Systems Essentials of Strategic Management_5 doc

therefore, to obtain synergy among the business units by providing needed resources to units, transferring skills and capabilities among the units, and coordinating the activities of shared unit functions to attain economies of scope (as in centralized purchasing). How Is a Corporate Parenting Strategy Developed? Campbell, Goold, and Alexander recommend that the search for appropriate corporate strategy involves three analytical steps: 1. Examine each business unit (or target firm in the case of acquisition) in terms of its strategic factors. Strategic factors will likely vary from company to company and from one business unit to another. People in the business units probably identified the strategic factors when they were generating business strategies for their units. 2. Examine each business unit (or target firm) in terms of areas in which performance can be improved. These are considered to be parenting opportunities. For example, two business units might be able to gain economies of scope by combining their sales forces. In another instance, a unit may have good, but not great, manufacturing and logistics skills. A parent company having world-class expertise in these areas can improve that unit’s performance. The corporate parent could also transfer some people from one business unit having the desired skills to another in need of those skills. People at corporate headquarters may, because of their experience in many industries, spot areas where improvements are possible that even people in the business unit may not have noticed. Unless specific areas are significantly weaker in regard to the competition, people in the business units may not even be aware that these areas could be improved, especially if each business unit only monitors its own particular industry. 3. Analyze how well the parent corporation fits with the business unit (or target firm). Corporate headquarters must be aware of its own strengths and weaknesses in terms of resources, skills, and capabilities. To do this, the corporate parent must ask if it has the characteristics that fit the parenting opportunities in each business unit. It must also ask if there is a misfit between the parent’s characteristics and the strategic factors of each business unit. Can a Parenting Strategy also be a Competitive Strategy? Although competitive strategy was discussed in Chapter 5 in terms of a company or a business unit operating only in one industry, it can also be used across business units. A horizontal strategy is a corporate parenting strategy that cuts across boundaries of business units to build synergy across them and improve the competitive position of one or more business units. When used to build synergy, it acts like a parenting strategy; when used to improve the competitive position of one or more business units, it can be thought of as a corporate competitive strategy. Large multibusiness corporations often compete against other large multibusiness firms in a number of markets. These multipoint competitors are firms that compete with each other not only in one business unit, but also in a number of business units. At one time or another, a cash-rich competitor may choose to build its own market share in a particular market to the disadvantage of another corporation’s business unit. Although each business unit has primary responsibility for its own business strategy, it may sometimes need some help from its corporate parent, especially if the competitor business unit is getting heavy financial support from its corporate parent. In this instance, corporate headquarters develops a horizontal strategy to coordinate the various goals and strategies of related business units. 6 For example, Procter & Gamble, Kimberly-Clark, Scott Paper, and Johnson and Johnson compete with one another in varying combinations of consumer paper products, from disposable diapers to facial tissue. If (purely hypothetically) Johnson and Johnson had just developed a toilet tissue with which it chose to challenge Procter & Gamble’s high-share Charmin brand in a particular district, it might charge a low price for its new brand to build sales quickly. Procter & Gamble might not choose to respond to this attack on its share by cutting prices on Charmin. Because of Charmin’s high market share, Procter & Gamble would lose significantly more sales dollars in a price war than Johnson and Johnson would with its initially low-share brand. To retaliate, Procter & Gamble might thus challenge Johnson and Johnson’s high-share baby shampoo with its own low-share brand of the same product in a different district. Once Johnson and Johnson had perceived Procter & Gamble’s response, it might choose to stop challenging Charmin so that Procter & Gamble would stop challenging Johnson and Johnson’s baby shampoo. Multipoint competition and the resulting use of horizontal strategy may actually slow the development of hypercompetition in an industry. The realization that an attack on a market leader’s position could result in a response in another market leads to mutual forbearance in which managers behave more conservatively toward multimarket rivals, and competitive rivalry is reduced. Multipoint competition is likely to become even more prevalent in the future, as corporations become global competitors and expand into more markets through strategic alliances. Discussion Questions 1. How does horizontal growth differ from vertical growth as a corporate strategy? How does it differ from concentric diversification? 2. What are the trade-offs between an internal and an external growth strategy? Which approach is best as an international entry strategy? 3. Is stability really a strategy or is it just a term for no strategy? 4. Compare and contrast SWOT analysis with portfolio analysis. 