the expense of both the stockholders and the managers of client companies. That lack of competition may help explain why postwar German banks have played such a small role in equity underwriting. In 1993.
as elsewhere. improve governance in target companies. Takeovers were never easy. The central problem limiting the effectiveness of boards. 3. In the 1980s. which have succeeded in discouraging hostile takeovers. and thus discouraging some efficient takeovers. Hostile takeovers A third approach to disciplining directors and managers is the threat of a hostile takeover. Conclusion It is unrealistic to expect board members to serve the function of disciplining management and protecting shareholders’ investments when we have designed a system that prevents boards from having the incentive to do so. Although the privatisation process was bumpy in Poland. the broadening of corporate goals makes it impossible to hold managers accountable to stockholders. managers know that if managerial rent seeking gets sufficiently large. as many companies were encouraged to avoid takeovers by reducing managerial rent extraction. while various states’ “stakeholder statutes” have also served to discourage takeovers. The alternative means to wrest control from incumbent managers – a proxy fight – is no more attractive to would-be acquirers. 169 . Acquirers had long been required by law to announce their intention of purchasing the company through tender offers. In the presence of a credible threat. and there is evidence that the hostile takeovers of the 1980s did. incumbent managers developed “poison pills” (corporate charter clauses that dilute the stock of hostile acquirers). it will pay raiders to buy up shares to unseat them.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics oversee the restructuring of those enterprises. Courts in the US have upheld these techniques. observers tend to regard its successes as partly reflecting the positive role of NIF managers in rationalising the restructuring process. in response to many successful takeovers. The social gains from these takeovers were even larger. which often limit the number of board members coming up for re-election at any one time to only a third or a fourth of the board. or to any other constituency. But recently enacted legal obstacles to takeovers have protected managers and captive boards of directors from that external discipline. in turn. Each NIF was given a lead role (and a 33 per cent stake) in approximately 30 companies. The most popular of these is the staggering of board terms. and of corporate governance more generally. thereby reducing the gain to acquirers of improving corporate efficiency. is the lack of political will to place the interests of stockholders first when considering the rules under which corporate governance occurs. in fact. That. for that matter. encourages better corporate governance. Would-be acquirers have to be willing to fight many proxy battles over many years before being able to take control of the target. In effect. Shares in NIFs were allocated to the public and traded. owing to the many obstacles that boards can use to reduce the chance of success. even during the 1980s.
ffhsj. have often resulted in the political decision to hobble the financial system as an instrument for disciplining corporate managers.com/cmemos/031017_post_enron. if necessary. Public Company Accounting Oversight Board in the US.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy Populist revulsion to concentrations of power. non-exec directors who themselves will have personal responsibility (and liabilities). Empower intermediaries (e. Enforce personal accountability as a deterrent. Details may be found in the paper ‘The Post Enron Corporate Governance Environment: Where are We Now? ‘ found on: http://www. and that encourage the concentration of stock in the hands of those who would ensure that the voices of stockholders are heard in the boardroom and. QUESTION: 1. The second step is to enact laws that hold managers and board members accountable to that objective. NASDAQ. Tougher regulations. The first step toward avoiding future Enrons is deciding that the overriding objective of the board is to maximise the value of the company. Better regulatory framework to police corporate activities and detect fraud early. Some of the above measures (and many more) are receiving attention by the Securities and Exchange Commisison. and special interest politics. accounting and auditing practices. in the courtroom. How do you think the Enron scandal (and indeed Worldcom and Parmalat) could have been avoided? CASE STUDY FEEDBACK Feedback on Question: The following measures in the US would have helped avoid such a scandal: 1. 3. 5. Ensure that a certain percentage of the Board are independent. New York Stock Exchange. to stop companies exploiting the ‘Delaware’ loophole.g.pdf 170 .g. 4. Some rules have already been enacted and others are at the proposal/discussion stage. Fund Managers) to probe business operations (requires legislative change particularly in the US). 2. e.
92-104. Business ethics are critical during times of fundamental change. Business Ethics What is Business Ethics? Ethics involves learning what is right or wrong. e.G. Many ethicists consider emerging ethical beliefs to be related to future legal matters. Stanford Law School. October. (2002) “Enron: what happened and what we can learn from it”. This is in regard to effects of products/services and in relationships with stakeholders. K. and the Cost of Capital”. Hubbard. Ultimately it’s up to the individual. Business ethics has come to mean various things to various people. what is an ethical guideline today is often later translated to a law. working paper. However ‘the right thing’ is not straightforward.G. F. Edwards.L. Statements around how these values are applied are sometimes called moral or ethical principles. responsibility.g. G. etc. respect. 105-27.e. it’s coming to know what is right or wrong in the workplace. April.. Himmelberg. decisions and choices. regulation or rule. honesty. and Hubbard. Journal of Accounting and Public Policy 21. (2000) “The growth of institutional stock ownership: a promise unfulfilled”. and Scott. C. R. and doing what’s right. Development Research Group Working Paper. Journal of Applied Corporate Finance 13.’ Ethics includes the fundamental ground rules by which people live their lives. This is because there may be no clear moral compass to guide leaders through 171 . Many philosophers consider ethics to be the ‘science of conduct. World Bank Finance. (2002) “Taking shareholder protection seriously: corporate governance in the United States and Germany”. Ownership. i. I. T. A. Many ethicists say that there is always a right thing to do based on moral principle and others believe the right thing to do depends on the situation.J. and Hartgraves. fairness.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics Other articles that you will find helpful in this area are: Benston. Baums. and Love. and then doing the right thing. Generally. R. 2834. Values that guide how we ought to behave are considered moral values. Most ethical dilemmas in the workplace do not comprise a simple set of issues. (2002) “Investor Protection.
these businesses owed it to our country to work to improve society.g. An increasing number of people asserted that because businesses were making a profit from using our country’s resources. suppliers and the wider community. wrongful use of resources. social awareness movements raised expectations of businesses to use their massive financial and social influence to address social problems such as poverty. 2. 172 .). Many researchers. business schools and managers have recognised this broader definition and in their planning and operations have replaced the word “stockholder” with “stakeholder. As commerce became more complicated and dynamic. In that decade. unethical or questionable practices of individual managers or organisations. in their book Essentials o f Business Ethics (Penguin Books. Moral mazes Madsen and Shafrits. Many people do not take business ethics seriously saying that business ethics only states the obvious (“be good. crime. Two Broad Areas of Business Ethics The two broad areas of business ethics relate to: 1. potential conflicts of interest. mismanagement of contracts and agreements. Organisations have realised that they needed to manage a more positive image to the public and so the recent discipline of public relations was born. environmental protection. e. public health and improving education. 1990) explain that managerial mischief includes “illegal.” etc.” Moral mazes of management refer to the numerous ethical problems that managers must deal with on a daily basis. Business ethics has come to be considered a management discipline. Also. etc. These ‘principles of the obvious’ disappear during times of stress. ethics help ensure that when leaders and managers are struggling in times of crises and confusion. organisations realised they needed more guidance to ensure their dealings supported the common good and did not harm others — and so business ethics was born. Attention to ethics in the workplace sensitises leaders and staff to how they should act. they retain a strong moral compass. as well as the causes of such behaviours and remedies to eradicate them.” meaning to include employees. Managerial mischief. customers. equal rights. especially since the birth of the social responsibility movement in the 1960s.” “don’t lie. Organisations realised they needed to better manage their human resources and so the recent discipline of human resources was born.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy complex dilemmas about what is right or wrong.
supports greater consistency in standards and qualities of products. ethics training. such as: · Attention to business ethics has substantially improved society. However. quality management. roles of ethicists and ethics committees. · Ethics programs cultivate strong teamwork and · Ethics programs support employee growth. · Ethics programs help manage values associated with · Ethics programs promote a strong public image. strengthens the coherence and balance of the organisation’s culture. and cultivates greater sensitivity to the impact of the enterprise’s values and messages. CASE STUDY – Business Learns the Value of Good Works Corporate Philanthropy: US Companies Have For Many Years Made A Connection Between Social Responsibility And The Bottom Line. 173 . · Managing ethical values in the workplace legitimises managerial actions. · Ethics programs help maintain a moral course in turbulent times. etc. Nokia has: Financial Times. 2000 By Jimmy Burns When Nokia hosted a media lunch in a small London restaurant last week. improves trust in relationships between individuals and groups. · Ethics programs help ensure that policies are legal.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics Ethics in the workplace is managed through use of codes of ethics. codes of conduct. the aim was not to publicise its latest mobile telephones but gently to draw attention to the time its employees are devoting to schoolchildren in need around the world. as well. Many people are used to reading or hearing of the moral benefits of attention to business ethics. productivity. procedures to resolve ethical dilemmas. there are other types of benefits. strategic planning and diversity. Business ethics in the workplace is about prioritising moral values for the workplace and ensuring behaviours are aligned with those values. Dec 19. · Ethics programs help avoid criminal acts “of omission”. policies and procedures.
Traditionally. Sustainable global success demands respect for our stakeholders – our staff. social investment. Nokia UK’s senior communications manager. Nokia has not ruled out giving employees time off to participate but it has apparently assured the IYF that hundreds of its employees will use their flexible working arrangements to take part in the scheme. Europe has lagged behind the US. is about to make its presence felt in some UK schools.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy Nokia’s Make a Connection campaign. in turn.5m on the campaign during the next three years and says it should help up to 1m children and young people. Nokia plans to spend £7. The campaign is operating in South Africa. Brazil and Germany. current and potential. The notion of corporate citizenship has developed during the past decade in both the US and Europe as more companies address social accountability. humanitarian and cultural organisations. the potential for enhancing corporate reputation – and. Mr Stoneham puts a different business case for Nokia’s campaign: “We hope people will see this as a sincere community issue. China. This may be changing. “Involvement could range from giving time to organise fundraising events. want to see good citizenship and our investors and customers want us to behave ethically. social auditing. as well as in the UK. According to the Institute of Directors. to provide teaching packages to children with learning difficulties. to having our engineers help set up websites and CD-Roms. with social exclusion and education the predominant themes. corporate governance and business ethics. the company insists. The campaign will not feature the Nokia brand or free mobile phones. Projects range from internet-related newspaper schemes among aspiring young journalists in China to mentoring programmes in East Germany. But it raises questions about whether behind it lies a subtle ploy to use good works to strengthen its market position among the younger generation. The US still leads the way in philanthropy.” he says. with foundations holding more than $330bn (£224bn) in assets and contributing more than $20bn annually to educational. It is tailored to local needs. launched this year. and to offer volunteers from its own workforce. The Finnish telecommunications company has entered a global partnership with the International Youth Foundation.” says David Stoneham. however. Mexico. This is partly because the state has tended to play a more central role and partly because the act of giving has never been regarded as conferring high status. as the European Commission encourages business to form social partnerships and the UK government implements tax changes to increase donations. business competitiveness – is being recognised by some of the largest UK companies. 174 .
. According to Jamie Camplin. says companies are being forced to market themselves differently in response to changing attitudes and a new “aspirational agenda”: “We are living in a period of great expectations. in co-operation with the Prince of Wales Business Leaders Forum. .” he says. Ms Roddick publicly denounced the “vast gap” between the company’s humane image and the reality of human rights violations in Nigeria. 175 . It found that six out of 10 consumers form impressions of a company based on broader responsibilities such as labour practices. Last October Anita Roddick. the effect of this further blow was to make the company even more determined to project a caring image. In a guide sponsored by the company. It had reorganised and changed reporting processes in 1997 so that environmental and social achievements sat alongside financial data in the annual report. While Nokia has encountered no negative publicity from its socially responsible efforts. attacked Shell’s ethical advertising campaign. with people expecting to improve the quality of their lives and believing they can get it all. Shell had committed itself in its Business Principles to sustainable development well before Ms Roddick’s outburst. still smarting from the adverse publicity of the 1995 Brent Spar fiasco. head of group social investment. managing director of Environics.” He says businesses have to be seen to be responding to the agenda set by aid agencies after “black eyes” over issues such as child labour and environmental disasters. Doug Miller. were the main impetus for giving. the same cannot be said for Shell. “I visit 75 boardrooms a year and I can tell you. rather than a cost-benefit analysis.” In fairness. a company that has received more than one “black eye” from the media. the members of the board are living in fear of getting their corporate reputations blown away in two months on the Internet.” A survey conducted towards the end of last year by Environics International. wrote: “The challenge for the 21st Century Company is to bring all the developments in corporate citizenship together . Tim Hollins. responsibility to society at large and environmental effects. highlighted the fact that business is no longer only about personal aggrandisement or simply making profits. For Shell. into a coherent framework of practice that makes good business sense as well as benefiting society.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics Such an approach is a far cry from that of the corporate citizens of the late 19th and early 20th centuries. business ethics. author of The Rise of the Rich: “Hospitals. libraries and museums were the main objects: all built in a style that re-affirmed the principles of conspicuous waste rather than public benefit. when the personal considerations of the donor. the Toronto-based consultancy group. founder of the Body Shop.
director of WDM. a UK-registered charity established in June with the aim of “supporting efforts worldwide to advance the goal of sustainable development”. specifically into job competences and performance assessments.” Nokia’s discreet lunch last week and its insistence that its marketing of mobile telephones is kept separate from its social work may be a reflection of this. Characteristics of a highly ethical organisation The following points characterise a highly ethical organisation: · They are at ease interacting with diverse internal and external stakeholder groups. showed that one in five companies with a code of ethical conduct had not issued the code to all its staff and nearly half had failed to make the code publicly available on request. “If corporate social responsibility is to prove sustainable in the long term. it circulated the latest information about the activities of the Shell Foundation. Last month. conducted by Arthur Andersen and the London Business School. · They are obsessed with fairness. The charity recommends in a new report that social responsibility criteria should be incorporated into management processes and procedures. Yet for aid agencies such as the World Development Movement.” he says. According to Mr Miller. which caused an outcry in the 1990s and dented Nike’s reputation. some companies worry about taking a bigger leadership role than governments in the area of social responsibility: “There is a concern that the high-profile philanthropic approach might backfire and that the public might begin to look at business [as if it were] the new feudalism. 176 .Unit 6 – Corporate Governance and Ethics Global Corporate Strategy The group has chosen to continue its high-profile campaign and to risk attacks by organised pressure groups. Barry Coates. much more has to be done before hardened campaigners can be convinced that enlightened self-interest is delivering results in a way that truly benefits society. feels too many companies fall outside the new ethical agenda and stand to take advantage of unregulated markets. governments must meet their responsibilities and regulate to provide an ethical framework. But a study last year of 78 FTSE 350 companies and non-quoted companies of equivalent size. Save the Children recently outlined the measures a socially responsible company and its suppliers could take to tackle the issue of child labour.
· They see their activities in terms of purpose. The basic business formula of the company has not changed much since then. And purpose ties the organisation to its environment. 177 . This purpose · There is a clear vision and picture of integrity throughout · The vision is owned and embodied by top management.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics · Responsibility is individual rather than collective. CASE STUDY – Nike and the University of Oregon The next case study is case study 22.000 people. but had a workforce of an estimated half a million labouring for them in 565 contract factories in 46 countries – making it one of the largest private company de facto employers in the world. · Policies and practices of the organisation are aligned with the vision. The company directly employed 20. In 2000. Nike never felt that to be its responsibility. had close to $9 billion of sales and put Knight among the top ten richest individuals in United States. instead from the very beginning has been importing the products from the Asian Far East. Nike enjoyed 45% global market share. Nike is designing and marketing high quality sports shoes and sports apparel around the world. Work there meant 70-hour workweeks performing hazardous and/or monotonous routines under abusive supervision and with appalling equipment. Labour conditions in Nike’s contract factories were not even close to any labour laws and compensation practices in the industrialised countries. let alone the US. is a way of operating that members of the organisation highly value. no mixed messages. The company has never owned production of the goods it sells. with individuals assuming personal responsibility for actions of the organisation. Until the early l990s. De Wit & Meyer. It builds its brand appeal through savvy marketing and sophisticated product R&D. Below is the case synopsis: Case Synopsis Philipp H. · It is understood that every significant management decision has ethical value dimensions. (“Nike and the University of Oregon”) on Pages 933-940 of your key text. · The reward system is aligned with the vision of integrity. the organisation. Knight founded Nike’s predecessor company in 1963.
union supported Workers Rights Consortium. Nike became one of the founding members of the Apparel Industry Partnership launched by President Clinton. In April 2000. unions and humanitarian NGOs. professors and administration of the University of Oregon. including Nike quite seriously. Knight broke off all contact with the university saying “the bonds of trust have been shredded”.5 billion of sports apparel (2% of the US textile market) for their varsity teams only from WRC approved vendors. carried by the textile companies. And ever since Charles Dickinson and Emile Zola. more sophisticated factories such as household goods production. The university had lost a major source of discretionary income! Points to Highlight (extracted from Teaching Note 22. this course of events has always attracted the ire of many whose fortune of life it was to grow up in the more economically advanced part of society. He had given more than $ 50 million to the school. This pattern remained remarkably unchanged over almost two centuries: throughout all times and places of industrial development. followed by machinery assembly and ultimately followed by precision machining for high tech goods. because Phil Knight was alumni of UG and had been a generous benefactor of his alma mater. and was about to donate his largest contribution yet for renovating the football stadium. But Nike had already become the lightning rod of a fervent labour practices movement and kept on being pilloried for being an imperialist profiteer. Nike and the University of Oregon. Workers there would stay for two to three years and then either return to the countryside or “graduate” on to higher value added. It had been a very difficult decision for the university. industrial development started with large scale textile factories. If WRC was successful it could harm profits at the textile companies. because production costs would probably rise significantly. espousing a certain set of minimum conditions. The group split into a Fair Labour Association.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy Ever since the early 19th century in England. who wanted measures to be a lot more stringent and better controlled. and the student-led. Eventually the differences proved too far to bridge between the members. illiterate and non-urbanised farm surplus workers into the industrial age. a committee comprised of students. The alternative would usually be starvation in the countryside. In long drawn negotiations the ALP attempted to establish industry-wide accountable minimum standards for supplier factory conditions. Confronted with such a bout of consumer activism supported by American unions in the early '90s. Nike began to take a few halfhearted measures to improve standards at its suppliers. The key stick that the WRC could wield was to convince universities to purchase their $2. voted that UO should join the WRC for one year. encompassing several textile companies. textile factories have served the critical function of “breaking in” the poor. After the decision of UO. Peer Ederer and Jaco Lok) 178 . under the condition that WRC would give companies a voice in its operations. With the campaigns beginning to have an impact on Nike.
the Asian producers and the WRC. At the same time. Questions: 1. because their respective customers might break business relations with them as a result. which the four main participants have. American presidential elections and trade restrictions are introduced? With 45% global market share. 4. while being barely noticeable to the final consumer? Did Nike do enough with supporting FLA to solve its stakeholder problems? How much does Nike stand to lose. but who and how? · Shareholder value and stakeholder values perspectives. The case gives enough information to illuminate the validity and presence of both perspectives. if the issue enters. The nice thing about the case is that the conflict is suffered by four participants in equal measure: Nike. University of Oregon. assignment of blame will not solve the strategic problem at hand. and may eventually also lead to resolution. is there an option for Nike to recreate the industry rules for a better deal to all stakeholders? What might that option look like? 2. say 5% or 6% do tremendous good to them. What seems to be the core problem behind the fact that 500. Nike and University of Oregon is a typical case where stakeholder interests seem insolvably squared off against shareholder interests. 5. Employing a stakeholder analysis will yield a map of the conflicting interests. Depending on one’s own personal bias. and also how neither perspective will get very far. even as their input to the overall value of the final product is only 4%? Wouldn’t just a little more to them. · Use of the stakeholder framework to identify strategic problems and possible solutions. if it does not seek to accomplish a synthesis. 3. competitors and any other stakeholders that you find relevant. Each one of them simply cannot afford to run their business under financial consideration alone anymore. Identify the four main protagonists. However. What are the financial interests of their owners and/or sponsors? Identify the other stakeholder interests involved. including customers. 179 . employees. reading the case will quickly lead to a judgement on who is right and who is wrong. say. Somebody needs to start taking responsibility for the “non-financial” currencies in which companies trade. suppliers. each one of them has only very limited influence to materially improve the conditions as required by their customers.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics · The paradox of profitability and responsibility. Note how the perspectives differ.000 human individuals are working under such poor conditions. governments.
and shareholder organisations. From 1995 onwards. did not shy away from using his financial power over the University of Oregon to protect these interests. continuously shifting production locations within the region to the lowest cost countries. including several leading manufacturers. achieving higher air quality standards. around 9% on a pair of Nike Air Pegasus shoes) Nike has always relied on outsourced production in Asia where wage rates are low. and later by raising the minimum age. since the mid-90s Nike and its owners have been forced to recognise that its responsibilities for the welfare of employees involved in its supply chain extend beyond the boundaries of the firm itself. The main interest of Nike’s owners is to maximise Nike’s financial success in the long run. several human rights. The Fair Labour Association (FLA) originated out of the Apparel Industry Partnership on Workplace Standards (ALP). As margins in the industry are not particularly high (e. as exemplified by the fact that in 1995 a proposal by shareholder activists to review labour practices by its subcontractors only gathered 3 percent of the shareholder vote. and improving worker safety by substituting harmful chemicals and by training personnel. consumer. preferring instead to keep the monitoring results behind closed doors. Nike’s main owner. However.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy CASE STUDY FEEDBACK Feedback on Question 1: · Nike. labour unions. Nike and its owners however continued to protect their financial bottom-line by opposing WRC’s demands for paying a living wage instead of the legally required minimum wage. after agreeing on a Workplace Code 180 . and comprised of 18 organisations. These efforts were made in the context of Nike’s participation in the FLA whose “sweatshop-free” service mark could help convince Nike’s customers that it was indeed a socially responsible manufacturer.g. and by opposing WRC’s monitoring methods. Nike thus became more active in improving labour practices throughout the supply chain. which was launched by the Clinton administration in August 1996. Nike and its owners have come to see that the continuation of exploitative labour practices in Asia would do severe damage to its reputation and brand and could eventually harm its bottom line (if for example universities would boycott its products). Philip H. However. · Fair Labour Association. Knight. Nike’s owners did not feel responsible for the work practices adopted by its suppliers. first by hiring independent monitors and ending the use of child labour in Pakistan. ALP’s goal was to ensure anti-sweat conditions in the industry through certification of participating manufacturers.
which was quickly endorsed by the Clinton Administration. The WRC comprised exclusively of student activists who felt that the FLA did not go far enough. according to Knight. who both stood to benefit from participation. which was to bring apparel jobs back to the U. Knight had already contributed over $50 million to the school and was considering making his biggest donation yet to renovate the football stadium. thus went beyond the mere improvement of labour practices in Asia. adequate to provide the basic needs of an average family. It is clear then that the FLA mainly represented the (financial) interests of manufacturers and colleges and universities. The University of Oregon was caught in the middle between its activist student and staff body on the one hand and Philip H. They then formed the FLA to oversee compliance with its Workplace Code of Companies. It proposed a more independent monitoring system and demanded that companies pay a living wage. The University of Oregon subsequently changed its mind and joined the FLA instead (see ‘What happened after the case?’). This union involvement led Knight to accuse the WRC of supporting the unions’ hidden political agenda. WRC’s interests. could warrant to their students that the apparel and athletic gear they used and sold were manufactured according to fair labour standards. such as universities. Knight as the university’s most important financial benefactor on the other. A subgroup of nine centrist participants including Nike began meeting separately in an effort to move forward and announced an agreement on a monitoring system in November 1998. Students convinced their universities and colleges. which both had to convince their customers that their products were “sweat free”. 181 . Unfortunately for the University this compromise was not good enough for Knight who spoke of the shredding of the bonds of trust and stopped his donations to the University. · University of Oregon. to join the WRC and to fund its operations.S. Manufacturers could benefit through 3-year FLA certification and institutional buyers. Financially the University was both dependent on its students as well as its sponsors. conditional on the consortium’s agreement to give companies a voice in its operations. and it is not surprising therefore to see that it tried to reach a compromise: it would join WRC for one year. WRC did not permit corporations to join and gave human rights organisations and unions an advisory role. who were important sports wear buyers and who were (financially) dependent on their students’ support. · Workers Rights Consortium. The FLA was funded by participating companies and by affiliated colleges and universities.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics of Conduct in April 1997 progress slowed as disagreement arose over the monitoring process and over workers’ rights to bargain collectively.
Nike’s customers are likely to continue to be price as well as trend sensitive.S. In purchasing their goods. Customers do not only expect good value for their money. was willing and able to pressure Nike by threatening a boycott. After all. especially in the U. which represented a significant. It is clear that many of Nike’s customers. but by no means a dominant share of Nike’s total market. Only when watching news programs would they feel temporarily uncomfortable. Yet Nike maintained that its sales were never affected by all the bad publicity.S. but also increasingly expect manufacturers to be socially responsible.. customers are likely to even the playing field and continue buying Nike’s products. how many teenagers really would choose to forego on the opportunity to look cool in order to be socially responsible? Furthermore. Imagine the number of times Nike employees will have been forced to justify their company’s actions by their friends and families during dinner parties and social events at a time when Nike’s exploitative practices were all over the news! Although their own work environment may actually be very satisfactory. we can therefore reasonably assume that it was in the personal interest of many Nike employees to oppose their company’s work practices in Asia. Only those who fully believed in minimising the cost price of Nike’s products in the face of Nike’s aggressive competitors could be expected not to buckle under the social pressures in their private lives. · Nike‘s own employees. In 1996 ‘bad labour practices’ was the top third perception of Nike as a company amongst young people aged 13 to 25. have grown increasingly concerned about its (ab)use of cheap labour in Asia ever since Nike’s methods started attracting a lot of negative publicity in the early nineties. but we can imagine that it is not a lot of fun to work for a company that is widely known to exploit labour in developing countries. This may be explained by the fact that Nike sells its products globally. Nike was forced to act. and that the percentage share of its customer base that would actually be willing to boycott Nike’s products is very low. The case does not analyse the situation from the perspective of Nike’s own employees in the U.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy Feedback on Question 2: · Customers. To protect this market and to avoid possible repercussions in the rest of its markets. Only the activist student body. because they did not represent all of its customers. 182 . and changed its practices without needing to comply fully with the student activists’ demands.. and most of them are unlikely to consider the company’s labour practices when making the actual purchasing decision. who is to say that the alternatives are actually manufactured under better conditions? Without information on who is and who is not a socially responsible manufacturer.
did not perceive of the wages as particularly low and therefore chose to work at Nike’s subcontractors. despite the wages being the lowest of all countries where Nike manufactured. It did not need to raise its pay levels at its subcontractors. for example. because they were highly dependent on Nike financially. because despite continuing to live in poverty. In Nike’s Vietnamese factories. Given these employee interests it is not surprising that Nike only addressed the latter practices. Nike used over 500 different suppliers and could easily switch suppliers who were operating in a highly competitive market across the whole of South East Asia. Ensuring consistent. they were often unaware of the health risks they were exposed to. bringing their management expertise with them. · Asian governments. choosing not to wear their protective gear because it was too hot and humid in the plant. mass production systems using cheap. Because of the intense regional competition between different suppliers with low barriers to entry. Both local governments and local employees welcomed their presence as an important source of jobs. The case makes it clear that although many of the work conditions in Nike’s subcontractor factories were indeed appalling. Attracting Foreign Direct 183 . Of course. Workers in the chemical sections were thought to have high rates of respiratory illnesses. · South Korean and Taiwanese suppliers. Subcontractors. of course. Nike’s shoes and other factories made up 5 percent of Vietnam’s total exports alone. female workers in the Vietnamese factories considered the jobs to be transitional – a way to earn money for a dowry or to experience living in a larger city for two or three years. When Nike moved from one location to another. · Although the employees themselves. high output quality was of crucial importance in maintaining the supply relationship with Nike. can hardly be said to have voluntarily chosen to work at Nike’s subcontractors. generally had no choice but to follow Nike. As such local Asian governments were dependent on Nike’s presence in their economy and were well aware of Nike’s practice to move to the lowest wage countries if wages became too high. unlike the WRC. raising the minimum age and improving safety standards.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics · Subcontractor employees. there was no shortage of applicants for the work. Nike was also caught using child labour in Pakistan and children. manual labour. it was in the Taiwanese and South Korean owners’ interests to maximise the financial returns from their businesses by deploying low cost. often its Taiwanese and South Korean factory operators followed. if that meant increasing their cost price and thus risking their relationship with Nike. the average annual income for factory workers was double the national average. of course. Most of the young. employees seemed satisfied with their pay as their alternatives were worse. suppliers could not be expected to improve labour practices on their own accord. because alternatives would be even worse.
This meant that many of its competitors could hide behind Nike and could wait to see whether they could perhaps capitalise on Nike’s increased vulnerability. they are not likely to accept unilateral action by Nike without being convinced that this made sense from a long-term business perspective. and the AAMA scoffed at the whole idea of monitoring). They can also shift the responsibility to the local Asian governments. The customer can relieve him or herself of responsibility by claiming that he/she doesn’t have any real choice and that it can’t be up to them to know how all the goods that they buy are produced to ensure that their manufacturers are socially responsible. claiming that it is their responsibility to ensure that minimum 184 . which means the increased wages would have to be paid for by Nike’s shareholders. can point to the pressure they are under from shareholders to maximise financial returns. why should they have to pay more for their product when manufacturers and their retailers make multi-billion profits? These manufacturers. Feedback on Question 3: The core problem seems to be that the responsibility for improving the plight of the thousands of workers in developing countries can and is constantly being shifted from one party to the next. some companies remained opposed to the FLA’s proposed monitoring system and did not join (e. and it can therefore be expected that local governments would not do anything that would make it more difficult for manufacturers to set up shop in their countries. This is why it was of crucial importance to Nike that its main competitors would also support the FLA.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy Investment in the labour intensive textile industry is generally seen as one of the first and necessary steps in the economic development of a country. Despite being such a dominant player. so that the increased cost of improved labour practices would be shared amongst its main competitors. It would. and to their competitors for making it impossible to initiate changes unilaterally in a price sensitive market. of course. With a global market share of over 40% Nike justifiably attracted most of the negative attention. Furthermore. Nike could ill afford to raise its cost price unilaterally by paying higher wages. The increase in minimum wages for example. They should be able to rely on the manufacturers and on the government to ensure products are safe and “non sweat shop”.g. could not be expected to be supported by local Asian governments as they risked undermining the base of their efforts to develop their economies by risking to lose not only textile manufacturers but also other industries that relied on cheap labour. · Nike‘s competitors. be difficult for Nike to transfer the increased cost price on to higher store prices. Warnaco left the FLA. because of the price sensitivity of many of the sportswear customers (brand loyalty can quickly fade when prices are not on par with main competitors). therefore. which the WRC desired. However. Since most shareholders are interested in maximising the returns on their investments.
for a long time to come. Thus. Feedback on Question 4: By reversing its ‘hands-off attitude towards labour practices deployed by its subcontractors to a more pro-active stance. and know that if they were to unilaterally increase their minimum wages this could seriously harm their economy. The ability for constituents to shift the responsibility on to other links in the complex chain makes it very difficult to make even the smallest improvements. the bottom line is that the lives of Nike’s subcontractor employees can only be improved if profits are distributed differently in which case shareholders of either Nike. Nike should also make sure that it continues to receive government backing for its FLA initiatives. It is also likely that customers. However. meaning that their people would be even worse off.S. It managed to secure the backing of many of the more centrist participants of the AIL for its FLA proposal. without necessarily affecting the living standards of the richer nations all that much. However. Of course. actively pushing for better standards in its industry. then Nike could be severely damaged. If the unions are successful in pressuring the government to make it difficult for companies like Nike to rely on cheap foreign labour through the use of tariffs. who already did not appear to be overly ready to change their purchasing behaviour. although Nike has probably done enough to appease its most important customer segments. and should still do as much as possible to prove to them that it is doing everything that can be reasonably expected of them to improve the livelihoods of its workers in developing countries.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics wages amount to living wages. the real damage to Nike’s reputation was done in the 1990s and cannot be easily reversed. the global capitalist system in which we live does not provide the clear means to make this possible. it will therefore always be relatively easy for activists to attack Nike and gain some popular support by triggering the old. In the American market its competitors may well face the same problems as Nike. well-established image of Nike as the abusive imperialist. it should not make the mistake of underestimating the influence of a relatively small group of activists again. are also in competition with one another. Therefore. whether WRC agrees with the FLA label or not. Feedback on Question 5: Being such a dominant player in the industry. including the U. will be more than happy with the government backed FLA seal to quiet their conscience. Nike has come a long way in solving its stakeholder problems. government and many universities. but globally foreign competitors would continue to use cheap labour and could thus easily out compete Nike. It can effectively use this backing to defend itself against continued criticism from activists who believe Nike is not going far enough. a redistribution of wealth from richer to poorer nations would do billions of people around the world a lot of good. These governments. one could argue that Nike should have the power to recreate the rules of the industry to improve the plight of all of the stakeholders involved in the supply chain. of course. its 185 . However.
or if the customer is willing to pay more for Nike products. In addition to complying with legal requirements there are business benefits arising from adopting strong business ethics. only in the (unfortunately unlikely) case of Nike convincing its customers to pay more for its products and preventing competitors from undercutting these prices at the same time. Nike can’t formally agree with its competitors to raise prices because that would amount to illegal price collusion. Of course. no matter how dominant Nike may be in terms of market share in its own industry. of course. of course. depending on the nature and intensity of price competition in the industry. Unless. there is no guarantee that competitors will follow suit. Summary In this unit we have considered the importance of corporate governance. and at what characterises a highly ethical organisation. We have also considered business ethics. Nike could use its marketing muscle and expertise to try to convince customers to pay more for “non sweatshop” sportswear. and have looked at recent developments in the UK in this area. If pension and insurance holders were to collectively demand their fund trustees to invest in socially responsible companies even if that means lower returns on their investments. and they may instead choose to capture market share by selling socially responsible products at the old prices. If Nike nevertheless were to succeed in convincing its customers to pay more without harming its ‘cool’ brand image. it is in no position whatsoever to convince individual investors across the country to demand and pay for more socially responsible investments. both Nike’s communications campaign and higher subcontractor prices would have to be paid for by its shareholders. We have seen the importance of prioritising moral values and aligning behaviour with those values.Unit 6 – Corporate Governance and Ethics Global Corporate Strategy retailers and/or its suppliers pay. Of course. We have looked at these benefits. In fact. In this case. major competitors may not try to undercut the new higher prices since they could also stand to gain from charging higher prices. 186 . it is questionable whether the Nike branding people would want to explicitly associate their brand with the way its products are produced. particularly relating to managerial mischief and moral mazes. can the situation potentially be improved for all stakeholders. then it would also allow companies like Nike to improve their practices without running the risk of financial harm. Therefore. However. shareholders themselves become more actively involved in the way their funds are invested.
Now consider the following: 1. 2.Global Corporate Strategy Unit 6 – Corporate Governance and Ethics REVIEW ACTIVITY Consider your own organisation (private or public sector). what changes can be made? Will this require a management culture change? Can it be accomplished within the current organisational structure? Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. How do you rate your organisation’s ethical code of business conduct against the characteristics identified in the section ‘Characteristics of a highly ethical organisation’? Also look again at the benefits listed in the section ‘Two broad areas of business ethics’. Chapter 5 Pages 201-224 Ref 10. Chapter 10 Pages 374-381 187 . Does your organisation have a written code of business conduct? Do employees explicitly sign up to the code of business conduct on joining the organisation? Do they annually renew their commitment (by signature) to the code of business conduct. and agree to abide by any changes? Are independent escalation. 4. 2. Where your answers have been negative. Ref 7. and complaints and grievances procedures in place? 3.
It encourages managers to diagnose problems by looking at larger patterns of interaction within the organisation. Too often in organisations. some companies are beginning to adopt systems thinking in organisational management.Unit 7 Managing Complexity LEARNING OUTCOMES Following the completion of this unit you should be able to: · Explain the usefulness of systems thinking in managing complexity. · Apply the principles of a systems methodology to a given scenario. System thinking reminds us that even if units can be ‘perfected’ by themselves this does not imply that they integrate well together. Thus. Systems thinking can help managers look at organisations from a broader perspective and take a holistic view to help interpret patterns and events. It models an organisation as a system. management break down complexity by decomposing the system and dealing with its individual units separately. Introduction With the tremendous change facing organisations and increasing complexity of relationships in an organisation. 189 . · Apply a contemporary methodology of strategic control. It is playing a role in organisational design. · Assess the validity of the application of chaos theory to organisations. diagnosis and problem solving. and the process interdependencies. · Appreciate the importance of Performance Measurement. an interdependent network of units forming a unified pattern. managers have focused on and scrutinised a particular part of the organisation (perhaps a poorly performing unit) before moving on to the next unit and so on.
In addition. the ideas of which were born in mathematics and science. The principles of emergent strategy are to an extent explained by an understanding of chaos and complexity (see Unit 2). Learning – Team Dynamics Evolutionary Process Strategy follows organisation In both perspectives. i. Cultural. The application of complexity theory to organisations states that simple ‘deterministic rules’ apply. The ideas generated by the consideration are central to some of the themes considered in this module. there is a clear objective that the organisation (or system) is trying to achieve. rather an organisation is in a constant state of flux. Key opposing perspectives can be explained by the following table. Vision & Skill Controllable Process Organisation follows strategy Chaos Democratic Style Bottom Up Self Organisation Political.Unit 7 – Managing Complexity Global Corporate Strategy In this unit we shall look at the role systems analysis has in managing complexity in organisations.e. organisations can be seen as complex human activity systems that exhibit properties of compliance with complexity theory. and focus on a contemporary soft system methodology. understand the difference between hard and soft methodologies. Alternatively. A contemporary example of this is the Balanced Scorecard which is outlined in the latter part of this unit. We shall examine the principles of systems thinking. De Wit calls this the ‘organisational dynamics perspective’ and can be regarded as the opposing end of the control / chaos continuum. and have been applied to organisations. De Wit terms it ‘the organisational leadership perspective’ and can be regarded as the extreme end of a continuum where control is exerted in a systematic fashion. Control Authoritarian Style Top Down Structural Design Leadership. an explanation of how a learning organisation functions (see Unit 8) can be achieved by an understanding of these principles. as well as an ‘experimental’ view of innovation (see Unit 9). organisations need to be controlled – therefore chaos does not imply lack of control. Paradox of Control and Chaos Organisations can be seen as essentially logical hierarchical structures that can be controlled by a series of performance measures. 190 .
It can be traced back to Aristotle and Plato. Over the 1950s and 1960s RAND influenced systems thinking through its publications on strategy and methodology in systems analysis. there is clear applicability to business in terms of the recognition of the role of market forces. as the computer analysts adopted the RAND style methodology in ignorance of this original but fundamental omission. Systems analysis grew simultaneously with systems engineering throughout the 1950s. the degree to which a system interacts with its environment. This leads to emergence and organisational learning. RAND. It emerged from a post-war contract between the US Army Air Forces and the Douglas Aircraft Co. It can be said that the dynamic of success is ‘chaotic’. – an open system takes or receives things from its environment and/or provides things into its environment. Systems Thinking A Brief History Systems thinking is not a new subject area.Global Corporate Strategy Unit 7 – Managing Complexity Understanding these rules enables control and makes the complex ‘simple’. established in 1948. Systems 191 . in developing its advisory role. the supply chain. If this is true then long term planning is ineffective (see Mintzberg) and managers tend to develop strategies to react to unexpected and unanticipated events. Therefore. the 1940s saw the emergence of various formal systems thinking disciplines such as general systems theory (GST). This may explain some of the reasons why computer systems analysts took little account of the user during their analysis. systems analysis and systems engineering. Systems analysis as an approach and a methodology is closely associated with the RAND (Research and Development) Corporation. It began as a non-profit advisory organisation. However. expected its clients to take into account the social issues like welfare economics. i. However. One of the most prominent early pioneers of GST was Ludwig Von Bertalanffy. intervention by government institutions. The RAND Corporation. The Operational Research and systems ideas of the 1940s and 1950s influenced the way engineers tackled their problems and accordingly there has been increasing reference to “systems engineering”. was funded by the Ford Foundation and several banks. i. etc. He referred to a system’s openness. turbulent in nature.e.e. the methodology was criticised due to the lack of interest in people by systems analysts.
D. It is quite possible that the new organisation could perform worse. and systems thinking is influencing organisational change management. there is no guarantee that it would work any better than the original company. R. For example.pages 155-166 Chapter 11 . Boundaries and Purpose Systems thinking suggests that a system has a boundary.pages 255-273 Application in the Business Context An organisation in itself may be viewed as a system. processes and outcomes. It can be composed of positive and negative feedback loops. outputs. A system has inputs. Defining this boundary in business can be problematic. This theory can be applied to organisations. It introduced control systems ideas such as positive and negative feedback.Unit 7 – Managing Complexity Global Corporate Strategy engineers have been involved in the provision of many civilian applications such as communication. Cybernetics is another discipline that developed about the same time and was defined as “the science of control and communication in the animal and the machine”. If one of the units of the system is removed or altered the nature of the entire system is changed. (2000) Strategic Management & Organisational Dynamics – The Challenge of Complexity (3rd Edition) – Published by: Financial Times Prentice Hall (ISBN 0-273-64212-X). When a complex network of work units is organised to do some activities then the result may not provide entirely what was expected. if a company was benchmarked against its competitors and the best operational divisions in each were identified and combined to make a new organisation. an interdependent group of units forming a unified pattern to achieve its business goals and objectives. transportation and manufacturing systems. ACTIVITY (optional)) As background to this unit it is suggested that you source the following book Stacey. 192 . and read the following: Chapter 8 .
shareholders of a company may invest in their main competitors in order to know what they are doing.Global Corporate Strategy Unit 7 – Managing Complexity The business modelled as a system is a “purposeful” system. focusing solely on the sales department. e. stakeholders. For example. The sales department has vital dependencies and patterns of interaction with other units and with its supply chain. “Purposeful” systems include education systems. all of which blur the view of the boundary of an organisation. Clearly an organisation is “purposeful” with business goals and objectives. But who sets these goals? For whose purpose and why? These are some of the issues addressed by contemporary methodologies when applied to management. etc. postponing an investigation of its sub-systems. Production may not be able to meet the demand. The purpose of an education system may be to provide for the development of the individual. competitors) and often multiple roles in relationships add to the blurring. transportation system and communication systems. political systems. and counters the silo phenomenon of departments and managers working in isolation. or major customers. individual pieces of the organisation. 193 . ‘tweaking things’ and introducing novel procedures may not successfully increase its performance. principles and theories or the application of skills. it may be that the sales department of a company is not working as well as desired. The complexity of relationships (supply chain. understanding and analysis of facts. Yet this company could be both a competitor and a main supplier or customer. companies may have employees working in Brussels monitoring the European Union’s activities. However. or warehousing of finished stock may have insufficient space. It encourages managers to diagnose problems by looking at the larger patterns of organisational interaction. Others may have a good trading partnership with the main companies in their supply chain. To compound this it is likely to be some combination of these which will ‘emerge’ over time.g. There may be complexity implicit in investment options. rather than examining and ‘fixing’ separate. The Purpose of a System and Synergy Systems thinkers take a holistic view of the system in question and try to determine the emergent (the resulting synergy) purpose of the system. As an example. In business the system boundary is often blurred. or suppliers may be inadequate in terms of lead time or quantities. A political system may provide for the management of the affairs and resources of a community (local or national). Systems thinking addresses some of the problems of functional organisations. goods inward may not be able to deal with the deliveries. customer. For example.
