Professional Documents
Culture Documents
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.
Contents
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
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
This Activity Feedback icon is used to provide you with the information
required to confirm and reinforce the learning outcomes of the activity.
This icon shows where the Virtual Campus could be useful as a medium for
discussion on the relevant topic.
This Key Point icon is included to stress the importance of a particular piece
of information.
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. Try to use your own background knowledge when
completing the activities and draw the best ideas and solutions you can
from your work experience. If possible, discuss your ideas with other
students or your colleagues; this will make learning much more
stimulating. Remember, if in doubt, or you need answers to any
questions about this workbook or how to study, ask your tutor.
Preface
Corporate Strategy is a very wide and all encompassing subject area.
One only has to look at the relative content of individual key texts in this
area (e.g. De Wit & Meyer, Lynch, Johnson & Scholes, etc.) to appreciate
the volume of material that has been written over the years.
However, relatively speaking, it is the newest area of management
research. Initial work in strategy took place in the early sixties. In their
book Strategy Safari, Mintzberg, 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. It also
indicates a wide range of divergent views on the subject. The ten schools
are;
1
iii
Preface
10
iv
Preface
Preface
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, it is in your interests to read more widely than the specified
reading dictates.
The module will enable you to recognise and describe many different
features of organisations. However, 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. You should
be able to recognise and understand the importance of the various
aspects of strategic decision making and implementation processes.
You should remember that it is a Masters level module and you will
only reap the full benefits if you put in the effort. This means preparing
well and fully utilizing other arrangements to enhance your learning,
e.g. tutor support and contributing to remote discussion and chat via
available virtual learning environments.
vi
Unit 1
Introduction
The term corporate strategy can bring to mind various aspects of
corporate management. Vision, competition, competitive advantage,
new markets, managing for shareholder value, moulding corporate
culture, operational processes for execution, strategic plans all come to
mind. But what exactly is strategy?
In this unit we shall define strategy, particularly as it applies to a
manager. We shall also look at the various levels of strategy, and the key
role of strategic thinking within an organisation. We shall examine the
role of strategic models and how they can assist organisations in
breaking down the complexity of strategic thinking. In particular, we
shall examine the Johnson & Scholes model.
Depending on the maturity of the market that a company operates
within, the maturity of the company, and the corporate management
culture, organisations adopt different approaches to strategy. The
approach can be classified as deliberate, emergent or incremental, and
we shall examine the differences between them.
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.
VIRTUAL CAMPUS
Discuss with your colleagues how a tactical action in your work context
furthered the companys strategy. In particular, how it influenced:
Competitive position.
Market share.
Customer satisfaction.
Short-term vs. Long term profits and margins.
New opportunities.
Business strategy
Some definitions of business strategy that are helpful are as follows:
KEY POINT
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.
ACTIVITY
Read p. 1-19 of Chapter 1 and section 2.1 of the key text, De Wit, B & Meyer, R
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
Operational Strategy
Corporate Strategy
Corporate Strategy:
Operational Strategy:
Business
Unit Strategy
Business
Unit Strategy
Business
Unit Strategy
Operational Strategy
Corporate Strategy
Corporate Entity 1
Business
Unit Strategy
Business
Unit Strategy
Corporate Entity 2
Corporate Strategy
Business
Unit Strategy
Business
Unit Strategy
Business
Unit Strategy
Corporate Entity 3
Operational Strategy
Business
Unit Strategy
Operational Strategy
Corporate Strategy
ACTIVITY
Think of an example, perhaps from your own work context, of how corporate
strategy translated to business unit strategy and operational strategy.
Did networks or strategic alliances play a role in moulding corporate strategy?
Strategic Concepts
A number of factors influence the type of strategy an organisation
adopts. These factors include the maturity of an organisation, maturity
of the market sector it operates in, its corporate management culture,
and market leadership goals.
There are broadly two types of strategic concepts:
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, but perhaps had more
difficulty with examples of strategic stretch.
One example of strategic stretch is the Waitrose/Ocado partnership in the
UK, which provides on-line grocery shopping and home delivery service.
Currently, in the UK, the market for on-line shopping is small. With the
exception of Tesco, which makes a small profit on on-line deliveries, most
companies providing this service make huge losses, and many are withdrawing
from this service altogether. Waitrose/Ocado are also making losses currently.
However, they are strategically stretching themselves, and investing
considerable amounts to expand services. They forecast a huge market
opportunity in a few years to come. Waitrose operates in wealthy,
middle-class areas, where the average weekly spend, on groceries, is in excess
of 150 a week. If on-line shopping takes off (as they predict it will, in
approximately 2-3 years time), Waitrose/Ocado would have carved
themselves a very lucrative market, indeed.
Strategic Thinking
Where previously (in the 1970s and 1980s) the focus was on managerial
skills in strategic planning, now the emphasis is on strategic thinking.
Strategic thinking has creativity at its heart, and encourages the entire
organisation to be involved. It minimises the risks associated with
management power over strategy.
A simplistic definition of strategic thinking is finding the answers to the
following:
De Wit & Meyer discuss the paradox of Logic and Creativity. They see
strategy as a wicked problem, i.e. ambiguity, complexity and
uncertainty prevail in making strategic decisions. The implication is that
creative (or generative) thinking is crucial to enable managers (and their
organisations) to move beyond the obvious, from the comfortable to the
uncomfortable to be successful. This is often termed lateral thinking or
thinking out of the box.
Nevertheless, a role for logic is still in place. A manager still needs to be
able to think rationally and be analytical in certain circumstances.
However, they are bounded by their own rational thought and so are
limited in what they can achieve.
ACTIVITY
Learn more about Strategic Thinking by reading the introductory section to
Chapter 2 (p 51-67) in your key textbook, De Wit, B & Meyer, R
Bottom-up processing.
Top-down processing.
Bottom-up processing
The characteristics of bottom-up processing, in the context of strategic
thinking, are:
Top-down processing
The characteristics of top-down processing, in the context of strategic
thinking, are:
10
11
Rigour.
A varied approach to information processing.
A balance between theory and practice to cross-check
validity.
ACTIVITY
It is good practice for strategic decisions to be evaluated against set criteria.
From your own work experience, can you identify the criteria (in the form of
bullet points) against which strategy can be judged.
ACTIVITY FEEDBACK
You would have come up with a number of ideas. Some of which may be
specific to the industry/sector in which you operate. A good list of evaluation
criteria is outlined in the key textbook, De Wit, B & Meyer, R, Criteria for
Evaluation, pages 74-75.
Strategic Models
Strategic thinking is a complex area. As such there is a role for strategic
models that can enable analysis. However, they should be used with
caution, noting that theoretical models can over-simplify the practical
and complex issues faced by organisations in the real world.
Firstly, it is helpful to recognise that strategic thinking has three
dimensions to it as shown in Figure 1.3.
12
Context
Content
Process
Strategy
Figure 1.3. The dimensions of strategic thinking.
ACTIVITY
Can you think of some examples of how inner context can influence strategy.
Similarly, think of an example of how outer context influences an
organisations strategy.
13
ACTIVITY FEEDBACK
You may have thought of one or two examples of how inner context influences
strategy. Here is another example.
Shell and Exxon are giant oil corporations. However, they are organised very
differently. Shell has a structure that favours and devolves power to national or
regional management. Whereas, Exxon has a strong corporate focus with an
emphasis on functional and product lines of structure.
In the Shell structure, strategic thinking is carried out at the regional level (e.g.
by operating companies such as PDO in Oman, Brunei). The corporate
headquarters at The Hague does influence strategy at regional levels, but
doesnt dictate business unit-level strategy.
In the Exxon example, the corporate body defines strategy. Strategy is then
cascaded to the functional units. Processes and standards (e.g. IT standards and
software applications) are defined by the corporate body.
ACTIVITY
Can you now think of an example of how outer context influences an
organisations strategy?
ACTIVITY FEEDBACK
Increasingly environmental and ethical factors strongly influence strategy. Such
factors are outside the control of the organisation, but nevertheless the
organisation must adhere to it.
Many Western companies utilise cheap factory labour from third-world
countries, such as India, Taiwan, etc. More recently, skilled jobs, such as call
centre operations, have also moved to countries such as India, as it is more
cost-effective. Raised environmental and ethical awareness has forced
Western companies to pay fair wages and provide satisfactory working
conditions in these countries. Company stakeholders often demand ethical
and sound environmental practices. This is an example of outer context,
where the company must comply with external influences.
14
ACTIVITY
Reinforce your understanding of the dimensions of strategy by re-reading
p.5-11 of the key text, De Wit, B & Meyer, R.
Target Setting.
Gap Analysis.
Strategic Appraisal.
STRATEGIC CHOICE
Strategic formulation.
STRATEGIC IMPLEMENTATION
As the arrows indicate above, Argenti suggested that strategic analysis
should precede choice, and choice precede implementation. In reality,
the phases often overlap. The overlapping nature of the phases was
elaborated by Johnson and Scholes. Figure 1.4 shows types of issues that
should be considered within the strategy development phases.
15
Expectations
and purposes
Resources,
competences
& capabilities
The
environment
Strategic
analysis
Bases of
strategic
choice
Organisation
structure
and design
Strategic
choice
Strategy
implementation
Resource
allocation
and control
Strategic
options
Strategy
evaluation
and selection
Managing
strategic
change
16
REVIEW ACTIVITY
Learn more about the above by reading the section The paradox of
Deliberateness and Emergentness in your key text, De Wit, B & Meyer, R,
p.111-116.
Also learn about the strategic planning perspective vs. strategic incrementalism
by reading p.117 123 of your key textbook, De Wit, B & Meyer, R.
Now apply what you have learned in this unit to your own work context.
1.
2.
3.
4.
From what you have learned, can the strategy process be improved? If
so how?
5.
6.
Share your thoughts on the questions above with colleagues, either on the
Virtual Campus or at your workplace. Solicit their input and ideas also,
especially on items 4 and 6 above.
17
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.
In the 1980s, Anders Moberg became the chief executive. However, the
influence of Ingvar Kamprad could still be found. IKEA had always been frugal in
its approach. In its early years it had relocated to Denmark to escape Swedish
taxation. Echoes of the same philosophy and style could be seen in Anders
Moberg. He would arrive at the office in the company Nissan Primera, dressed
in informal clothes, and clock in just as other employees did. When abroad he
travelled on economy class air tickets and stayed in modest hotels. He
expected his executives to do likewise. Such prudence was extended to the
company whose shares were held in trust by a Dutch charitable foundation and
not traded. Furthermore, IKEAs expansion plans envisaged only internal
funding with 15% of turnover being reinvested.
The 1980s saw rapid growth. IKEA benefited from changing customer
attitudes, from status and designer labels to functionality, encouraged by an
economic recession. It also developed a number of unique elements which
came to make up IKEAs winning business formula: simple, high quality
Scandinavian design, global sourcing of components, knock-down furniture kits
that customers transported and assembled themselves, huge suburban stores
with plenty of parking and amenities such as cafs, restaurants, wheelchairs and
even supervised child-care facilities. A key feature of IKEAs concept was
universal customer appeal crossing national boundaries, with both the
products and shopping experience designed to support this appeal. Customers
came from different lifestyles: from new homeowners to business executives
needing more office capacity. They all expected well styled, high quality home
furnishings, reasonably priced and readily available. IKEA met this expectation
by encouraging customers to create value for themselves by taking on certain
tasks traditionally done by the manufacturer and retailer, for example the
assembly and delivery of products to their homes.
IKEA made sure that every aspect of its business system was designed to make
it easy for customers to adapt to their new role. For example, information to
assist customers make their purchase decisions was provided in a 200-page
glossy catalogue; during their visit to the store customers were supplied with
tape measures, pens and notepaper to reduce the number of sales staff
required; furniture was displayed in 100 model rooms; and sales staff were
expected to involve themselves with customers only when asked.
To deliver low-cost yet high-quality products consistently, IKEA also had 30
buying offices around the world whose prime purpose was to identify potential
suppliers. Designers at headquarters then reviewed these to decide which
would provide what for each of the products, their overall aim being to design
for low cost and ease of manufacture. The most economical suppliers were
always chosen over traditional suppliers, so a shirt manufacturer might be
employed to produce seat covers. Although the process through which
acceptance to become an IKEA supplier was not easy, it was highly coveted,
for, once part of the IKEA system, suppliers gained access to global markets,
and received technical assistance, leased equipment, and advice on how to
bring production up to world quality standards. By the mid 1990s, IKEA was
18
19
Questions:
1.
2.
20
21
22
23
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.
The conclusion from the above case study is that strategic decisions often
exhibit the following characteristics:
1.
2.
3.
4.
Feedback on Question 2:
Decisions on whether a company takes an environment led approach (fit) or a
resource based approach (stretch) is often complex. IKEA is such an example
where arguments can be formed to justify both.
Taking a strategic fit approach means, as in the case of IKEA, trying to identify
the opportunities which exist in the environment and tailoring the future
strategy to capitalise on these, for example by locating in particularly
favourable markets or seeking to appeal to attractive market segments.
However, strategy can also be seen as building on or stretching an organisations
resources and competencies to create opportunities or to capitalise on them.
The product range IKEA had designed and developed was not only low cost
but unique, not only because of its kit form but also in its style and image. IKEA
benefited from years of design experience dedicated to its operation and
markets. The logistics of the operation, from sourcing of products to control
of stock and the immediate supply of the product to take away, had been
learned over many years and provided not only a quite distinct way of
operating, but a service greatly appreciated by customers. In short, both the
resources and experience built up over the years had been consciously
developed to service the evident opportunity in the market place.
24
IKEA then stretched its capabilities, using its experience in the furniture
market, to create a different market opportunity. It set out to reinvent value,
and experimented with housing in the late 1990s. It started to think about
value in a new way; one in which consumers are also suppliers, suppliers are
also customers, and IKEA itself is not so much a retailer but as a central hub for
services, goods, design, management, support and even entertainment.
In practice, organisations such as IKEA, develop strategies on the basis of
environmental fit and stretch. IKEAs experiment with housing was the
result of identifying a new market opportunity, but it was also an attempt to
capitalise on its skills in developing kit-form products at low-cost.
Feedback on Question 3:
The issues to consider are:
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.
25
opened for further new entrants as well. Along with the privatisation
and liberalisation, the government introduced completely new
mechanisms of matching supply and demand, such as an electricity pool
or the creation of a separate transmission company, and the
installation of new regulatory institutions. All market players needed
to learn how to operate an energy market, where before there was
only a central planning agency.
As the name of CEGB implied, the institution from which PowerGen
emerged, had strong planning instincts for fulfilling its task to supply
electricity to British households and industry. Therefore, it was not
surprising when PowerGen started preparations for being an
independent company in 1988, that a very detailed strategic planning
system was installed with the help of McKinsey consultants. However,
already in 1992, only two years after the operational start of the
company, a substantial reorganisation was conducted, which triggered
a complete change of the strategic planning system as well. When this
new planning system failed to function satisfactorily in 1993, it was
substantially revised for the 1994 planning cycle.
In 1996 the company underwent again a major reorganisation,
adjusting the company to a number of internal and external strategic
developments. That also caused the strategic planning system to be
substantially revised. In particular it was now broadened to include a
highly sophisticated scenario development module to be conducted on
the business unit level.
The corporate composition did not stabilise thereafter either. In 1998
PowerGen completed a major purchase of a regional energy
distribution company, merger discussions with US partners continued
on and off, government interference changed the pricing arrangements
of the industry and dictated strategic directions, etc. It seemed that the
planning system was always several steps behind the actual conditions
of the company. On the other hand, without the planning support,
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, De Wit, B &
Meyer, R) with the following learning objectives in mind:
26
Questions:
1.
2.
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.
3.
Collect the hints in the case, which suggest that there is also a parallel
strategy formation process in place that operates in a more
incremental, emergent fashion.
Separated financial role within the Finance division for reviews and
projection of plans.
Process: how and when?
Deliberate formation.
27
12-month process.
Content:
28
Content:
Responsibility for the plan and for managing the corporate planning
process was passed to the director of finance, effectively increasing
the influence of financial considerations in the planning process.
29
30
31
32
5.
6.
Feedback on Question 3:
In order to cope with the limitations of the various planning processes that
were effective at PowerGen during the 1990s, an unofficial, parallel formation
process emerged, on different dimensions. If the planning processes of the first
and fourth phase are compared, to some extent the planning process in itself
underwent change. The planning process became less formal and it was
recognised it could not be sequential. Over the years, the results of the
process became increasingly dependent on coalition forming, lobbying and a
constant discussion between the different planning process levels of
PowerGen. The extent of freedom to business units in developing strategy
increased significantly. Whereas in the early '90s all strategy development and
planning activities were performed by almost a single department, in later
33
Summary
In this module we have described what corporate strategy entails. We
have noted that strategy must be holistic, and that strategic thinking
must dominate an organisation and influence its daily actions. We
examined the various levels of corporate strategy, and also considered
network level strategy; increasingly relevant in todays world.
We have looked at the importance of strategy to a manager, the skills
required to be a strategist, and the characteristics of good strategic
decision making.
We considered the role of models in strategic thinking, in particular the
Johnson and Scholes model.
Finally, students have been presented with two contextual case studies
(IKEA and PowerGen) to work through.
34
2.
35
Unit 2
Strategic Capability
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
Corporate strategy is the overarching strategy that applies to a number
of businesses combined within a single corporation. This is more than
aggregating the individual strategies of its various component
businesses. 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. To obtain optimal corporate performance, a corporation
may increase or reduce the number of component businesses so as to
create a more effective combination. Corporations use different
management styles in achieving an optimal mix. We shall examine
portfolio management and core competencies as two different styles.
Portfolio management was fashionable in the 1970s and 1980s, when the
focus was purely on financial control, and it was thought that benefits
could be obtained by holding a portfolio of diverse strategic business
units. 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, and a greater focus has come about on
developing a corporations core competencies. Corporations thus
started to alter their composition in order to strengthen core
competencies. Whichever approach is adopted, executing corporate
strategy often involves acquisitions, mergers and divestments.
We shall also examine some case studies concerning strategic capability.
37
Portfolio management.
Strategic planning by Core Competencies.
Portfolio management is a management style whereby financial control
is performed by the corporate centre, but otherwise the individual
businesses are de-centralised and highly autonomous. Corporations
adopting this style, achieve greater responsiveness because the
individual subsidiaries are autonomous, but fail to achieve the
longer-term benefits of exploiting synergy. The Hanson group of
companies is a classic example.
Corporations that wish to exploit synergies between their various
businesses and develop a longer-term competitive advantage, generally
adopt a management style based on core competencies. Canon is a good
example of a corporation that carries out strategic planning based on
core competencies.
In practice, many corporations try to balance responsiveness with
synergy by adopting management styles that fall between the two
perspectives of portfolio management and core competencies. This is
sometimes termed the strategic control perspective. See Figure 2.1.
Nestle is an example.
Responsiveness
Synergy
Corporate Level Strategy
Hanson
Nestle
Canon
38
ACTIVITY
Learn about organisations and capability building by reading the following from
your key text, De Wit, B & Meyer, R.
Readings 5.2 and 5.3: pages 267-285.
Also read Chapter 6 on Corporate Level Strategy : pages 297-318.
Portfolio Management
In portfolio management, in the strictest sense and at the very extreme
position, the corporate centre acts solely as an investor with financial
stakes in the standalone businesses. The corporations main philosophy
is to leverage financial control. See Figure 2.2. In this extreme position,
there is very little co-ordination between the various business units, and
there is fuzzy co-operation. Each business unit has its own
characteristics and market demands.
39
Corporate
Centre
Financial control
SBU1
SBU2
SBU3
SBU4
SBU5
SBU6
As we move to the right along the continuum (see Figure 2.1), various
strategic approaches can be described that are still essentially
portfolio-based. But the corporate centre takes more of a parenting
role, and can add value in some of the following areas: efficiency
improvements, leverage, provision of expertise, investment and
competence building, fostering innovation, mitigation of risk, provision
of image and networks, collaboration/co-ordination across SBUs,
standards and performance measurements, vision.
With the parenting approach, the question must still be asked on
whether the corporate centre adds value or destroys value. Those who
argue the value creation case cite the following advantages:
1.
- Information sharing
- Co-operation of directors/managers
- Real time decision making
2.
Exploitation of:
40
Those who argue that parenting destroys value would make the case
that SBUs would be better off on their own, because the corporate centre
creates:
1.
Additional cost
2.
3.
4.
Reduces responsiveness
5.
2.
3.
4.
41
ACTIVITY
Study the BCG matrix and GE business screen as shown on Figure 6.2, p. 299
of the key text, De Wit, B & Meyer, R .
What conclusions do you derive from it?
ACTIVITY FEEDBACK
The BCG matrix is drawn up against two orthogonal axes; relative market
share and market growth
Relative market share indicates a businesss market power (one source of
competitive advantage) and this is equated with its ability to earn above
average rates of return. In the extreme, higher returns derive from a
monopoly (100% market share). More often, however, having a large market
share will coincide with cost benefits from large production runs and large
cumulative volumes of production.
Market growth in the BCG matrix is related to the product life-cycle
concept, which suggests that growth will be minimal or negative when a
product is mature.
ACTIVITY
As an introduction to this section, read the following from your key text, De
Wit, B & Meyer, R.
Reading 6.1: pages 319 325
42
Stars.
Cash cows.
Dogs.
Question marks.
A business is categorised as one of the above, depending on its market
share vs. growth rate characteristics. This is clearly depicted in Figure
2.3.
Question
marks
Cash
cows
Dogs
Growth rate
Stars
Market share
Figure 2.3: Business portfolio.
43
Shareholder portfolios
Many of the ideas relating to portfolio management stemmed from the
management of shareholder portfolios in the field of finance and
economics. In particular, risk reduction by spreading investment across
a portfolio of shares with different patterns of dividend payments and
capital appreciation. In trying to balance stars and cows the corporate
strategy manager acts like a shareholder, reducing the unique risk that
comes from owning one business.
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 manager of a diversified corporation is not, however, a shareholder
investing in a portfolio of stocks in the market. Portfolio theory is based
on the assumption of perfect markets, and a perfect market is dependent
on the availability of perfect information. Critics of corporate portfolios
submit, however, 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. In a perfect market it is unclear how a corporate
portfolio manager can add further value for shareholders. Indeed,
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.
In situations where co-operation and co-ordination are introduced (e.g.
the role of the Parental Developer, described above) between
autonomous SBUs, a company is then moving along the
responsiveness / synergy continuum towards a more resource based
view of the company. The combining of effort leads to the creation of
greater efficiency or synergy in the use of resources.
44
Synergy in Corporations
Synergy is often put forward as the justification for acquiring or
merging businesses.
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 equation 2+2 = 5 is often used to
demonstrate the effect.
Synergy describes a corporations ability to create value, by identifying
the fit between the opportunities arising from combining activities, and
the corporations ability to then exploit these opportunities.
Not all corporations will seek to exploit all available synergies, nor are
they able to. Some corporations may look to exploit only certain
synergies, e.g. financial, technical, mass production, capital assets.
ACTIVITY
Can you think of an example of a corporation that, 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. Here is one.
The UK conglomerate Hanson is a classic example. It had no interest in
achieving benefits from combining the activities of its acquired businesses. Its
focus and main source of success stemmed from the imposition of centralised
financial control of its corporate headquarters upon its separate subsidiaries.
45
Negative Synergy
Managers should be alert to the dangers of negative synergy the
potential disadvantages and costs of a poor combination. In an
inappropriate or badly handled diversification, value can be destroyed,
rather than created. In these instances, the negative synergy effect can be
described as the sum of the parts being greater than the whole, or 2+2 =
3.
Many conglomerates in the late 1980s and early 1990s have been
devalued by investors to reflect such negative synergy.
Physical assets
Complementary benefits can be obtained from the
simple combination of physical assets such as factories
and machinery. These can be achieved when physical
assets are under-utilised, incapable of being fully utilised
(e.g. due to seasonal cycles), or because combining them
reduces risk/uncertainty. Such benefits may include
economies of scale, higher capacity utilisation, improved
cash flow and improved product line and mix.
Itami quotes the example of bulk carrier vessels, which
carry Japanese cars to the US West Coast, loading up with
46
Invisible assets
Invisible assets are assets such as corporate culture,
technical expertise, a strong corporate or brand image, or
expert knowledge of the marketplace. It is hard to
quantify in $ terms the value of these, and this
combination benefit is described by Itami as the synergy
effect.
A recent example of synergy effect is from the IBM acquisition of the
business consulting group, PwC Consulting, in late 2002. IBM gained
strong business consulting skills from PwC, exploited synergies with
IBMs
complementary
IT
competencies
and
strong
leadership/branding. As a result the combined consulting arm vastly
increased global marketshare (compared with the sum of the individual
marketshare prior to the acquisition).
47
ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R.
Reading 6.4, Seeking Synergies: pages 340 356.
48
Resources
Resources
Intellectual capital
(physical)
Tangible and
intangible
Intangible
ACTIVITY
Read the following paper on core competencies by Prahalad and Hamel in your
key text, De Wit, B & Meyer, R.
Reading 6.2: pages 325- 333
Prahalad and Hamel have explored the role that competencies play in
corporate strategy. They view the corporation as a collection of core
competencies and core products, rather than a portfolio of businesses
49
2.
3.
VIRTUAL CAMPUS
Spend some time thinking about your organisations core competencies. If you
feel that the company you work for is not suitable for this activity, select a
services company, e.g. IT or Business Consulting Services (e.g. Accenture)
1.
2.
3.
How do your core competencies position you better for the future?
50
2.
3.
4.
Divestment
As we have seen achieving superior corporate performance often results
in divestments that is, the sale or disposal of one or more of a
corporations activities. Divestments may occur when corporate
synergies no longer exist, under-utilised corporate assets can be better
deployed elsewhere or core competencies can not be enhanced by
leverage across the corporation.
Many divestments occur when subsidiary businesses show decline. But
is divestment always the correct response to failing businesses?
51
3.
4.
52
within
corporation,
or
by
outside
ACTIVITY
Can you think of some high-profile example of outsourcing, which has
delivered, or will deliver, massive cost savings.
ACTIVITY FEEDBACK
You may have thought of a number of examples. Many oil companies, financial
institutions, energy companies and banks have outsourced their IT activities to
the likes of EDS, IBM, Logica.
More recently, the UK government is divesting aspects of its state activities to
private companies, e.g. NHS patient records and data services, army logistics,
etc.
CASE STUDY
Rohm, Japan strategy in a medium-sized Japanese company
surviving in a difficult environment.
Even as the Japanese economy has been battered by one of the worst recessions in
memory, some Japanese companies have bucked the national trend. 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.
Rohm is a manufacturer of highly specialised integrated circuits based in Kyoto.
Its profits have increased steadily over the past four years at a time when most
Japanese companies have struggled to cut their losses. Rohms recurring
53
profits in the year to March 1998 came to Y110.1 billion (US$917 million), or
nearly one-third of sales at Y335.9 billion and a fivefold increase from the Y21.6
billion it made in 1994.
Its return on equity, at 16.5%, would be the envy of many blue-chip Japanese
companies for whom return on equity has tended to be a single-digit figure.
Although profits were expected to be flat in 1998, Rohm intended to increase
its recurring income to sales ratio to 33.1% in 1999 from 32.8% in the year
ended March 1998.
Like many of its successful neighbours, 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. Rohms strength is
its company policy of focusing its resources on products that stand out and
that it can differentiate from those of its competitors, explains Nobuo Hatta,
the director in charge of overseas sales. To that end the company has adopted
policies that are almost diametrically opposed to those that have ruled most
large, well-established electronics companies in Japan.
Rather than pursue mass volume businesses, such as the memory chips which
have been huge profit-earners for the likes of Toshiba and NEC, Rohm has
been happy to stick to niche markets where it can offer unique products. It is a
policy to which Rohms founder and president, Kenichiro Sato, has steadfastly
adhered.
Mr Sato started the company 40 years ago after giving up his dream of
becoming a professional pianist. His first successful product was a miniature
resistor he invented, not in his garage but in the family bathroom. At the time
most of the large electronics companies were making only large resistors to
put into the large radios. But then the transistor boom hit and Rohm found
itself ahead of the game on miniature transistors.
From that time on, Rohm has focused its energies on products that slipped
through the net of the large electronics companies, such as customised chip
parts. I never fight battles I cannot win, Mr Sato declares. That concentration
on core skills has shielded Rohm from the devastating effects of both the
bubble economy and the downturn in semiconductor prices. The company
even develops its own manufacturing facilities, 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. 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.
Also in defiance of traditional Japanese business practice, Rohm does not
employ a seniority-based system of promotion and hires as many as 20 to 30%
of its employees in mid-career. Mr Hatta believes that being based in Kyoto has
helped the company. Western Japan is far away from bureaucrats and
politicians in the central government so we have been able to focus on
business, he says.
54
There is also a feeling among Kansai people that they would rather be big fish
in a small pond, he notes. Many Kyoto companies have something they can
claim is number one in the world. In its focus on core skills, its pursuit of
profits rather than market share and its emphasis on employee performance
over seniority and lifetime employment, Rohm may sound more like a US
company than a company based in one of Japans most tradition-bound cities.
But Mr Hatta, who spent some years in the USA, 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. We believe the model we
provide is based on the best of both worlds, Mr Hatta says.
Note: Kansai is the western Japanese province that includes Kyoto.
Questions:
1.
What were the main aspects of the environment affecting Rohm over
the last four years?
2.
3.
55
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. 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, 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.
However, the strategy went further. Rohm deliberately set out to produce
products for its chosen niches that were reliable, low cost and available
quickly. In other words, the company set out to dominate the niche into which
it had chosen to enter. Looking at it another way, the strategy focused on
customised rather than mass produced products. It was not enough just to
identify the special market opportunity: Rohm still had to perform better than
any potential competitors.
Such strategies have an obvious attraction for smaller companies when
competing against the larger electronics giants. However, the difficulties of
finding an attractive niche and then exploiting the opportunity in that niche are
not to be underestimated.
Feedback on Question 3:
56
Summary
In this unit we have looked at the different styles in corporate strategic
management. In particular the portfolio management and core
competencies perspectives. We have also examined the influence of
synergy on a corporations strategic decisions.
We have looked at the role of divestments and the increasing focus on
core products and core competencies. We have seen how this recent
trend has led to outsourcing.
To gain maximum benefit from this module, students are encouraged to
apply the lessons learnt to their own work context.
REVIEW ACTIVITY
In the earlier Virtual Campus activity you were asked to think about what your
organisations core competencies are. Now verify this by reading your
organisations mission statement. Identify any references to core
competencies. If this is absent in the mission statement, consult a broad
spectrum of senior managers and identify what the core competencies are.
1.
2.
57
58
1.
2.
3.
Unit 3
Globalisation
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The phenomenon of globalisation is accelerating in pace. Globalisation
has received much publicity in recent years both positive and
promoted by large global corporations and organisations such as the
WTO, but also negative coverage from the anti-globalisation movement
highlighting some of the issues. But what exactly is globalisation? In this
unit we shall consider exactly what globalisation is. We shall consider
the globalisation of markets and the globalisation of production.
We shall consider the changing nature of multinational enterprises. In
particular, the rise of non-US multinationals, and now increasingly a
growth in mini-multinationals.
For corporations, globalisation involves radical change. Globalisation
presents opportunities but also poses challenges for the management of
highly distributed worldwide organisations. We shall consider some of
these issues.
Finally we shall look at two case studies concerning Globalisation.
What is Globalisation
The concepts of globalisation, global strategies, global corporations,
global markets, global production, global productisation and
global branding are widely used. Sometimes these terms are used
synonymously, and their meaning is not well understood. In this
59
Unit 3 Globalisation
ACTIVITY
As an introduction to this section read Chapter 10, The International Context,
pages 534-556 in your key text, De Wit, B & Meyer, R.
60
Unit 3 Globalisation
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:
61
Unit 3 Globalisation
ACTIVITY
This topic links with subjects that are to be covered in other units. At this point
briefly scan the following sections, ahead of studing the units in detail.
Unit 6: section on Value Management
Point to note: Many companies are relocating to other countries to save costs.
Classic examples of this have been in call centres. A further example has been
Dyson who switched their production to Malaysia saving 25% on production
costs. The explanation for this was to spend the money on R&D and to keep
the company afloat. However, a customer backlash resulted in a 5% reduction
in the number of vacuums sold.
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, e.g. Nike and
Ikea. However, 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
Globalisation forces
Micro chips
Automobile
Military aircraft
Pharmaceuticals
Bulk chemicals
Civil aircraft
Telecommunication
services
Retail banking
Food retailing
Low
Low
Localisation forces
High
Figure 3.1: Global integration vs. Local responsiveness grid for various sectors.
62
Unit 3 Globalisation
Cultural
factors
e.g. attitudes,
tastes, social
practices
Technical
factors
e.g. standards,
e-business,
communications
Commercial
factors
Localisation
e.g. customer
responsiveness,
customisation,
networks
Legal
factors
e.g. regulations
63
Unit 3 Globalisation
At the meso level, for businesses, the issues concern markets and
industries, as follows:
Major changes from globalisation at the meso level include the more
even distribution of Foreign Direct Investment (FDI), and waves of
cross-border mergers, acquisitions and strategic alliances. There has
also been a notable expansion in the services sector at the expense of
manufacturing.
At the macro level, for the worlds economies, the issues concern:
64
Unit 3 Globalisation
ACTIVITY
Read the following article on the globalisation of markets from your key text,
De Wit, B & Meyer, R.
Reading 10.1: pages 557-561
In many global markets, the same firms frequently confront each other
as competitors in nation after nation, e.g. Coca-Colas and Pepsi, Ford
and Toyota, Boeing and Airbus, Caterpillar and Komatsu, and
Nintendo and Sega.
Thus, diversity is replaced by greater uniformity. As rivals follow rivals
around the world, these multinational enterprises emerge as important
drivers of the convergence of different national markets into a single,
and increasingly homogenous, global marketplace.
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
Unit 3 Globalisation
ACTIVITY FEEDBACK
You may have thought of a number of examples ranging from differing tastes in
cars (North America vs. Europe) to foods. One example is that of coffee,
where tastes vary vastly from continent to continent. Latin Americans prefer a
bitter taste, Europeans like strong blends, and Americans can only tolerate
weak blends. So, for example, Nescafe markets different variations under the
same brand to different countries.
Now, as a follow-on to the above activity, read the following article in your key
text, De Wit, B & Meyer, R., that critically examines the notion that success in
international markets requires adoption of global products and brands.
Reading 10.2: pages 562-569
66
Unit 3 Globalisation
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.g.
call centres) to one country. For example, many financial institutions have
outsourced their call centres to India.
There is also another aspect the distributed globalisation of production. This
is particularly so in the IT sector, where companies are increasingly distributing
the production of software across geographies. Companies such as IBM run
projects where aspects of the same software is developed in China, other
aspects in India and yet others in South America. The whole system may then
be integrated in yet another country (e.g. US). This achieves round-the-clock
productivity. Not only do huge cost savings result from cheaper professional
rates from non-Western countries, but also round-the-clock productivity
enables corporations to achieve aggressive time-lines. Effectively work is being
carried out throughout the 24-hour clock. However, this is not the panacea it
sounds. There are challenges with such globally distributed production, and
such practices require strong management control, standards and robust IT
and communication infrastructures. These are some of the management
challenges of globalisation which we shall examine later in this unit.
67
Unit 3 Globalisation
Drivers of Globalisation
Two main factors seem to underlie the trend toward greater
globalisation:
68
Unit 3 Globalisation
technologies, and now the Internet and the World Wide Web. These
technologies rely on the microprocessor to encode, transmit and decode
the vast amount of information. The cost of microprocessors continues
to fall, while their power increases (a phenomenon known as Moores
Law, that predicts that the power of microprocessor technology doubles
and its cost of production halves every 18 months). As this happens, the
costs of global communications are plummeting, which lowers the costs
of co-ordinating and controlling a global organisation.
An important factor and, possible the most critical factor, contributing
to globalisation has been the Information Technology revolution. The
emergence of standards in IT has made our world inter-connected
through high-speed computers. The American defense institutions
were largely instrumental for the rise of standards and protocols in
communications, messaging and IT. Through the adoption of
standards, heterogeneous computer systems (from India to Beijing to
Europe to US) are able to communicate seamlessly and securely. This
has led to open and interoperable applications. IT infrastructures are
now essential pre-requisites for modern global corporations. These
developments have accelerated the pace towards globalisation in many
sectors of the global economy.
Transportation technology
In addition to developments in communications technology, several
major innovations in transportation technology have occurred since
World War II. In economic terms, the most important are probably the
development of commercial jet aircraft and super-freighters and the
introduction of containerisation, which simplifies trans-shipment from
one mode of transport to another. The advent of commercial jet travel,
by reducing the time needed to get from one location to another, has
effectively shrunk the globe.
69
Unit 3 Globalisation
70
Unit 3 Globalisation
All four of these qualities either have changed or are now changing
rapidly. Refer to Table 3.1 for the changes in world output and trade, for
example.
Country
United States
40.3%
20.8%
12.6%
Japan
5.5%
8.3%
7.76%
Germany
9.7%
4.8%
9.9%
France
6.3%
3.5%
5.46%
United Kingdom
6.5%
3.2%
4.94%
Italy
3.4%
3.2%
4.76%
Canada
3%
1.7%
3.81%
China
NA
11.3%
2.85%
South Korea
NA
1.7%
2.45%
Table 3.1. Changing World Output and Trade (Source: Export data from World Trade Organisation, International Trade Trends
and Statistics, 1996. World Output data from CIA Factbook).
71
Unit 3 Globalisation
ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R.
Reading 10.3, The Competitive Advantage of Nations, pages 569-577
72
Unit 3 Globalisation
73
Unit 3 Globalisation
74
Unit 3 Globalisation
are agents of globalisation companies that have the most to gain from
globalisation. Some of these companies (e.g. Starbucks, Nike) have
become front-line targets of critics who blame globalisation for a variety
of ethical and social issues, e.g. global warming, pollution, exploitation
of labour in poor countries, encroachment on human rights, etc.
Globalisation is challenged on grounds that it widens the gap between
the rich and the poor.
ACTIVITY
To read the arguments for and against globalisation, refer to the following
websites:
The website of the World Trade Organisation (WTO) for pro-globalisation
viewpoints:
www.wto.org
For anti-globalisation viewpoints refer to the following websites:
www.southcentre.org
www.wtowatch.org
75
Unit 3 Globalisation
VIRTUAL CAMPUS
Globalisation on the one hand can have a levelling-down effect, and on the
other hand a levelling-up effect. So for instance, in the outsourcing context
(e.g. call centres) there is a view that Western countries (e.g. UK and US) have
lost out in this sector, whereas developing countries such as India have
benefited.
From your organisations viewpoint and also geographical viewpoint, identify
on the Virtual Campus whether globalisation has had a levelling-up or
levelling-down effect. Elaborate.
Now look at the opposing views (posted on the Virtual Campus) and try to
understand their perspective from a rational viewpoint. Assess whether your
viewpoint has changed.
76
Unit 3 Globalisation
77
Unit 3 Globalisation
ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R.
Reading 10.4, Transnational Management, pages 577-586
78
Unit 3 Globalisation
79
Unit 3 Globalisation
Questions:
1.
What benefits does the company gain from its global strategy? And
what have been the problems?
2.
80
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.) How
did they cope with the great geographical distances and the selling task in their
chosen country? And so on.
Thus other medium-sized companies can learn something from Giant Bicycles
but the full case for international expansion remains unclear.
Feedback on Question 1:
Benefits include:
81
Unit 3 Globalisation
82
Unit 3 Globalisation
83
Unit 3 Globalisation
A key element of Citigroups global strategy for its consumer bank is the
standardisation of operations around the globe. This has found its most visible
expression in the so-called model branch. Originally designed in Chile and
refined in Athens, the idea is to give the companys mobile customers the same
retail experience everywhere in the world, 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. By the end of 1997 this model branch was in
place at 600 of Citicorps 1,200 retail locations, and it is being rapidly
introduced elsewhere. Another element of standardisation, less obvious to
customers, is Citigroups emphasis on the uniformity of a range of back-office
systems throughout its branches, including the systems to manage checking
and savings accounts, mutual fund investments and so on. According to
Citigroup, this emphasis on uniformity makes it much easier for the company
to roll out branches in a new market. Citigroup has also taken advantage of its
global reach to centralise certain aspects of its operations to realise savings
from economies of scale. For example, in Citigroups fast-growing European
credit card business, all credit cards are manufactured in Nevada; printing and
mailing are done in the Netherlands; and data processing is done in South
Dakota. Within each country, credit card operations are limited to marketing
people and two staff units; customer service and collections.
Questions:
1.
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 Citigroups global retail bank?
2.
3.
4.
84
Unit 3 Globalisation
85
Unit 3 Globalisation
Staff uniforms.
Standards of service the same globally.
Also (not mentioned in case) standardised training and staff
development.
Assumptions based upon:
Summary
In this unit we have considered the impact of globalisation on
multinational enterprises. We have looked at the definition of
globalisation, and have considered the different dimensions
globalisation of markets and globalisation of production.
We have considered the drivers of globalisation, the changing world
order and the implications for businesses from the globalisation
phenomenon. We have also touched on the globalisation debate
considering the opposing views. Finally, we have looked at the
particular challenges faced by managers when managing in the global
marketplace.
86
Unit 3 Globalisation
REVIEW ACTIVITY
Consider the following situation. Imagine that your organisation is reviewing
its strategy, and that you have been seconded by the team to focus and report
on the impact of globalisation. You have to carry out the necessary research
and prepare a paper (in no more than 1000 words).
Your paper should address the following:
1.
2.
3.
Global competition.
4.
2.
87
Unit 4
Introduction
Globalisation and the advent of the new economy, has led to big
changes in todays business landscape. Consolidation through mergers
and acquisitions is rife in many industries, as corporations seek to
increase their global reach and competitiveness. There is a recognition
that to compete effectively in the global market, cross-border alliances,
sometimes with competitors, is necessary. This has also led to a rise in
global strategic alliances.
In this unit we shall look at strategic alliances, and mergers and
acquisitions; the two vehicles through which many organisations aim to
globalise.
Mergers and Acquisition (abbreviated as M&A) activity has grown in
pace since the 1990s. In this unit we shall look at some of the
terminology used in the context of M&A. We shall then look at some of
the drivers for M&A activity and potential benefits. We shall then assess
the factors that give rise to successful mergers and acquisitions, and
briefly consider an integration process.
89
90
(1)
(2)
(3)
ACTIVITY
See how collaboration with competitors can result in a win-win scenario by
reading p. 383-387, Reading 7.1, in your key textbook, De Wit, B & Meyer, R.
Read p. 388-396, Reading 7.2, in you key textbook, De Wit, B & Meyer, R, 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.
KEY POINT
The term strategic alliance refers to an arrangement, generally between
actual or potential competitors, to co-operate.
91
ACTIVITY
Read p. 359 382 (Network level strategy) in your key textbook, De Wit, B &
Meyer, R, to learn more about how companies in strategic alliances co-operate
together, and co-ordinate their strategies to work as a team.
92
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.
There are the following advantages associated with entering a market
early, known as first-mover advantages;
Entry Methods
The choice of method for entering a foreign market is another major
issue. Options are;
Exporting.
Turnkey Projects.
93
Licensing.
Franchising.
Joint Ventures.
Wholly owned subsidiaries.
Each of these options has advantages and disadvantages. The optimal
entry method varies from situation to situation depending on a variety
of factors including transport costs, economic risks, political risks, trade
barriers and corporate strategy.
Let us now examine each of the entry methods.
Exporting
Advantages
Disadvantages
Turnkey projects
In a turnkey project, the contractor agrees to handle every detail of the
project for the client, including the training of operating personnel. At
completion of the contract, the client is handed the key to a plant that
is ready for full operation. This is a means of exporting process
technology to other countries. Turnkey projects are most common in the
chemical, pharmaceutical, petroleum refining and metal refining
94
industries, all
technologies.
of
which
use
complex,
expensive
production
Advantages
Disadvantages
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. In return the licensor receives a royalty fee from the
licensee. Intangible property includes patents, inventions, formulas,
processes, designs, copyrights and trademarks.
95
been renegotiated and extended several times since. The licensing agreement
between Xerox and Fuji-Xerox also limited Fuji-Xeroxs 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).
Advantages
Disadvantages
96
Franchising
Franchising is similar to licensing but involves longer-term
commitments. Franchising is basically a specialised form of licensing in
which the franchiser not only sells intangible property to the franchisee
(normally a trademark), but also insists that the franchisee agree to
abide by strict rules as to how it does business.
The franchiser will also often assist in running the business on an
ongoing basis. As with licensing, the franchiser typically receives a
royalty payment, which amounts to some percentage of the franchisees
revenues. Franchising is used mainly by service firms. McDonalds is a
good example of a firm using a franchising strategy.
Advantages
The advantages of franchising as an entry method are very similar to
those of licensing. The firm is relieved of many of the costs and risks of
opening a foreign market on its own. Instead, the franchisee typically
assumes those costs and risks. This creates a good incentive for the
franchisee to build profitable operation as quickly as possible. Using a
franchising strategy, a service firm can build up a global presence
quickly and at a relatively low cost and risk.
Disadvantages
The disadvantages are less than licensing. Since franchising is used
mainly by service companies, experience curve and location economies
are less of an issue. But franchising may inhibit the firms ability to take
profits out of one country to support competitive attacks in another.
A more significant disadvantage of franchising is quality control. The
foundation of franchising is that the firms brand name conveys a
message about the quality of the firms product. This can be overcome
by setting up a subsidiary in each country (wholly owned company or
joint venture). The subsidiary assumes the rights and obligations to
establish franchises throughout the particular country or region, e.g.
McDonalds establishes a master franchisee in many countries. Further
examples are Kentucky Fried Chicken and Hilton International.
97
Joint Ventures
A joint venture means establishing a firm that is jointly owned by two or
more otherwise independent firms. Fuji-Xerox, for example, was set up
as a joint venture between Xerox and Fuji Photo. Establishing a joint
venture with a foreign firm has long been a popular method for entering
a new market. The most typical joint venture is a 50/50 venture.
However, some firms have sought joint ventures in which they have a
majority share and tighter control.
Advantages
Disadvantages
A joint venture does not give a firm the tight control over
98
Advantages
Disadvantages
foreign market. Firms doing this must bear the full costs
and risks of setting up overseas operations. The risks
associated with learning to do business in a new culture
are less if the firm acquires an established host-country
enterprise. However, acquisitions raise additional
problems, e.g. marrying divergent corporate cultures.
Partner selection
2.
Alliance structure
3.
Alliance management
99
Partner selection
The partner selection process must consider whether a potential
partnership is viable and whether it actually adds value. The following
assessments are pertinent in this regard:
Alliance Structure
Having selected a partner, the alliance should be structured so that the
firms risks of giving too much away to the partner are reduced to an
acceptable level.
100
Alliance Management
Many alliances fail because the issues concerning the management of
the alliance have been underestimated. The key issues include;
Reference: Internatio nal Business in the Glo bal Mark etp lace (2000) by
Charles W.L. Hill
ACTIVITY
As further background to this section read p. 402-409, Reading 7.4, How to
make strategic alliances work, in your key textbook De Wit, B & Meyer, R.
101
ACTIVITY
For up-to-date articles and thinking on alliances go to the McKinsey Quarterly
website:
http://www.mckinseyquarterly.com/
Select Alliances under the Function menu on the home page. (Registration to
this site is free, and many articles can be accessed free of charge)
102
High
Cultural risk
M&A
Strategic
alliances
Internet development
Low
Low
High
Financial risk
Cultural risk
M&A
Strategic
alliances
Internet
development
Low
Low
Market-entry risk
High
Figure 4.1: Market failure vs. Cultural risk for expansion options.
103
Mergers
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:
Acquisitions
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.
ACTIVITY
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.
104
ACTIVITY FEEDBACK
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 PwCs existing lucrative contracts.
PwC gained the IBM brand, as well as access to the breadth of IBMs product
and IT skills to facilitate the implementation and delivery of projects following a
consulting engagement.
HSBC/Midland Bank, UK
The acquisition of the UKs 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 SONYs highly profitable VCR manufacturing business and
Columbias film-making business. Columbia is still part of Sonys 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.
105
Other Terminology
There are a number of other terms associated with M&A activity.
Leveraged buy-outs
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.
Joint Ventures
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
Sell-offs are considered the opposite of mergers and acquisitions. The
two major types of sell-offs are spin-offs and divestitures.
ACTIVITY
Can you think of examples of other M&A related transactions, and identify the
possible motivation for the transaction and benefits (if any).
106
ACTIVITY FEEDBACK
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 Europes 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
107
framework of taking however much time and money it took to get things done
right. The new AT&T had to learn how to find out and deliver what its
customers wanted, when its customers wanted it, in competition with others
who sought to fill the same customers needs. Although AT&T had great
technological and personnel strengths upon which to build, the transition
proved far more complex than anyone imagined in 1984.
M&A Activity
Drivers for M&A activity
M&A activity is rife in many industry sectors today, e.g. finance &
banking, oil exploration & production, telecoms, IT services,
pharmaceuticals, car manufacturing. There are push and pull factors
driving M&A activity. Push factors arise from stakeholders who may
have concerns about the companys strategic direction or its
management, 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.
ACTIVITY
From what you have learnt so far, try to identify some of the drivers for M&A
activities. Why do companies pursue external expansion, through mergers and
acquisitions, over internal growth?
ACTIVITY FEEDBACK
Here are some of the drivers. The list, although not exhaustive, does indicate
the principal reasons for external expansion through M&A activities.
108
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. If the two companies merge, the losses may be
deductible from the profitable companys taxable income and hence
lower the combined companys income tax payments.
109
Revaluation
It is not uncommon during merger negotiations or joint venture
planning, for the revaluation of the ownership of shares to occur. The
revaluation arises as a result of new information generated during
negotiations. For example:
1.
2.
110
Here we go again?
Global M&A*, announced deals, $bn
United states
Britain, France
and Germany
Japan
1,750
1,500
1,250
1,000
750
500
250
0
95
96
97
98
Source: Dealogic
99
2000
01
02
03
04**
* By country of target
** To Feb 17th annualised
111
112
Due diligence.
The value creation logic (how is it valued?).
Negotiation of the deal.
The post-acquisition process is about how the integration is managed.
This is considered the most important source of success or failure.
ACTIVITY
With the increase in globalisation, and a push to achieve marketshare quickly in
foreign markets, cross-border M&A activity is on the rise.
What are some of the challenges for cross-border M&A activities. 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, and pose further management
challenges for successful execution and post-merger integration. The
complexities arise in both the pre- and post-acquisition phases.
At the pre-acquisition phase, due diligence and valuation are particularly
complex. Emerging markets, in particular, suffer from the problem of
unreliable marketing and strategic information, and the due diligence may not
be entirely accurate in this respect. Furthermore, local accounting standards
may not be compatible with international standards. Political and nationalistic
attitudes may also make an unbiased assessment difficult.
In the post-acquisition phase, transition management and integration
management are the biggest challenges because of the geographical
distribution.
Despite the compounded problems of cross-border M&A, studies focusing just
on cross-border M&As suggest that the success rate is no worse than
domestic, and, if anything, slightly better. John Kitching (in 1973) looking at
cross-border acquisitions in Europe, found that 25% were straight failures and
25% not worth doing, giving a success rate of 50%. A further study by
McKinsey focusing just on cross-border M&As found a 57% rate of success.
The slightly higher success rate may be simply because most cross-border
acquisitions are horizontal (i.e. in core business) and all studies show that
horizontal acquisitions tend to be more successful than others.
113
Listed below are many of the common reasons for failure in M&A:
1.
heat of the deal, the acquirer may find it all too easy
to bid up the price beyond the limits of reasonable
valuations.
2.
114
3.
4.
5.
VIRTUAL CAMPUS
Microsoft revealed recently that it tried to buy SAP, the German software
giant, in late 2003. If the merger had been successful it would have made
Microsoft a dominant force in the enterprise software market, dealing a blow
to Oracle and even IBM. However, the merger attempt failed.
Research this failed merger attempt (Internet, FT article under Comments &
Analysis on 14 June 2004, company statements, etc).
Now divide yourselves into two groups. Those with last name beginning A-M
should wear the Microsoft hat, and the others the SAP hat. Now carry out the
following on the Virtual Campus:
1.
2.
3.
Both groups: analyse why the merger went wrong (cultural, political,
other issues). Could Microsoft have handled it better.
(This Virtual Campus activity also interlocks with the units on Innovation and Strategic
IT & e-business)
2.
115
not fit with their own company (i.e. too big, too small,
availability.)
3.
4.
116
117
118
Questions:
1.
(i) Which are the relational actors relevant to the technical and
commercial success of the Stolen Vehicle Recovery System?
(ii)Which relational objectives, power positions and arrangements
exist between LoJack corporation and the actors?
2.
3.
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?
MicroLogic. When the original founder of LoJack, Bill Reagan, met for
the first time with Sheldon Apsell, founder and president of
MicroLogic, it was still a small product development firm, which
specialised in developing electronics products for others. Reagan
and Apsell immediately hit it off. With only a hand-shake to
119
120
121
122
For LoJack, things developed also in a different way. 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, the development of a new generation LoJack system was necessary to
reduce the cost of the hardware and improve efficiency of the installation
process. The success of this third generation system would allow LoJack to
enter the highly competitive market for stolen vehicle recovery. 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. 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. Alternatively, LoJack was
also exploring cellular and satellite technologies to enhance its opportunities in
this market. But all in all, its competitive edge was no longer the same as it had
been when the first LoJack system was introduced to the market. LoJack
management, therefore, thought that there might be even greater
opportunities in leveraging LoJacks connections with law enforcement agencies,
reputation, brand awareness and distribution muscle. All this could be leveraged in
the mobile asset management-market, starting with construction equipment.
This could be done in a joint venture with MicroLogic, 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, it can be concluded that its competitive advantage had changed,
broadening its commercial capabilities.
Feedback on Question 3:
Basically, LoJack has three major issues that it should contemplate:
1.
2.
Will the new alliance leverage to the utmost LoJackss strengths or is its
marketing capability only of limited use in this new marketplace? Also,
considering MicroLogics changed strategy to develop and market its
own products, is the compatibility in objectives not only temporary
and predominantly focused on obtaining the LoJacks venture capital?
3.
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, by selling equipment at
break-even or a very small profit, and long term revenues and the
123
majority of profits from monthly fees plus individual charges for special
services).
124
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. Citigroups 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. Weills 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 Americas 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 Noahs Ark approach to top
management- everything in twos. As well as Messrs Weill and Reed, half the
new boards 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. Weills 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
125
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 Citis
corporate relationship bank. Integration had been half-hearted: SSBs 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. Weills 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 Citis biggest shareholder, Prince Alwaleed bin Talal of Saudi
Arabia, fretted in public about the relationship between the firms 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
wouldnt want to do this, so what do I care about what John wants?
The reality was that Sandys children were increasingly winning the top jobs,
and Johns were quitting in droves. Citigroup was rapidly becoming Mr. Weills
creature. One top-notch Travelers person did leave, however: Heidi Miller,
Citis 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
126
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
1997
1999
Blurred vision?
127
Travelers annuities were selling in the Citibank branch network, and now
generate revenues of $750m a year.
Travelers has now pre-underwritten all of Citis 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 lions 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 wed 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.
MERGER
350
Citicorp
300
Citigroup
250
200
150
100
Travellers
50
1996
97
98
99
2000
Adding to the frustration has been the groups muddled Internet strategy. Mr.
Reed, who took sole charge of it in July 1999, believed that Citis Internet
potential would best be fulfilled by developing from scratch an entirely
self-contained, state-of-the-art online retail financial-services provider. More
128
than $500m was spent developing e-Citi a classic example of the big-bang
innovation strategy pursued by Mr. Reed decades earlier when he installed
thousands of ATMs, in Citi branches, and transformed the way people used
their bank.
E-Citi attracted few customers, and was resented by Citis established
businesses. Since Mr. Reeds retirement, it has been downgraded to a sort of
incubator, and 1400 of its employees have been despatched to other Citigroup
brand businesses. Now, ownership of Internet strategy is left with the top
executives in individual businesses. This caution may be a mistake. Asked in
June whether Mr. Weill could take Citi into the Internet age, Mr. Reed said,
This isnt Sandys deal. He is not going to personally design the Internet
company that is going to do this. Mr. Reeds boldness might eventually have
brought rewards as did his huge spending on ATMs, which initially meant
huge losses.
Despite the infighting, strategic mishaps and delays in integration, Citigroup has
prospered, with both profits and the share price soaring. Mr. Weill has, as
usual, cut costs and made under-managed assets sweat. New managers from
Travelers have instilled a more aggressive sales culture in Citibank branches.
But the Travelers people who now lead Citibank lack experience in overseas
markets, where the group expects its main growth. Citibanks institutional
memory, which gave some protection from bad lending decisions, has gone. So
has Mr. Reeds vision. Mr. Weill is skilled at fixing and then expanding
under-managed companies. But he has yet to show that he can fix and expand
an already successful global giant.
Questions:
1.
What are the problems that have become apparent after the merger?
2.
3.
How do you think the company could have overcome these problems?
4.
Summary
In this unit we have considered the options available for global
expansion; strategic alliances and mergers and acquisitions (M&A).
Firstly we considered the role of strategic alliances, and the paradox of
co-operation and competition. We noted the advantages arising from
129
pooled resources, know-how and shared risk, but also noted that there
can be conflicting goals and there is the potential loss of know-how.
We then considered mergers and acquisitions, and other M&A related
transactions. We saw how M&A can give ready-access to markets,
know-how and management capability. We looked at some of the drivers
for M&A activity. Noting the high rate of failure of M&A, we identified
some of the common pitfalls of M&A, and finally concluded with the
McKinsey five-step program for successful mergers and acquisitions.
REVIEW ACTIVITY
We have noted that one of the main pitfalls in M&A is the integration phase.
When a company acquires another, what is the best recipe for assimilation?
How can the right balance be struck between the need for
organisational autonomy vs. strategic interdependence.
Prepare your responses to the above, and then read p.334 (Reading 6.3) in the
key textbook De Wit, B & Meyer, R.
2.
*Highly recommended
130
Unit 5
Value Management
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The term value can bring to mind different things. It can mean one thing
in the public sector and have a different focus in the private sector.
Economists think of value in quantitative terms, in a strict monetary
context. Shareholders think of future potential. Increasingly, and
particularly in the knowledge-based economy, there is an emphasis on
intangible and intellectual capital assets.
Whichever business context you operate in, value should be determined
by your key stakeholders. In commercial organisations, the key
stakeholders are the companys shareholders. Increasingly executives
and managers are overhauling their understanding of shareholder
value. There is now the recognition that what was thought to be true
about valuation is, in fact, only situationally true. Traditional
approaches can, in fact, be misleading in certain contexts particularly
in the knowledge-based economy, in the area of new and emerging
technologies.
In this unit we shall look at the concept of value from a stakeholders
perspective. 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.
Two case studies are also presented to highlight the issues.
131
ACTIVITY
Consider the definition of Value in the context of an organisation. Draw up a
list of the different aspects of the word value, e.g. value-added.
ACTIVITY FEEDBACK
Your list may have included some of the following:
132
Value Chain.
Value System.
Value Cycles.
Value Management.
Stakeholder Value.
We shall look at some of these concepts in more detail in this unit.
Stakeholder Value
Whether in the private sector or public sector, value should be judged
by the organisations key stakeholders.
In this unit we shall focus our attention mainly on commercial
organisations. However we shall now briefly look at some of the
differences between the private and public sectors in relation to value.
Public Sector
Strategic management is, of course, just as important to the public sector
as it is to commercial entities. For example, the notion of competition for
a public organisation is usually concerned with competition for scarce
resource inputs, typically in a political arena. However, the emphasis on
value concepts can be different in the public and private sectors. The
overarching need is for public bodies (e.g. central government, local
government, health service organisations) to demonstrate Value for
Money in outputs. Many of the developments in management practices
and theories in the public sector (e.g. changes to internal markets,
performance indicators, competitive tendering) have been used to
attempt to introduce competition to encourage improvements in value
for money.
Overall, the role of ideology in strategy development in the public
sector is probably greater than that in a commercial organisation. This is
because the type, range and position power of Stakeholders interested
in an organisations strategic choice is greater. Therefore, the
acceptability to stakeholders of strategic choice is probably of greater
significance in the public sector than in the commercial sector.
The measurement of value to stakeholders in the public sector is
difficult to quantify, because it is essentially a perception by the
stakeholder of the value for money in the service they have received.
133
Private Sector
Stakeholder value is a critical factor for strategy and management in the
private sector.
Theoretically, all managerial actions should be carried out only when
they can add value to the company. This introduces the concept of the
Value Chain in an organisation, i.e. the internal linkages that exist
within the boundaries of an organisation. In addition to this, to fully
understand the concept of value, linkages to the entire supply chain,
upstream with suppliers and downstream with distributors and
customers, must be taken into account. This overall picture of value to
an organisation can be termed the Value System.
Clearly, the value system can be different from company to company
depending upon their strategic choice. Value chains and systems can
establish significant competitive advantage. For example, two
competing firms with equivalent internal value chains can be
differentiated in terms of value by better suppliers and/or distributors.
The value system is therefore better for that company. Some
organisations, particularly those with several business units, have very
complex value chains and systems making strategic analysis difficult
and time consuming.
The key work in this area of strategy was carried out by Michael E Porter
in 1985 and 1990.
Key Stakeholders
It could be argued that the key stakeholders to any commercial
organisation are the shareholders (particularly where the company is
publicly owned). If shareholders become disenchanted with a company
and sell their shares in sufficient quantities, the law of supply and
demand dictates that the share price will fall. 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.
For this reason, companies try to avoid shareholder dissatisfaction and
regard shareholders as key stakeholders. This is logical as the
shareholders own the company and employees have traditionally
answered to the owners. All employees have a fiduciary duty to
preserve and build upon the owners investment in the firm. This raises
the issues of Value Management how can a company manage itself
(strategically) to maximise shareholder value? In addition to that, how
can shareholder value be measured?
134
Value Management
How do companies adopt strategies to deliver shareholder value. What
is value? Business models and definitions of value that worked well
until the early 1990s, are now being challenged. Why is sensitivity to
stock price now a critical lever for managing the future?
There is an increasing recognition that the market, over time, represents
a brutally honest evaluator of performance. This has led to the
recognition that management, and indeed employees at large, need to
view their company from the outside in. They need to act like long-term
shareholders themselves, and feel the pressure from the marketplace in
order to deploy assets and adopt strategies wisely. To achieve this,
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). Value chains and value cycles are
pertinent in this discussion. Increasingly companies are adopting a
value cycle approach, as opposed to the traditional value chain
approach. A value chain is seen to deliver value to the customer,
whereas a value cycle approach views the process as an interaction with
the customers. Many forward-looking companies view their key
customers as critical partners in setting business direction.
ACTIVITY
As background to the next sections, learn about the shareholder value
approach by reading, Shareholder value and corporate purpose, Reading 11.1,
p. 610-615 in your key text, De Wit, B & Meyer, R.
Creation of Value
Value is added to a firm when profits increase, operational or financial
risks are reduced or when greater efficiencies are produced. Decisions
which add value to a company, add value to the shareholders either in
the form of dividends, value of the share holdings or both.
Various ratios and tools have been introduced into business for
analysing financial statements, e.g. Return on Capital Employed
(ROCE). But any measure of shareholder value must include the
following considerations:
Cash flow.
135
136
What is EVA
EVA is a measure of profit, but not the accounting profit seen in a
corporate profit and loss account. It is profit as economists define it.
Both are measured net of operating expenses but they differ in the
treatment of capital costs. While accountants (in P&Ls) recognise only
out-of-pocket costs, such as the interest paid to bankers, EVA recognises
all capital costs, including the o p p o rtunity cost of shareholder funds.
The value of any business must equal its net assets (the sum of fixed
assets, cash and net working capital) plus the present (in other words,
discounted) value of future EVAs. Therefore, as stock market
expectations of corporate EVA increase, so too do share prices.
Companies can therefore use EVA targets to motivate managers to
deliver the financial results the stock market wants. 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. 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.
137
138
139
ACTIVITY
Value innovation is said to be the essence of strategy in the knowledge
economy. Learn more about this by reading Strategy, value innovation and the
knowledge economy in your key textbook, De Wit, B & Meyer, R.
General
value-management
tools
Industry specific
factors
Company specific
factors
(adapt to industry)
Valuation models
Cost of capital calculations
Portfolio management
Controlling tools
Value system/corporate
philosophy and policy
Strategy
Organisation/structures
Product cycles
Production processes
Success factors
Resources
Company specific
strategy
Industry-specific success
factors
Specific tools
Tailored implementation
140
Step 5:
Inform stakeholders
and develop investor
relations
Step 4:
Adapt
compensation
systems
Step 1:
Identify value
performance
and value drivers
Increase
shareholder
value
Step 2:
Implement
value creation
programmes
Step 3:
Extend
management and
control systems
141
SBU 1
"Stars"
Deviation
from riskadjusted
market
returns
SBU 4
SBU 7
Sell
Optimise or discontinue
SBU 3
SBU 6
Low
"Dogs"
SBU 2
SBU 8
High
Figure 5.3. Value portfolio chart, Ref: Stefan Botzel & Andreas Schwilling, Managing for Value
1999.
The Stars in the value portfolio are those businesses that create
shareholder value by;
142
Let us now deal with each window of the value portfolio in turn;
Stars that fit the corporate vision:
143
Increase Revenues.
Increase Margins.
Optimise Investments.
Minimise the cost of capital through Financial
Engineering.
144
Stocks.
Stock options.
Convertible bonds.
Artificial Participation Models:
Bonuses.
Combined forms.
The variety of value based incentive schemes possible means that a
scheme can be devised for any level of management it doesnt have to
be the same across the whole company.
145
EVA bonus plans dont just motivate managers to think about current
EVA. If they did, managers would focus entirely on short-term
performance at the expense of the future. Value-creating investments
might be avoided because their immediate effects on EVA are negative.
The solution is to give managers a direct economic stake in future EVA,
not just the current period. The figure above shows how such an
approach can work.
Remember that the value of the company (that is, the value of debt and
equity) equals net assets plus the present value of future EVAs. This
means that the market capitalisation of a companys shares is based on
expectations of future EVA performance. Share price increases when
these expectations are exceeded.
This insight yields the first principle of EVA-linked compensation: the
key performance measure is not EVA itself, but excess improvement. To
derive this measure, companies must first set targets based on market
expectations. Then, a target bonus, usually stated as a percentage of
salary, is paid if the target level of EVA improvement derived from the
companys share price is earned.
Note, however, that the payout is not capped. This is the second basic
principle of EVA-linked compensation. If manager and shareholder
interests are to be aligned, management pay should more closely
resemble payouts received by owners.
As a result, there is no ceiling on the EVA bonus, but there is also a
downside. 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). This bonus is credited to a bonus bank, and the
bonus bank balance, rather than the current year bonus earned,
determines the payout.
Typically, the payout rule for the bonus bank is the full bonus bank
balance (if positive), up to the target bonus, plus one-third of the bank
balance in excess of the target bonus. When the bonus bank is negative
(which is possible if under performance is great enough), no bonus is
paid. The EVA interval determines the sensitivity of the bonus earned to
excess EVA improvement, and is chosen by senior managers based on
the degree of upside potential and downside risk they wish to inject into
the plan.
The bonus bank component adds a critical dimension to the scheme by
extending managerial planning horizons beyond the short term. The
bank allows for a negative bonus, wiping out at least a portion of EVA
bonuses earned in previous years. 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.
Otherwise, part of the bonuses they earn in the current year might be
forfeited. In other words, the bonus bank provides medium-term
incentives for value creation, in addition to the short-term incentives
146
from annual payouts. Stock options add to the EVA bonus plan by
providing long-term incentives.
147
Is EVA Appropriate?
All companies can benefit from the shareholder value perspective and
the value-creating incentives offered by EVA, but some are more likely
to benefit than others.
An important part of EVA is that it can provide value creation incentives
for divisional managers, not just for top executives. This suggests that
companies with autonomous business units benefit more than
companies that operate as one large unit. Also, matrix organisations
tend to derive fewer benefits because of the difficulty of establishing
accountability.
Companies with substantial shared resources are less likely to benefit
from EVA. For example, if common manufacturing facilities or sales
staff serve multiple business units, and if these units are not forced to
buy this capacity, investment accountability, EVA measurement and
management incentives can be undermined.
Another difference between successful and unsuccessful users is that
the former rely on strong managerial wealth incentives tied to business
148
Summary
In this unit we have looked at the concept of value, what it means to
different stakeholders, and how our ideas of value and its measurement
are changing.
We have looked at EVA as a measure of value, and have seen how EVA
is influencing the management philosophy of value-based companies.
We have also looked at the components of a value-driven approach.
We have noted that EVA is no panacea, or substitute for sound
corporate strategies. 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
have looked at two case studies where EVA has made a significant
impact.
REVIEW ACTIVITY
In the late 1990s high-tech stocks soared in value, and there seemed to be an
unsustainable wave of dot.com mania. The dot.coms invaded every sector of
commerce; e-business seemed be to overturning established relationships, and
attacking long-established price points. The year 2000, however, saw the
collapse of many dot.com shares. What went wrong?
1.
2.
Now identify a survivor from the dot.com period. Spend some time
researching the company. Find out about its strategy, during the
dot.com period specifically with regard to e-business. Comment on
its market valuation during the dot.com period and on what premise
these valuations were made. Identify the hallmarks of their success
150
success, easy life. A real business is serious work and must have a realistic
business plan for break-even and profitability thereafter; profitability in the
not-too-distant future. In addition to future potential (and by future potential is
meant realistic future EVA) profits and cash flow do matter.
2.
3.
Ref 15
*Highly recommended
151
Unit 6
Introduction
Globalisation has heightened the awareness of social responsibility.
There has been much debate about its adverse impact on social, political
and environmental issues. Furthermore, recent high-profile corporate
scandals, such as Enron, Worldcom and Parmalat, have led to an
increased focus on corporate governance and the tightening of
accounting procedures.
What is clear is that companies can no longer pay lip-service to good
corporate governance and business ethics. Profitability cannot be the
sole corporate driver. Undoubtedly, there is a paradox between
profitability and stakeholder responsibility. See Figure 6.1. Profitability
will always be driven by the shareholder view, and guided by value
management principles. But stakeholder responsibility must also be a
part of organisational purpose. Stakeholder responsibility is not just
responsibility to the shareholders, but to the stakeholders (including
employees, suppliers, customers and the community) at large.
Stakeholder responsibility must be guided by good corporate
governance and business ethics.
153
Profitability
Organisational purpose
Responsibility
Shareholder value
perspective
Shareholder value
perspective
Value management
principles
Corporate governance
and ethics
Corporate Governance
The term corporate governance has been used in a variety of contexts,
particularly in relation to the boards of companies listed on a stock
exchange. Governance is at the heart of the role that all boards of
directors play. The range of issues is varied, e.g. company performance,
individual performance, role of directors, roles of shareholders.
Corporate governance came to the fore in the early 1980s in the United
States during extensive corporate take-over activity. Perceiving little
support from their institutional shareholders, numerous company
boards began to introduce protective practices to ward off undesirable
take-over bids. These measures were seen by some shareholders,
especially public pension funds, as acting against their best interest.
Accordingly, shareholders began to take a greater interest in their
investments. Out of this, corporate governance was born.
154
ACTIVITY
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.
155
1.
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.
2.
3.
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
Venezuela
26
Columbia
Indonesia
Thailand
Malaysia
24
Brazil
Korea
Italy
22
Mexico
Argentina
Taiwan
20
Chile
Japan
Germany
France
Spain
18
Switzerland
US
UK
0
Latin America
Asia
Continental
Europe
Anglo-Saxon
Source: McKinsey
Figure 6.2: Average premiums investors would be willing to pay for a well-governed
company
156
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:
157
158
ACTIVITY
Read the latest version of the Combined Code on the following website:
http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf
159
ACTIVITY
Read the Summary and Recommendations section of the Higgs Review from
the following website:
http://www.dti.gov.uk/cld/non_exec_review/pdfs/higgsreport.pdf
160
161
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, which includes ensuring the financial viability of the
business. The process and structure define the division of
power and establish mechanisms for achieving
accountability among shareholders, the board of directors
and management. The direction and management of the
business should take in account the impact on other
stakeholders such as employees, customers, suppliers and
communities.
Where w ere the d irecto rs? To ro nto Sto ck Exchange (1994)
This definition retains Cadburys systems focus, but suggests that the
structures and processes chosen by directors must take into account
parties other than shareholders.
162
163
164
management should be able to exert more effective oversight since they are
disinterested parties.
Able, perhaps, but not necessarily willing. Independent board members are
busy people; they are chosen because of their name recognition, not because
they have either the time or the inclination to discipline management, or the
technical knowledge to perform adequate audits. And their very independence
may be compromised if their seat on the board depends on continuing
management support, as it often does.
Enrons board was almost entirely independent, and composed largely of
highly skilled and experienced corporate managers. It included chair Robert
Jaedicke, a professor of accounting and dean of Stanford Business School, and
Wendy Gramm, former Chair of the Commodity Futures Trading
Commission. Yet they and their colleagues seem to have been asleep at the
switch.
Evidence is mixed on the question of whether the independence of directors
improves corporate governance. Recent studies suggest that board
independence may matter, but that effective independence (measured by the
boards ability to restrain executive compensation) is influenced by a variety of
other board attributes, including the size of the board (smaller is better), the
number of boards on which board members serve (fewer is better), the age of
board members (younger is better), and whether the independent member
was chosen by the chief executive (which reduces effectiveness).
How can we establish a process for selecting and rewarding board members
that will place stockholders interests above those of managers? Here,
economics teaches us that incentives are as important as skills. 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. There are three approaches to ensuring such a process
of board selection.
1. Concentration of ownership
First, if board members and managers both own sufficiently large amounts of
stock, the conflict of interest between managers and stockholders may be
largely overcome by the direct incentives of board members to protect their
own wealth. The positions of board members with sufficiently large
stockholdings are secure, and they have strong incentives to discipline
managers to pursue value maximisation.
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. In both the US and UK, where legal protections are relatively
strong, the median insider ownership share of the largest 150 corporations is 1
per cent. In France and Germany, where legal protections of stockholders are
weak, the proportions are 55 per cent and 61 per cent.
During the first industrial revolution of the early nineteenth century, when the
scale of manufacturing production was relatively small, ownership and
165
166
Scholars have argued that the relationships between German universal banks
and client companies, and the discipline over management provided by
bankers, permitted industries to access external finance easily and thus grow
rapidly, especially in new product areas that required large minimum efficient
scale of operation (such as electricity generation). Although postwar Germany
has been known for its reliance on debt as the main source of external finance,
that was not true of pre-First World War Germany; in fact, equity finance was
much larger a proportion of industrial funding there than in the US prior to the
First World War.
In the US, banking regulations limited the geographic scope of banks, and
therefore also the scale of banks. Those regulations constrained the role of
banks in financing industrial growth by large-scale corporations during the
second industrial revolution. As the scale and geographic scope of industry
increased, industry outgrew banks, and bankers turned mainly to commercial
finance. Commercial banks were also constrained from participating in
underwriting, not by law prior to 1933, but rather by their small size and
regional isolation, which made it hard for them to operate German-style
networks for the sale of shares or the aggregation of voting rights.
Thus, US-style finance capitalism typified by J.P. Morgans famous network
of partners who held seats on various boards of directors was a very limited
phenomenon reserved for the largest, established companies, which usually
became Morgan companies as the result of consolidations of mature
companies, rather than through public underwriting of equity to finance new
investments. Morgans role was typically as a reorganiser or a bond, not a
stock, underwriter, and its authority came from the network of influential
stockholders that relied on its advice and corporate governance skills.
Research by Bradford DeLong and others argues that corporate chief
executives who wore the Morgan collar wore it proudly and to great effect.
They were better able to finance their growth and to weather financial storms
than their competitors.
Despite its benefits, and even though its role in the economy was quite limited,
J.P. Morgans brand of finance capitalism was too much for populist US
sentiment against the concentration of power. Successive acts of legislation
constrained investment bankers abilities to establish control through
networks of skilled partners acting as disciplinarian board directors, and forced
the separation of commercial and investment banking.
The role of intermediaries in controlling corporate boards took a third form in
postwar Japan, as part of the keiretsu system, in which a company surrounds
itself with a permanent structure of subsidiaries, banks and suppliers. Main
banks of keiretsus controlled blocks of a client companys shares, both directly
and through other companies in which they owned interests, and acted as an
effective check on managers. By 1990, many US academics were writing paeans
to the virtue of Japanese corporate governance, praising the high level of
managerial turnover and the fact that bank-sponsored corporate governance
helped companies economise on the costs of external finance.
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
168
oversee the restructuring of those enterprises. Each NIF was given a lead role
(and a 33 per cent stake) in approximately 30 companies. Shares in NIFs were
allocated to the public and traded. Although the privatisation process was
bumpy in Poland, as elsewhere, observers tend to regard its successes as partly
reflecting the positive role of NIF managers in rationalising the restructuring
process.
3. Hostile takeovers
A third approach to disciplining directors and managers is the threat of a
hostile takeover. In the presence of a credible threat, managers know that if
managerial rent seeking gets sufficiently large, it will pay raiders to buy up
shares to unseat them. That, in turn, encourages better corporate governance;
and there is evidence that the hostile takeovers of the 1980s did, in fact,
improve governance in target companies. The social gains from these
takeovers were even larger, as many companies were encouraged to avoid
takeovers by reducing managerial rent extraction.
But recently enacted legal obstacles to takeovers have protected managers and
captive boards of directors from that external discipline. Takeovers were
never easy, even during the 1980s. Acquirers had long been required by law to
announce their intention of purchasing the company through tender offers,
thereby reducing the gain to acquirers of improving corporate efficiency, and
thus discouraging some efficient takeovers.
In the 1980s, in response to many successful takeovers, incumbent managers
developed poison pills (corporate charter clauses that dilute the stock of
hostile acquirers), which have succeeded in discouraging hostile takeovers.
Courts in the US have upheld these techniques, while various states
stakeholder statutes have also served to discourage takeovers. In effect, the
broadening of corporate goals makes it impossible to hold managers
accountable to stockholders, or to any other constituency, for that matter.
The alternative means to wrest control from incumbent managers a proxy
fight is no more attractive to would-be acquirers, owing to the many
obstacles that boards can use to reduce the chance of success. The most
popular of these is the staggering of board terms, 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. Would-be acquirers have to be willing to fight many
proxy battles over many years before being able to take control of the target.
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. The
central problem limiting the effectiveness of boards, and of corporate
governance more generally, is the lack of political will to place the interests of
stockholders first when considering the rules under which corporate
governance occurs.
169
QUESTION:
1.
How do you think the Enron scandal (and indeed Worldcom and
Parmalat) could have been avoided?
2.
3.
4.
5.
Some of the above measures (and many more) are receiving attention by the
Securities and Exchange Commisison, New York Stock Exchange, NASDAQ,
Public Company Accounting Oversight Board in the US. Some rules have
already been enacted and others are at the proposal/discussion stage. Details
may be found in the paper The Post Enron Corporate Governance
Environment: Where are We Now? found on:
http://www.ffhsj.com/cmemos/031017_post_enron.pdf
170
Other articles that you will find helpful in this area are:
Benston, G.J. and Hartgraves, A.L. (2002) Enron: what happened and what we
can learn from it, Journal of Accounting and Public Policy 21, 105-27.
Himmelberg, C., Hubbard, R.G. and Love, I. (2002) Investor Protection,
Ownership, and the Cost of Capital, World Bank Finance, Development
Research Group Working Paper, 2834, April.
Edwards, F. and Hubbard, R.G. (2000) The growth of institutional stock
ownership: a promise unfulfilled, Journal of Applied Corporate Finance 13,
92-104.
Baums, T. and Scott, K. (2002) Taking shareholder protection seriously:
corporate governance in the United States and Germany, working paper,
Stanford Law School, October.
Business Ethics
What is Business Ethics?
Ethics involves learning what is right or wrong, and then doing the right
thing. However the right thing is not straightforward. Most ethical
dilemmas in the workplace do not comprise a simple set of issues,
decisions and choices.
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. Ultimately its up to the individual. Many philosophers
consider ethics to be the science of conduct. Ethics includes the
fundamental ground rules by which people live their lives.
Many ethicists consider emerging ethical beliefs to be related to future
legal matters, i.e. what is an ethical guideline today is often later
translated to a law, regulation or rule. Values that guide how we ought
to behave are considered moral values, e.g. respect, honesty, fairness,
responsibility, etc. Statements around how these values are applied are
sometimes called moral or ethical principles.
Business ethics has come to mean various things to various people.
Generally, its coming to know what is right or wrong in the workplace,
and doing whats right. This is in regard to effects of products/services
and in relationships with stakeholders.
Business ethics are critical during times of fundamental change. This is
because there may be no clear moral compass to guide leaders through
171
Managerial mischief.
2.
Moral mazes
172
173
Nokias Make a Connection campaign, launched this year, is about to make its
presence felt in some UK schools. The Finnish telecommunications company
has entered a global partnership with the International Youth Foundation, to
provide teaching packages to children with learning difficulties, and to offer
volunteers from its own workforce.
The campaign is operating in South Africa, China, Mexico, Brazil and Germany,
as well as in the UK. It is tailored to local needs, with social exclusion and
education the predominant themes.
Projects range from internet-related newspaper schemes among aspiring
young journalists in China to mentoring programmes in East Germany.
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.
Involvement could range from giving time to organise fundraising events, to
having our engineers help set up websites and CD-Roms, says David
Stoneham, Nokia UKs senior communications manager.
Nokia plans to spend 7.5m on the campaign during the next three years and
says it should help up to 1m children and young people. The campaign will not
feature the Nokia brand or free mobile phones, the company insists. 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.
Mr Stoneham puts a different business case for Nokias campaign: We hope
people will see this as a sincere community issue. Sustainable global success
demands respect for our stakeholders our staff, current and potential, want
to see good citizenship and our investors and customers want us to behave
ethically, he says.
The US still leads the way in philanthropy, with foundations holding more than
$330bn (224bn) in assets and contributing more than $20bn annually to
educational, humanitarian and cultural organisations.
Traditionally, Europe has lagged behind the US. 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.
This may be changing, however, as the European Commission encourages
business to form social partnerships and the UK government implements tax
changes to increase donations.
The notion of corporate citizenship has developed during the past decade in
both the US and Europe as more companies address social accountability,
social auditing, social investment, corporate governance and business ethics.
According to the Institute of Directors, the potential for enhancing corporate
reputation and, in turn, business competitiveness is being recognised by
some of the largest UK companies.
174
Such an approach is a far cry from that of the corporate citizens of the late 19th
and early 20th centuries, when the personal considerations of the donor,
rather than a cost-benefit analysis, were the main impetus for giving.
According to Jamie Camplin, 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.
A survey conducted towards the end of last year by Environics International,
the Toronto-based consultancy group, in co-operation with the Prince of
Wales Business Leaders Forum, highlighted the fact that business is no longer
only about personal aggrandisement or simply making profits.
It found that six out of 10 consumers form impressions of a company based on
broader responsibilities such as labour practices, business ethics, responsibility
to society at large and environmental effects.
Doug Miller, managing director of Environics, 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, with
people expecting to improve the quality of their lives and believing they can get
it all.
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.
I visit 75 boardrooms a year and I can tell you, the members of the board are
living in fear of getting their corporate reputations blown away in two months
on the Internet, he says.
While Nokia has encountered no negative publicity from its socially
responsible efforts, the same cannot be said for Shell, a company that has
received more than one black eye from the media. Last October Anita
Roddick, founder of the Body Shop, attacked Shells ethical advertising
campaign. Ms Roddick publicly denounced the vast gap between the
companys humane image and the reality of human rights violations in Nigeria.
For Shell, still smarting from the adverse publicity of the 1995 Brent Spar
fiasco, 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,
Tim Hollins, head of group social investment, wrote: The challenge for the
21st Century Company is to bring all the developments in corporate
citizenship together . . . into a coherent framework of practice that makes
good business sense as well as benefiting society.
In fairness, Shell had committed itself in its Business Principles to sustainable
development well before Ms Roddicks outburst. It had reorganised and
changed reporting processes in 1997 so that environmental and social
achievements sat alongside financial data in the annual report.
175
The group has chosen to continue its high-profile campaign and to risk attacks
by organised pressure groups. Last month, it circulated the latest information
about the activities of the Shell Foundation, a UK-registered charity established
in June with the aim of supporting efforts worldwide to advance the goal of
sustainable development.
Yet for aid agencies such as the World Development Movement, 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.
Barry Coates, director of WDM, feels too many companies fall outside the
new ethical agenda and stand to take advantage of unregulated markets.
If corporate social responsibility is to prove sustainable in the long term,
governments must meet their responsibilities and regulate to provide an
ethical framework, he says.
Save the Children recently outlined the measures a socially responsible
company and its suppliers could take to tackle the issue of child labour, which
caused an outcry in the 1990s and dented Nikes reputation.
The charity recommends in a new report that social responsibility criteria
should be incorporated into management processes and procedures,
specifically into job competences and performance assessments.
But a study last year of 78 FTSE 350 companies and non-quoted companies of
equivalent size, conducted by Arthur Andersen and the London Business
School, 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.
According to Mr Miller, 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.
Nokias 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.
176
177
Ever since the early 19th century in England, industrial development started
with large scale textile factories. Workers there would stay for two to three
years and then either return to the countryside or graduate on to higher
value added, more sophisticated factories such as household goods
production, followed by machinery assembly and ultimately followed by
precision machining for high tech goods. This pattern remained remarkably
unchanged over almost two centuries: throughout all times and places of
industrial development, textile factories have served the critical function of
breaking in the poor, illiterate and non-urbanised farm surplus workers into
the industrial age. The alternative would usually be starvation in the
countryside. And ever since Charles Dickinson and Emile Zola, 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.
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. But Nike had already become the lightning
rod of a fervent labour practices movement and kept on being pilloried for
being an imperialist profiteer. With the campaigns beginning to have an impact
on Nike, Nike became one of the founding members of the Apparel Industry
Partnership launched by President Clinton, encompassing several textile
companies, unions and humanitarian NGOs. In long drawn negotiations the
ALP attempted to establish industry-wide accountable minimum standards for
supplier factory conditions.
Eventually the differences proved too far to bridge between the members. The
group split into a Fair Labour Association, carried by the textile companies,
espousing a certain set of minimum conditions, and the student-led, union
supported Workers Rights Consortium, who wanted measures to be a lot
more stringent and better controlled. The key stick that the WRC could wield
was to convince universities to purchase their $2.5 billion of sports apparel
(2% of the US textile market) for their varsity teams only from WRC approved
vendors. If WRC was successful it could harm profits at the textile companies,
including Nike quite seriously, because production costs would probably rise
significantly.
In April 2000, a committee comprised of students, professors and
administration of the University of Oregon, voted that UO should join the
WRC for one year, under the condition that WRC would give companies a
voice in its operations. It had been a very difficult decision for the university,
because Phil Knight was alumni of UG and had been a generous benefactor of
his alma mater. He had given more than $ 50 million to the school, and was
about to donate his largest contribution yet for renovating the football
stadium. After the decision of UO, Knight broke off all contact with the
university saying the bonds of trust have been shredded. The university had
lost a major source of discretionary income!
Points to Highlight
(extracted from Teaching Note 22, Nike and the University of Oregon, Peer Ederer
and Jaco Lok)
178
Questions:
1.
Identify the four main protagonists. What are the financial interests of
their owners and/or sponsors?
2.
3.
What seems to be the core problem behind the fact that 500,000
human individuals are working under such poor conditions, even as
their input to the overall value of the final product is only 4%?
Wouldnt just a little more to them, say 5% or 6% do tremendous
good to them, while being barely noticeable to the final consumer?
4.
5.
With 45% global market share, is there an option for Nike to recreate
the industry rules for a better deal to all stakeholders? What might
that option look like?
179
180
181
Feedback on Question 2:
Nikes own employees. The case does not analyse the situation
from the perspective of Nikes own employees in the U.S., 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. Imagine the number of times Nike employees will
have been forced to justify their companys actions by their
friends and families during dinner parties and social events at a
time when Nikes 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 companys work practices in Asia. Only those
who fully believed in minimising the cost price of Nikes
products in the face of Nikes aggressive competitors could be
expected not to buckle under the social pressures in their
private lives.
182
South Korean and Taiwanese suppliers. When Nike moved from one
location to another, often its Taiwanese and South Korean factory
operators followed, bringing their management expertise with them.
Subcontractors, of course, generally had no choice but to follow
Nike, because they were highly dependent on Nike financially. 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. Of course, it was in the Taiwanese and
South Korean owners interests to maximise the financial returns
from their businesses by deploying low cost, mass production
systems using cheap, manual labour. Ensuring consistent, high output
quality was of crucial importance in maintaining the supply
relationship with Nike. Because of the intense regional competition
between different suppliers with low barriers to entry, suppliers
could not be expected to improve labour practices on their own
accord, if that meant increasing their cost price and thus risking
their relationship with Nike. Both local governments and local
employees welcomed their presence as an important source of jobs.
183
184
185
retailers and/or its suppliers pay, or if the customer is willing to pay more for
Nike products.
Nike could use its marketing muscle and expertise to try to convince
customers to pay more for non sweatshop sportswear. However, it is
questionable whether the Nike branding people would want to explicitly
associate their brand with the way its products are produced. If Nike
nevertheless were to succeed in convincing its customers to pay more without
harming its cool brand image, major competitors may not try to undercut the
new higher prices since they could also stand to gain from charging higher
prices. Of course, Nike cant formally agree with its competitors to raise prices
because that would amount to illegal price collusion. In fact, depending on the
nature and intensity of price competition in the industry, there is no guarantee
that competitors will follow suit, and they may instead choose to capture
market share by selling socially responsible products at the old prices. In this
case, of course, both Nikes communications campaign and higher
subcontractor prices would have to be paid for by its shareholders. Therefore,
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, can the situation potentially be improved for all
stakeholders.
Unless, of course, shareholders themselves become more actively involved in
the way their funds are invested. 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, then it
would also allow companies like Nike to improve their practices without
running the risk of financial harm. Of course, no matter how dominant Nike
may be in terms of market share in its own industry, it is in no position
whatsoever to convince individual investors across the country to demand and
pay for more socially responsible investments.
Summary
In this unit we have considered the importance of corporate
governance, and have looked at recent developments in the UK in this
area.
We have also considered business ethics; particularly relating to
managerial mischief and moral mazes. We have seen the importance of
prioritising moral values and aligning behaviour with those values. In
addition to complying with legal requirements there are business
benefits arising from adopting strong business ethics. We have looked
at these benefits, and at what characterises a highly ethical organisation.
186
REVIEW ACTIVITY
Consider your own organisation (private or public sector). How do you rate
your organisations 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.
Now consider the following:
1.
2.
3.
4.
Where your answers have been negative, what changes can be made? Will this
require a management culture change? Can it be accomplished within the
current organisational structure?
2.
187
Unit 7
Managing Complexity
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
With the tremendous change facing organisations and increasing
complexity of relationships in an organisation, some companies are
beginning to adopt systems thinking in organisational management. It
is playing a role in organisational design, diagnosis and problem
solving.
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; an interdependent
network of units forming a unified pattern.
Too often in organisations, management break down complexity by
decomposing the system and dealing with its individual units
separately. Thus, 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. System thinking reminds us that
even if units can be perfected by themselves this does not imply that
they integrate well together. It encourages managers to diagnose
problems by looking at larger patterns of interaction within the
organisation, and the process interdependencies.
189
In this unit we shall look at the role systems analysis has in managing
complexity in organisations. We shall examine the principles of systems
thinking, understand the difference between hard and soft
methodologies, and focus on a contemporary soft system methodology.
Chaos
Authoritarian Style
Democratic Style
Top Down
Bottom Up
Structural Design
Self Organisation
Controllable Process
Evolutionary Process
190
Systems Thinking
A Brief History
Systems thinking is not a new subject area. It can be traced back to
Aristotle and Plato. However, the 1940s saw the emergence of various
formal systems thinking disciplines such as general systems theory
(GST), systems analysis and systems engineering.
One of the most prominent early pioneers of GST was Ludwig Von
Bertalanffy. He referred to a systems openness, i.e. the degree to which
a system interacts with its environment, an open system takes or
receives things from its environment and/or provides things into its
environment. Therefore, there is clear applicability to business in terms
of the recognition of the role of market forces, the supply chain,
intervention by government institutions, etc.
Systems analysis grew simultaneously with systems engineering
throughout the 1950s. Systems analysis as an approach and a
methodology is closely associated with the RAND (Research and
Development) Corporation. It emerged from a post-war contract
between the US Army Air Forces and the Douglas Aircraft Co. The
RAND Corporation, established in 1948, was funded by the Ford
Foundation and several banks. It began as a non-profit advisory
organisation.
Over the 1950s and 1960s RAND influenced systems thinking through
its publications on strategy and methodology in systems analysis.
RAND, in developing its advisory role, expected its clients to take into
account the social issues like welfare economics. However, the
methodology was criticised due to the lack of interest in people by
systems analysts. This may explain some of the reasons why computer
systems analysts took little account of the user during their analysis, as
the computer analysts adopted the RAND style methodology in
ignorance of this original but fundamental omission.
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. Systems
191
ACTIVITY (optional))
As background to this unit it is suggested that you source the following book
Stacey, R.D. (2000) Strategic Management & Organisational Dynamics The
Challenge of Complexity (3rd Edition) Published by: Financial Times Prentice
Hall (ISBN 0-273-64212-X), and read the following:
Chapter 8
- pages 155-166
192
193
World Views
Systems thinking promotes the expression of different world-views, in
order to enrich information in the problem domain. By World View we
mean the particular perspective of an individual on the problem. (We
shall look at World Views in more detail later in this unit). In the
business context, one would identify the different business actors and
elicit their views of the system. So for perspectives on the purpose of the
organisation itself, the following business actors may view the system
from different and sometimes conflicting perspectives. See Table 7.1.
Business Actor
Manager
View(s)
Profit-making system
Revenue-generation system
Growth-potential system
...
Customer
Supplier
Client system
Employee
Employment system
Shareholder
194
Ideas
used in
METHODOLOGY
Perceived
real world
generates
195
cold of winter and the bodys metabolism can use up existing calories
converting fats into sugars in order to keep the temperature at around
o
37 C.
Do businesses then have to emulate homeostatic systems? In a tactical
way an organisation already does so. Once aware of a particular entity
in the environment causing turbulence a company finds ways to
measure the effects and take action accordingly. The company tends to
adapt or influence the causes of the turbulence, if known.
Unfortunately, symptoms rather than causes are identified and the
wrong things are measured in total ignorance of what should be
measured. But, unlike the physical problems such as that bull elephant
in the parable, companies are dealing with abstractions, concepts and
expectations which cannot be touched and for which there are poor
measurements.
A homeostatic system reacts to its environment and adapts to survive.
This reactive approach is not strategic but tactical; strategic ideas are
based on proaction not reaction.
Professor Max Boisot, a leading figure in strategic thinking, states that
there are two assumptions within strategic planning:
1.
2.
ACTIVITY
Chaos Theory is another discipline that is being used in organisational
management. The modern notion of chaos describes irregular and highly
complex structures in time and in space that follow deterministic laws and
equations.
Read the following article about the validity of the application of chaos theory
to organisations.
196
Strategy as order emerging from chaos, Reading 9.2, p. 500-505 in your key
text, De Wit, B & Meyer, R
Performance Measures
We have noted that if an organisation is a homeostatic system, then it
learns and adapts to environmental changes, thereby keeping the
overall system in balance. In the context of a business, learning and
adaptation will result in adjustments to business outputs such as
strategic plans, policies and operational systems.
In order to decide on appropriate performance measures, it is crucial to
understand the complex relationships of cause and effect, delay,
feedback and so on. From this understanding, key performance drivers
can be identified and a performance measurement strategy devised. The
Balanced Scorecard Approach for measuring performance is
particularly pertinent in this context, and will be examined later in this
unit in the section on Strategic Control.
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,
market-share, deployment of knowledge assets, etc.
Following performance analysis, if problem areas are identified then the
principles of systems thinking (e.g. openness, eliciting world views,
etc.) can be applied again to the problem domain, and objectives
revised, where appropriate.
197
and negative synergy by some soft systems thinkers) from the purpose
of the whole. If we wish to reduce sub-optimality, or negative synergy,
the sub-systems purposes must in some way be congruent with that of
the whole system.
In business one fundamental resource, itself a soft system, is a person.
Individual views or discipline-oriented views are somewhat blinkered
and narrow in scope. The shared view provides a richer picture. If there
is dialogue rather than a missive about the systems purpose; if the
individuals involved in the dialogue participate in the derivation of the
systems purpose, perhaps negative synergy will be reduced, perhaps
the emergent properties of the whole will be value added, providing
creative advantage or positive synergy. As learning or adaptive systems
appear to be of a higher order than others, then the more the people in
the organisation continue learning, the more likely the emergent
purpose of the business will reflect this. If every employee sees the
turbulence in a learned way, the more likely, through dialogue, the
company will clarify its position with regard to the turbulence and
progress.
As mentioned earlier, soft systems thinking focuses on human activity
systems. The problem, recognised by Checkland and so many others, 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.
198
1
Problem situation
unstructured
6
Change and action
to improve
2
Problem situation
expressed
5
Real/systems
world comparison
REAL WORLD
SYSTEM WORLD
3
Root definition of
relevant systems
4
Conceptual models
2.
3.
4.
5.
6.
7.
Taking action
199
Stages 1,2,5,6 and 7 can be regarded as working in the real world, while
stages 3 and 4 can be considered to be systems thinking about the real
world. Refer to Figure 7.2.
Let us now consider the various stages:
Stage Three
Root definitions are constructed for the relevant HAS identified in
stages one and two. The root definition should encompass the emergent
properties of the system in question. To define the emergent properties
one needs to consider the mnemonic CATWOE:
C: customer (people affected by the system, beneficiaries or victims);
A: actor (people participating in the system);
T: transformation (the core of the root definition the transformation
carried out by the system);
W: Weltanschauung (world view);
O: ownership (the person(s) with the authority to decide on the future of
the system);
E: environment (the wider system).
The CATWOE mnemonic can be used as a checklist to ensure that the
root definition is complete. Alternatively, the root definition can be
formulated from the components of the CATWOE mnemonic. Either
way, the root definition will be a short paragraph that will contain all the
necessary information to describe the system. Several root definitions
can be constructed for each of the relevant HAS identified. Each root
definition will encompass a different world view. Different
individuals will perceive the same event in different ways according to
their view of the world, based on their experiences, personality and
situation. These different views result in inferences being made that are
200
Stage Four
Each root definition will result in a conceptual model. The conceptual
model identifies the minimum necessary activities for that HAS. In
addition, it represents the relationships between the activities. The
conceptual model must be derived from the root definition alone. It is an
intellectual model and must not be clouded by knowledge of the real
world. All of the elements of the CATWOE mnemonic must be included
somewhere in the conceptual model, otherwise the conceptual model is
incomplete. It should not be possible to take out words from the root
definition without affecting the conceptual model.
Stage Seven
Recommendations for change will be implemented. It is important to
appreciate that once these changes have been implemented, the
problem situation will be modified. In other words, the process is
cyclical. It is recognised that nothing remains static and that mere
intervention by the consultant will affect the organisation.
201
The article includes details of a case study which Checkland took part in, with
the Shell Group. It led to a major rethink of one of Shells Manufacturing
functions in the late 1980s.
SSM Summary
SSM deals with problems of a fuzzy nature where objectives are unclear,
and where there may be several different perceptions of the problem.
Indeed, SSM can be applied where there is simply an area of concern,
where no particular problem has been identified, but where it is felt that
some improvement can be achieved. SSM does not aim to solve the
problems in one fell swoop but to make incremental improvements.
SSM is often used as a front end to a hard methodology. 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. SSM
recognises that different individuals will have different perceptions of
the situation and different preferable outcomes. 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. Hard methodologies, where the problem is assumed to be
clearly defined, and where the individuals who will be affected have no
means of involvement in the solution process, often result in resentment
and rejection of the solution.
Using SSM as a front end provides a means for as many individuals who
have an interest in the outcome as possible, to express their perceptions
of the area of concern. These concerns can then be accommodated in the
definition of the problem area, before a hard methodology is applied.
SSM has been used in a variety of organisations ranging from a
company dealing with food products to British Airways. It has been
used to assist in a range of problem situations, such as deriving
recommendations for improvement, reorganisation and role analysis.
Given the flexibility of the methodology, it can be seen that the range of
situations to which SSM can be applied is vast. The only limitations of
SSM are the capability and adaptability to new situations, of the
consultant.
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, and to take
corrective action accordingly. Strategic control is also about keeping
employees motivated, focused on the important problems confronting
202
ACTIVITY
However well managed an organisation may be, for effective strategic control,
it is also necessary from time to time to conduct an assessment of an
organisations state of health. This is necessary to identify the organisations
strengths and weaknesses and uncover information that may be essential for
the organisations strategy.
Read the following article on the web (by David Hussey, Visiting professor,
Nottingham Business School) about an approach to company analysis:
http://www.environmental-expert.com/magazine/wiley/1086-1718/pdf5.pdf
Efficiency.
Quality.
Innovation.
Responsiveness.
Measuring the above, informs managers of how the organisation is
likely to perform in the future. Whereas a focus purely on financial
information, informs managers of the results of decisions that they have
already taken.
R. S. Kaplan and D. P. 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. For the complex task of navigating
and flying an airplane, pilots need detailed information
about many aspects of the flight. They need information on
fuel, airspeed, altitude, destination and other indicators that
203
2.
3.
4.
204
Summary
In this unit we have looked at the role of systems thinking in managing
organisational complexity. We have considered the principles of
systems methodologies, and have looked at its applicability in a
business context. We have noted the differences between hard and soft
methodologies and have examined in detail the Checkland
Methodology.
Finally we looked at strategic control and examined the importance of
performance measurements to judge the health of an organisation, and
focused on a contemporary methodology of strategic control, the
balanced scorecard method.
REVIEW ACTIVITY
Now turn your attention to the organisation you work for and focus on its
culture.
1.
2.
205
For example, such a methodology does not lend itself to traditional project
management practices. Checkland himself stated that there is no way of telling
whether a SSM project is a success or failure. Most companies will not be able
to justify costly endeavours where there are no clear success criteria.
Another criticism of SSM is that it ignores the issues of power and hierarchy
within an organisation. SSM assumes that managers and employees alike can
openly discuss and influence organisational issues. This is rarely the case in
most organisations. Thus, critics from the business world discard SSM on the
basis that its values of openness and equality are unrealistic in the real world,
and confine systems thinking to academic analysis.
2.
3.
4.
* Highly recommended
206
Unit 8
Knowledge Management
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The global business environment is changing rapidly. As organisations
grow in size, complexity and geographical distribution, intellectual
capital is becoming an increasingly important asset of the enterprise. By
managing its knowledge assets astutely, and rapidly deploying
knowledge gained in one geographical area or one industry across
another, corporations can improve their competitiveness, and
adaptability. Re-cycling knowledge know-how is now key to
competitiveness, particularly in the knowledge economy. In some
sectors (e.g. professional services) knowledge management is a matter
of survival.
In practical terms, the focus on knowledge management can be
attributed to two developments. Firstly, capital and labour-intensive
industries in developed economies have continued to decline. Secondly,
the relative importance of technology and information-intensive
industries has increased. 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.
When defining knowledge management, some emphasise the human
interaction and psychological factors that impact knowledge sharing,
whereas others stress the enabling infrastructure and knowledge
management system. A successful deployment of knowledge
management must recognise that views of knowledge are
207
ACTIVITY
Now, as background to this unit, read the following from your key text, De
Wit, B & Meyer, R
1.
2.
208
Resource-based view
A resource-based perspective highlights the need for a fit between the
external market context and its internal capabilities. In accordance with
this, a companys competitive advantage derives from its ability to
assemble and exploit a combination of resources.
Competitive advantage is achieved by developing existing resources
and creating new resources in response to changing market conditions.
Writers like Robert Grant argue that knowledge represents the most
important value-creating asset. 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. The
resource-based view, therefore, suggests that knowledge, like any other
asset, can be stored, measured and moved around an organisation.
Post-modern view
Post-modern perspectives on organisations challenge the
resource-based assumption. Writers like Frank Blackler argue that
knowledge cannot exist in any absolute or objective sense.
The recognition of knowledge and how it is applied is determined by
the social and organisation context in which a company operates. An
innovative proposal, 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.
If knowledge is a social construct, i.e. it emerges through interaction, it
follows that it cannot be formally managed. Like culture, knowledge
exists only in an abstract form within organisations. Also, it is affected
by managerial action and its nature can change only gradually over
time, through a process of interaction between the various individuals
within the organisation.
There is thus a debate concerning two opposing theoretical
perspectives.
VIRTUAL CAMPUS
Taking into account your own working experience and sphere of activity, 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.
209
ACTIVITY
Here is a quote from Tony Blair from his speech at the Lord Mayors Banquet,
Guildhall, London. November 1998.
The ambition is to turn Britain into the leading knowledge-based
economy in the world. That is our future: a knowledge-based,
creative economy. In global markets, where products can be
made anywhere and shipped anywhere, in which production
technologies can soon be copied, we cannot base our future
prosperity on the traditional building blocks of the old industrial
economy: raw materials, land, machinery, cheap labour. We
must base our competitiveness on distinctive assets which our
competitors cannot imitate our know-how, creativity and
talent.
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 easier to understand
knowledge in terms of what it is not. It is not data and it is not
information. Data are objective facts. Data becomes information when it
is categorised, analysed, interpreted, summarised and placed in context,
i.e. given relevance and purpose. Information develops into knowledge
when it is used to make comparisons, assess consequences, establish
connections and engage in a dialogue. Knowledge can be seen as
information combined with experience, judgement, intuition and
values.
See Figure 8.1 for a pyramid view on data, information and knowledge.
Knowledge is at the top of the value chain. Data is at the bottom. Data is
essentially meaningless on its own. It is raw data. Reasoning, perception
and interpretation are critical in transforming data into information. In
addition to reasoning, perception and interpretation, decision making
(using experience, judgement, intuition and values) is key to the
transformation of information into knowledge.
210
Reasoning
Perception
Interpretation
Decision making
Reasoning
Perception
Interpretation
Knowledge
Information
Value chain
Data volumes
Data
KEY POINT
Knowledge is the result of deciphering and attaching meaning to facts and
information.
Knowledge management is the capability of an organisation to create, capture,
combine and share knowledge amongst its members. It is the process by which
an organisation generates value by using its intellectual assets.
211
Knowledge problems
Knowledge represents a source of power for an individual. Sharing
valuable knowledge with colleagues is often seen as risking reduction of
value of that individual to the company. There are, thus, psychological
issues relating to knowledge management. Davenport and Prusak
argue there are three conditions under which an individual would agree
to share knowledge.
212
Barriers to understanding
It is easiest to learn about things that we already know. It is very difficult
to learn from an expert if your do not have a basic grounding in the
topic. The expert must take time to explain the context and translate the
jargon. The barriers to communication in organisations that arise
between departments typify this problem. These problems can be
ascribed to differences in the content of the knowledge bases. To
overcome these problems, particularly in larger global organisations
engaged in diverse activities, it is necessary to establish communities of
practice based on the core competencies of the organisation.
Knowledge Transfer
Much can be done within an organisation to encourage knowledge
transfer. IT-based frameworks (e.g. Lotus Knowledge Discovery
System) provide the essential infrastructure for knowledge
management, but to be used effectively and achieve widespread
take-up, other conditions are necessary to establish:
1.
2.
3.
The first two points pose particular challenges for large, diverse,
globally dispersed organisations. Establishing communities of practice
(based on core competencies) is critical. Examples of such communities
of practice might be Researchers, Project Managers, Quality
Champions, Programmers, Research Chemists, Marketeers in a
particular geography, etc. The precise communities of practice would
213
2.
3.
4.
214
ACTIVITY
Identify the types of intellectual capital within your organisation.
ACTIVITY FEEDBACK
Intellectual capital is essentially any intangible asset that has potential for
re-use. The following list gives you an idea of what can be shared.
Sales proposals.
Market research.
Client information.
Competitor information.
Contracts.
215
Case studies.
Methodologies.
Project plans.
Client deliverables (with confidentiality safe-guards).
Interpretation methods.
White papers.
216
3.
4.
5.
6.
7.
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. It is suggested that a company score each of the
dimensions against a 10-point scale. This can be done against best
industry practices, so that a score of ten relates to best practices. A score
of zero will apply if that particular dimension does not feature at all in
the corporation. See Figure 8.2 for an example of a knowledge
management web diagram for a company. From a strategy perspective
it is also useful to score your main competitors on the web diagram and
then identify weaknesses/strengths. Additionally strategic partners can
be scored. It may be the case that where the corporation scores weakly, a
217
Company strategy
10
Knowledge quality
Competitor's
KM capability
10
Collaboration culture
10
10
Knowledge processes
Knowledge access
Corporation's
KM capability
10
Knowledge bases
10
Enabling technology
10
218
ACTIVITY
Research the application, impact and business benefits of knowledge
management by reading some of the articles on knowledge management on the
INSEAD website:
http://knowledge.insead.fr/
Go to the home page and select Knowldege Management under the menu
Themes. (Registration to the website is free of charge).
219
220
Questions:
1.
2.
How has Kao been able to build a learning organisation? What is their
corporate philosophy and what type of structure, culture, systems and
leadership roles has the company developed to become a learning
organisation?
3.
How does Kao go about forming strategy? What are the strategy
formation processs main features?
4.
5.
221
222
223
224
225
226
the other hand, is that many things cannot be forecast or thought out in
advance. Kao seems to be trying to combine both feedback and feed forward
to get the best possible results. However, the threat of inefficiency and
irreparable damage remains.
Threat of slower decision making. Above, it was argued that trial and
error learning might be time-consuming. To this it can be added that
the participatory decision-making system and need for consensus
can also be relatively slow. Especially in circumstances where the
speed of decision-making is essential (a crisis or a sudden
opportunity), Kao might be at a disadvantage. In general, however, 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).
Slower decision-making might be more than compensated by
quicker implementation. Investing time during the decision-making
process to produce high quality plans that are widely understood
and enjoy broad acceptance often facilitates rapid action, making the
total amount of time spent from issue identification, through
diagnosis, to conceiving and realising less than in other firms.
227
228
A formal or informal company? Kao must also wonder whether its lack
of hierarchy (the paperweight organisation), lack of organisational
boundaries (biological self-control) and lack of formalised
procedures all remain possible as the organisation grows both in
volume and geographically. 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?
229
town of Portland, Oregon. Then in 1964, both he and Bowerman each put up
$250 to found the Nike shoe company, named after the Greek goddess of
victory.
To start the company, Knight used his athletics contacts to sell running shoes
from a station wagon at track and field events. He bought the shoes from Japan
but always felt that there was potential for a US designed shoe. By the early
1970s, Knight was working on his new design ideas. At the same time as
exploring these, demand for Nike shoes was sufficient for him to consider
developing his own shoe manufacture. However, he was concerned to use
Japanese experience of shoe production. In 1972, he placed his first contract in
Japan to begin shoe manufacture to a Nike all-American design.
Over the next couple of years, the yen moved up against the dollar and
Japanese labour costs continued to rise. This made Japanese shoe production
more expensive. In addition, Nike itself was gaining more experience of
international manufacture and making more contacts with more overseas
manufacturers. In order to cut production costs, Nike switched its operations
in 1975 from Japan to two newly industrialised nations, Korea and Taiwan,
whose wage costs were exceptionally low at that time. Nikes costs came
down dramatically, allowing the company more scope for funding further
product development and marketing.
In sourcing production internationally from low wage countries, Nikes
approach to shoe manufacture was revolutionary for its time. The company
realised that sports shoe manufacture required substantial labour input, so
labour costs were potentially high and justified manufacture in countries where
workers were paid much lower wages. However, 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. Thus, 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. In this context, the company had to learn how to handle
overseas production, how to brief manufacturers on new designs and models,
and how to set and maintain quality standards.
The decade of difficulty and renewal: The 1980s
By the early 1980s, Nike was profitable and continued its role as a specialist US
sports shoe manufacturer with no production facilities in its home country.
Then along came competition in the form of a new sports shoe manufacturer,
Reebok. From a start up company in 1981, Reebok went into battle against
Nike under its founder and chief executive, Paul Fireman. Reebok launched a
strong and well designed range of sports shoes with great success. By the mid
1980s, Reebok had equalled Nikes annual sales in a fierce competitive battle.
In 1987, Reebok was clear market leader with sales of $991 million and a
market share of 30%, compared with Nikes sales of $597 million and a share of
18%.
Part of the problem and opportunity for both manufacturers was the fickle and
design-conscious nature of the target market: young, hip teenagers and adults
buy the latest fashions. Both Nike and Reebok realised that, in order to build
230
volume, it was necessary to move from the specialist sports shoe market to
wider adoption by this much larger, fashion aware teenage and young adult
market. 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. Mr. Fireman criticised Phil Knight as being just a shoe guy who saw
himself as a big time presence in sports. In response, Mr. Knight said that he
hated his competitor and that the most innovative piece of R&D equipment
they have is the copy machine. 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.
To hit back against Reebok, Nike then began to invest considerable sums on
developing new and innovative sport shoe designs. The most successful of
these was begun in the late 1980s, the Nike Air shoe. It was an intuitively
simple technology to understand said John Horan, publisher of Sports Goods
Intelligence, a US industry newsletter. Its obvious to consumers that if you put
an airbag under the foot, it will cushion it. But it was not until 1990 that the
Nike Air shoe was launched and began to deliver success for Nike. Thus the
1980s were both the decade of difficulty and the time for renewal. Nike had
learned about the heat of competition and the need for innovation and
continual R&D in its shoe designs.
The new heights of the 1990s
Coupling the new Nike Air
shoe
with
advertising
featuring Michael Jordan was
a touch of marketing
inspiration.
The
US
basketball star, top of his
chosen sport, was signed up
to promote the new
product
in
a
multimillion-dollar deal that
added a new dimension to
sports sponsorship. The
marketing
campaign
developed links between
Nike and Jordans athletic
ability and image. Reebok hit
back with its own design, the Reebok Pump shoe, but it was forced to use
Shaquille ONeal, a major basketball star but second to Michael Jordan. Thus
around the turn of the decade, Nikes market share rose from 25% in 1989 to
28% in 1990 while Reeboks share dropped from 24% to 21%.
Building on this success, Nike realised that such promotion provided powerful
support for the brand. Over the next few years, this was enhanced by the
heavy funds Nike was prepared to invest. For example, in 1995 Nike invested
almost US$1 billion in sports marketing compared with Reeboks spending at
around US$400 million. This investment in sports marketing was much higher
than previous sums. It was developed after Nike had assessed the results of its
heavy advertising campaigns earlier in the 1990s.
231
232
Questions:
1.
What knowledge has Nike acquired over the years? Use the
definitions of knowledge to help you move beyond the obvious.
2.
3.
233
234
Summary
In this module we have looked at the vital role knowledge management
can play in todays knowledge economy. We have noted that in some
sectors, re-use of intellectual capital is no longer a case of gaining
competitive advantage, but survival.
235
We have examined what knowledge is, and have noted the differences
between explicit and tacit knowledge. We have looked at the theoretical
perspectives, the socialisation and technology issues, and the challenges
posed to organisations. We have concluded by considering some
practical steps in the implementation of KM.
Students are encouraged to apply the lessons learnt to their own work
context, and consider how their organisations can better exploit
intellectual capital to gain competitive advantage.
REVIEW ACTIVITY
Consider the following scenario. You have been asked by your companys
board to rate your knowledge management capability against your chief
competitor and present your proposals for a realistic improvement plan.
1.
2.
3.
4.
information
to
2.
3.
* Highly recommended
236
their
Unit 9
Innovation
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
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. However, disruptive technologies
pose particular problems and challenges for the established
corporations. When faced with disruptive technologies, management
teams in blue-chip companies frequently respond by vacillation, and
hide behind internal research, extensive pilot studies, lengthy internal
assessments and so on. They frequently hire external consultants to give
them the answers. They are so geared with managing continuous
innovation within established technologies, that they cannot cope with
revolutionary, new technologies.
Over the last decade, innovation has gathered increasing pace, and
significant venture capital has flown into start-ups. In this environment,
new technologies are continually emerging; some have powerful
business potential and many do not. How can established companies
discover powerful disruptive technologies more quickly, and evaluate
them more accurately? What are the problems faced by established
organisations, and what steps can organisations take to be more
responsive to innovative technologies? In this unit we shall look at some
of these issues.
237
Unit 9 Innovation
Innovation strategies
Disruptive innovations, spawned by developments in emerging
technologies, e.g. grid computing, wireless, genomics, nanotechnology,
have the potential to consume industries and make existing strategies
obsolete. Conventional wisdom says that large established companies
are likely to lose out to smaller attackers when they try exploiting these
breakthroughs. Why should incumbents (large established companies)
encounter so much difficulty? Companies such as GE, Intel and
Microsoft have embraced disruptive innovations. What can we learn
from them?
Established companies control substantial resources: established
infrastructure and processes, scale and scope, valuable brand names
and entrenched relationships. They can spend heavily on technology
development and market research, although most of this money is
devoted to evolutionary innovations that make their current offerings
perform better in ways their customers already value.
For all their advantages, incumbents are often impotent when it comes
to disruptive innovations. Their size slows them down and past
commitments restrict their flexibility. 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. Incumbents are disadvantaged by their structures,
capabilities and outlook. Their finely honed instincts, 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;
Technological uncertainties.
Ambiguous customer signals.
Immature competitive structures of markets for
disruptive innovations.
ACTIVITY
As background to this unit, read about the dimensions and paths of industry
development, the drivers and inhibitors of development, and how companies
can adopt an industry leadership position.
Read p. 421-436 of your key text, De Wit, B & Meyer, R .
238
Unit 9 Innovation
Problem 1: Delay
When faced with uncertainty, it is tempting to wait. A watching brief
may be assigned to an internal team that monitors families of
technologies. 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, e.g. early electronic watches were bulky. It is natural
to underestimate developing technologies or new approaches because
they dont measure up to the familiar alternative, or appear suitable
only for narrow applications. Other developments may be easy to
dismiss on the grounds that their small markets will not meet the
growth needs of large companies. Yet all large markets were once in an
embryonic state with their origins in limited applications.
239
Unit 9 Innovation
ACTIVITY
Microsoft currently dominates the desktop operating systems market.
However, more recently there has been a rise in focus on open systems.
Customers are demanding plug and play interoperability across different
vendor applications, and see open systems as delivering this choice. They view
themselves as being locked in by proprietary Microsoft systems/applications.
This development has led to the rise of Linux as an open operating system.
Linux itself was developed by a Swedish engineer as a hobby project, and was
itself a disruptive technology.
How is Microsoft responding to the challenge of Linux? Research this area.
What options does Microsoft have to safeguard its dominance?
ACTIVITY FEEDBACK
Broadly, Microsoft has four options:
240
1.
Do nothing.
2.
3.
4.
Unit 9 Innovation
241
Unit 9 Innovation
Problem Avoidance
Whilst awareness of the pitfalls described in the previous section can
help avoidance, the best defence is a good offence. There are four
approaches:
242
Unit 9 Innovation
Paint the big picture: This is not the time to ask for carefully
calibrated results. The issue is simply whether the market is big
enough to support development.
2.
3.
243
Unit 9 Innovation
VIRTUAL CAMPUS
1.
If this has not already been done, post on the Virtual Campus a short
resume of the type of organisation you work for. Public or private
sector? Large, medium or small? Sector (e.g. services, manufacturing)?
2.
Once all the resumes have been posted on the Virtual Campus, pair
yourself with a partner. Choose a partner who works for an
organisation which, you believe, has a very different learning culture
from yours.
3.
4.
5.
244
Unit 9 Innovation
245
Unit 9 Innovation
ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R:
Strategy, value innovation and the knowledge economy, Reading 8.4,
p.464-473.
Conclusion
Success or survival in industries that are being created or transformed
by disruptive innovations requires support from senior management,
separation of the new, flexibility and a willingness to take risks and
learn from experiments. There should be a diversity of opinion to
challenge dominant attitudes and misleading precedents, so avoiding
myopic views of new ventures. The best innovators think broadly and
will entertain a wide range of possibilities before they converge on a
solution.
These prescriptions need considerable tailoring to match each
disruptive innovation and the organisation involved. Indeed, 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. The main point is that managing disruptive
innovations constitutes a different game for established companies,
with its own problems and solutions.
Reference Do nt Hesitate to Inno vate by Geo rge Day and Paul
Scho em ak er (Financial Tim es Oct 9, 2000)
246
Unit 9 Innovation
247
Unit 9 Innovation
specialist connectors such as the ones Oxley sells to the mobile telephone
industry, based on principles developed for military radio applications in the
early 1970s.
Oxley makes millions of tiny gold-plated spheres each 1mm in diameter
that fit into telecoms base stations sold by Ericsson and Motorola, the two
biggest forces in the mobile phone industry. The spheres are part of miniature
ball-and-socket connectors. With the ball snapping in and out of the socket at
high speed, the system forms part of a switch (selling for 10p) that checks
whether telecoms equipment is operating at the correct wavelength. We are
the only company in the world that can make the (ball and socket) devices to
this kind of precision, Mr Edwards says.
Oxley also produces electromagnetic screening systems for military radios.
They prevent damage to the equipment from lightning strikes or radiation
from a nuclear bomb. In the next few years, the company intends to keep its
military focus. As the defence industry consolidates around bigger companies,
Mrs Oxley says, small, specialist companies will find a niche. We think we can
continue to run between the legs of the elephants, she says.
But the company is also keen to keep edging into other markets, perhaps with
the help of partners with specific knowledge of new business fields. In the next
five years, Mr Edwards would like the companys sales to double. We have no
choice, he says. Having this kind of growth target is essential if we want to
keep the company sharp and interested in new ideas.
Questions:
1.
2.
248
Unit 9 Innovation
VIRTUAL CAMPUS
Further points to note, from the Oxley case study, include:
2.
249
Unit 9 Innovation
Post, on the Virtual Campus, what you can glean from the case study about the
above two points. Share your views. Then challenge, extend, discuss.
Students are advised to complete the next case study (Telepizza, where control of
business innovation has been removed by being publicly owned) before undertaking
this activity. The Telepizza case study has a bearing on point 2 for discussion.
250
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.
Telepizza also understands that although Spaniards have belatedly come round
to the concept of fast food, the domestic culture remains imbued with the
tradition of good home-made cooking. 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. Having
pioneered pizza home deliveries, Telepizza has stayed ahead of its competitors
by introducing the do-it-yourself pizza: clients can summon up literally
thousands of permutations of the products 15 basic ingredients. Its most
recent success was the Tex-Mex pizza called the Jalisco, dreamt up by its
consumer research department.
Corporate culture
The corporate culture and growth strategy are no less important. Telepizza
believes in decentralisation and cutting out bureaucracy. This ethos has set the
tone of its staff relations and franchising. Telepizza has succeeded in creating a
corporate culture and with it an expansion strategy that has multiplied its
rewards. Employees who deliver pizzas by motorcycle within half an hour of
receiving the order are, in the companys parlance, autonomous business
people responsible for their own slice of the pizza market. These employees
are allotted a specific area. It is up to them to develop a relationship with their
clients. Spurred on by sales incentives and bonus packages, Telepizzas
representatives will spend nearly as much time promoting the company in their
allotted area as they do delivering its products to customers. Although
numbers vary per outlet, there are approximately ten people, including five
sales representatives, employed in each pizza parlour.
About half the 195 Telepizza centres in Spain are franchises. The company
believes that this mix is the right one and that as it expands further franchises
will, for the time being, be the property of the existing 50 or so franchise
owners. For a franchise system to work, you have to love the company and
what it produces, says Mr Serrano. These are exactly the sort of people that
we have got now and we want them to grow with us.
Investment policy
Telepizza has pursued a strong investment policy, ploughing Pta 1.3 billion into
new centres and equipment in 1994. It invested a further Pta 1.5 billion in 1995.
One reason for the boardroom revolt that forced Mr Fernandez Pujals
resignation in October 1995 was that other shareholders were clamouring for
dividends and objected to the drive for expansion that he was masterminding.
Firmly established in Spain, Telepizza has also tested foreign waters, again
through a mixture of directly owned outlets and franchises, and has set up
around 50 centres abroad. It is operating in Poland, Portugal, Greece and
Belgium as well as in Mexico, Chile and Colombia. The focus is on Spain,
however, and its home market is far from saturated.
Source: Corporate Strategy by Lynch (Financial Times, 16 November 1995)
251
Unit 9 Innovation
Questions:
1
252
Unit 9 Innovation
retain the loyalty of its existing people. However, it is highly likely that some of
the initial zip will go out of the company.
Feedback to Question 3
Although full details are not given in the case, it is likely that significant
resources are devoted to the international growth in the 50 centres operating
abroad. There will inevitably come a time when further growth in Spain will be
difficult: international opportunities will then maintain the momentum of the
group. Moreover, international growth would be one way of offering an
incentive to those individual managers unable to find new outlets in Spain.
However, there is no evidence that growth has disappeared in Spain. Given its
strengths in the home market, it is surprising that so much effort seems to have
been devoted to international expansion with all its associated costs and
pressures.
Given that international expansion has now taken place, one way forward is to
find a balance between the home market expansion and foreign growth. At the
time of the case, it would appear that international growth should take second
place to completing national expansion in Spain. However, this does not mean
that international growth should stop, rather that a judgement is required on
the pace of such expansion.
Case note what happended later
The founder, Mr Leopoldo Fernandez Pujals, reduced his shareholding from
40% to 22 % in June 1996. The well-known large Spanish bank, Banco Bilbao
Vizcaya (BBV), bought 18 % of the company. 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, with Merrill Lynch responsible for a placing of part of the
shares internationally.
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.
Summary
In this unit we have looked at the challenges posed by disruptive
technologies, particularly on established companies. We have examined
how some of the problems can be managed, and have noted the
importance of cultivating a learning culture, and the importance of
organisations adopting strategic flexibility.
253
Unit 9 Innovation
REVIEW ACTIVITY
Consider the organisation and industry that you currently work in. As we
noted in this unit, there are likely to be many signals from the periphery of your
industry (or supporting sectors) from numerous emerging technologies/ideas.
Some of these will be relevant to the future, others will be a complete waste of
time.
Identify two or three emerging/new innovations that you feel are likely to make
a significant business impact on your sphere of activity. Technologies or ideas
that could offer your organisation deep market potential.
1.
2.
3.
Noting the culture of your own organisation, how would you go about
assessing these innovative technologies and implementing them
(where appropriate)?
Share your findings with your Manager and colleagues in your organisation.
Encourage constructive comments.
2.
* Highly recommended
254
Unit 10
Introduction
In the age of the Internet, new markets are emerging faster than ever
before. As each new market goes through its development cycle, it gives
power to those companies that are able to harness the power of IT and
the Internet to transform their businesses, and that of their customers.
Power is shifting from what was previously a trusted source of value
creation towards something that was previously secondary.
Information has replaced assets as the source of value. This is the new
management agenda, and corporate IT strategy has become an
important determinant of stock price.
The strategic shift from assets to information, has also been coupled
with a shift from products to services. Services offerings cannot be
managed using the same IT systems as product offerings. Services
offerings are much more customer-centric and this has led to an
emphasis on ERP (enterprise resource planning), CRM (customer
relationship management) and supply chain management.
Furthermore, it is well recognised that a corporations own efficiency
comes from how seamlessly data, information and knowledge flows
within the company, and indeed between its supply chain and strategic
partners. Unless corporate data can get to the point of decision in time to
impact that decision, Information Management has failed. For all these
reasons IT has become a powerful influence on corporate strategy;
Strategic IT defines the very nature of the business. In this new age, IT is
not about the business, it is the business; e-business.
255
IT strategy, just like any other strategy, has to take into account the
above, as this is a prerogative of any modern business. IT strategy has to
be flexible and accommodate a fast changing world. Indeed, corporate
IT systems such as Enterprise Resource Planning, Supply Change
Management and Customer Relationship Management systems allow
for a level of strategic flexibility for this reason.
Since the emergence of e-business, in particular, the linkage between
business strategy and IT strategy has been strengthened. IT strategy is
no longer solely an output from business strategy, but is a fundamental
input in itself. Let us explore this paradigm shift further.
256
2.
Political
factors
Economic
factors
Social
factors
Business
strategy
Technology/IT
strategy
Technical
factors
e-business
The advent of e-business is having a profound impact on business
strategy. The appointment of directors of e-business and the
formulation of e-business strategies recognise that IT is changing the
way companies do business. This clearly impacts upon business
strategy; it poses opportunities and threats.
There is sometimes confusion around the definition of e-business. Many
confuse e-business with e-commerce. But e-business is far more than a
business that carries out trade electronically (e-commerce). An
e-business is an organisation that is transforming its interactions with
customers, suppliers, strategic partners and employees by exploiting
257
Leverage information
and knowledge
Define IT environment
(security, scalability,
standards, tools
and applications)
e-business
strategy
Transform
business
processes
ACTIVITY
Read about the huge impact of recent technological advances (principally
e-business) on organisations strategic approaches, in an extract from Geoffrey
Moores book Living on the fault line. Find it on p. 451-464, Reading 8.3 in your
key text, De Wit, B & Meyer, R .
258
VIRTUAL CAMPUS
On-demand computing or grid-computing is being touted by the major
computer vendors (IBM, Sun, HP) as delivering the next paradigm shift in
business. Is this hype or reality?
Very simply, on demand computing harnesses a grid of machines and other
resources (distributed anywhere) to rapidly process data beyond an
organisations own available capacity. It is akin to an electricity grid.
Organisations pay varying prices for the computing power depending on usage
and demand at the time. The business benefits are potentially far-reaching.
Companies embracing the on-demand concept are said to be able to adapt
dynamically to whatever business challenges arise. By integrating their business
processes end-to-end, not only internally, but with their entire supply chain,
strategic partners and customers, organisations can exploit this technology to
respond rapidly to customer needs, market opportunities or even threats.
Research this area on the Internet. In particular, look at the IBM, Sun and HP
websites. Discuss these developments with IT colleagues in your own
organisation.
Now post your views on the Virtual Campus on the following topics:
259
IT Strategy Methodology
Strategy Framework
Companies frequently adopt formal methodologies when developing
IT strategy. There are many methodologies on the market developed
by leading IT companies and professional services firms such as
Accenture. The principles are the same. One that has been used by new
economy organisations is the FAST methodology. The four tasks or
elements that make up FAST are:
Futurising.
Assets.
Stimulants.
Threats.
The FAST methodology is entirely inductive, but provides a way of
addressing strategy-making. It is not the only methodology available.
FAST should, in fact, be viewed as a framework to get started; by posing
the right questions. It does not directly address process and
implementation issues. If business strategy and IT strategy are indeed
inextricably linked, then there has to be good communication and trust
between the business and IT personnel. By asking radical questions on
futurising, assets, stimulants and threats, the organisation can address
issues of understudying, involvement, communication and buy-in from
personnel from the business and IT functions.
Futurising
Some companies, such as the Swedish financial group Skandia, have
created special teams to question what the future might bring. These
teams use checklists with probing questions aimed at all parts of the
business. The answers to the probing questions highlight important
trends or significant uncertainties.
Futurising is not just raising an alarm about new technologies and their
future impact, but rather looks at the intersection of new technologies
and the shift in the business environment, and asks what is changing,
threatening or opportunity-rich. The PEST (political, economic, social,
technological) tool for environmental analysis applies in thinking about
futures, but more thorough scenarios are likely to be where these
variables interact.
Some companies are constructing visions, stories, pictures and dramas
of what businesses might look like or what businesses could be created.
The outputs could be good questions to ask, trends to watch,
260
Assets
What competencies, capabilities or assets might yield opportunities?
These are assets because:
Stimulants
The efforts of companies that are trying to encourage entrepreneurial
behaviour can be thought of as stimulants. Examples of this are
internal venture capital funds and e-business divisions. Some
companies measure how much of their capital budget is being allocated
to new ventures and e-commerce. Some businesses are creating
261
Threats
The final element is to think of threats, but not only as shock treatment.
If a company sees how a new entrant or rival can attack, why not attack
first? This has been a philosophy at General Electric, where executive
teams have been asked to think how their business could be destroyed
by e-commerce. Threats stimulate survival instincts and can be more
effective than looking for opportunities, which can seem optional.
ACTIVITY
Consider the following scenario.
Assume that you are a manager in your organisation, and that your
organisation has enjoyed significant market dominance in its particular sector.
Now pretend that a new entrant is going to attack your market share. Envision
the new entrants winning approach. What strategy, business and IT, is the new
entrant likely to adopt in your sector?
From the above analysis, 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. It was used with great success by General Electric
during Jack Welchs reign.
(The above activity is quite wide in scope. For purposes of this unit, restrict it as best as
possible to the impact of IT on strategy.)
262
Continuous.
Flexible.
Involve learning by doing.
Rapid turnaround and delivery of quick wins.
A natural activity.
Today, strategy integrated IT and business strategy is revisited
frequently; priorities re-evaluated, new technologies assessed and
incorporated where relevant to the business. Strategy can no longer be
cast in stone. The pressure to launch, the need to respond to what is
learnt by doing, the uncertainty of new markets and models, and the fact
that on-line business evolves in real time, mean that the formal
structures of traditional IT strategy-making are inappropriate.
Because IT strategy-making is business development, it is a
multi-functional team effort. The chief executive and technology
director should be in frequent dialogue. IT people are learning to work
with marketing people and vice versa. Furthermore, strategising and
planning must be closely followed by implementation. Rapid
Application Development methodologies are frequently adopted.
Strategy making is now an evolving, continuous, ever-changing
process. (See Figure 10.3). The underlying IT architectural framework
must allow for change.
263
2.
3.
4.
5.
6.
Capture organisational
strategy
Manage
IT
evolution
Process
re-engineering
Link strategy,
organisation
and processes
264
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.gartner.com
www.forrester.com
265
CASE STUDY
compuship.com/easy2ship.com
Problems developing a global e-commerce concept into a viable
business process.
Case study from Tayeb M (2003) International Management Theories and Practices.
Harlow: Pearson. (Chapter 8. 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, i.e. either the vehicle is
empty for 30% of its journeys or is 30% empty on every journey. In reality it is
probably a combination of the two states. 30% is a minimum conservative
estimate and in the USA it could be nearer 40%.
Efforts are always made to reduce this inefficiency by ensuring maximum
possible loading or finding return loads. Traditionally this has been difficult.
Either there are problems of timing and co-ordination, or financial problems
due to the unknown creditworthiness of shippers of return loads.
By using e-commerce Internet connectivity, it is possible to bring together
potential carriers and shippers in real time to maximise efficiency. 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. This creates a win/win/win scenario.
Additionally, by factoring the service through a bank/credit agency, the service
provider can guarantee payment to the carrier within a fixed timeframe.
Further benefits are the provision of cargo insurance as well as creating a new
marketing channel within the transport industry.
The history
In 1997, 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 caused him to analyse the nature of the
carriers transport operations to see if he could identify areas where their
services could be improved.
During his research, he discovered only one fact that struck him as being a
possible area of improvement. He learned from several sources that road
transport had one particular inefficiency. This was that many journeys were
undertaken unladen and that many others were made with less than a full load.
In fact, it appeared that the industry was running at only some 60% of its
maximum capacity.
266
267
268
of Easy2ship.com, whose staff was laid off in December 2000 and whose UK
directors resigned shortly thereafter.
Case study summary
The business process is viable. The concept was professionally market tested
through focus groups and accepted with enthusiasm by both carriers and
potential users. However, due to its failure from causes outside its direct
control, as well as the current commercial suspicion of investment in
E-commerce, funds are not forthcoming.
This scenario has been repeated in many other commercial sectors, most of
which are suffering from a lack of confidence on the part of the institutional
investors. 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.
Questions:
1.
2.
3.
4.
5.
- Europe?
- Non-European countries?
269
270
Dispute resolution.
Hard copy documentation.
Difficulties for expanding into non-European countries:
Summary
We have seen that in todays world, business strategy is inextricably
linked with IT strategy. The business benefits and competitive
advantages that new technologies, and e-business, can deliver are huge;
a company should be constantly looking to exploit this potential.
We have looked at the role of IT strategy methodologies, and have noted
that methodologies need to allow for flexibility and responsiveness to
changes in the business and in technology. We have briefly considered
how to manage IT evolution within an organisation and the cyclic role of
the various processes. We have noted that if e-business is the business,
and if IT strategy cannot be separated from business strategy, the chief
executive and technology director need to be working as partners.
Strategic leadership, that pro-actively encourages multi-functional
strategic effort, is vital as well as new concepts and practices of strategy
formulation.
Finally we have looked at the issue of reconciling legacy systems with
the e-business paradigm.
REVIEW ACTIVITY
We have seen that e-business is far more than just e-commerce. Many
companies, (e.g. Cisco Systems, Airbus Industrie) have achieved supply chain
efficiencies and enormous cost savings by adopting electronic methods such as
e-procurement. Use of enterprise resource planning systems (e.g. SAP) has
also played a significant role.
271
2.
Address the potential over the next five years, and likely business
benefits.
References
The following are the references for your key text and supporting texts:
272
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Stonehouse G., Hamill J., Campbell D. & Purdie T. (2000) Glo bal
and Transnatio nal Business Strategy and Managem ent
Published by: John Wiley & Sons (ISBN 0-471-98819-7).
14.
273