Strategic Management Essays, The quality of your answer is much more important than its quantity. You do not need to use in-text citation, nor reference in answering the questions.
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Module7Corporatestrategyv2.pdf
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Opening story: How corporations create value? - Wesfarmers
It is an Australian conglomerate, headquartered in Perth, WA, covers business in retail, chemicals, fertilisers, coal mining and industrial and safety products.
It is widely regarded as the Australian version of General Electric (GE)
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Meet the CEO - Wesfarmers
Former CEO of Wesfarmers Richard Goyder talking about Wesfarmers
https://www.youtube.com/watch?v=bhdgxEQxuG0
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Learning objectives
After you have studied this module, you should be able to: Understand the potential directions for corporate development (Scope: the Growth Matrix)
Identify alternative strategy options Assess the relative benefits of each option.
Describe the three roles of corporate parenting regarding how it can add value to its business units.
Portfolio Managers Synergy Managers Parental Developer
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What is a corporation?
A corporation refers to an organisation that has multiple businesses (or multiple strategic business units (SBUs)).
Thus, an corporation serves multiple distinctive markets
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What is corporate strategy?
Corporate (level) strategy It is concerned the overall purpose and scope of the organisation and how to create value for the corporation as a whole.
Business (level) strategy (competitive strategy) How to create competitive advantage in each business in which the company competes,
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Corporate
Business
Function (e.g., marketing, HR)
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What is a corporate parent (headquarters)?
The corporate parent refers to the levels of management above that of the business units, and therefore without direct interaction with buyers and competitors.
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The Multi-Business Organisation
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BHP Billion
Group headquarters: Melbourne
Four divisions: Petroleum and Potash; Copper; Iron Ore; and Coal. The Operating Model has been designed to ensure that decision-making
remains as close to the Businesses as possible.
Group Functions: Group (HQ) Functions support the Businesses and operate under a defined
set of accountabilities authorised by the Group Management Committee (GMC).
E.g., marketing, legal, HR
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Why need a corporation? -- The golden rules for corporate strategy
Value (A+B) > Value (A) + Value (B) + Coordination costs (A+B)
The value created by the corporation should be larger than the sum of value created by two individual businesses and their coordination costs when incorporating them into a corporation
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Scope: Corporate strategy directions
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Direction 1: Market penetration and consolidation
Market penetration refers to a strategy of increasing share of current markets with the current product range.
E.g., Medibank to grow its current business
Consolidation refers to a strategy by which an organisation focuses defensively on their current markets with current products.
e.g., Telstra to maintain its leading positon in Australia
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Direction 2: Product development Product development refers to a strategy by which an organisation delivers modified or new products to existing markets.
e.g., Apple s iPod, iPhone, and iPad; Google developed its mobile phone business.
This strategy option: involves varying degrees of related diversification (in terms of
products); can be an expensive and high risk, may require new strategic capabilities
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Direction 3: Market development
Market development refers to a strategy by which an organisation offers existing products to new markets
e.g., new geographical location: Amazon opened its new branch in Australia; Bank of China set up its branches in Australia. New users: stainless steel for cutleries
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Direction 4: Diversification
Diversification involves increasing the range of products or markets served by an organisation.
Conglomerate (unrelated) diversification involves diversifying into products/services or markets with no relationships to the existing businesses.
TPG bought Myers in 2007
Related diversification involves diversifying into products/services or market with relationships to the existing business. e. g., Wesfarmers bought Coles in 2008 and sold in 2017 (Horizontal
diversification)
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Drivers for diversification
Exploiting economies of scope efficiency gains through appl ing the organisation s existing resources or competences to new markets or services.
e.g., BHPB has its central marketing department in Singapore for selling all its minerals to their customers
Stretching corporate management competences. e.g., Wesfarmers financial management
Exploiting superior internal processes. e.g., IBM project management process
Increasing market power
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Conglomerate or (unrelated) diversification
Conglomerate (or unrelated) diversification takes the organisation beyond both its existing markets and its existing products and radicall increases the organisation s scope.
e.g., Wesfarmers, GE, Berkshire Hathaway (US), Virgin Corporation, and Temasek Holding (Singapore) Private equity: Blackstone (US), Texas Pacific Group
(TPG, Luxemburg)
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Related diversification
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Vertical integration
Vertical integration describes entering activities where the organisation is its own supplier or customer.
Backward integration refers to development into activities concerned with the inputs into the compan s current business.
e.g., OneSteel (Now Arrium) acquired an iron ore mine from WPR Forward integration refers to development into activities concerned with the outputs of a compan s current business.
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How can corporate headquarters create or destroy activities?
Value-adding activities Envisioning Coaching and facilitating Providing central services and resources Intervening
Value-destroying activities Adding management costs
Adding bureaucratic complexity Obscuring financial performance
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Indirect
Direct
How corporate parent can create value? -- Three corporate rationales
The portfolio manager operates as an active investor in a way that shareholders in the stock market are either too dispersed or too inexpert to be able to do. In short, they are
Agents for financial market (TPG)
The synergy manager is a corporate parent seeking to enhance value for business units by managing synergies across business units.
E.g., CBA, Qantas, Telstra, BHP, etc
The parental developer seeks to employ its own central capabilities to add value to its businesses.
e.g., Wesfarmers
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Portfolio manager Logic
Agent for financial market Strategic requirement
Identifying and acquiring undervalued asset Divesting low-performing SBUs quickly and good performers at a premium
Organizational requirement Small low-cost corporate staff Autonomous SBUs Incentives based on SBU results
It is appropriate for unrelated diversification For example, GE, Virgin Corp, and many private equity companies, such as TPG.
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TPG Capital, a global private investment firm, has a portfolio of more than 200 businesses (companies) invested
Including Financial services Consumer and retail
Healthcare
Example: It acquired Myer in 2006, and sold it in 2009 for a profit of $1.4billion
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The synergy manager (1/4) Logic
The achievement of synergetic benefits
Synergy refers to the benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts.
Synergy is often referred to as the
1 + 1 > 2 e ec .
Corporate examples BHP, Qantas, Commonwealth Bank of Australia, Telstra
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The synergy manager - Sharing activity (2/4)
Sharing activities often lowers costs or raises differentiation
Sharing activities can lower costs if it: Achieves economies of scale; Boosts efficiency of utilisation; Means more rapid movement through learning curve
Sharing activities can enhance potential for or reduce the cost of differentiation.
Sharing activities must involve activities that are crucial to competitive advantage
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The synergy manager- Transferring core competences (3/4)
Exploits interrelationships among divisions: Identify ability to transfer skills or expertise among similar value
chains. Exploit ability to share activities
Two firms can share the same sales force, logistics network or distribution channels
Example: Transferring Bunnings retailing capability to OfficeWork, Wesfarmers
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Degree of synergy ake b ? (4/4)
Synergy can reside as different levels At SBU level or corporate level
e.g., BHPBilliton and RioTinto, CBA and NAB, At functional level
e.g., Distribution, marketing, R&D At modular level
e.g., customer service (call centre)
Thus, in considering M&A, the synergetic benefit should outweigh the costs of coordination.
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The parental developer Logic
Central competences can be used to create value in SBUs Example: Wesfarmers, Virgin Corporation
Strategic requirements SBUs not fulfilling their potential The center has clear and relevant resource or capabilities to enhance SBU potential The portfolio is suited to Center s expertise
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The a e al de el e (C d)
Organizational requirements Center managers understand SBUs Effective structural and control linkage from Centre to SBUs SBUs may be autonomous unless collaboration is required Incentives based on SBU performance
Former Coles managing director, Ian McLeod, gathered up $10.74 million 2012-2013 for his turnaround of Coles Mr McLeod's long-term payments over the five years of the package total $34.5 million - all paid in cash
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Three corporate rationales summary
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Portfolio managers, synergy managers and parental developers
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Challenges in corporate parenting
Which rationale of corporate parenting is dominant? Can multiple rationales work simultaneously? If they can, how to manage them? How should corporate headquarters clarify and communicate its parenting rationale to its stakeholders?
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Module summary
A corporation is an multi-business organisation
Corporate strategy is concerned with the overall purpose and scope of the organisation and how to create value for the corporation as a whole.
Two major tasks for developing a corporate strategy Deciding on the strategic directions understanding how corporate parent can add value to its business
Ansoff s growth matrix Market penetration, market development, product development, and diversification
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M d le a (C d)
Three types of role played by corporate parent Portfolio managers Synergy managers Parental developers
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Prepare for next week
Module 8 International Strategy Read Chapter 9 of the textbook Read Assignment 2 Guide and form your group of FOUR (4).
Start preparing for proposing ONE strategic initiative
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