. The above table of world views is very broad-brush and simplistic. one would identify the different business actors and elicit their views of the system. By ‘World View’ we mean the particular perspective of an individual on the problem. See Table 7. So for perspectives on the purpose of the organisation itself. Business Actor Manager View(s) Profit-making system Revenue-generation system Growth-potential system .1: Business Actors and Worldviews. in order to enrich information in the problem domain. See Figure 7. It is sometimes necessary to adopt formal methodologies (and mapping tools such as UML) to map individual business actor ideas into their perceived real-world..1. the following business actors may view the system from different and sometimes conflicting perspectives. Customer Supply (products & services) system Value system .1 194 . In the business context..Unit 7 – Managing Complexity Global Corporate Strategy World Views Systems thinking promotes the expression of different world-views. capturing the business actor’s world view is not as straightforward as it may seem. This is an iterative process for complex problems. In reality.. Supplier Employee Shareholder Client system Employment system Profit making system Growth-potential system Share value management system Table 7. (We shall look at World Views in more detail later in this unit).
give assurance and confidence about a “specialist” explanation of the world. discussions. A homeostatic system is one which adapts to produce a state of internal equilibrium so it can continue and progress. it can adapt in a disturbed environment. Individual’ specialisations of marketing..e. it is necessary to introduce the concept of a homeostatic system. An example is a human being who can walk out of centrally-heated buildings into the 195 . Cross-functional meetings. Every problem is different and the same solution cannot always be applied to similar. If the purposes of any sub-system conflict with the purpose of the overall system then the system displays sub-optimisation or ‘negative’ synergy. Implications for Business Sharing views for clarification The future is a mystery.1: Iterative process for world views. Systems methodologies investigate each problem critically. A paradox in systems thinking is that any chosen system cannot be understood without knowing its emergent characteristics and something about the features of its sub-systems. finance. The Notion of Hierarchy A system is made up of interacting parts or sub-systems that can be studied as systems themselves. Yet each is unsatisfactory in isolation. etc. Each of these sub-systems will have emergent properties that will define its purpose. production. or even apparently exactly similar. i. How stable is an organisation? In the context of stability and adaptability. debates and dialogues present richer pictures of the problems faced providing a more broad brush solution than would otherwise be obtained. problems.Global Corporate Strategy Unit 7 – Managing Complexity Ideas used in METHODOLOGY Perceived real world generates Figure 7. This is called the notion of hierarchy and is an advantage for the analyst because the same system's ideas can be used.
That is to say. Turbulence is only minor fluctuations in an otherwise stable environment which will hold up to rational analysis. a leading figure in strategic thinking. Once aware of a particular entity in the environment causing turbulence a company finds ways to measure the effects and take action accordingly. some universal. This “reactive” approach is not strategic but tactical. companies are dealing with abstractions. Read the following article about the validity of the application of chaos theory to organisations. Unfortunately. symptoms rather than causes are identified and the wrong things are measured in total ignorance of what should be measured. The modern notion of chaos describes irregular and highly complex structures in time and in space that follow deterministic laws and equations. concepts and expectations which cannot be touched and for which there are poor measurements. However.Unit 7 – Managing Complexity Global Corporate Strategy cold of winter and the body’s metabolism can use up existing calories converting fats into sugars in order to keep the temperature at around o 37 C. Environmental data can be captured and processed. ACTIVITY Chaos Theory is another discipline that is being used in organisational management. The company tends to adapt or influence the causes of the turbulence. unlike the physical problems such as that bull elephant in the parable. There is a cybernetics principle called the law of requisite variety which says that rate at which a system learns must match or be better than the rate of change in the system’s environment. strategic ideas are based on proaction not reaction. if known. How stable then is an organisation? If it is a homeostatic system in dynamic equilibrium with its environment then learning and adaptation should occur naturally. objective truth. as if somewhere behind such fluctuations is an unchanging order. turbulence is “noise” or “interference”. and that action can be taken faster than it changes. Professor Max Boisot. and keep the organisation in overall balance. if and only if. the fluctuations are relatively small or short-lived. Do businesses then have to emulate homeostatic systems? In a tactical way an organisation already does so. But. 2. A homeostatic system reacts to its environment and adapts to “survive”. this applies. 196 . states that there are two assumptions within strategic planning: 1.
In order to decide on appropriate performance measures. emergent properties are produced which add or detract value (called sub-optimality in hard systems thinking 197 . delay. whereas those systems whose objectives are difficult to define or whose end-to-be-achieved cannot be taken as given. policies and operational systems. feedback and so on. market-share. it is crucial to understand the complex relationships of cause and effect. then it learns and adapts to environmental changes. if problem areas are identified then the principles of systems thinking (e. openness. eliciting world views. These early approaches paid little regard to human activities and interactions. and will be examined later in this unit in the section on Strategic Control. In the context of a business. where appropriate. Reading 9. and objectives revised. thereby keeping the overall system in balance. Corporate planning can also exploit methods such as SWOT analysis to evaluate corporate performance and the contributions of each individual unit against defined objectives such as profitability. p. De Wit. Their objectives were relatively simple.g. etc. Following performance analysis. Therefore the early methods are not entirely appropriate in a business context. most of which were dedicated to a specific task or set of tasks. Consolidation of Systems Thinking Early systems thinking did not really address the social issues. 500-505 in your key text. learning and adaptation will result in adjustments to business outputs such as strategic plans. Human activity systems are such soft systems. R Performance Measures We have noted that if an organisation is a homeostatic system. are referred to as “soft” systems. deployment of knowledge assets.2. targeting systems composed of potential technologies. etc. key performance drivers can be identified and a performance measurement strategy devised.) can be applied again to the problem domain. Systems with well defined objectives are classed by Checkland as “hard” systems.Global Corporate Strategy Unit 7 – Managing Complexity ‘Strategy as order emerging from chaos’. The Balanced Scorecard Approach for measuring performance is particularly pertinent in this context. B & Meyer. From this understanding. If sub-systems are combined.
SSM is concerned with human activity systems (HAS). If every employee “sees” the turbulence in a learned way. perhaps the emergent properties of the whole will be value added. As mentioned earlier. through dialogue. This has led to a generic methodology that can be adapted to any given situation. the more likely the emergent purpose of the business will reflect this. Soft Systems Methodology (SSM) SSM has been developed at Lancaster University over the last 25 years. the more likely. such as mathematical). Individual views or discipline-oriented views are somewhat blinkered and narrow in scope. such as bridges. If we wish to reduce sub-optimality. the company will clarify its position with regard to the turbulence and progress. Professor Peter Checkland is the best known member of the team in the Department of Systems and Information Management involved. the sub-systems’ purposes must in some way be congruent with that of the whole system. The problem. rather than to solve well-structured problems.Unit 7 – Managing Complexity Global Corporate Strategy and negative synergy by some soft systems thinkers) from the purpose of the whole. then the more the people in the organisation continue learning. in which people are purposefully engaged and the relationships between the activities. through action research. soft systems thinking focuses on human activity systems. A HAS is defined as a collection of activities. and abstract. If there is dialogue rather than a missive about the systems purpose. itself a soft system. where objectives are unclear or where multiple objectives may exist. the learning was analysed and incorporated into the methodology. These are different from natural systems (physical systems). providing creative advantage or positive synergy. As more experience was gained dealing with different sorts of problem situations. It partly aims to structure previously unstructured situations. The boundary around a system is drawn to encompass that 198 . perhaps negative synergy will be reduced. is that each person has his/her own world view or “weltanschauung” of the problem area and that such views must be shared in an open way in order that a deeper understanding of the problem can be realised. or negative synergy. In business one fundamental resource. As learning or adaptive systems appear to be of a higher order than others. but as active subjects. SSM deals with problem formulation at the strategic level. recognised by Checkland and so many others. or designed systems (these can be both physical. is a person. It deals with “fuzzy” problem situations – situations where people are viewed not as passive objects. The shared view provides a richer picture. if the individuals involved in the dialogue participate in the derivation of the systems purpose.
SSM does not attempt to analyse sections of the whole that are considered to be particularly relevant to the study. However. 4. 3. desirable changes Taking action 199 .Global Corporate Strategy Unit 7 – Managing Complexity group of activities that would give the system some emergent properties. The problem situation unstructured The problems situation expressed Root definitions of relevant systems Deriving conceptual models Comparing conceptual models with the “real” world Defining feasible. The Checkland methodology. or the seven-stage model. the emergent properties are lost. 7. 6. Therefore. SSM covers a range of methodologies developed to deal with different situations. The Checkland Methodology 1 Problem situation unstructured 6 Change and action to improve 2 Problem situation expressed REAL WORLD SYSTEM WORLD 5 Real/systems world comparison 3 Root definition of relevant systems Source: Patching 1990 4 Conceptual models Figure 7. the set of activities required becomes clear. The seven stages are: 1. 5. is considered by most people to be the SSM.2: The Checkland Methodology. If just one activity is removed from the system. 2. but uses the concept of the whole being more than the sum of its parts. once the emergent properties are identified.
A: actor (people participating in the system). This reduces the possibility of opposing perceptions of the real world hindering the modelling process later on.5. Where there is a team of consultants. the root definition will be a short paragraph that will contain all the necessary information to describe the system. E: environment (the wider system). These different views result in inferences being made that are 200 . This is simply to aid the modeller or consultant to gain an understanding of the situation. the rich picture is a way of consolidating understanding of the problem situation. Several root definitions can be constructed for each of the relevant HAS identified. the root definition can be formulated from the components of the CATWOE mnemonic. T: transformation (the core of the root definition – the transformation carried out by the system). Different individuals will perceive the same event in different ways according to their view of the world.Unit 7 – Managing Complexity Global Corporate Strategy Stages 1. Stage Three “Root definitions” are constructed for the relevant HAS identified in stages one and two. The idea is to represent pictorially all the relevant information and relationships. O: ownership (the person(s) with the authority to decide on the future of the system). The rich picture should not be used as a tool to communicate with the client. The CATWOE mnemonic can be used as a checklist to ensure that the root definition is complete. beneficiaries or victims). Either way. Each root definition will encompass a different “world view”. The rich picture will reveal one or more HAS.6 and 7 can be regarded as working in the real world. Let us now consider the various stages: Stages One and Two The problem situation can be expressed as a “rich picture”. To define the emergent properties one needs to consider the mnemonic CATWOE: C: customer (people affected by the system. Refer to Figure 7.2. The root definition should encompass the emergent properties of the system in question. W: Weltanschauung (“world view”). personality and situation. based on their experiences.2. while stages 3 and 4 can be considered to be systems thinking about the real world. Alternatively.
the process is cyclical. This would then be a recommendation for change.Global Corporate Strategy Unit 7 – Managing Complexity not explicit.ca/courses/seng/613/F97/grp4/ssmfinal. Stage Seven Recommendations for change will be implemented. However.ucalgary. It may be that activities in the conceptual model do not exist in the real world. The conceptual model identifies the minimum necessary activities for that HAS. Conversely. The conceptual model will be compared with the real world to highlight possible changes in the real world. It should not be possible to take out words from the root definition without affecting the conceptual model. it represents the relationships between the activities. The conceptual model. otherwise the conceptual model is incomplete. In other words. Stage Five and Six The conceptual model identifies which activities need to be included in that particular HAS. encompasses all the activities necessary for the emergent properties of the system. In addition. if constructed correctly. the problem situation will be modified. It is recognised that nothing remains static and that mere intervention by the consultant will affect the organisation. it may be the case that activities appear in the real world that do not fit into the conceptual model. ACTIVITY (including case study) Go to the following website and read the report on SSM by a team from the University of Calgary: http://sern. The conceptual model must be derived from the root definition alone. Differences between the two must never result in a change to the conceptual model. Stage Four Each root definition will result in a conceptual model.html 201 . or are included in the conceptual model in a different form. It is not concerned with how these activities will be carried out. All of the elements of the CATWOE mnemonic must be included somewhere in the conceptual model. These activities are either unnecessary. these different views from different individuals must be appreciated and incorporated where possible. It is important to appreciate that once these changes have been implemented. It is an intellectual model and must not be clouded by knowledge of the “real” world. Removal of activities from the conceptual model would result in those emergent properties being lost.
and to take corrective action accordingly. but where it is felt that some improvement can be achieved. Strategic control is also about keeping employees motivated. SSM does not aim to solve the problems in one fell swoop but to make incremental improvements. and where there may be several different perceptions of the problem. It has been used to assist in a range of problem situations. and where the individuals who will be affected have no means of involvement in the solution process. The only limitations of SSM are the capability and adaptability to new situations. SSM has been used in a variety of organisations ranging from a company dealing with food products to British Airways. SSM Summary SSM deals with problems of a fuzzy nature where objectives are unclear. to express their perceptions of the area of concern. where no particular problem has been identified. Indeed. Hard systems assume that the problem can be clearly defined with an agreed goal and that a standard format can be applied to reach a solution. focused on the important problems confronting 202 . where the problem is assumed to be clearly defined. it can be seen that the range of situations to which SSM can be applied is vast. Using SSM as a front end provides a means for as many individuals who have an interest in the outcome as possible. It led to a major rethink of one of Shell’s Manufacturing functions in the late 1980s. Given the flexibility of the methodology.Unit 7 – Managing Complexity Global Corporate Strategy The article includes details of a case study which Checkland took part in. SSM can be applied where there is simply an area of concern. SSM is often used as a front end to a hard methodology. Trying to work through these differences from the outset will go some way towards ensuring that the results of the intervention will be acceptable to all parties concerned. such as deriving recommendations for improvement. SSM recognises that different individuals will have different perceptions of the situation and different preferable outcomes. with the Shell Group. Hard methodologies. These concerns can then be accommodated in the definition of the problem area. Strategic Control? Strategic control is the process by which managers monitor the ongoing activities of an organisation and its members to evaluate whether activities are being performed efficiently and effectively. of the consultant. reorganisation and role analysis. often result in resentment and rejection of the solution. before a hard methodology is applied.
Whereas a focus purely on financial information. The building blocks of competitive advantage are: · Efficiency. need to be measured. destination and other indicators that 203 . for effective strategic control. informs managers of the results of decisions that they have already taken. pilots need detailed information about many aspects of the flight. Nottingham Business School) about an approach to company analysis: http://www. For the complex task of navigating and flying an airplane. P. R. though important. The building blocks of competitive advantage.com/magazine/wiley/1086-1718/pdf5. informs managers of how the organisation is likely to perform in the future. · Quality. · Innovation. ACTIVITY However well managed an organisation may be. Kaplan and D. altitude. Measuring the above. it is also necessary from time to time to conduct an assessment of an organisation’s state of health.environmental-expert. Visiting professor. Read the following article on the web (by David Hussey. S. airspeed.pdf The Balanced Scorecard Approach Traditionally strategic managers have relied on financial measures of performance such as profit and return on investment to evaluate organisational performance. is not enough by itself. · Responsiveness. and working together to find solutions to improve the corporation’s performance over time. They need information on fuel. The balanced scorecard approach recognises that financial information.Global Corporate Strategy Unit 7 – Managing Complexity an organisation now and in the future. Norton were the developers of this approach and they have described it as such: ‘Think of the balanced scorecard as the dials and indicators in an airplane cockpit. This is necessary to identify the organisation’s strengths and weaknesses and uncover information that may be essential for the organisation’s strategy.
Successful innovation occurs when managers create an organisational setting in which employees are empowered to be creative.’ In the context of the balanced scorecard approach. The above competitive advantage measures. Focusing on and measuring quality promotes continuous improvements.g. Responsiveness to customers: responsiveness can be measured by the number of repeat customers. Furthermore. raw materials etc) vs. number of hours needed to produce a product or deliver service. and return on investment or equity. and the expense and cost of product development. There must be a management control system that allows the measure of productivity. Reliance on one instrument can be fatal. Innovation: Innovation can be measured by the number of new products introduced. the complexity of managing an organisation today requires that managers be able to view performance in several areas simultaneously. and level of customer service. Similarly. the number of defective products returned from the customer. Control systems to allow managers to evaluate how employees interact with customers can help. increase in market share. Quality: Quality is now recognised as a key competitive factor. 4. number. employees who know their behaviour is being monitored have more incentive to be helpful and consistent in the way they act towards customers. 204 .Unit 7 – Managing Complexity Global Corporate Strategy summarise the current and predicted environment. together with financial measures such as cash flow. the level of on-time delivery to customers. 2. errors. give a complete picture of organisational performance. quarterly sales growth. the cost of raw materials. It compares the units of input (resources. Efficiency: how efficiently resources are used. the building blocks of competitive advantage are controlled and measured in this way: 1. the time taken to develop the next generation of new products in comparison with the competition. software bugs. 3. strategic managers are in a good position to re-evaluate the company’s mission and goals. grade and rates of human resources used. product. product reliability over time and customer satisfaction. services etc). Managers must be able to measure quality in the form of the number of rejects. Efficiency is measured by the level of production costs. Monitoring employees’ performance/behaviour with customers can help identify areas for education and training. etc. the units of output (e. and in which authority is decentralised to employees so that they feel able to innovate and take risks. They can also take corrective action or exploit new opportunities by changing the organisation’s strategy and structure – which is the purpose of strategic control. Based on the complete set of measures in the balanced scorecard.
and focused on a contemporary methodology of strategic control. one could argue that attempts at deploying SSM in itself could bring about positive change in control type cultures. If your answer to 1 is ‘Yes’. From what you have learned. Critics of the system's methodologies express concerns that the open-ended nature of the methodology makes it difficult to manage and measure success. 205 . If you have a collaboration culture then the deployment of SSM could be a natural part of organisational management. it is unlikely to succeed. We have noted the differences between hard and soft methodologies and have examined in detail the Checkland Methodology. . 2. and have looked at its applicability in a business context. On the other hand. .Global Corporate Strategy Unit 7 – Managing Complexity Summary In this unit we have looked at the role of systems thinking in managing organisational complexity. the balanced scorecard method.Why might it not work? REVIEW ACTIVITY FEEDBACK It all depends on the culture of your organisation. Finally we looked at strategic control and examined the importance of performance measurements to judge the health of an organisation. REVIEW ACTIVITY Now turn your attention to the organisation you work for and focus on its culture.What benefits might you achieve? How will you measure success or failure? If your answer to 1 is ‘No’. 1. We have considered the principles of systems methodologies. If your organisation exhibits a Control Culture (“stick with the plan!”). can systems thinking be applied successfully in your organisation? Elaborate.
This is rarely the case in most organisations. & Jackson M. Chapter 11 – pages 255-273 Patching D.D. Thus.L. SSM assumes that managers and employees alike can openly discuss and influence organisational issues. critics from the business world discard SSM on the basis that its values of openness and equality are unrealistic in the real world. & Carson E. (1990) Practical Soft Systems Analysis -ISBN 0-273-03237-2 Flood R.C (1991) Creative Problem Solving – Total Systems Intervention (ISBN 0-471-93052-0) 2. 3. 4. Another criticism of SSM is that it ignores the issues of power and hierarchy within an organisation. Stacey.R. (1993) Dealing With Complexity – An Introduction to the Theory and Application of Systems Science (ISBN 0-306-44299-X) Flood R.L. (2000) Strategic Management & Organisational Dynamics – The Challenge of Complexity (3rd Edition) – Published by: Financial Times Prentice Hall (ISBN 0-273-64212-X). Checkland himself stated that there is no way of telling whether a SSM project is a success or failure. such a methodology does not lend itself to traditional project management practices. Most companies will not be able to justify costly endeavours where there are no clear success criteria. * Highly recommended 206 .Unit 7 – Managing Complexity Global Corporate Strategy For example. Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. Chapter 8 – pages 155-166. R. and confine systems thinking to academic analysis.
the relative importance of technology and information-intensive industries has increased. When defining knowledge management. particularly in the knowledge economy. Rapid advances in information technology have enabled companies in even the most traditional industries to develop sophisticated systems for capturing new sources of information and disseminating and exploiting this information more effectively. and rapidly deploying knowledge gained in one geographical area or one industry across another. · Appraise the methods available to apply knowledge management principles. intellectual capital is becoming an increasingly important asset of the enterprise. the focus on knowledge management can be attributed to two developments. Re-cycling knowledge know-how is now key to competitiveness. In some sectors (e. professional services) knowledge management is a matter of survival.g. · Understand the principles of knowledge transfer in organisations. capital and labour-intensive industries in developed economies have continued to decline. complexity and geographical distribution. Firstly.Unit 8 Knowledge Management LEARNING OUTCOMES Following the completion of this unit you should be able to: · Compare opposing theoretical concepts regarding knowledge in organisations. Secondly. whereas others stress the enabling infrastructure and knowledge management system. Introduction The global business environment is changing rapidly. In practical terms. corporations can improve their competitiveness. By managing its knowledge assets astutely. A successful deployment of knowledge management must recognise that views of knowledge are 207 . some emphasise the human interaction and psychological factors that impact knowledge sharing. As organisations grow in size. and adaptability.
Thus. 512 – 525 Theoretical Concepts on Knowledge In theoretical terms. R 1. Enabling technology is particularly critical for geographically distributed organisations. and exhibit different temperaments. collaboration. it is equally important that a corporation take a strong process perspective in establishing knowledge management. B & Meyer. knowledge creation. examine the principles of knowledge transfer and then focus on the methods and practical issues relating to knowledge management. organisations. 2. which have challenged fundamental assumptions about the nature and meaning of knowledge within companies. on relationships that build trust and a sense of mutual obligation. However. In this unit we shall look at some of the theoretical concepts relating to knowledge management. · The development of post-modern perspectives on 208 . where opportunities for face-to-face interaction is limited.3. and on a common language and context. industries and society as a whole. as background to this unit. ACTIVITY Now. sharing and deployment. People are different from one another. read the following from your key text. it is vital that organisations foster a collaborative culture for success. ‘The knowledge-doing gap’.4. Building intellectual capital is based on the existence of communication channels between people. ‘Building learning organisations’. Teamwork over individual excellence should be rewarded. De Wit. p 505-512 Reading 9. Some of these differences are profound and influence collaboration and knowledge sharing. p.Unit 8 – Knowledge Management Global Corporate Strategy fundamentally human views. two developments have contributed to an increased emphasis on knowledge in looking at strategic management: · The popularity of the resource-based view of the company: This clearly identifies knowledge as potentially the primary source of sustainable competitive advantage. and invest in the appropriate technology to facilitate the process. Reading 9.
it emerges through interaction. An innovative proposal. In accordance with this. The primary function of the company is to create conditions under which many individuals can integrate specialist knowledge in order to produce goods and services. do you support the resource-based view or post-modern view? Debate your views (relating it to using your work situation) with others on the Virtual Campus. Competitive advantage is achieved by developing existing resources and creating new resources in response to changing market conditions. If knowledge is a social construct. Writers like Frank Blackler argue that knowledge cannot exist in any absolute or objective sense. Post-modern view Post-modern perspectives on organisations challenge the resource-based assumption. The resource-based view. measured and moved around an organisation. Like culture. i. Also. a company’s competitive advantage derives from its ability to assemble and exploit a combination of resources. like any other asset.Global Corporate Strategy Unit 8 – Knowledge Management Resource-based view A resource-based perspective highlights the need for a fit between the external market context and its internal capabilities. 209 . through a process of interaction between the various individuals within the organisation. There is thus a debate concerning two opposing theoretical perspectives. which may be perfectly valid to an external observer may be rejected by those inside the organisation because it fails to conform to their mental model of what constitutes valid or useful knowledge. knowledge exists only in an abstract form within organisations. therefore. Writers like Robert Grant argue that knowledge represents the most important value-creating asset. VIRTUAL CAMPUS Taking into account your own working experience and sphere of activity.e. can be stored. suggests that knowledge. The recognition of knowledge and how it is applied is determined by the social and organisation context in which a company operates. it follows that it cannot be formally managed. it is affected by managerial action and its nature can change only gradually over time.
it is easier to understand knowledge in terms of what it is not. judgement. judgement. interpreted. Data is essentially meaningless on its own. we cannot base our future prosperity on the traditional building blocks of the old industrial economy: raw materials.1 for a pyramid view on data. Data are objective facts. Guildhall. intuition and values.’ What do you consider to be the assets of your company? Does intellectual capital (know-how) currently feature as an important asset? Can your working practices and output turnaround be improved by re-cycling of knowledge (or better re-cycling of knowledge)? What opportunities does knowledge management present for your company and what are the barriers to implementation/wider take-up? Knowledge What is knowledge? In the context of strategic management. It is raw data. assess consequences. where products can be made anywhere and shipped anywhere. analysed. November 1998. Reasoning. In global markets. in which production technologies can soon be copied. Information develops into knowledge when it is used to make comparisons. summarised and placed in context. land. Knowledge can be seen as information combined with experience. London. In addition to reasoning. cheap labour. Data becomes information when it is categorised. perception and interpretation are critical in transforming data into information.e. given relevance and purpose.Unit 8 – Knowledge Management Global Corporate Strategy ACTIVITY Here is a quote from Tony Blair from his speech at the Lord Mayors Banquet. It is not data and it is not information. ‘The ambition is to turn Britain into the leading knowledge-based economy in the world. Data is at the bottom. establish connections and engage in a dialogue. machinery. That is our future: a knowledge-based. intuition and values) is key to the transformation of information into knowledge. creative economy. 210 . Knowledge is at the top of the value chain. We must base our competitiveness on distinctive assets which our competitors cannot imitate – our know-how. creativity and talent. decision making (using experience. See Figure 8. information and knowledge. i. perception and interpretation.
capture. organising and retrieving information. The latter are merely efficient mechanisms for capturing.Global Corporate Strategy Unit 8 – Knowledge Management Data volumes Reasoning Perception Interpretation Decision making Knowledge Value chain Reasoning Perception Interpretation Information Data Figure 8. It is the process by which an organisation generates value by using its intellectual assets. combine and share knowledge amongst its members. make decisions and act. KEY POINT Knowledge is the result of deciphering and attaching meaning to facts and information. information and data. and provide a ‘place’ (virtual) for teams to work.1: Pyramid view on knowledge. but also systematically create associations between corporate expertise and information resources. One must be careful not to confuse knowledge management systems with data and information management systems. 211 . personalise and organise knowledge for individuals and communities. Knowledge management is the capability of an organisation to create. A true knowledge management system must capture. organise and retrieve information.
g. Sharing valuable knowledge with colleagues is often seen as risking reduction of value of that individual to the company. reports written. A green fingered gardener cannot explain to a novice precisely why his plants always thrive. · Reciprocity: Will an individual receive valuable knowledge in return. It is this area that presents the greatest opportunity for knowledge management within organisations. This trust can exist at an 212 . Knowledge problems Knowledge represents a source of power for an individual. Trust is an essential condition for the smooth functioning of the market. psychological issues relating to knowledge management. · A limited stock of explicit knowledge. repute and altruism functioning as payment mechanisms.g. e. advice given fall into this category. with reciprocity. Knowledge is exchanged between buyers and sellers. Traditional craft apprenticeships systems recognise this. thus. · The majority is tacit knowledge. books read. much knowledge remains tacit because no attempt has been made to make it explicit. self-gratification): Individuals find some subjects fascinating and want to talk to others about them. an internal market for knowledge. However. e. which is easy to articulate to others. The primary goal of knowledge management systems is to identify the valuable knowledge that resides within individuals and disseminate it throughout the organisation.Unit 8 – Knowledge Management Global Corporate Strategy The nature of knowledge An individual’s knowledge base is like an iceberg. However. Most knowledge is hidden below the surface and can be divided into two types. which cannot be easily articulated to others. There are. · Repute: An individual will need to be certain that the · Altruism (though the motives may be more akin to Davenport and Prusak’s analysis leads them to argue that there is in effect. Tacit knowledge only transfers through observation and practice. Davenport and Prusak argue there are three conditions under which an individual would agree to share knowledge. this seemingly straightforward process is in practice complex and can be fraught with difficulties. either now or in the future? source of knowledge will be recognised and others will not claim the credit.
and the reward system must reflect a high focus on knowledge sharing.Global Corporate Strategy Unit 8 – Knowledge Management individual level. diverse. The barriers to communication in organisations that arise between departments typify this problem. To overcome these problems. 2. Knowledge Transfer Much can be done within an organisation to encourage knowledge transfer. The expert must take time to explain the context and translate the jargon. The precise communities of practice would 213 . through close working relationships between colleagues. or at an organisational level. It is very difficult to learn from an expert if your do not have a basic grounding in the topic. Marketeers in a particular geography. it is necessary to establish communities of practice based on the core competencies of the organisation. Project Managers. The first two points pose particular challenges for large. the right collaborative culture must be fostered. Examples of such communities of practice might be Researchers. for successful deployment of knowledge management in organisations. encouraging staff to think and talk about what they know and what they need to know 3. by the creation of a cultural context which encourages and rewards knowledge sharing and discourages and penalises knowledge hoarding. particularly in larger global organisations engaged in diverse activities. other conditions are necessary to establish: 1. Trust – Face-to-face contact is important when seeking to build strong interpersonal relationships. articulated and disseminated in a hurry. Lotus Knowledge Discovery System) provide the essential infrastructure for knowledge management. Leading knowledge-based companies include the contribution of intellectual capital as part of the employee’s business objectives. Programmers. Research Chemists. globally dispersed organisations. but to be used effectively and achieve widespread take-up. Barriers to understanding It is easiest to learn about things that we already know. Creating a common language for talking about knowledge. Establishing communities of practice (based on core competencies) is critical. Noting the above issues. Quality Champions. IT-based frameworks (e.g. the individual contributor of intellectual capital recognised. Time – exchanging information at speed may be efficient. These problems can be ascribed to differences in the content of the knowledge bases. but tacit knowledge cannot be discovered. etc.
Combination is the process of analysing. it is more easily combined with the knowledge of others. efficient and easy-to-use. it should also be noted that it is not enough simply to manage existing knowledge. the simplification of complex concepts in a highly simplified form using models. supported by the technical infrastructure. but it does not fully explain how new knowledge is created. exploiting and renewing the knowledge base within the 214 . identify four interrelated processes by which knowledge flows around the organisation and transmutes into different forms. · Senior management must be committed to accumulating. whereby individuals absorb explicit knowledge to enable the development of new forms of tacit knowledge. e-learning initiatives. codified form. Once an individual has externalised tacit knowledge. industries and functions can yield enormous business benefit.g. Individuals share experiences. e. categorising and integrating the explicit knowledge of a set of individuals in order to create new explicit knowledge.Unit 8 – Knowledge Management Global Corporate Strategy depend on the sphere of activity of the corporation. 4. 3. Thus knowledge sharing through informal and formal gatherings. Externalisation is the process of converting tacit knowledge into explicit concepts. across horizontal and vertical divides. but also be able to share knowledge which technology cannot at present capture. Socialisation is the process of communicating tacit knowledge to a broader organisational context. Nonaka and Takeuchi in their book The Kno w led ge Creating Co m p any. 1. networking and mentoring is critical. not just existing. How can knowledge creation be encouraged? Nonaka and Takeuchi identify five key conditions. which can be disseminated more widely within the organisation. 2. but new knowledge across the global organisation. in a rapid. In the context of knowledge transfer. Competitive advantage is achieved when organisations adapt and evolve continuously in response to changing market conditions. The final link in the process is internalisation. Knowledge management can play a key role in this. It is then essential that people within communities of practice have the opportunity to meet and share knowledge. Externalisation may occur at an individual level or at a collective level. demonstrate skills and model behaviour in such a way that they can be observed and copied by others within the organisation. seminars. Re-use of intellectual capital across geographies. The above processes explain how individual tacit knowledge flows until it is widely disseminated around the organisation. The competitive edge arises when companies leverage knowledge.
Opportunities should actively be provided for even unrelated individuals to exchange knowledge. · Contracts. · Market research. ACTIVITY FEEDBACK Intellectual capital is essentially any intangible asset that has potential for re-use. · Sales proposals. ‘creative chaos’ where flux and crisis cause reconsideration of established precepts at a fundamental level. an individual must be given scope to follow initiatives and explore unexpected opportunities that emerge. ACTIVITY Identify the types of intellectual capital within your organisation. · Client information. organisation’s internal diversity must match the variety and complexity of the external environment.g. an A drawback is that the knowledge creating company Nonaka and Takeuchi describe is often far removed from organisational reality. e. · As new ideas first develop at an individual level. The following list gives you an idea of what can be shared. · This process of exploration can be further encouraged by · Knowledge should not be rationed (or hoarded).Global Corporate Strategy Unit 8 – Knowledge Management organisation and be able to create management systems that will facilitate this process. · Competitor information. · In order to respond creatively to changing conditions. 215 . chaos and crisis are just as likely to stifle as to promote creativity by provoking anxiety and insecurity.
e. Company strategy: Score the extent to which knowledge management is incorporated into strategy and business and operational plans. and benchmark against best practices. it is important at regular intervals to evaluate your knowledge management capability. · Client deliverables (with confidentiality safe-guards). Does knowledge management feature in company-wide strategy or only in specific strategies. · Methodologies. marketing? Is a strategy in place to address knowledge management process. time and common language get addressed? What practical steps can be taken to implement knowledge management and leverage the corporation’s intellectual capital? It is important to emphasis that knowledge management must be at the heart of a company’s strategy if it is to work.g. · Project plans. Senior executives should be accountable and rewarded for encouraging knowledge sharing and knowledge enabling. Practical steps to promote Knowledge Management In the previous sections we looked at the key issues relating to knowledge management – but from a somewhat theoretical perspective. · Interpretation methods. issues of culture and technology? Is there 216 . A collaboration culture must be promoted from the top of the company. · White papers. with the following dimensions: 1. Assessment of current capability Wherever you are in the deployment of knowledge management.Unit 8 – Knowledge Management Global Corporate Strategy · Case studies. A practical tool for such an assessment is to score your capability using a knowledge management spider diagram (see Figure 8. The company should then put in place a roadmap to target areas of weakness.2). How do issues of trust.
It may be the case that where the corporation scores weakly. do you have other enabling technologies such as data-warehousing. maintenance and QA of knowledge assets? Furthermore. data mining. so that a score of ten relates to best practices. 7.g.g.g. or does the business process require them to check the Knowledge Management System first? Enabling Technology: What are the current technologies used for knowledge sharing? If there is no specialist Knowledge Management System (e. supply chain) and business partners (e. and level of integration into the business. From a strategy perspective it is also useful to score your main competitors on the web diagram and then identify weaknesses/strengths. teamwork and knowledge sharing built into the ethos of the company? What is the level of senior management support? Are there senior roles in knowledge management? Knowledge processes: Is there a formal and unambiguous process for the creation/acquisition. Collaboration culture: Company-wide awareness of knowledge management. 5. and is there a flag to indicate importance/relevance. workflow management. a 217 . 4. A score of zero will apply if that particular dimension does not feature at all in the corporation. This can be done against best industry practices.Global Corporate Strategy Unit 8 – Knowledge Management knowledge collaboration externally – across stakeholders (customers. You will note that the dimensions of the Web Diagram are the knowledge management success factors we identified during the course of the earlier sections. business intelligence. It is suggested that a company score each of the dimensions against a 10-point scale. GroupWare and messaging. to what extent have knowledge management practices been incorporated into core business processes. 6. See Figure 8. 3. when selecting a project management methodology or developing project plans do Project Managers re-invent the wheel each time. Additionally strategic partners can be scored. web-based technologies in the company? Do you have a corporate intranet? Knowledge Bases: To what extent have knowledge sources (explicit and tacit) been identified. distribution. captured and indexed? Knowledge Access: What level of accessibility is there to the knowledge sources? How easy is to search for information? What access rights and security measures are in place? Knowledge Quality: What Quality Assurance procedure are there in place? Are there reviews and sign-offs prior to intellectual capital being made ‘public’ on the system? What procedures are in place to maintain up-to-date and relevant knowledge? Is knowledge catalogued by business area. organisation/storage. through strategic alliances)? 2. application. e.2 for an example of a knowledge management web diagram for a company. Lotus Knowledge Discover System). Is collaboration. electronic data management.
particularly in comparison to best practices and also to the competition. For those organisations relatively immature in the deployment of knowledge management. A road map should then be prepared to get the organisation to the desired state. 10 Enabling technology 10 Road Map for Improvements Having assessed your current knowledge management capabilities. The ‘where you want to be’ state may also be mapped on the web diagram. · Train leaders in generic KM practices (e. a picture emerges of the gaps in access to knowledge. virtual teamworking. Based on the gaps identified. 218 . therefore. and in what time-scales. the following steps are recommended: · Identify communities of practice or teams based on core competencies. knowledge creation. business units will suffice as ‘communities’. wider collaboration opportunities across strategic alliances.2: Knowledge Management Web Diagrams. 10 Company strategy Competitor's KM capability 10 Collaboration culture Knowledge quality 10 0 10 Knowledge processes Knowledge access 10 Corporation's KM capability Knowledge bases Figure 8. cultural factors and enabling technology. There are. sharing). and nominate leaders for each community. For smaller organisations.Unit 8 – Knowledge Management Global Corporate Strategy strategic partner scores highly. the organisation can then develop a picture of where it wants to be.g. · Identify a sponsor (senior executive) for each community.
visits. sharing. skills in specified subject matters.fr/ Go to the home page and select ‘Knowldege Management’ under the menu ‘Themes’. successes. KM system and knowledge · Raise team awareness of contexts through presentations. e. short-term assignments) in early stages of deployment. education. · Train all staff in KM process. · Build. application. · Promote widespread deployment and publicise early · Recognise and reward knowledge contributors.insead. Ref: The Challenge o f Managing Kno w led ge by Laura Em p so n – Financial Tim es 4th Octo ber 1999 ACTIVITY Research the application. rights) model. yellow pages (who is who for what). Define access (security. · Evaluate and implement enabling technology. etc. manage and maintain a network of staff with deep · Define the KM process (covering knowledge creation/acquisition. organisation/storage. · Use knowledge proponents/developers (experts who create new content on dedicated. · Define categories and populate with generic information. 219 . workshops.g. etc) with informal agenda to allow tacit knowledge to be shared.Global Corporate Strategy Unit 8 – Knowledge Management · Facilitate socialisation and transitional encounters (meetings. seminars. impact and business benefits of knowledge management by reading some of the articles on knowledge management on the INSEAD website: http://knowledge. (Registration to the website is free of charge). distribution. maintenance and QA).
Kao is particularly interesting due to its corporate philosophy. De Wit & Meyer. Used in conjunction with chapter 3 of your key text. non-hierarchical culture. However. Bob de Wit. while more nationalities will become involved in strategy development. The company’s structure. In 2002 the company had sales of Y865 billion (more than US$ 6. This concept of a “learning organisation” is achieved by having a very flat organisational structure. The strategy process can be characterised as continual. The company will grow in size and complexity. The company must learn how to remain a learning company. this case can be used to understand the following key points: · The building of a learning organisation. largely in Japan and South East Asia. (“Kao Corporation”) on pages 721-737 of your key text. De Wit and Meyer. Point to Highlight: (extracted from Teaching Note 6. Therefore information must flow freely throughout the organisation and all individuals must be equipped to continually learn from the information obtained. The company believes that competitive advantage stems from the superior attainment and usage of information.Unit 8 – Knowledge Management Global Corporate Strategy CASE STUDY 1 – Kao Corporation The next case study is case study 6. during the 1980s and 1990s Kao has acquired a number of companies in the US and Europe and has committed itself to further internationalisation. and the learning organisation. an open. 2 and 3).3 billion). Case Synopsis Kao is Japan’s market leader in detergents and shampoos. The key question raised by the case is how this strategy process and the company’s learning ability can be maintained as they further internationalise. participatory. Kao Corporation. This case describes the manner in which Kao has been able to transform itself into a learning organisation. Its strategic intent is to belong to the three or four global detergent/cosmetics/personal care companies that they believe will eventually survive. and runner up in disposable diapers and cosmetics. giving insight into the circumstances that are necessary to create an organisation 220 . leadership and systems are described. flexible and incremental. Ron Meyer and Henk van den Berg) Note this case touches on subjects wider than just knowledge management. It also touches on the area of strategy formation and globalisation (linking with Units 1. broad participation in strategy development. largely informal. culture. extensive information systems and a state of mind that emphasises that learning is an essential never-ending process.
He does not play the traditional role of master planner and architect of implementation (Commander Approach or Change Approach). culture. Senge. he creates the circumstances under which ideas and strategies can arise and grow within the organisation (Crescive Approach). of your key text. the impact of various leadership approaches on the strategy formation process can be explored. Globalisation. (link to Reading 3. Quinn. (link to Reading 3. 5. Kao’s strategy formation approach is strongly inclined towards the incrementalist perspective. of your key text. for instance. This case highlights the strengths and weaknesses of incrementalist approaches to strategy formation. What is learning and what is a learning organisation according to Kao? How is organisational learning different from. and Reading 9. On the contrary.2. Dr. 221 . Of particular interest in the Kao case is the role of the CEO. 4. systems and leadership roles has the company developed to become a learning organisation? How does Kao go about forming strategy? What are the strategy formation process’s main features? What are the advantages and disadvantages of Kao’s current strategy formation process? How would Kao need to adapt or change its strategy formation process to accommodate further internationalisation? What type of action would you recommend? (You may also wish to refer to Unit 3.3. Quinn. De Wit and Meyer) · The role of leadership in a learning organisation. (Link to all readings. 3. Maruta.) Questions: 1. · Advantages and disadvantages of the incrementalist perspective. and Reading 9. before responding to this question) 2.Global Corporate Strategy Unit 8 – Knowledge Management capable of continual learning. Maruta’s leadership style demonstrates the influence of leadership on learning. This case illudes to the link between learning and strategy formation. More broadly. De Wit and Meyer) · Learning as part of the strategy formation process. Senge. a person learning from reading a book? How has Kao been able to build a learning organisation? What is their corporate philosophy and what type of structure.3. Kao’s focus on learning is an integral part of their thinking about how to manage the strategy formation process.2.
Dr. everyone within the organisation is expected to participate in this joint learning process. whether above and below him. continually seeking new insights and better understanding. In other words. Mission setting. reading an article is a long way off from organisational learning. In Kao. but incidental learning. internalised intuition). Feedback on Question 2: Building a learning organisation is not a matter of changing the organisational structure or tinkering with the incentive system. It is the company’s fundamental assumption that such learning. · Collective. a daily matter. states that Kao is “an educational institution in which everyone is a potential teacher. More specifically. the company truly believes in the importance of learning. Kao has taken systematic action on a number of fronts. Learning is also viewed as largely intuitive – by doing and discussing. drawn from scarce information. but is viewed as “a frame of mind. · Intuitive. collective and largely intuitive learning is well developed. Most importantly. although it can be an ingredient of the process.” All employees. Hence. but largely formalised learning. it is believed that organisational learning has the following characteristics: · Continual. it is not collective. Learning is not an activity that an employee carries out individually behind a desk.” In this way. including Maruta himself. Reading an article is not continual. helping not only himself to learn. and it is not intuitive. This places an important emphasis on the development of tacit knowledge over the attainment of formalised/codified knowledge. but individual learning. although they could be elements of a more encompassing effort to build up a company’s learning ability.Unit 8 – Knowledge Management Global Corporate Strategy CASE STUDY FEEDBACK Feedback on Question 1: At Kao learning is simply defined as gaining a better understanding of the truth. are seen as students of the truth. but a process that takes place through open discussions and the investigation of concrete business ideas. a learning organisation is simply an organisation in which the process of daily. To really become a learning organisation. Maruta. every activity can lead to further learning. but also all others. A person reading an article differs on all three counts. managers often unknowingly internalise knowledge (the Zen Buddhists speak of kangyo ichijo. the president of Kao. Learning does not take place at fixed moments. In isolation these actions will not result in a learning organisation. is the ultimate source of 222 .
· Pro-activeness. the collective nature of organisational learning requires a strong cultural emphasis on the good of individual initiatives. 223 . believing that collective learning can only take place in an organisation where people discuss matters on an equal footing. and largely intuitive learning that Kao believes is essential. Kao’s culture emphasises that every employee should have full access to all information and that all discussions should be held out in the open.Global Corporate Strategy Unit 8 – Knowledge Management competitive advantage and therefore needs to be carefully nurtured: “The company that develops a monopoly on information. Although the organisation must learn together. “past wisdom must not be a constraint. knowledge and its acquisition through learning. where everyone is free to hear what is said and to participate. everyone loses. Therefore. Linked to this underlying philosophy is an organisational culture that reinforces the importance of information. independent of rank and therefore the principle of equality is central to Kao’s culture. Therefore.” The emphasis is rather on what has been learnt today that can be useful tomorrow (link to the discussion on mental models in chapter 2). However. By providing individuals and teams some degree of autonomy. and has the ability to learn from it continuously. · Mutual assistance. because there is no cross-fertilisation. it is a commonly held view within Kao that learning should not be solely based on previous experience. Therefore. Kao rejects authoritarianism. Joint learning also requires the free flow of information and ideas. is the company that will win. the values and beliefs held by managers within Kao regarding learning are very strong and are a main factor in shaping Kao as a learning organisation. this culture is further reinforced by other organisational elements. if needed. Finally. organisation-wide. mutual assistance is stressed as a key principle. the company’s culture emphasises a number of principles: · Equality. but something to be challenged. Yesterday’s success formula is often today’s obsolete dogma. · Openness. If each individual or department tries to optimise only its own learning. ideas are born and knowledge is spread by initiatives taken by individuals. · Individual initiative. Organisational learning also requires individuals and departments to take an active interest in each other’s problems and development. As Maruta puts it. To facilitate the daily. Organisational culture. irrespective of its business. Interaction and the spread of ideas require that opinions are judged on their own merits. In short. Kao can use the energy of intrapreneurs to stay innovative and competitive.
inventory. the way that top managers define their roles within the company has a significant impact on Kao’s learning ability. but must assist their organisations to learn. Everyone has access to the Logistics Information System (ordering. · Leader as teacher. As horizontally shared information is essential to Kao’s organisational learning. it seems that Kao fits the mould. openness. As Senge (reading 9. To allow for the equality. We [Kao] constantly adjust our strategy flexibly.” who creates trust and commitment by his unselfish desire to serve others and the organisation as a whole. Feedback on Question 3: The remark about Kao’s joint venture with Colgate-Palmolive on page 733 really gets to the essence of Kao’s strategy process: The way the two firms decided on strategy was totally different. mutual assistance. Most fundamentally. Further information exchanges and networking opportunities are created through regular R&D conferences and through the open physical layout of the Kao building. Finally. leaders should not be motivated by a desire for power. Leaders must understand that learning cannot be commanded. the company leaders have designed the needed organisational structure and systems. Leadership roles. In Kao this is exactly the case – Dr. Information systems. but by their desire to serve other people and the organisation. Leaders should not be authoritarian experts.3) argues. but aids employees in coming up with their own ideas. Leader as steward. They [Colgate-Palmolive] never start without a concrete and fixed strategy. so that these can function optimally. Maruta does not push one vision of reality. Maruta seems very much a “servant leader. individual initiative and proactiveness mentioned above. In other words. guide and facilitate everyone in the organisation. but must coach. production and sales data) and the Market Intelligence System (market research. In Kao. which Kao refers to as “biological self control”. Senge identifies three critical roles of leadership in a learning organisation. and have fostered the essential organisational culture. 224 . Kao has designed a very flat organisational structure. leaders cannot learn on behalf of their organisations.Unit 8 – Knowledge Management Global Corporate Strategy Organisational structure. sales. and marketing data). We could not wait for them. but that a “social architecture” must be created that will support organisational learning. the company has placed a strong emphasis on developing information systems so that the most up to date information is available to all members of the organisation. without significant boundaries or titles. with various parts interacting and assisting each other where necessary. There is relatively little hierarchy and not a strict separation of tasks – the organisation functions fluidly and flexibly. Here too. each of which is also applicable to Kao: · Leader as designer.
There are no formalised. · Implementation. so the strategy should continue to grow as the knowledge and wisdom of the organisation continue to expand. When examined more closely. Kao’s strategy formation process can be seen to have the following characteristics: · Creating issue awareness. it is every person's responsibility to identify the critical issues to which the organisation must respond and to bring these issues to the attention (agenda setting) of all relevant colleagues (link to chapter 2). horizontally and intuitively. They too can contribute to the evolving ideas and by their participation lend weight and credibility to the plans. clusters of affected or interested individuals form around them (see 9. At this stage there will not yet be any fixed proposals. which grew into a plan. everyone is focused on obtaining feedback information that can lead 225 . On the contrary. If groups are formed. Using the energy of intrapreneurs one can develop new and innovative ideas. no one expects the plans to be fully implemented as formulated. Hence. The prevailing principle at Kao is referred to as ‘tataki-dai’. As the ideas developing in these small groups become increasingly clear. periodic procedures using rational analytical techniques to ensure that issue identification takes place. while Kao approach was much more in line with the incrementalist perspective. As consensus emerges in this fashion. This is also the point at which higher management levels are involved. · Developing ideas and legitimising new viewpoints. but also it helps to create ‘zoawase’ – a common perspective or view. so that discussions can be truly open. In other words. Not only does this enhance the quality of the idea. informally.2. all of the participants in this strategy formation process also become increasingly committed to making the strategy a success. systematic learning and reformulation. None of Kao’s managers believes that the strategy formation process is over once the initial plans have been formulated (option selection). they are shared more widely. which grew into a proposal. “present your ideas to others at 80 percent completion” so that others can criticise and contribute to them before they become a proposal. without any individual defending a predetermined point of view. Stacey). these people may meet formally or informally to exchange information and jointly develop ideas on how to proceed. Within the open and participatory culture of Kao. Once issues or problems have been identified. nor is it a task assigned to only a small number of senior managers. the definition of threats and opportunities. credibility and commitment.Global Corporate Strategy Unit 8 – Knowledge Management Colgate-Palmolive’s approach to strategy formation was inspired by the planning perspective. A first set of plans is merely a snapshot in the learning process – as an issue grew into an idea. and the focusing of organisational attention take place continuously. · Obtaining contributions. consensus.
which is particularly important in unpredictable environments. However. the focus is on the strategy development process – how organisations continually and gradually create patterns in their streams of decisions and actions. Furthermore. Feedback on Question 4: The advantages of Kao’s current strategy formation process have become quite clear from the discussion above. Kao’s vision is less variable than its strategies and thus acts as a guiding principle in the incremental strategy formation process. of your key text. the continual improvement of proposals. By trying out something in the market a company can damage its name or make investments that cannot be recovered. at the same time. but is developed in the same incremental manner as described above. De Wit and Meyer. Their strategy formation process is flexible. High participation and a crescive approach by top management led to more bottom-up information and ideas. When looking at learning. the following potential disadvantages can be identified: Disadvantages of ‘finding out". · The role of vision. the focus is on the competence development process – how organisations continually and gradually obtain information and increase their knowledge and abilities. The most common problems of feedback are inefficiency and the danger of irreparable mistakes. In short. the company vision helps to determine the pattern in the stream of organisational actions. The alternative is feed forward. The case writers are particularly kind toward the company and do not mention any disadvantages encountered by using this approach. and broad understanding and commitment throughout the organisation. because estimates are made of what will likely happen (we therefore speak of ‘figuring out’). based on the readings in Chapter 3. and open to learning. However. because learning is based on past successes and mistakes (we refer to this as ‘finding out’). adaptive. Feedback is also referred to as output. Kao’s vision is not static or top-down. Learning by trial and error can often be time. The company’s vision helps managers to focus on the right issues. These points underscore that incrementalism and learning are two sides of the same coin.and resource-consuming compared to thinking things through in advance. some “errors” cannot be repaired. whereby future activities are based on forecasts and estimates. In other words. on 226 . Learning and incrementalism are based on the principle of feedback – the results of current activities are used to adapt future activities. and points managers in certain directions where they should seek solutions and new opportunities. A common vision about the organisation’s purpose. Feed forward is also referred to as input. The main problem of feed forward. proceeding in unison. The two are wrapped up in one another. identity and strategic intent is both the outcome and the guiding principle in the above process.Unit 8 – Knowledge Management Global Corporate Strategy to learning and can be used to adapt and further develop the strategy.or error-driven.or forecast-driven. When looking at incrementalism.
keeping up the shared culture and strategic intent will be increasingly difficult.3 Allison). while decision-making time is likely to increase. Investing time during the decision-making process to produce high quality plans that are widely understood and enjoy broad acceptance often facilitates rapid action. · Threat of slower decision making. · Difficult to internationalise. The organisation will be larger. Kao might be at a disadvantage. Especially in circumstances where the speed of decision-making is essential (a crisis or a sudden opportunity). made up of more nationalities and divided by larger physical distances. large capital investments or shifts in technologies.Global Corporate Strategy Unit 8 – Knowledge Management the other hand. such as takeovers. The case. cooperation-oriented corporate culture and a shared strategic intent. Kao seems to avoid these problems by a strong. Because Kao has a strong bias toward incremental action (get started and learn as you go along). without a clear-cut source of authority to resolve disputes. 227 . through diagnosis. they might find it more difficult to formulate and execute far-reaching plans. The wide variety of opinions and the diffusion of power can easily lead to confrontational political processes. · Threat of political infighting. To this it can be added that the participatory decision-making system and need for consensus can also be relatively slow. it should be recognised that the length of the decision-making process (“time-to-decision”) is usually less important than the length of the total decision and implementation process (“time-to-results”). trust and commitment will be difficult to maintain under these circumstances. homogeneous. however. making the total amount of time spent from issue identification. it was argued that trial and error learning might be time-consuming. the threat of political infighting is likely to grow as well. the ease of interaction is likely to decrease. does not suggest that this is a problem. Kao seems to be trying to combine both feedback and feed forward to get the best possible results. In general. Above. Slower decision-making might be more than compensated by quicker implementation. An inherent threat of flat organisations with widespread participation is (as everyone at a university knows) political infighting (link to 3. If ideas need to be surfaced and consensus needs to grow between people at scattered locations around the world. is that many things cannot be forecast or thought out in advance. however. the threat of inefficiency and irreparable damage remains. · Threat of strategic drift. There will be fewer informal contacts and differences of interests are likely to grow. to conceiving and realising less than in other firms. Furthermore. Openness. However. Companies that employ an incremental approach to strategy formation run the risk of making adjustments that are not radical enough. As the company internationalises.
3 Haspeslagh and Jemison). Feedback on Question 5: This is a difficult question. parallel interests and frequent informal contacts – attributes that are more typical of a medium-sized firm. spread all over the world not frustrate the company’s ability to learn? Shouldn’t Kao remain a Japanese company with foreign interests. At Kao. the US and Europe. informal rules and tacit organisational routines prevalent throughout the company. how can managers at the acquired firms be integrated into the Kao way of learning and strategy formation if their culture is radically different? The more exceptional Kao’s culture. learning and strategy formation have not been formalised into policies and procedures that can be easily transferred to an acquired company. the more difficult it will be to absorb foreign cultures into the organisation (link to 6. varying from the obvious to the profound. Maruta’s own metaphor is that of an organism. or will be rejected if implantation is attempted.Unit 8 – Knowledge Management Global Corporate Strategy · Difficult to integrate acquisitions. it can be questioned whether a foreign body can be made compatible. however. The Kao way of doing things has grown out of a philosophy and is engrained in the beliefs. leaving the Tokyo headquarters the role of supporting regionally based. The often-used metaphor is that of a new “part” that must be slotted into the organisational “machinery”.” Compared to the current situation this would require a significant amount of decentralisation and growth of an international management cadre. with the headquarters in Tokyo remaining as the focus of its learning activities? Should 228 . particularly as it goes a step further than the literature provided. The very particular attitude toward learning and the strategy formation process at Kao makes it very difficult for other organisational cultures to be integrated into the Kao system. Dr. At corporations with highly formalised strategic planning systems. with more foreigners. companies that are acquired need to adapt themselves to a number of procedures and regulations governing the strategy process. As mentioned above. based in one location. The following are particularly pertinent: · A Japanese or transnational company? Kao seems to believe in the transnational corporation judging by its vision that “headquarters’ functions would be dispersed to SE Asia. Will a bigger company. with a homogeneous culture. In other words. Taking this metaphor one step further. These are maintained by a common culture. locally managed operations by giving strategic assistance. Kao’s learning organisation is currently dependent on mutual trust. You may have come up with a broad range of suggestions at this stage. understanding and involvement. The question is whether this can be achieved without destroying Kao’s unique learning capability. openness. interdependence.
Bill Bowerman. if this eventually leads to the leveraging of Kao’s learning capability? (link to Reading 6. or rely on a core group of Japanese expatriate managers that relate each foreign operation to Tokyo headquarters? · A formal or informal company? Kao must also wonder whether its lack of hierarchy (the “paperweight organisation”). Yet this is what the company had become by the late 1990s. This case examines the foundations of the company’s growth.3. Shouldn’t Kao take the longer and rougher road of organic growth. Yet. But he continued to study accountancy. he would have had little credibility if he had defined his purpose as being to build the world’s largest sportswear company. difficulty to share learning. especially the knowledge developed and retained within the company over the years. transferring Kao’s learning capability to a company that has been acquired is terribly difficult. Haspeslagh and Jemison) CASE STUDY 2 – Developing New Knowledge at Nike Developing New Knowledge at Nike When Phil Knight founded Nike with $500 in 1964. How can communication be as frequent and as informal as within the Tokyo headquarters? How can control be exerted over subsidiaries far away from the centre? Can this be achieved “informally” or are systems and procedure necessary to ensure that the foreign subsidiaries remain a part of the larger learning organisation? · An acquiring or organically growing company? As mentioned in the answer to question 4. local management and market knowledge) really offset the costs (cultural incompatibility. lack of organisational boundaries (“biological self-control”) and lack of formalised procedures all remain possible as the organisation grows both in volume and geographically. both in Europe and in the United States. Phil Knight was a middle distance runner in the University of Oregon’s track team. The question is whether the benefits of these takeovers (instant market share.Global Corporate Strategy Unit 8 – Knowledge Management Kao develop a diverse group of global managers from a variety of national backgrounds. about the lack of good US running shoes. existing brand names. He complained on number of occasions to his coach. difficulty to transfer learning capability). eventually graduating and moving to teaching in his home 229 . Early learning years Back in 1958. Kao has staged major acquisitions as an important part of its foreign market entry strategy.
By the mid 1980s. In sourcing production internationally from low wage countries. In this context. Knight used his athletics contacts to sell running shoes from a station wagon at track and field events. Korea and Taiwan. In 1972. Then in 1964. he placed his first contract in Japan to begin shoe manufacture to a Nike all-American design. both he and Bowerman each put up $250 to found the Nike shoe company. This made Japanese shoe production more expensive. Reebok went into battle against Nike under its founder and chief executive. He bought the shoes from Japan but always felt that there was potential for a US designed shoe. the company only switched contracts for large scale production when it could be sure that a new manufacturing contractor was able to meet its quality standards. Then along came competition in the form of a new sports shoe manufacturer. Nike was profitable and continued its role as a specialist US sports shoe manufacturer with no production facilities in its home country. allowing the company more scope for funding further product development and marketing. Reebok launched a strong and well designed range of sports shoes with great success. To start the company. Both Nike and Reebok realised that. Nike’s approach to shoe manufacture was revolutionary for its time. Part of the problem and opportunity for both manufacturers was the fickle and design-conscious nature of the target market: young. Nike switched its operations in 1975 from Japan to two newly industrialised nations. there were real risks in manufacturing overseas because the greater geographical distance and different national cultures made it more difficult to control production and quality. the yen moved up against the dollar and Japanese labour costs continued to rise. Reebok had equalled Nike’s annual sales in a fierce competitive battle. how to brief manufacturers on new designs and models. whose wage costs were exceptionally low at that time. compared with Nike’s sales of $597 million and a share of 18%. he was concerned to use Japanese experience of shoe production. Nike itself was gaining more experience of international manufacture and making more contacts with more overseas manufacturers. Knight was working on his new design ideas. The company realised that sports shoe manufacture required substantial labour input. From a start up company in 1981. Thus. Nike’s costs came down dramatically. in order to build 230 . However. the company had to learn how to handle overseas production. In addition. Reebok was clear market leader with sales of $991 million and a market share of 30%. However. Reebok. demand for Nike shoes was sufficient for him to consider developing his own shoe manufacture. Over the next couple of years. and how to set and maintain quality standards. hip teenagers and adults buy the latest fashions. named after the Greek goddess of victory. By the early 1970s. In order to cut production costs. so labour costs were potentially high and justified manufacture in countries where workers were paid much lower wages. At the same time as exploring these.Unit 8 – Knowledge Management Global Corporate Strategy town of Portland. The decade of difficulty and renewal: The 1980s By the early 1980s. In 1987. Oregon. Paul Fireman.
Mr. The most successful of these was begun in the late 1980s. Thus around the turn of the decade. was signed up to promote the new product in a multimillion-dollar deal that added a new dimension to sports sponsorship. Nike realised that such promotion provided powerful support for the brand. The new heights of the 1990s Coupling the new Nike Air shoe with advertising featuring Michael Jordan was a touch of marketing inspiration. but it was forced to use Shaquille O’Neal. ‘It’s obvious to consumers that if you put an airbag under the foot. This was the battleground that was initially captured by Reebok with good products and a campaign of public relations that was highly disrespectful of Nike. Over the next few years. Nike had learned about the heat of competition and the need for innovation and continual R&D in its shoe designs. Mr. ‘It was an intuitively simple technology to understand’ said John Horan. Thus the 1980s were both the decade of difficulty and the time for renewal. Nike then began to invest considerable sums on developing new and innovative sport shoe designs.’ But it was not until 1990 that the Nike Air shoe was launched and began to deliver success for Nike. Building on this success. this was enhanced by the heavy funds Nike was prepared to invest. Fireman criticised Phil Knight as being ‘just a shoe guy’ who saw himself as ‘a big time presence in sports’.Global Corporate Strategy Unit 8 – Knowledge Management volume. the Nike Air shoe. The marketing campaign developed links between Nike and Jordan’s athletic ability and image. top of his chosen sport. The US basketball star. publisher of Sports Goods Intelligence. the Reebok Pump shoe. To hit back against Reebok. fashion aware teenage and young adult market. Reebok hit back with its own design. it will cushion it. For example. it was necessary to move from the specialist sports shoe market to wider adoption by this much larger. a major basketball star but second to Michael Jordan. One author of a book on Nike commented that ‘Paul Fireman was installed as a devil figure inside Nike and he remains a dark presence to this day’. This investment in sports marketing was much higher than previous sums. In response. a US industry newsletter. It was developed after Nike had assessed the results of its heavy advertising campaigns earlier in the 1990s. Knight said that he ‘hated’ his competitor and that the ‘most innovative piece of R&D equipment they have is the copy machine’. 231 . Nike’s market share rose from 25% in 1989 to 28% in 1990 while Reebok’s share dropped from 24% to 21%. in 1995 Nike invested almost US$1 billion in sports marketing compared with Reebok’s spending at around US$400 million.
the company had come to understand its target market well – young. The company claimed that such scientific development was a major part of its success: new materials. it was developing the Nike brand into non-shoe activities such as clothing and sports equipment. compared with Reebok’s 16%. Nike’s market share in the USA continued to climb. for a previously unheard-of sum. It bought the television rights for five friendly games each year involving the Brazilian national team. In addition. Although the company was sympathetic. Following its success with the Air shoe. Moreover. During the 1990s. But it is also likely that Nike came to realise that its target group craved new products that would appear more innovative than the models of previous years. Nike also embarked on a programme of further and extensive product development. The accompanying slogan of ‘winning your own way’ captured the aggression. some 300 new designs were launched into the US market. Knight was unwilling to give way. It reached 43% in 1996. It had been expanding its international sales for some time and these continued to grow rapidly. Nike was not alone in this approach which was typical of many companies bringing out variations on models in order to capture the fashion desires of customers. In one year alone. was developed to express the individuality of the target group. By 1996. But it was not just the amount of money invested in campaigns at Nike. The new millennium: the year 2000 Throughout the 1990s. During the 1980s and 1990s. the levels of Nike research activity. competition and individual success epitomised by the sports stars who were signed up. its marketing support. Nike’s ‘swoosh’ logo appeared around the world in many televised golf tournaments. e. and in the televised final of the 1998 Football World Cup and in the year 2000 Sydney Olympics with Brazilian footballers. the whole Brazilian football team. Mr.g. related activities. Also. new fabrics and new designs were developed. The branding and the message were also important. By signing a ten-year deal in 1996 worth between US$200 and 400 million. over US$100 for sports shoes. its clarity in its targeting to teenagers and the breadth of Nike’s coverage were all totally new in sports shoe activity. Nike’s total sales were US$9 billion and it was the biggest sports goods 232 . cool and competitive teenagers. ‘just do it’.Unit 8 – Knowledge Management Global Corporate Strategy Nike’s sponsorship knowledge Subsequent sports sponsorship deals included the golf star Tiger Woods and. Such prices led to a concerted campaign in the USA aimed at forcing Nike to pay higher wages to workers in the foreign factories of its suppliers. The ‘swoosh’ logo was highlighted on all its goods to help brand the product and the main message. Nike broke new ground in football sponsorship. The implication was that it had to bring out new models even if the innovative content was more a surface design than a substantive change. Nike continued to develop rapidly in two further. Nike was criticised for its use of cheap labour in some countries and was forced to take steps to deal with this. However. Nike had succeeded in growing the US market with sales alone exceeding US$3 billion (compared to US$597 million in 1987). Its products were sold at high prices.
Mr. Tom Clarke had taken over as chief executive. 233 . Clarke was quite clear: You grow a lot. Phil Knight had become the chairman and Mr. we’re a fairly self-critical bunch. specialist sports shoe company to the largest sportwear operation in the world. not to keep people happy for the next couple of quarters. Nike had developed such a deep knowledge of sports items. What knowledge has Nike acquired over the years? Use the definitions of knowledge to help you move beyond the obvious. Questions: 1. We’re running the company for the long-term. what conclusions can you draw on the emergent purpose of Nike in relation to its knowledge? 2. clothing and branding that it was expecting to weather the storm and remain the largest in the world. Feedback on Question 1: Explicit knowledge will include: · Shoe and sportswear technical design and performance. In addition.. then you need a period when things aren’t booming to ask what works and what doesn’t.. the Asian economic downturn had hit the company hard and there was heavy overstocking of its products in the US retail trade. p475 – 478 CASE STUDY FEEDBACK The case traces the company’s development from its origins as a small. Remember. although the company had suffered a setback as sports shoes gave way to brown shoes as fashion items for teenagers in the late 1990s. Profits were well down and painful job cuts were necessary. 3. What other resources beyond knowledge does the company possess that offer clear sustainable competitive advantage? From a consideration of this case.Global Corporate Strategy Unit 8 – Knowledge Management manufacturer in the world. but the company was still optimistic about the future... It begins by making the key point that it would have been unrealistic for Nike to have defined its purpose at its inception in 1964 in a way that would have captured its market position in 1999.. Source – Corporate Strategy by Lynch 2nd Edition.
· Ability to negotiate with the representatives of major sports stars. contacts with individual retail shop buyers and knowledge of their methods of operating. workers and governments have proved especially helpful and co-operative in placing manufacturing contracts. unrecorded aspects of many of the above areas: · Experience of which combinations of technical characteristics will produce technically superior performance. · Knowledge of which manufacturing suppliers are particularly reliable and which individual managers within such companies are crucial to product quality and costs. The over-riding point is the interaction of the different forms of knowledge creation and transfer (in accordance with Nonaka & Takeuchi). Tacit knowledge will include many of the less formal. · Understanding of the target customer groups and their motives for purchase. · Experience of which countries. 234 . stock handling and transport. which may be difficult to measure precisely. · Marketing and selling to retail stores globally. e. · Ability to manage such manufacturing contracts in terms of quality of product. control of costs. · Worldwide knowledge of different sports goods retailing. · Experience of how to handle various sports stars and their agents: this alone must be highly valuable! · Knowledge and experience of individual advertising agencies. · Ability to negotiate and place manufacturing contracts with companies outside the USA.g. the conversion of tacit knowledge (design ideas originating in the first instance from Philip Knight) into explicit knowledge (creation of production drawings). time to market. market research companies and other marketing suppliers.Unit 8 – Knowledge Management Global Corporate Strategy · Shoe and sportswear fashion design and development. · Contacts with individual fashion designers and other individuals that have been particularly fruitful in terms of creating new market trends.
externalisation of ideas onto drawings. Feedback on Question 2: Other resources that are important to Nike include: · Its ‘swish’ logo and brand name. · Purpose may not capture the full potential of an organisation if it is confined to specific and well-defined objectives: it needs to be allowed to emerge over time. · Its innovative ability to generate new marketing concepts and drive forward the sports goods business. yet provide sustainable competitive advantage. · Its reputation as a leading supplier of sportswear. These all add up to resources that move beyond knowledge. Link forward to innovation (Unit 9) where designers are encouraged to work together to be creative (socialisation processes to create more tacit knowledge). 235 . · Its network of contacts in global sports goods retailing: architecture. If Nike had defined its early purpose in terms of profits and shareholder wealth. it might have restricted its growth to more limited objectives. Knowledge is not the only form of advantage. · Its contracts with sports stars like the Brazilian football team. re-use of intellectual capital is no longer a case of gaining competitive advantage. but survival. Summary In this module we have looked at the vital role knowledge management can play in today’s knowledge economy. · Purpose needs to be seen in the context of the resources of an organisation: Nike’s purpose in becoming the leading world sports goods manufacturer only had some meaning when the company already had some record of success in its home country. Feedback on Question 3: There are three main conclusions: · Purpose develops over time: the opening comments to this case make the point clearly about Nike’s purpose in 1964 and 1999. We have noted that in some sectors.Global Corporate Strategy Unit 8 – Knowledge Management In other words.
information to their 2. Identify the likely position of your main competitor on the web diagram. We have concluded by considering some practical steps in the implementation of KM. and have noted the differences between explicit and tacit knowledge. REVIEW ACTIVITY Consider the following scenario. consult colleagues across different business areas and at different levels in the organisation. Prepare a Knowledge Management web diagram (as per Figure 8. Students are encouraged to apply the lessons learnt to their own work context.Unit 8 – Knowledge Management Global Corporate Strategy We have examined what knowledge is.2). Now identify areas where significant improvements can be made (within a 6-month period). 3. Carry out a realistic assessment of your knowledge management capabilities. (Students are encouraged to present this manager/colleagues. You have been asked by your company’s board to rate your knowledge management capability against your chief competitor and present your proposals for a realistic improvement plan. Ref 10*. and the challenges posed to organisations. To do this. Chapter 11 Pages 390-398 Ref 4*. Prepare your presentation (no more than 15 charts). Chapter 9 Pages 167-196. 1.) Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. Chapter 10 Pages 197-227 * Highly recommended 236 . 4. Chapter 9 Pages 196-228 Ref 12. 2. and how they can be achieved. the socialisation and technology issues. and elicit their comments. 3. We have looked at the theoretical perspectives. and consider how their organisations can better exploit intellectual capital to gain competitive advantage. Identify the business benefits that are likely to arise from the improvement plan. Chapter 8 Pages 141-155.
new technologies are continually emerging. disruptive technologies pose particular problems and challenges for the established corporations. lengthy internal assessments and so on. 237 . When faced with disruptive technologies. and evaluate them more accurately? What are the problems faced by established organisations. How can established companies discover powerful disruptive technologies more quickly. In this environment. innovation has gathered increasing pace. and what steps can organisations take to be more responsive to innovative technologies? In this unit we shall look at some of these issues.Unit 9 Innovation LEARNING OUTCOMES Following the completion of this unit you should be able to: · Examine how established companies can manage disruptive technologies. and significant venture capital has flown into start-ups. However. that they cannot cope with revolutionary. new technologies. Introduction The ability to rapidly assimilate powerful new/emerging technologies and processes into products/services is now an important competitive factor in the global environment. management teams in blue-chip companies frequently respond by vacillation. and hide behind internal research. They are so geared with managing continuous innovation within established technologies. extensive pilot studies. They frequently hire external consultants to give them the ‘answers’. · Analyse the relationship between innovation and establishing a ‘learning’ culture. · Understand the importance of maintaining strategic flexibility. some have powerful business potential and many do not. Over the last decade.
238 . Equity markets expect continued growth in earnings while start-ups are valued for their prospects and rewarded with large market capitalisation they can use to fund innovation. ACTIVITY As background to this unit. established ways of thinking and embedded skills make it tough to deal with a disruptive innovation that requires a different approach. Many of these problems are caused by. Conventional wisdom says that large established companies are likely to lose out to smaller attackers when they try exploiting these breakthroughs. although most of this money is devoted to evolutionary innovations that make their current offerings perform better in ways their customers already value. Why should incumbents (large established companies) encounter so much difficulty? Companies such as GE. 421-436 of your key text. incumbents are often impotent when it comes to disruptive innovations. scale and scope. They can spend heavily on technology development and market research. capabilities and outlook. Their size slows them down and past commitments restrict their flexibility. the drivers and inhibitors of development. and how companies can adopt an industry leadership position. wireless. · Ambiguous customer signals. B & Meyer. grid computing. spawned by developments in emerging technologies. have the potential to consume industries and make existing strategies obsolete. e. · Immature competitive structures of markets for disruptive innovations.g. Intel and Microsoft have embraced disruptive innovations. Incumbents are disadvantaged by their structures. · Technological uncertainties. For all their advantages. read about the dimensions and paths of industry development. nanotechnology. Read p. genomics. valuable brand names and entrenched relationships. What can we learn from them? Established companies control substantial resources: established infrastructure and processes. Their finely honed instincts.Unit 9 – Innovation Global Corporate Strategy Innovation strategies Disruptive innovations. De Wit. R .
This strategy is one adopted by many large corporations. Yet all large markets were once in an embryonic state with their origins in limited applications. large companies. and particularly in the high-tech world.g. then you acquire the start-up or co-opt them. It is natural to underestimate developing technologies or new approaches because they don’t measure up to the familiar alternative. e. including Microsoft. have acquired many start-ups for precisely this reason. Let us now look at some of the problems: Problem 1: Delay When faced with uncertainty. If the start-up shows market potential (and timing is all critical) and their deliverables represent a key source of competitive advantage or threaten your business. early electronic watches were bulky. Despite their large investment in R&D. A watching brief may be assigned to an internal team that monitors families of technologies. executives in many established and ‘innovative’ companies have come to the realisation that you don’t have to be an innovator to be innovative. They take the view that the little guys (start-ups) can do all the hard work with someone else’s investment (venture capital). incumbents are often unwilling to make a strong commitment to innovative technologies. and find it difficult to persist in the face of uncertainty and adversity. More recently. Problems for established companies Whether established companies innovate organically or by acquisition or by a combination of both (as is often the case). disruptive technologies pose threats for established companies. IBM and Cisco.Global Corporate Strategy Unit 9 – Innovation Innovation and established companies Disruptive innovations. it is tempting to wait. or appear suitable only for narrow applications. A pro-active stance by the management team is required to counter the threats and overcome the particular challenges faced by incumbents. and the someone else can also bear the risk of failure (and a large percentage of start-ups are failures). Dangers occur at different points in the decision process and require different remedies. 239 . make established companies prone to stick with what is familiar for too long. Even if this is avoided. Other developments may be easy to dismiss on the grounds that their small markets will not meet the growth needs of large companies. Whether there is any value in these moves depends on whether there is anyone who can see beyond the imperfections of the first costly version. posing a threat to their existing capabilities.
and get ahead of the competition quickly. Open systems is increasingly becoming an important factor in many sectors. Such a move makes customers suspicious. and see open systems as delivering this choice. 3. 2. Microsoft has four options: 1. because that worked in their core market.Unit 9 – Innovation Global Corporate Strategy Problem 2: Sticking with the familiar Choice of technology is often clouded by uncertainty about whether technical hurdles can be overcome and which standard will prevail. Actively oppose and push proprietary technology as the ‘de facto’ standard. Genuinely embrace open standards. companies are likely to base their decision on the technology path that feels most familiar. Established companies typically search in areas close to their current expertise. Customers are demanding ‘plug and play’ interoperability across different vendor applications. ‘Embrace’ and swamp. ACTIVITY Microsoft currently dominates the desktop operating systems market. and particularly in the IT sector. Do nothing. 240 . and was itself a disruptive technology. They view themselves as being ‘locked in’ by proprietary Microsoft systems/applications. and may not have the capability to appraise the options properly. especially in an open systems environment. This development has led to the rise of Linux as an open operating system. How is Microsoft responding to the challenge of Linux? Research this area. pay ‘lip service’ to standards. When there are competing choices. Linux itself was developed by a Swedish engineer as a hobby project. Their instincts may be to seek a proprietary position to lock in customers. However. steer open standards to their own flavour and implement. more recently there has been a rise in focus on open systems. What options does Microsoft have to safeguard its dominance? ACTIVITY FEEDBACK Broadly. 4.
However. Success may require patience.g. These explanations reinforce each other to impair decision-making. so they cannot balance the demands of familiar markets with the alien requirements of a disruptive innovation. Encyclopaedia Britannica was slow to move to CD-Rom and lost 70 per cent of its revenue between 1990 and 1997. Such issues do not inhibit new entrants. 241 . missed forecasts and dashed hopes are inevitable with disruptive innovation. erode enthusiasm and cause managers to hesitate. they are more likely to enter in stages. e. e.Global Corporate Strategy Unit 9 – Innovation Problem 3: Reluctance to commit Established companies seldom commit wholeheartedly to a disruptive innovation.g. competitors may crowd into the market or the technology may veer in an unexpected direction. threatening technology. At this point it is too late to achieve leadership. This makes them vulnerable to outsiders who use disruptive innovation as their platform. · Prospects may appear less attractive than current business. · Managers are concerned about changing profitable products or encountering resistance from channel partners. of 27 companies confronted with a · Successful organisations are not naturally ambidextrous. the company sold the business. The result is that companies often withdraw from early probes and don’t come back until the innovation is proven by others. Demand may not materialise as expected. Managers are focused on existing customers and new technologies may seem applicable only to small market segments they don’t serve or understand. Many reasons explain this. making it difficult to justify investments. when US newspaper giant Knight-Ridder’s early forays into television in 1978 and cable in 1983 met setbacks. Instead. Initial enthusiasm may be replaced with scepticism about the innovation becoming profitable. Problem 4: Lack of persistence Established companies being held to earnings forecasts have little patience with adverse results. · A study showed that. only four entered aggressively and three never participated at all.
But the periphery is ‘noisy’. Background noise to one company may be a strong signal to another. The relationship between performance and development expenditure is an S-curve. are designed for well-defined problems in existing markets. As the philosopher Kant noted. The first step in deciding which signals and trends to scan is to define the significant technologies. · Stay flexible strategically. the best defence is a good offence. · Provide organisational autonomy. Then. Companies also can study users who are ‘ahead of the curve’ to see the promise of a new technology. · Create a learning culture. Sample surveys. Traditional market research is seldom applicable to embryonic markets. such estimates are difficult. how well the innovation can deliver features that meet customer needs and budgets. e. unfamiliar customers are early adopters and different standards are emerging. The above are ingredients from which an approach can be fashioned. the challenge is to estimate the rate of adoption and potential market size. Some signs may be clear to those who look. This requires shifting the focus from the characteristics of products to features that provide benefits. etc. There are four approaches: · Widen peripheral vision. but they did need more accurate images of tissues and bones to help spot problems. Weak signals usually come from the periphery or boundary. initially. or work jointly with lead users on the next generation of products. relative to competing technologies must be assessed.g. customers did not want X-rays as such. ‘we can only see what we are prepared to see’. with numerous related technologies that may or may not be relevant. Let us look at each in turn: Widen peripheral vision Disruptive innovations often signal their arrival long before they happen. but then performance rises steeply for relatively little effort before levelling off. i. there is little sign of progress.Unit 9 – Innovation Global Corporate Strategy Problem Avoidance Whilst awareness of the pitfalls described in the previous section can help avoidance. When it is not yet apparent who customers will be and even early users have yet to experience the product. A different approach is needed when the concept is 242 . where previously unknown competitors are making inroads. others can only be seen by the prepared mind.e. Once features are defined.
Without learning. a combination may yield conclusions that are directionally sound. Use multiple methods: While any one market research method will be limited or flawed in some respect. it should be described by making the views and assumptions of managers clear. 3. Information must be absorbed. not insight. but they can assess how much more they value its benefits relative to present offerings. With this approach. 1. within and across departments. Changing is not easy because attitudes are grounded in experience. but they can be eloquent about their problems and changing needs. Xerox foresaw a business market of a million units. 243 . communicated and intensively discussed so its implications are understood. Before prevailing thinking can be challenged. availability. Xerox’s strategy for estimating the potential market for fax machines in the 1970s illustrates how customer benefits and functionality can be used to estimate markets. Build a learning culture The challenge is collective. Choosing how to assess the market for a disruptive innovation should be guided by three principles. Paint the big picture: This is not the time to ask for carefully calibrated results. Entrenched attitudes may impede thinking needed to grasp discontinuities and surprises. express delivery and so on. the technology is barely ready and questions of cost. Customers may not know whether they want a new product. not just individual. · Willingness to challenge deep-seated assumptions. and performance are unresolved.Global Corporate Strategy Unit 9 – Innovation ill-formed. telephone. Focus on needs not products: prospective customers may not be able to visualise radical products. Scenario planning can help challenge deep-rooted mentalities. Then they contrasted the promise of fax with mail. Managers measured the extent and frequency of urgent written messages. The organisation must possess or acquire several attributes: · Openness to diverse views. The issue is simply whether the market is big enough to support development. reinforced by commitments and protected by inertia. 2. their time sensitivity and the form and size of the message. noisy information flowing from the periphery will create confusion. · A climate that encourages experimentation and rewards “well-intentioned” failure.
4.g. Now describe your organisation’s learning culture. Commitment might seem to be the opposite of flexibility. However. flexibility is destroyed.). so lowering the cost of making a commitment and the cost of reversing direction. sometimes a strong commitment leads to success. and trying again in a process of successive approximation. Choose a partner who works for an organisation which. At 244 . Motorola and the cellular phone market. Maintain strategic flexibility A paradox of disruptive innovation is that although it is prudent to make limited investments. 3. followed by modifying the product. to your partner (in no more than 1000 words max.g. it was developing OS/2 with IBM. in the context of innovation. On the one hand. e. post on the Virtual Campus a short resume of the type of organisation you work for. e. Sometimes experiment requires a willingness to create diverse solutions. Get your partner to identify the strengths and weaknesses of your learning culture in relation to emerging innovative technologies. only when the commitment is irreversible. pair yourself with a partner. medium or small? Sector (e. Microsoft is a prime example of a company maintaining flexibility. Microsoft was operating on several fronts. Identify what improvements can be made to your own organisation’s learning culture based on this exercise. VIRTUAL CAMPUS 1. However. One way to reduce this dilemma is to increase organisational flexibility. Learning from this quickly is vital. If this has not already been done. services. 5. manufacturing)? Once all the resumes have been posted on the Virtual Campus. 2. Shell is developing renewable energy sources. Learn from each other.Unit 9 – Innovation Global Corporate Strategy Adapting to the vagaries of disruptive innovations requires experiment and an openness to learning from failures. you believe. In 1988 Apple was at its peak with its superior graphical interface for the Macintosh making Microsoft’s DOS look a poor second. has a very different learning culture from yours. Public or private sector? Large. It may also mean introducing prototypes into a market segment. by endorsing parallel development activities.g. on another. it was developing Windows.
Microsoft was introducing application software. e. features. By isolating. Kodak’s experience with electronic imaging highlights the strategic importance of separation (in whatever form). controls. Many large companies set up separate unit dedicated to new ideas. electronic imaging activities were dispersed among Kodak’s chemical imaging facilities. The objective of separating the new business is to enable the new group to do things differently while still permitting the transfer of resources and ideas from the parent. strategic value from the corporate centre. as well as different criteria so the performance of managers in the rest of the organisation is not jeopardised. This approach offers access to capital (via a public stock offering). risk-avoidance and big-company thinking that leads to the pitfalls discussed above. IBM’s PC unit.Global Corporate Strategy Unit 9 – Innovation the same time. the company protects the new venture from these issues. board and management teams. This had a number of bad consequences. Managers of the film business continually interfered with electronic imaging projects. Because digital imaging projects were scattered throughout the company. its portfolio of options was commensurate with the uncertainties then surrounding hardware and software development.g. entrepreneurial mindset. Microsoft developed a culture that could quickly change strategy. it creates flexibility. Provide organisational autonomy A strategy to avoid the problems faced by large incumbents is to hive off the disruptive business into a separate unit. The more the initiative can operate from a smaller. Originally. there was no cohesive vision and limited accountability for performance. channels and delivery modes (PCs versus servers) were still to be settled. Questions of standards. for both Windows and Macintosh. GM’s Saturn division. This also permits separate objectives. In addition to developing a robust hand. Above all. Microsoft had developed a strong hand of cards to play in a variety of worlds that might emerge. There are many degrees of separation. the less it will be held back by the inertia. 245 . which were perceived as threatening the existing customer base. development of executive talent in smaller units and greater motivation for key personnel through stock options and operating freedom. including Excel and Word. operating independence. recognition of long development cycles and continuing cash drains. The company policy that all engineers be paid the same meant Kodak could not compete for highly paid electronic engineers. Some companies take the approach as far as to create ‘spin-offs’. in which the parent retains some ownership. These may be complete companies with their own stock. In hindsight. For example.
value innovation and the knowledge economy’. the purpose of a template for a high-commitment organisation is to enable it to cope with the tension of uncertainty while achieving commitment to the choices made. There should be a diversity of opinion to challenge dominant attitudes and misleading precedents. R: ‘Strategy. with its own problems and solutions. so avoiding myopic views of new ventures.Unit 9 – Innovation Global Corporate Strategy ACTIVITY Read the following article from your key text. Conclusion Success or survival in industries that are being created or transformed by disruptive innovations requires support from senior management. “We use a 246 . The main point is that managing disruptive innovations constitutes a different game for established companies. p. Reference “Do n’t Hesitate to Inno vate” by Geo rge Day and Paul Scho em ak er (Financial Tim es Oct 9. These prescriptions need considerable tailoring to match each disruptive innovation and the organisation involved.464-473. flexibility and a willingness to take risks and learn from experiments.4. Jan 30. De Wit. separation of the new. By PETER MARSH (Financial Times. The subjects of their inquiries are rather esoteric. a private company with a 61-year record in innovation. Reading 8. ranging from tiny metal devices with dimensions less than 1mm to new versions of instrument displays for jet fighters. The best innovators think broadly and will entertain a wide range of possibilities before they converge on a solution. 2000) CASE STUDY 1 – Oxley: Step by Step into New Market Niches A private British company has been turning military technologies into commercial applications for the last 61 years. B & Meyer. Indeed. 2001) In rural Cumbria. The ten experts are members of a research and development team at Oxley. an unusual group of technology specialists is working away in an airy office-cum-laboratory tacked on to a country house.
with other staff members holding the remainder. Commanding high margins.” says Geoff Edwards. electronics design. The tags were encoded with information about the prisoners’ identities and intelligence data. Defence-related work accounts for 70% of sales. The company was founded in 1939. Mr Edwards calls them the company’s “eagles”. identified by Mr Edwards. Oxley employs just 240 staff. Oxley’s managing director. “We deliberately keep our researchers close to each other so they are chatting all the time. Mr Oxley ran the company until his death in 1988. when he held 145 patents in a range of scientific fields. hit on a way of making capacitors to be used in early radar work.” she says.” Oxley is not a large company. about health problems and milking record. for instance. About a third of the company’s revenue comes from outside the UK. optics and software. “We keep one foot in the areas we know about and move the other foot so we can gradually explore new ideas. “We run this company like an extended family. Ann. which attached them to Iraqi prisoners captured during the 1990-91 Middle East conflict. sales came to £12m. with little long-term planning. of which about £700. of which 50 are engaged in R&D.Global Corporate Strategy Unit 9 – Innovation ‘stepping stone’ approach to new product development. Oxley’s products are developed rather haphazardly. His wife. “From this interaction we get a marvellous source of new ideas. Last year. when Freddie Oxley. coated with chemicals that screen out infrared radiation. on the fringe of the Lake District. they provide the cash to finance new developments.” The disciplines covered by the group include materials science. These tags were first sold to the British Army. But most start with military contracts. the company moved in 1942 from London to its current location in Ulverston. Examples include sensitive optical filters for adding to the instruments and identification lights of aircraft such as the Tornado fighter. She has 90% of the shares. a physicist who started at Oxley 32 years ago. To escape the attentions of German bombers. Oxley has adapted the devices for use on cows to inform the farmer. manufacturing and test engineering. Other “eagles” include 247 . They enable pilots to use infrared night goggles without being blinded by their own aircraft’s lighting. This process starts with the ten experts.000 was the profit before tax. chairs the company. Mrs Oxley refuses to consider giving up private ownership. just before the 2nd World War. At the core of Oxley’s methods is its long involvement with the Ministry of Defence and large military contractors. The filters are made of glass. The company has several profitable product groups in this field. an entrepreneurial engineer. It is a potent case study of how military technologies can be used in civil applications. Similar lateral thinking helped Oxley to turn capacitor-based devices – made from tiny pieces of ceramic – into sensors used by UK pollution inspectors to monitor water quality.” he says. An example of how internal discussions lead to profitable business opportunities is Oxley’s use of its knowledge of capacitor technology – used in military radar and telecommunications systems – to produce capacitor-based data storage devices or “smart tags”. But the company’s story is relevant to many businesses because of the way it has used technological ingenuity to edge into new areas. chemistry.
