Agenda

Corporate Strategy Strategy and Structure Portfolio Management Case Exercise and Discussion: Walt Disney
FTMBA Strategic Management Lecture 4: Strategy in the Multi-business firm
By Dr. Brad MacKay, Senior Lecturer in Strategy
______________ 2011 MacKay

Learning Outcomes
To define corporate level strategy; To understand the relationship between strategy and corporate structure; To identify the value-adding and value-destroying aspects of corporate management approaches; To critically assess the benefits and limitations of portfolio approaches to managing businesses.

Corporate Composition

A multi-business firm is composed of two or more businesses. Diversification is when a corporation enters another line of business, either by starting up new activities (internal growth) or by buying another firm (acquisition).

Source: De Wit and Meyer 2004

Corporate Strategy
Existing

The Ansoff Matrix

Products New

Is concerned with how strategy develops across a a multiproduct group of businesses;

Economies of scale; and, Economies of scope (e.g. PG); Existing Market Penetration/ Consolidation Product Development

Focuses on decisions that lead companies to diversify;

Related Diversification (e.g. Unilever); Distantly-related diversification (e.g. Canon); Unrelated diversification (e.g. GE). Markets

New

Market Development

Diversification

Ansoffs Matrix
Market Penetration/Consolidation
Opportunities: Builds on existing capabilities or Downsizing Defends or increases market share Risks: Retaliation from competitors Legal constrains

Strategy and Structure

1960s Chandler investigated large-scale enterprises including General Motors, Du Pont, Sears, Roebuck and Co., Standard Oil; Corporate strategy is the determination of long-term goals and objectives, the adoption of courses of action and associated allocation of resources required to achieve goals; Technology and market changes led to changes in strategy, which led to changes in structure; He found that structure follows strategy

Product Development
Opportunity: Innovation; New capabilities Risks: Master strategic capabilities Project management risk

Market Development
Opportunities: New segments, new users; new geographies

Diversification
Opportunities: Efficiency gains, stretching capabilities, spreading risk, increase market power, responding to market decline, stakeholder expectations

Risks: Old products/services likely to fail; Risks: Lack of relevant brand and marketing skills All of the above; Unrelated diversification
Adapted from: Ansoff, I. Corporate Strategy. 1988. Penguin

Types of Structure

Multi-Divisional (M-Form)

All organizations require some form of organizational structure to implement and manage their strategies; Firms frequently alter their structure as they grow in size and complexity; Four Basic Types:
Multi-Divisional (M-Form); Functional Matrix Network

Virgin Group

Travel

Rail

Cinemas

Media

Group

Music

Trading

Holidays Atlantic Aviation Balloon

Rail

Cinemas PublIshing

Direct Net Money Mobile Telecoms

Records Radio EMI Music Digital Studios

Megastores Enterprises Clubs Cosmetics

Functional Structure

Matrix Structure

Upstream Oil Downstream Oil Natural Gas Coal

Global Business Units (GBUs): build major global brands with robust business strategies Corporate Functions (CFs): work to maintain a place as a leader of our industries. Global Business Market Developme Services (GBS): Organizations provide business (MDOs): build loc technology understanding and services that as a foundation fo drive marketing campai business success.

Finance

Marketing

R&D

Technology

East and Australasia

Europe

Metals Chemicals

Middle East Western Francophie Hemisphere Africa, and African South Asia Region

Royal Dutch/Shell pre-1996: Dismantled their matrix structure in 1996 in favour of a structure based on business sectors: upstream, downstream, chemicals and gas and power

Network Structure

Organizational Structure: Advantages/Disadvantages

Multi-Divisional (M-Form) (Virgin)
Adv.: High flexibility. Disad.: Low communication.

Linux: Established in 1993 by several thousand part-time hackers connected by the internet all over the world. Linus Torvalds's Leadership: release frequently and early, delegate, keep open model for collaborative software development

Functional Structure (McDonalds and Coca-Cola)

Adv.: Specialized functions Disad.: Local response can be weak

The Matrix Structure (Unilever)

Adv.: Increased pools of expertise, diverse project teams by need. Disad.: Too many lines of command, slow decision-making, demanding

The Network Structure (Linux)

Adv.: Difficult to disrupt or attack. Resilient. Disad.: No lines of command.

Source: Baran, P. Introduction to distributed communications, RAND Memorandum RM-3420-PR, Washington, RAND

Value-adding activities of the corporate centre

Envisioning
Providing a clear overall vision or strategic intent for its business units and a clear external image for its stakeholders.

Value-destroying activities Valueof the corporate centre

Adding management costs
Staff and facilities at the corporate-level are expensive! If the direct financial costs are greater than the value-adding activities, the corporate centre is net-destroying.

Coaching and facilitating

The corporate parent can help business unit managers develop strategic capabilities and facilitate cooperation and sharing across business units to improve synergies

Adding bureaucratic complexity

bureaucratic fog that is created by additional layers of management and trying to coordinate with sister businesses.

Providing central services and resources

Provide capital for investment and central services such as legal an human resource advice, IT etc. This also helps to give scale and efficiency.

Obscuring financial performance

Weak and underperforming businesses can be hidden or crosssubsidized by better performing sister businesses. The ability to hide underperforming businesses provides a disincentive to business-level managers.

Intervening
The parent also monitors performance and, where necessary, replaces weak managers.

Source: Johnson et al. 2004. Fundamentals of strategy, Prentice Hall.

Source: Johnson et al. 2004. Fundamentals of strategy, Prentice Hall.

The experience curve

High

Mead Corporation original matrix

Savings account
Growing businesses; Self-financing Self Medium risk High profit Should maintain cost effectiveness

Sweepstake
Developing businesses Net cash user Extremely high risk Low profit Not cost-effective cost-

Cost (Per Unit)

Market growth rate

Bond
Mature business Net cash generator Low risk High profit Cost-effective Cost-

Mortgages
Mature business Should be net cash generator Medium risk Low profit Likely not cost effective

Low

Volume (Cumulative)

High Relative Market Share

Low

Source: Aguilar, F. The Mead Corporation: Strategic Planning, Boston: Harvard Business School, Case 0-379-070

Growth-Share Matrix: Boston GrowthBox

High Star Problem Child/ Question Mark (?)

The BCG Matrix

Market growth rate Cash Cow

Business Growth Rate

22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0.5X 0.4X 10 X

0.3X

Dog

C F I G

Low High Relative Market Share Low

Relative Competitive Position

The BCG Matrix: An unbalanced portfolio

The BCG Matrix: A balanced portfolio

Business Growth Rate

20% 18% 16% 14% 12% 10% 8% 6% 4% 2%

10 X 4X

B C

Business Growth Rate

22%

Stars

Question Marks

22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2%

Stars
A

Question Marks
C

E G J

0.2X

Cash Cows
K L M

Dogs
I H
0.5X 0.4X

Cash CowsD
H G

Dogs
I J

0.5X 0.4X

0.1X

10 X

0.3X

0.2X

0.3X

Relative Competitive Position

Relative Competitive Position

BCG Growth-Share Matrices GrowthStrategies

COMPETITIVE POSITION Market share Technological know-how Brand image; Customer loyalty; Cost structure; Distinctive Competencies

Fictitious foreign sales market portfolio: The GE Matrix

Australia Canada
Industry Attractiveness

0.2X

0.1X

1.5X 1X

1.5X 1X

2X

4X

2X

0.1X

1.5X 1X

4X

2X

Brazil

High U.S. Germany China Egypt

CATEGORY Cash cow Stars Dogs Question Marks

STRATEGY Hold or harvest Hold Divest Divest or invest heavily to build

Medium

U.K. Italy

Low Market Share Market Size Strong

Mexico France Average Competitive Position Weak

Source: Adapted from: De Wit and Meyer. 2004. Strategy: Process, content and context

Limitations of the BCG and GE Matrices

The values are subjective; It is a static tool and doesnt take into consideration change or movement through the product life-cycle; The selection of labels (i.e. dog, star) is a political process that can be destructive; The matrices dont take into consideration risk-return; It was only ever meant as a presentational device for a first-phase of analysis. But ease of construction made it a popular device amongst managers; It influences resource allocation (i.e. divest the dog), without giving direction on how strategic decisions should be implemented; Recent developments in strategy, such as the core competence and dynamic capabilities view gives more direction.
Source: McKiernan, P. 1992. Strategies for growth. Routledge.

Expansion method matrix

Company Internal External

Internal Development Home country

Merger Acquisition Joint Venture Alliance Franchise Merger Acquisition Joint Venture Alliance Franchise Licensing

Geographic Location

Exporting Overseas office Overseas manufacture International Multinational operation Global operation

Source: Lynch, R. Strategic Management. Prentice Hall

Case: Walt Disney

Syndicate Group Discussion and Presentation Brief:

1. What were the key corporate challenges facing Walt Disney? 2. What was the relationship between Walt Disneys strategy and structure? 3. Does Disneys portfolio of businesses make sense? 4. What recommendations would you give to Walt Disneys Executive taking the company forward in the future? What structure should it take?