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Headquarter Level Strategy

Global Strategic Development

Introduction

Tata is now India’s largest and most admired conglomerate. Tata began its activities in 1847 as a single business company operating as a textile mill. Due to Government regulation Tata was forced to diversify itself into unrelated businesses. Tata’s activities span most key sectors of the Indian economy including steels, auto manufacturing, hotels, telecommunication, financial services, chemical, electricity, IT consultancy, tea & watches.

Introduction

Tata’s corporate strategy is to manage by a central group of corporate managers. – On the one hand their task is to act as a buffer between the different subsidiaries, so that each subsidiary is accountable for its activities. – On the other hand their task to act as a bridge across the different subsidiaries, so as to enable expansion into new businesses and regions and assistance to businesses that need capital help from the centre (venture capitalist).

Role of Corporate Parent

CP must determine the overall strategic direction and structure of the multinational firm: Global Sourcing CP must determine the scope of operation by defining the extent of the firm’s involvement across different operations and countries: Diversification The management team at the corporate level needs to develop basis for maintaining an overview of performance across all subsidiaries: managing a Global Portfolio

Global Sourcing Strategy

Sourcing refers to the process by which MNC’s manage the flow of components and finished goods to serve domestic and international markets. GSS is the management of logistics identifying which production units will serve which particular markets and how components will be supplied for production. GSS must enable firms to exploit both its own and its suppliers’ competitive advantages and the comparative locational advantages of various countries in global competition.

Global Sourcing Strategy
Sourcing Method
Intra- Firm/ Vertical Integration Sourcing Outsourcing Domestic Foreign Countries

Location

Type of Sourcing

Domestic Foreign Countries

In-house sourcing from domestic subsidiaries In-house sourcing from subsidiaries abroad Sourcing from domestic external suppliers

Sourcing from suppliers located abroad

Vertical Integration

VI represents the expansion of the firm’s activities to include activities carried out by suppliers or customers. – Firm source components in-house when cost of producing them abroad outweigh the benefits. – Global intra-housing strategyinvolves coordinating and integrating the flow of inputs both within and among subsidiaries in different countries.

Motives for VI

 


Lack of quality suppliers Retain control over property knowledge High entry barrier Maintain quality Add value at different stages of the value chain.

Problems of VI

 

Lost focus Higher cost Fast changing global business environment

Outsourcing

Outsourcing by multinational firm comprises the inputs supplied to the multinational firm by independent suppliers from around the world. Conditions of Outsourcing
– Specify what attributes it needs from suppliers – Technology and processes to measure those attributes must be reliable and conveniently accessible – Variations in the deliveries needs to be incorporated and adjusted in the final product.

Types of Outsourcing

Firm’s prefer domestic outsourcing when the disadvantages of producing them abroad outweigh the advantage.
– The cost of producing and distributing the components by a domestic supplier is lower than the cost of producing them by foreign suppliers – Where the foreign suppliers do not possess the necessary skills and technologies needed to produce the components

National differences also have an impact on the outsourcing strategy- Arm’s length basis/ Keiretsu.

Advantages of Outsourcing

   

Cost Saving Access to proprietary knowledge Focus on core competence Flexibility Competition

Disadvantages of Outsourcing

  

Hollow firms High failure rate Operational & Cultural problem Damage corporate image

Diversification
Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets.

Why Diversify?
•To maintain an appropriate level of risk exposure •To temper market volatility

Diversification Strategies
Focused Strategy: Single business/ Concentric Diversification Diversification Strategy

Industrial Diversification

Related Diversification

Unrelated Diversification

Global Diversification

Related Global Diversification

Unrelated Global Diversification

Related Global Diversification

Unrelated Global Diversification

Focused Strategy: Single Business

Single businesses strategy followers stick to the core business they know well; i.e. MacDonald, domino’s pizza , following concentration strategy. – Advantages  In-depth knowledge  Better positioned to develop CA- develop unique competence – Disadvantages  Risk is substantial – obsolete  Business starts to shrink

Industrial Diversification

Two industrial diversification options are available for firms: – Diversify into closely related business- Related Diversification: RD measures dispersal of activities across business segments within industries – Diversify into completely unrelated businessUnrelated Diversification: URD measures the extent to which a firm’s activities are dispersed across different industries.

Related Diversification

Related diversification: companies acquire businesses that are similar in some way to their original or core business – Ex.: Nike adding clothing line to its shoe operations

Related Diversification

Opportunities:
– Economies of scope: knowledge – Market power – R&D competencies sharing of

Unrelated Diversification

Unrelated diversification: firms acquire businesses in any industry – Sound financial investment: key concern – Diversify risks – Market/ Profit opportunity

 Problem of Contamination

Risks of Diversification

Demotivate better performing subsidiaries Parent’s interference

Diversification in Emerging
Economies

Developed economies are advised to stick to their core business unless they have a good reason to diversify. On the other hand large firms in emerging economies are advised to diversify into different line of businesses unless they have a good reason to follow a focused strategy.

Diversification in Emerging
Economies
Reasons – dealing with market imperfection
– Lack of venture capital – Political risk- bureaucracy, red tape – Lack of information flow

Global Diversification

The key motivations for global diversifications are – Search for new market to exploit unique assets – To gain access to lower cost higher quality input – To build scale economies and other efficiencies – Pre-empt competitors
While global diversification has increased over time, industrial diversification has declined over the same period.

Global Diversification

Related & Unrelated GD
– Related GD: the dispersion of a global firm’s activities across countries within relatively homogeneous cluster of countries – Unrelated GD: the dispersion of a global firm’s activities across heterogeneous geographic region

Global Diversification

Benefits
– Increases shareholders value – Create flexibility- production, operation – Lower the overall tax liability – Increased power – Spreading risk

Global Diversification

Costs
– More complex structure – Inefficient subsidiaries – Cost of coordination

Managing Portfolio: BCG Share Matrix

BCG Share Matrix

Division into four categories based on market share and relative market share
– Stars: the most successful firm – Dogs: businesses with low market shares in lowgrowth industries – Cash cows: businesses in slow-growth industries where company has strong market-share position – Problem children: businesses in high-growth industries where company has a poor market share

Managing Global Portfolio
Country Attractiveness

Companies compatibility with each country

Country Attractiveness: Ford

Competitive Strength: Ford

CA vs. CS