They prevent damage to the equipment from lightning strikes or radiation from a nuclear bomb. Mrs Oxley says. “We think we can continue to run between the legs of the elephants. In the next five years. based on principles developed for military radio applications in the early 1970s.” Questions: 1. “We are the only company in the world that can make the (ball and socket) devices to this kind of precision. specialist companies will find a niche. “We have no choice. Oxley also produces electromagnetic screening systems for military radios. The spheres are part of miniature ball-and-socket connectors.” he says. In the next few years. small.” she says. the company intends to keep its military focus. But the company is also keen to keep edging into other markets. The stepping stone approach could be seen as stretching from military (although this is the clear focus with 70% turnover) to commercial. the system forms part of a switch (selling for 10p) that checks whether telecoms equipment is operating at the correct wavelength.Unit 9 – Innovation Global Corporate Strategy specialist connectors such as the ones Oxley sells to the mobile telephone industry. 2.” Mr Edwards says. Strategically. · Exploitation of core competence (link to Unit 2) and knowledge (link to Unit 8). how would you categorise the ‘stepping stone’ approach to product development? Link this case to other key areas studied in this module. With the ball snapping in and out of the socket at high speed. 248 . Mr Edwards would like the company’s sales to double. As the defence industry consolidates around bigger companies. perhaps with the help of partners with specific knowledge of new business fields. “Having this kind of growth target is essential if we want to keep the company sharp and interested in new ideas. the two biggest forces in the mobile phone industry. CASE STUDY FEEDBACK Feedback to Question 1 · Link back to the discussion in Unit 1 about strategic ‘fit’ and ‘stretch’. Oxley makes millions of tiny gold-plated spheres – each 1mm in diameter – that fit into telecoms base stations sold by Ericsson and Motorola.
. 2. 50 of 240 staff. · Niche markets (specialist company – link to reading for this session and forward link to Unit 10 – the role of specialists such as IT). · Knowledge management – as above but the company makes “use of its knowledge” VIRTUAL CAMPUS Further points to note. · The significant proportion of staff engaged in innovation.” · Value Management – Boston Consulting Group Matrix – use of ‘eagles’ (cash cows) to fund future innovation. · Strategic Alliances – links to partners in specific fields to create knowledge management and transfer and technology transfer. Feedback to Question 2 · Core competence – protection of innovative technology via patents. the size of the company the family owned nature 249 .. the company has 145 – is this a lot? – yes as this is a significant financial investment over the years and has a high value to the company.. · Emergent strategy – commonplace for innovative organisations (link to the ‘experimentation’ of emergent strategy) “products are developed haphazardly.Global Corporate Strategy Unit 9 – Innovation · Creation of tacit knowledge from previously created tacit and explicit knowledge. include: · The importance of keeping researchers ‘chatting’ together to faciliate tacit knowledge through socialisation. from the Oxley case study.. Now discuss with your colleagues (on the virtual campus) innovation in respect of : 1.
It was forecasting sales of Pta 19 billion for 1995. Home deliveries. Market success By 1995. make up the bulk of Telepizza’s business. what you can glean from the case study about the above two points. more than double the Pta 375 million reported in the previous year. office workers. up from 1994’s Pta 12. Telepizza expected to post consolidated profits of more than Pta 800 million (US$6 million).3 billion. By late 1995. but he knew what the Spanish public was prepared to buy. ‘The market was zero when we started’. Fast food was what Spaniards wanted and needed. extend. He owns 40% of Telepizza’s shareholder capital and was its chairman until a boardroom coup in mid-1995. This case study explores how the company has grown and raises the question of what organisational structures are likely to be required over the next few years Telepizza realised before its competitors that Spain was changing rapidly. Furthermore. Students are advised to complete the next case study (Telepizza. Telepizza had a 54% share of the pizza home deliveries market in Spain. The company’s management understood that Spain had undergone a profound sociological change that had brought young mothers out of the kitchen and into the workplace. Its success is as much the triumph of a concept as it is of a product. Gone were the days of siestas and elaborate family meals. as opposed to office deliveries. The Telepizza case study has a bearing on point 2 for discussion. the company’s founder. like everywhere else. By the end of 1995. He knows a lot about marketing and consumer fads and nothing at all about fast food. Mr Fernandez Pujals was formerly an executive with the healthcare multinational Johnson & Johnson. ‘but there was a terrific opportunity. Then challenge. CASE STUDY 2 – Telepizza Telepizza is a young Spanish company that combines entrepreneurial flair with real growth. When he came across pizza home deliveries during a stay in the USA. where control of business innovation has been removed by being publicly owned) before undertaking this activity. spotted the gap in the market. discuss. says Mr Jose Maria Serrano.Unit 9 – Innovation Global Corporate Strategy Post. They are ordered both by children battling with their 250 . he had found the product he was looking for.’ Mr Leopoldo Fernandez Pujals. had begun to eat at their desks. The company was founded in 1988 as a single pizza parlour offering home deliveries in its immediate north Madrid neighbourhood. Share your views. Telepizza’s communications chief. it had nearly 200 centres spread out across 120 Spanish towns and cities. on the Virtual Campus.
Greece and Belgium as well as in Mexico.3 billion into new centres and equipment in 1994. however. The focus is on Spain. says Mr Serrano. Telepizza also understands that although Spaniards have belatedly come round to the concept of fast food. It invested a further Pta 1. This ethos has set the tone of its staff relations and franchising. Telepizza has also tested foreign waters. ‘These are exactly the sort of people that we have got now and we want them to grow with us. autonomous business people responsible for their own slice of the pizza market.’ Investment policy Telepizza has pursued a strong investment policy. be the property of the existing 50 or so franchise owners. and has set up around 50 centres abroad. Telepizza has stayed ahead of its competitors by introducing the do-it-yourself pizza: clients can summon up literally thousands of permutations of the product’s 15 basic ingredients. It is up to them to develop a relationship with their clients.5 billion in 1995. 16 November 1995) 251 . It is operating in Poland. Its most recent success was the Tex-Mex pizza called ‘the Jalisco’. you have to love the company and what it produces’. ploughing Pta 1. Although numbers vary per outlet. for the time being. the domestic culture remains imbued with the tradition of good home-made cooking. Telepizza believes in decentralisation and cutting out bureaucracy. employed in each pizza parlour. Corporate culture The corporate culture and growth strategy are no less important. Source: Corporate Strategy by Lynch (Financial Times. Telepizza’s representatives will spend nearly as much time promoting the company in their allotted area as they do delivering its products to customers. Having pioneered pizza home deliveries. Employees who deliver pizzas by motorcycle within half an hour of receiving the order are.Global Corporate Strategy Unit 9 – Innovation homework while their parents are still at their jobs or by exhausted parents staggering home late because office hours in Spain can stretch into the night. in the company’s parlance. About half the 195 Telepizza centres in Spain are franchises. This means that the company has to take special care over the quality of its product – fresh ingredients are delivered daily – and over the amount of choice it offers its customers. These employees are allotted a specific area. there are approximately ten people. dreamt up by its consumer research department. The company believes that this mix is the right one and that as it expands further franchises will. Firmly established in Spain. One reason for the boardroom revolt that forced Mr Fernandez Pujal’s resignation in October 1995 was that other shareholders were clamouring for dividends and objected to the drive for expansion that he was masterminding. ‘For a franchise system to work. including five sales representatives. Spurred on by sales incentives and bonus packages. Telepizza has succeeded in creating a corporate culture and with it an expansion strategy that has multiplied its rewards. Portugal. again through a mixture of directly owned outlets and franchises. and its home market is far from saturated. Chile and Colombia.
The company is attempting to hold its growth by restricting franchises to existing holders and by funding much of its growth internally. · Entrepreneurs might compete with each other inside a restaurant outlet on price or service.Unit 9 – Innovation Global Corporate Strategy Questions: 1 To what extent does Telepizza’s structure need to remain loose in order to encourage the dynamic entrepreneurial spirit that has characterised its growth? What are the problems with this approach? Is it inevitable that the company will begin to lose its entrepreneurial flair as it grows larger? How is it proposing to hold on to this approach? What is your view of the company’s international growth strategy – sensible expansion or a waste of scarce management resources. there may be a need to define more precisely the geographical territories or face the possibility that restaurants will compete against each other. This will limit the loose nature of the structure. which may not be advantageous for the company. according to the case. It wanted to 252 . Hence. · The quality of the product which is so important to its success. given the continued expansion possibilities in Spain and the resource difficulties of supervising foreign operations? 2 3 CASE STUDY FEEDBACK Feedback to Question 1 It is desirable that the organisation remains loose as long as possible in order to continue to build growth. may suffer if central monitoring is ignored. There might be a temptation for individual outlets to sacrifice quality for quantity and the centre would never know. as the enterprise grows. The problems with such an approach are: · The company may experience poor profit and cash control because the systems are weak. Feedback to Question 2 The evidence of Greiner in Chapter 7 would suggest that it is likely that it will become more bureaucratic: age and size will probably make the company less dynamic.
international growth would be one way of offering an incentive to those individual managers unable to find new outlets in Spain. We have examined how some of the problems can be managed. and the importance of organisations adopting strategic flexibility.Global Corporate Strategy Unit 9 – Innovation retain the loyalty of its existing people. Feedback to Question 3 Although full details are not given in the case. However. reduced his shareholding from 40% to 22 % in June 1996. Given its strengths in the home market. Banco Bilbao Vizcaya (BBV). it is likely that significant resources are devoted to the international growth in the 50 centres operating abroad. This move was a prelude to the company seeking a listing on the stock market for its shares through a public offer of 40 % of its shares in September 1996: BBV was acting as co-ordinator of the share issue. At the time of the case. one way forward is to find a balance between the home market expansion and foreign growth. Mr Leopoldo Fernandez Pujals. Given that international expansion has now taken place. with Merrill Lynch responsible for a placing of part of the shares internationally. Moreover. particularly on established companies. However. bought 18 % of the company. rather that a judgement is required on the pace of such expansion. there is no evidence that growth has disappeared in Spain. it is highly likely that some of the initial zip will go out of the company. Summary In this unit we have looked at the challenges posed by disruptive technologies. and have noted the importance of cultivating a learning culture. it is surprising that so much effort seems to have been devoted to international expansion with all its associated costs and pressures. 253 . The well-known large Spanish bank. The company was beginning to mature: the founder was selling part of his initial interest and the shareholding was becoming more widely available and institutionalised. However. this does not mean that international growth should stop. Case note – what happended later The founder. it would appear that international growth should take second place to completing national expansion in Spain. There will inevitably come a time when further growth in Spain will be difficult: international opportunities will then maintain the momentum of the group.
1. 3. REVIEW ACTIVITY Consider the organisation and industry that you currently work in. Chapter 12 (including Reading 12. Ref 10*. Chapter 11 – pages 407-416 Ref 8. Share your findings with your Manager and colleagues in your organisation. As we noted in this unit. students are encouraged to assess their own organisation’s approach to disruptive technologies. Encourage constructive comments. Identify two or three emerging/new innovations that you feel are likely to make a significant business impact on your sphere of activity. and identify what changes may be necessary to assess powerful disruptive technologies more quickly and respond faster to new opportunities.1 & 2) pages 403 – 453 * Highly recommended 254 . Some of these will be relevant to the future. Technologies or ideas that could offer your organisation deep market potential. Chapter 17 (including Readings 17. Prioritise the technologies/ideas and explain why you have selected them. What opportunities or paradigm shift in business do they show potential for? How could your organisation exploit these technologies/ideas? What threats do they pose for your company and the products/services you market? Noting the culture of your own organisation. Further reading for this unit (optional) The following are suggested as optional reading for this unit: 1. 2.Unit 9 – Innovation Global Corporate Strategy To gain maximum benefit from this unit. how would you go about assessing these innovative technologies and implementing them (where appropriate)? 2.1) pages 256-276. there are likely to be many signals from the periphery of your industry (or supporting sectors) from numerous emerging technologies/ideas. others will be a complete waste of time.
and indeed between its supply chain and strategic partners. and that of their customers. Strategic IT defines the very nature of the business. · Consider impact of e-business on strategy. and corporate IT strategy has become an important determinant of stock price. Unless corporate data can get to the point of decision in time to impact that decision. In this new age. new markets are emerging faster than ever before. has also been coupled with a shift from products to services. Information has replaced assets as the source of value. CRM (customer relationship management) and supply chain management. Furthermore. The strategic shift from assets to information.Unit 10 Strategic IT and e-Business LEARNING OUTCOMES Following the completion of this unit you should be able to: · Examine the impact technological advances in IT are having on strategy. Services offerings cannot be managed using the same IT systems as product offerings. This is the new management agenda. e-business. it is the business. it gives power to those companies that are able to harness the power of IT and the Internet to transform their businesses. information and knowledge flows within the company. Introduction In the age of the Internet. 255 . · Understand the strategic implications for legacy systems. Information Management has failed. For all these reasons IT has become a powerful influence on corporate strategy. Services offerings are much more customer-centric and this has led to an emphasis on ERP (enterprise resource planning). it is well recognised that a corporation’s own efficiency comes from how seamlessly data. As each new market goes through its development cycle. IT is not about the business. Power is shifting from what was previously a trusted source of value creation towards something that was previously secondary.
and then asking what are the implications for technology. Supply Change Management and Customer Relationship Management systems allow for a level of strategic flexibility for this reason. This is difficult to refute as investments should support real business needs. Since the emergence of e-business. For this reason. IT strategy has to be flexible and accommodate a fast changing world. No longer can the approach be taken of defining business strategy. just like any other strategy. IT strategy. and then an IT strategy to support it. The Link between Business and IT Strategy A core theme in business is that IT strategy should be aligned with business strategy. Let us explore this paradigm shift further. it became evident that a business strategy without a matching IT strategy was no strategy at all. corporate IT systems such as Enterprise Resource Planning. Indeed. in particular. The Internet. We shall also look at the definition of an e-business. However. There are obvious challenges with the strategic alignment approach. IT strategy is no longer solely an output from business strategy. and matching it to an IT strategy? IT now affects business strategy and can be seen as an input to business strategy as well as an output.Unit 10 – Strategic IT and e-Business Global Corporate Strategy In this unit we shall examine the impact of technological advances in IT on strategy. · The strategy-making process may be more emergent than prescriptive. general managers as much as IT executives have recognised the concept of “strategic alignment”. but is a fundamental input in itself. IT strategy is inextricably linked with business strategy. has to take into account the above. IT Strategy as an input to Business Strategy In today’s world. · The strategy may change regularly. the linkage between business strategy and IT strategy has been strengthened. e-business. Strategic alignment is based on the premise that an organisation defines business strategy. mobile communications and digital media present 256 . as this is a prerogative of any modern business. as companies began to depend more and more on IT in the 1980s and 1990s. because · There may be a lack of coherent or agreed business strategy in the first place. and consider the impact of e-business on strategy.
A revised view of alignment is therefore necessary. break down when exposed to the self-service pressures of the web. So business strategy cannot ignore how technology is changing markets. it is necessary to ask the following questions: 1.Global Corporate Strategy Unit 10 – Strategic IT and e-Business both threats and opportunities.1: Relationship between business and IT strategy. In particular. e-business The advent of e-business is having a profound impact on business strategy. Business processes. Political factors Economic factors Social factors Technical factors Business strategy Technology/IT strategy Influence of IT strategy on business strategy Figure 10. competition and processes. How does IT change business strategy? (alignment question) What IT investments does business strategy demand? (opportunity question) The iterative relationship between business strategy and IT strategy can be summarised as shown in Figure 10. it poses opportunities and threats. 2. This clearly impacts upon business strategy. But e-business is far more than a business that carries out trade electronically (e-commerce). Many confuse e-business with e-commerce.1. There is sometimes confusion around the definition of e-business. Business processes themselves are re-engineered because of the new opportunities for efficiency that IT can deliver. suppliers. An e-business is an organisation that is transforming its interactions with customers. strategic partners and employees by exploiting 257 . The appointment of directors of e-business and the formulation of e-business strategies recognise that IT is changing the way companies do business. they pose a deep series of challenges to the business. that worked well previously.
information and skills. Information sharing may include customers. Information sharing will be at the heart of the strategy. ACTIVITY Read about the huge impact of recent technological advances (principally e-business) on organisations’ strategic approaches. Leverage information and knowledge Define IT environment (security. standards.3 in your key text. The Information Management Strategy must enable the company to leverage its knowledge. may radically transform business processes (internal and external) and will define applications (many web-driven) to support the business processes. Reading 8. the new value resources. Find it on p. scalability. The supporting e-business strategy. 451-464. and extending its market reach to improve performance. This is at the core of business strategy. R . 258 . the company’s supply chain and strategic partners. This implies continual refinement and change. The components of a company’s e-business strategy can be broadly depicted as shown in Figure 10. B & Meyer. in an extract from Geoffrey Moore’s book Living on the fault line. De Wit. the information business strategy.Unit 10 – Strategic IT and e-Business Global Corporate Strategy Web technologies. tools and applications) e-business strategy Transform business processes Figure 10.2.2: Cyclic nature of e-business strategy. Note the cyclic nature of the various components.
The business benefits are potentially far-reaching. Is this hype or reality? Very simply. Try to keep a business focus. Now post your views on the Virtual Campus on the following topics: · Is on-demand computing just hype. or will it be pervasive? · What impact might it have on an organisation’s IT strategy and business strategy? Read the views of others. Discuss these developments with IT colleagues in your own organisation. By integrating their business processes end-to-end. not only internally. HP) as delivering the next paradigm shift in business. Sun. organisations can exploit this technology to respond rapidly to customer needs. on demand computing harnesses a grid of machines and other resources (distributed anywhere) to rapidly process data beyond an organisation’s own available capacity. Sun and HP websites. but with their entire supply chain. and pick one particular viewpoint that is contrary to yours and challenge it.Global Corporate Strategy Unit 10 – Strategic IT and e-Business VIRTUAL CAMPUS On-demand computing or grid-computing is being touted by the major computer vendors (IBM. market opportunities or even threats. look at the IBM. strategic partners and customers. (This virtual campus activity also interlocks with Unit 9 on Innovation) 259 . Research this area on the Internet. It is akin to an electricity grid. or can it deliver real business benefits? Elaborate by discussing its likely impact on your business? · Is on-demand computing going to impact only certain sectors of industry. In particular. Avoid technical detail and jargon in your postings and discussions. Organisations pay varying prices for the computing power depending on usage and demand at the time. Companies embracing the on-demand concept are said to be able to adapt dynamically to whatever business challenges arise.
It does not directly address process and implementation issues. Some companies are constructing visions. Futurising is not just raising an alarm about new technologies and their future impact. 260 . There are many methodologies on the market – developed by leading IT companies and professional services firms such as Accenture. FAST should. be viewed as a framework to get started. It is not the only methodology available. but rather looks at the intersection of new technologies and the shift in the business environment. then there has to be good communication and trust between the business and IT personnel. The four tasks or elements that make up FAST are: · Futurising. assets. The outputs could be good questions to ask. have created special teams to question what the future might bring. · Stimulants. by posing the right questions. Futurising Some companies.Unit 10 – Strategic IT and e-Business Global Corporate Strategy IT Strategy Methodology Strategy Framework Companies frequently adopt formal methodologies when developing IT strategy. pictures and dramas of what businesses might look like or what businesses could be created. involvement. such as the Swedish financial group Skandia. stories. technological) tool for environmental analysis applies in thinking about futures. trends to watch. social. economic. threatening or opportunity-rich. The PEST (political. but more thorough scenarios are likely to be where these variables interact. · Threats. These teams use checklists with probing questions aimed at all parts of the business. the organisation can address issues of understudying. stimulants and threats. The answers to the probing questions highlight important trends or significant uncertainties. By asking radical questions on futurising. The principles are the same. in fact. The “FAST” methodology is entirely inductive. but provides a way of addressing strategy-making. · Assets. One that has been used by ‘new economy’ organisations is the FAST methodology. If business strategy and IT strategy are indeed inextricably linked. and asks what is changing. communication and buy-in from personnel from the business and IT functions.
Some businesses are creating 261 . Assets What competencies. Some companies measure how much of their capital budget is being allocated to new ventures and e-commerce. information threads between its businesses that might allow it to restructure part of the logistics industry. if a company has world-class fulfilment processes. existing capabilities may have even more potential for value creation. Examples of this are internal venture capital funds and e-business divisions. where cost. that uncertainty is inevitable and that ignoring the future is more risky than trying to create it. capabilities or assets might yield opportunities? These are “assets” because: · They are potential sources of value creation. experiments to begin or “must do” ideas to develop. but might also make this capability evident to the world. · They should not be underestimated or left un-exploited. The database had taken 40 years to build and was now seen as an asset to protect as well as to exploit. Likewise. Jack Welch at General Electric has said that the company’s achievements in its Six Sigma quality processes are now really paying off in e-business. importantly. reliability and quality matter. For example. many information-rich organisations have content that is valuable to traditional and emerging businesses. you may discover hidden assets. then moving into e-commerce not only builds on this strength. is to explicitly suggest that the future may not be an extrapolation of the past. In other words. that opportunities co-exist with threats. As an example of underestimated assets. The main point about “futurising”.Global Corporate Strategy Unit 10 – Strategic IT and e-Business uncertainties to explore. when you re-examine a business as an information business or rethink it as a new economy business. an engineering company realised it had a valuable asset in its parts database when a business-to-business electronic market-maker approached it about building a business-to-business exchange. as Skandia calls it. For example. speed. In other words. one conglomerate realised it had several partnership opportunities and. Stimulants The efforts of companies that are trying to encourage entrepreneurial behaviour can be thought of as “stimulants”. · They may be hidden until potential is realised through e-commerce. Hidden assets can become evident in many ways.
Threats The final element is to think of threats. business strategy and IT strategy are integrated. Threats stimulate survival instincts and can be more effective than looking for opportunities. Assume that you are a manager in your organisation. futurising. If a company sees how a new entrant or rival can attack. The theory is that there are latent entrepreneurs and e-commerce ideas in companies. and that your organisation has enjoyed significant market dominance in its particular sector. Strategy is not all top-down. assets. but not only as shock treatment. ACTIVITY Consider the following scenario. but should reach through all levels. In this way. where executive teams have been asked to think how their business could be destroyed by e-commerce. Now pretend that a new entrant is going to attack your market share. business and IT. restrict it as best as possible to the impact of IT on strategy. which can seem optional. suggest that both IT personnel and business executives are involved and that initiatives are prompted which involve multifunctional teams. Envision the new entrant’s winning approach. (The above activity is quite wide in scope. 262 . why not attack first? This has been a philosophy at General Electric. stimulants and threats. is the new entrant likely to adopt in your sector? From the above analysis. For purposes of this unit. What strategy. It was used with great success by General Electric during Jack Welch’s reign. It is the classic “let loose” cycle often employed when strategic change is on the agenda: stimulating everybody to think and act as a new business. how can your organisation retain the high-ground and modify its strategy? The above approach of envisioning competitive threats and modifying strategy has been adopted widely.) The combination of the four elements.Unit 10 – Strategic IT and e-Business Global Corporate Strategy FAST-track learning schemes to move people through venture capital units and back to the mainstream business.
com businesses is that multifunctional teams build and evolve the business with no demarcation between functions. In today’s world. Strategy making is now an evolving. · A ‘natural’ activity. The chief executive and technology director should be in frequent dialogue. New methods of IT strategy-making have the following characteristics. whether framed as ‘alignment’. priorities re-evaluated. skills and strategies. Strategy can no longer be cast in stone. Furthermore. · Continuous. Because IT strategy-making is business development. · Rapid turnaround and delivery of quick ‘wins’. (See Figure 10. long-term and driven principally by the IT department. new technologies assessed and incorporated where relevant to the business. lacked ‘buy-in’ from the business and hence implementation of strategy often lost momentum. continuous. and the fact that on-line business evolves in real time. Traditional methods of IT strategy-making. The pressure to launch. It must deliver real business benefits in short-time frames. These methods are no longer satisfactory. and flexible in incorporating new challenges and business change into core information systems. IT people are learning to work with marketing people and vice versa. were periodic (often annual). Today’s Strategy Challenges In a global marketplace where technological innovations have a profound impact on corporate strategy and organisation. They allowed little flexibility for change or for the adoption of new processes and technologies. This leads to redefining IT strategy and planning. mean that the formal structures of traditional IT strategy-making are inappropriate. ‘opportunity’ or both.Global Corporate Strategy Unit 10 – Strategic IT and e-Business A positive lesson to be learned from dot. The underlying IT architectural framework must allow for change. the IT methodology framework must be comprehensive. strategising and planning must be closely followed by implementation. IT strategy cannot just be the domain of the IT department. strategy – integrated IT and business strategy – is revisited frequently. · Involve learning by doing. as they were discontinuous.3). the uncertainty of new markets and models. the need to respond to what is learnt by doing. 263 . Rapid Application Development methodologies are frequently adopted. it must engage the businesses. ever-changing process. Today. formalised. it is a multi-functional team effort. · Flexible.
Manage all aspects of evolution. Implement and align relevant information systems. and enable them to evolve over time to meet changing business demands. organisation and processes Figure 10. the steps in developing and implementing IT strategy can be summarised as follows: 1. and legacy integration is a key requirement. Capture organisational strategy Implement and align information systems Manage IT evolution Map business processes to the organisation Process re-engineering Link strategy. applications and third-party systems. 6. reconciling new technologies with legacy systems is a fundamental pre-requisite of a corporation’s IT strategy. It must adhere to a common architecture and comply with industry standards. 3. processes.3: Evolutionary nature of IT strategy. including business domains. where appropriate. Established companies cannot afford to take a revolutionary approach. the IT strategy 264 . Map business processes to the organisation.Unit 10 – Strategic IT and e-Business Global Corporate Strategy IT strategy must support the entire life cycle of the organisation’s information systems. 2. organisation and processes. In broad terms. Capture organisational strategy. 5. 4. Carry out process re-engineering.3 illustrates the cyclic nature of the various stages. Therefore. Figure 10. Reconciling Legacy Systems with New Technologies Unless the organisation is a very young organisation. Link strategy.
but maintaining the core application logic.com 265 . Competitive pressures and the drive for increased efficiency and productivity demand that the integrated environment be a modern e-business environment.). Today’s business demands that customers and suppliers are provided with the most up-to-date information possible – whether that be by Internet. and be fronted by familiar interfaces such as a web front-end.Global Corporate Strategy Unit 10 – Strategic IT and e-Business must deliver a flexible architecture that allows new components and mission-critical legacy systems to be integrated and managed in harmony. easy-to-use interface. Consequently. However. loss of expertise. For this reason legacy systems should be left unaltered as far as is possible. e-mail. Firstly. some changes are necessary to reconcile legacy systems with the new components and achieve integration on an e-platform. most companies will find that it is more strategic than ever to adopt a flexible architecture and maintain many of their mission-critical legacy systems.gartner. In conclusion. it is important to note that 70% of the world’s data still resides on legacy systems.com www. legacy integration must support real-time access. ACTIVITY Research the impact of the Internet and other IT technologies on the ‘new economy’ by reading some of the articles on the following websites: www. and changes to such systems are not only costly and time-consuming. legacy systems can be reconciled with new technologies on an e-business platform.forrester. etc. In this way. but risky. phone. They also demand a familiar. The e-business environment must leverage legacy systems. Legacy systems are frequently ‘fragile’ (due to poor documentation. in the Internet age. because organisations can’t replace them quickly enough and still be responsive to business needs. These changes are fairly minimal and can be achieved by use of Application Program Interfaces (APIs) and wrappers. Let us briefly examine the implications for legacy systems. Clearly new applications should be developed as ‘genuine’ e-business applications. etc.
Case study from Tayeb M (2003) International Management Theories and Practices. In fact. This was that many journeys were undertaken unladen and that many others were made with less than a full load. either the vehicle is empty for 30% of its journeys or is 30% empty on every journey. Traditionally this has been difficult. The reduced fixed costs of the carrier should offset freight reductions offered as an inducement to the shipper as well as providing revenue for the service provider. During his research. Efforts are always made to reduce this inefficiency by ensuring maximum possible loading or finding return loads. the service provider can guarantee payment to the carrier within a fixed timeframe. Harlow: Pearson. By using e-commerce Internet connectivity. it appeared that the industry was running at only some 60% of its maximum capacity. Additionally.com/easy2ship. (Chapter 8. he discovered only one fact that struck him as being a possible area of improvement. Further benefits are the provision of cargo insurance as well as creating a new marketing channel within the transport industry.com Problems developing a global e-commerce concept into a viable business process. it is possible to bring together potential carriers and shippers in real time to maximise efficiency. 30% is a minimum conservative estimate and in the USA it could be nearer 40%. Either there are problems of timing and co-ordination. This caused him to analyse the nature of the carriers transport operations to see if he could identify areas where their services could be improved. an American computer reseller became unhappy with the level of service his company was receiving from the carriers he used to deliver equipment to his customers. This creates a win/win/win scenario. i.e. by factoring the service through a bank/credit agency. He learned from several sources that road transport had one particular inefficiency. 266 .Unit 10 – Strategic IT and e-Business Global Corporate Strategy CASE STUDY – compuship. In reality it is probably a combination of the two states. E-commerce Worldwide by Brian M W Clements and Monir H Tayeb) The concept It is acknowledged by the European transport industry that there exists an inefficiency of over 30% in road haulage operations. The history In 1997. or financial problems due to the unknown creditworthiness of shippers of return loads.
Techspan. A beta test and trial launch were planned for October with a full launch to follow at the end of November. He registered Compuship. Second. Help came in the form of Ci4net. They eventually located a software development company. his Compuship. Two were hired. A year later. Undeterred. His belief was that the carrier would be prepared to cost price for last minute loads to fill up empty space. First.com was still unhappy about two factors in the proposed operation. But Ci4net. It became apparent at the same time that other companies were working on parallel developments. However. The Ci4netNA.Global Corporate Strategy Unit 10 – Strategic IT and e-Business He decided that it would be a simple matter to create an Internet exchange to manipulate a win/win situation. they insisted that the operation needed professional input and control by logistics industry experts. whose shares were priced at over $100 and who was consequently in a buoyant and acquisitive frame of mind. so a measure of urgency was necessary. Techspan advised that the work completed only constituted a sketchy demonstration and lacked the technical flexibility and robustness to be developed into a commercially viable Internet exchange. They in turn sought external finance.com and financed the re-acquisition of the freight exchange for $1 million.com and the rights to the business process he had developed. A wholly owned UK company. they were also suffering from a lack of finance. that shippers would benefit from lower than standard freight rates and that he would be able to charge a small margin on each transaction.com. he eventually found an entrepreneur who was developing a small Internet incubation company. 267 . which was interested in developing the concept on his behalf. Then came the first major setback. the other in UK road haulage and marketing. a Channel Island and UK incubation company. Easy2ship.com took responsibility for the final development and the hosting of the exchange in the US.com. recently launched on the NASDAQ market. who are based in California’s “Silicon Valley”. After their analysis of the development work originally undertaken by Compuship. they believed that the USA was too large and amorphous a market for the initial launch. the CEO who was an expert in international logistics and commerce.com. The two new directors then collaborated in the creation of both business and marketing plans for the exploitation of this new exchange process.com Limited was created in early summer 2000 to complete the exchange and launch the concept into the European marketplace. he lost his previously profitable computer business. They purchased I-Global. due to the uncontrolled and unanticipated software costs he had incurred. They joined forces and tried to re-acquire the rights to the project development already undertaken.com. I-Global.com and commenced development. renaming it Ci4netNA.
Ci4net. Their efforts to do so apparently distracted their attention from events in the world’s financial markets. Many of the Phase 3 Internet companies had “burned” their investors’ money. Ci4net. There was no realistic possibility that they would get second round funding. keeping Easy2ship. They subsequently acknowledged that they had believed that this was a temporary setback and that the second round funding would be secured before it was needed to meet their commitments to their 50-odd subsidiaries.com. Ci4net. but that these were temporary and would soon be resolved. In reality. However.com.com was formed. Techspan wanted payment for the work to date before they were prepared to work on the final stage of development. This delay obviously caused the date of the beta test to be postponed for the ten weeks it was now going to take to develop a working prototype. This was that they had failed to secure a second round of funding in May. Following the preparation of the business and marketing plans. admitted “some cashflow problems”. the directors were advised that £9 million was available for the UK launch. but the bubble had burst.Unit 10 – Strategic IT and e-Business Global Corporate Strategy The UK directors immediately flew to California and spent some weeks re-specifying the business processes and re-designing the structure of the exchange.com’s shares. This delay proved fatal. The problems became apparent at the end of the re-design phase of the development. They had contracted to undertake the work with the Ci4netNA. Institutional investors had leapt onto the bandwagon when they had seen the immense capital gains to be made from the spectacular and much-publicised IPO capitalisation of many “Dot.com had insufficient skilled managers to control the activities of all these subsidiaries. one fact was not disclosed by Ci4net. This would time the beta test for the hectic fortnight before the Christmas holiday in the UK. However. They divested themselves of over 80% of their subsidiaries. The UK parent organisation.com and expected payment from them. the source of all the finance. they were not able to meet either the development costs they had incurred with Techspan or the operational costs 268 . the earliest that a revenue stream could be generated would be May. The business plan reflected the fact that growth to a financially self-sustaining state would take about 18 months and that the company would require a substantial injection of cash during the first six months of operation to finance a pan-European marketing campaign and the expansion of the company structure. It was then decided that the only option was to further delay the launch until February 2001.com” companies. If the exchange were to be launched in February. which was crucial to their development plans. originally valued at over US$100 on the NASDAQ market had slumped to under US$1 by early 2001. At the time that Easy2ship.com among five or six others. without having any realistic hope of developing an adequate revenue stream. this was formally increased to £25 million each for the pan-European and subsequent North American launches.
5.com. Obviously. funds are not forthcoming. the development time might have been less critical. . most of which are suffering from a lack of confidence on the part of the institutional investors. Case study summary The business process is viable. However. Was the development time a significant cause for the termination of the project? What would an investor need to know before making a commitment to fund such a venture? Can a win/win/win scenario really exist. 3. 4. whose staff was laid off in December 2000 and whose UK directors resigned shortly thereafter.Global Corporate Strategy Unit 10 – Strategic IT and e-Business of Easy2ship. as well as the current commercial suspicion of investment in E-commerce. or is there a commercial loser? Could the concept be limited to operation within national boundaries? What are the likely difficulties of expansion into: 2.Non-European countries? CASE STUDY FEEDBACK Feedback on Question 1: In the normal course of events.Europe? . due to its failure from causes outside its direct control. Questions: 1. This scenario has been repeated in many other commercial sectors. The concept was professionally market tested through focus groups and accepted with enthusiasm by both carriers and potential users. 269 . outgoings may be heavy and there is no income. it is important to keep a development period to the minimum. They had their fingers burned by investing heavily in E-commerce without having either made prudent checks that the business process was going to work or that there was the likelihood of the generation of an adequate revenue stream in the foreseeable future. since at this stage.
· The elapsed time between the start of the project and the first income. · The size of the potential market. etc. as well as the Channel Tunnel. Germany. · Details of all competition. since the parent company could not survive without the income relied upon from this source. there is ferry transport to Scandinavia. · Critical success factors. In the case of the UK. It is possible for the carrier.Unit 10 – Strategic IT and e-Business Global Corporate Strategy This negative cashflow is normally allowed for in the business plan. France. Therefore. Feedback on Question 5: Difficulties for expanding into Europe: · Language barriers for advertising. Feedback on Question 2: An investor would need to know: · The track record of the management. unless the state concerned had no normal road transport access to and from neighbouring states. Netherlands. Feedback on Question 4: It would be impractical to attempt to limit this concept to a single state. the shipper and the service provider to benefit from the business process. there was little that could be done to accelerate the process of bringing the company online. · The elapsed time between first income and financial breakeven. the extended development period was a significant cause for the termination of the project. This is because of the size of the structural inefficiency in the current business process (30%+) and to the detriment of conventional “bricks and mortar” return load service providers. · The reliability of the business process and technology. 270 . Belgium. Feedback on Question 3: A win/win/win scenario could exist as described in this case study. as it certainly was in this case. However. even though the directors were not aware of the parent company’s funding shortfall. Spain and Ireland. · Euro currencies.
Global Corporate Strategy Unit 10 – Strategic IT and e-Business · Dispute resolution. Strategic leadership. Difficulties for expanding into non-European countries: · Credit rating of shippers. · Credit rating of carriers. REVIEW ACTIVITY We have seen that e-business is far more than just e-commerce. Airbus Industrie) have achieved supply chain efficiencies and enormous cost savings by adopting electronic methods such as e-procurement. and have noted that methodologies need to allow for flexibility and responsiveness to changes in the business and in technology. · Unreliable legal systems. Many companies. Use of enterprise resource planning systems (e. The business benefits and competitive advantages that new technologies. We have looked at the role of IT strategy methodologies. business strategy is inextricably linked with IT strategy.g. We have briefly considered how to manage IT evolution within an organisation and the cyclic role of the various processes. a company should be constantly looking to exploit this potential.g. and e-business. is vital as well as new concepts and practices of strategy formulation. · Hard copy documentation. · Trust and confidence in all parties. SAP) has also played a significant role. We have noted that if e-business is the business. the chief executive and technology director need to be working as partners. can deliver are huge. Finally we have looked at the issue of reconciling legacy systems with the e-business paradigm. that pro-actively encourages multi-functional strategic effort. 271 . and if IT strategy cannot be separated from business strategy. Summary We have seen that in today’s world. Cisco Systems. (e.
3. 2. (2002) – Co ntem p o rary Strategic Analysis – Co ncep ts. (2003) – Im ages o f Strategy – Published by Blackwell Publishing (ISBN 0-631-22610-9) De Wit. Chapter 14 Pages 381 – 394 Ref 13. (2000) – Organisatio ns – A Strategic Persp ective – Published by: Macmillan Press Ltd.. 272 . Ap p licatio ns (4th Edition) – Published by Blackwell Publishers (ISBN 0-631-23136-6) 2. Bennett R. (Key Text) Ferguson P.Unit 10 – Strategic IT and e-Business Global Corporate Strategy Consider your own organisation. (1999) – Internatio nal Business (2nd Edition) – Published by: Financial Times Pitman Publishing (ISBN 0-273-63429-1).R. Wilson D. Chapter 10 Pages 221-247 * Highly recommended References The following are the references for your key text and supporting texts: 1. (ISBN 0-333-74550-7). Further reading for this unit (optional) The following are suggested as optional reading for this unit: Ref 10*. Techniques. & Meyer. irrespective of whether or not in operates in the new economy. Grant R. What impact has e-business had on your company’s strategy? What is its potential? 1. Content & Context International Perspective (3rd Edition) – Published by: Thomson Learning (ISBN 1-86152-964-3). Chapter 11 Pages 400-403 Ref 9. Consider the changes achieved over the last five years.M.J. 5. and irrespective of whether or not e-commerce opportunities present itself. 4. & Ferguson G. and likely business benefits. R (2004) – Strategy Process. Address the potential over the next five years. B. Cummings S.
J. Strickland A.. 273 . (2001) – Strategic Managem ent – A Fresh Ap p ro ach to Develo p ing Sk ills. 8.. 12. (2003) – Corporate Strategy (3rd Edition) – Published by: Financial Times Prentice Hall (ISBN 0-273-65854-9). (2003) – Strategic Managem ent – Co ncep ts and Cases – Published by McGraw-Hill Irwin (ISBN 0-07-112132-3) 7. Campbell D. 9.. (1999) – Exp lo ring Co rp o rate Strategy (5th Edition) – Published by: Prentice Hall (ISBN 0-13-080740-0). 11.. (2003) – Glo bal Strategic Managem ent – Published by: Palgrave McMillan (ISBN 0-333-79375-7) Lynch.Global Corporate Strategy Unit 10 – Strategic IT and e-Business 6. Haberberg A. Ahlstrand B. & Lampel J. & Purdie T. (2000) – Glo bal and Transnatio nal Business – Strategy and Managem ent – Published by: John Wiley & Sons (ISBN 0-471-98819-7). H. (Main supporting text) Mintzberg. R. Hamill J. & Rieple A. 14. 10.. (1998) – Strategy Safari – Published by: Financial Times Prentice Hall (ISBN 0-273-65636-8) Stacey. 13. Joyce P. Thompson A.A. R..D. & Scholes K. (2000) – Strategic Managem ent & Organisatio nal Dynam ics – The Challenge o f Co m p lexity (3rd Edition) – Published by: Financial Times Prentice Hall (ISBN 0-273-64212-X) Stonehouse G. & Woods A. (2001) – The Strategic Managem ent o f Organisatio ns – Published by: Financial Times Prentice Hall (ISBN 0-13-021971-1) Johnson G. Kno w led ge and Creativity – Published by Kogan Page Limited (ISBN 0 7494 3583 6) Lasserre P.
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