5. How is corporate parenting different from portfolio analysis and how is it similar to it? Is it a useful concept in a global industry? Key Terms (listed in order of appearance) corporate strategy 90 directional strategy 90 portfolio strategy 90 parenting strategy 90 growth strategies 90 stability strategies 90 retrenchment strategies 90 concentration strategies 91 vertical growth strategy 91 vertical integration 91 transaction cost economics 92 horizontal growth strategy 92 horizontal integration 92 diversification strategies 93 concentric diversification 93 synergy 94 conglomerate diversification 94 pause/proceed-with-caution strategy 94 no-change strategy 94 profit strategy 95 turnaround strategy 95 captive company strategy 96 sellout/divestment strategy 96 bankruptcy 96 liquidation 96 portfolio analysis 97 BCG Growth-Share Matrix 97 GE Business Screen 99 corporate parenting 102 horizontal strategy 103 multipoint competitors 103 Notes 1. C. Zook and J. Allen, “Growth Outside the Core,” Harvard Business Review (December 2003), pp. 66–73. 2. K. R. Harrigan, Strategies for Vertical Integration (Lexington, Mass.: Lexington Books, 1983), pp. 16–21. 3. L. Dranikoff, T. Koller, and A. Schneider, “Divestiture: Strategy’s Missing Link,” Harvard Business Review (May 2002), pp. 74–83. 4. W. H. Hoffmann, “How to Manage a Portfolio of Alliances,” Long Range Planning (April 2005), pp. 121–143. 5. A. Campbell, M. Goold, and M. Alexander, “Corporate Strategy: The Quest for Parenting Advantage,” Harvard Business Review (March–April 1995), p. 121. 6. M. E. Porter, Competitive Advantage (New York: The Free Press, 1985), pp. 317–382. [...]... structure It developed an elaborate system of groups made up of managers from different functions The primary goal of these cross-functional teams was to develop products for new markets “Councils” were in charge of markets that had the potential to reach $10 billion in sales “Boards” were in charge of markets with the potential to reach $1 billion Both types of teams were supported by “working groups”... opportunities Thus far, the only disadvantage of the new structure was the large number of meetings demanded by the system.1 8.1 WHAT IS STRATEGY IMPLEMENTATION? Strategy implementation is the sum total of the activities and choices required for the execution of a strategic plan It is the process by which strategies and policies are put into action through the development of programs, budgets, and procedures... created out of close interaction with the sales force How Does a Company Achieve Synergy? One of the goals to be achieved in strategy implementation is synergy between and among functions and business units, which is why corporations commonly reorganize after an acquisition The acquisition or development of additional product lines is often justified on the basis of achieving some advantages of scale... achieving some advantages of scale in one or more of a company’s functional areas Synergy can take place in one of six ways: shared know-how, coordinated strategies, shared tangible resources, economies of scale or scope, pooled negotiating power, and new business creation.3 Cisco Systems is an example of a company using a matrix structure to obtain all six forms of synergy, but especially the last one, new... brilliant founders are able to get out of the way of the newly empowered functional managers Once into Stage II, the corporate strategy favors protectionism through dominance of the industry, often through vertical or horizontal integration The great strength of a Stage II corporation lies in its concentration and specialization in one industry Its great weakness is that all of its eggs are in one basket By... type of matrix structure) pioneered by Procter & Gamble The general conclusion seems to be that firms following similar strategies in similar industries tend to adopt similar structures What Are the Stages of Corporate Development? Successful firms tend to follow a pattern of structural development, called stages of corporate development, as they grow and expand Beginning with the simple structure of. .. some way in implementing corporate, business, and functional strategies Most of the people in the organization who are crucial to successful strategy implementation probably had little, if anything, to do with the development of the corporate and even business strategy Therefore, they might be entirely ignorant of the vast amount of data and work that went into the formulation process Unless changes in... direct traffic through a computer network, but also provides operating system software to support Internet-type corporate networks and services to help customers maintain those networks Following a growth strategy of concentric diversification, the firm has acquired dozens of other networking firms in order to build its portfolio of products and services—all related to networking As its portfolio grew,... independently of other functions? 2 Why is penetration pricing more likely than skim pricing to raise a company’s or a business unit’s operating profit in the long run? 3 How does mass customization support a business unit’s competitive strategy? 4 When should a corporation or business unit outsource a function or activity? 5 What is the relationship of policies to strategies? Key Terms (listed in order of appearance)... pp 53–55 13 O Gadiesh and J L Gilbert, “Transforming Corner-Office Strategy into Frontline Action,” Harvard Business Review (May 2001), pp 73–79 PART IV: STRATEGY IMPLEMENTATION AND CONTROL 8 STRATEGY IMPLEMENTATION:ORGANIZING FOR ACTION Cisco Systems is one of the most successful computer companies in the world The company’s domination of the networking market allows it to earn high gross margins . Consider Management s Attitude Toward Risk? The attractiveness of a particular strategic alternative is partially a function of the amount of risk it entails. Risk is composed not only of the. pursued by the firm or its units. 12 7 .5 DEVELOPMENT OF POLICIES The selection of the best strategic alternative is not the end of strategy formulation. Management must establish policies that. development of additional product lines is often justified on the basis of achieving some advantages of scale in one or more of a company’s functional areas. Synergy can take place in one of six ways: