Philip Sadler Strategic Management 2nd edition (BookFi)
13 Managing strategic change 217
He is aFellow of the International Academy of Management, a Companion of the Institute of Management, a Fellow of the Institute for Personneland Development, a Fellow of the Institute of Directors, and a Patron of the Centre for Tomorrow’s Company. He holds the Burnham GoldMedal of the Institute of Management and was appointed CBE in 1986.
THE MBA MASTERCLASS SERIES
Another important development in the past few years has been the growing acceptance by companies, particularly large global enter-prises, of the need to set objectives in the field of corporate social responsibility as well as financial ones and to measure and report onthe extent to which they are being achieved. Finally, events such as the collapse of the Enron empire and the associated demise of Andersen have reminded business leaders thatfailure to put shareholders’ long-term interests at the top of the agenda and failure to observe basic ethical principles can not only lead tocorporate collapse but also to the very real possibility of prison sentences.
THE ELEMENTS OF STRATEGY
Policies In the context of company strategy, policies are guiding rules or prin- ciples that are regarded as an integral part of the company’s ‘successmodel’; that is to say, they are practices or ways of doing things, often long established, that are seen as indispensable parts of the company’sformula for achieving a sustainable competitive advantage. Defining what business the company is in and defining what kind of company it is Decisions about corporate purpose and company policies are closely linked to two key sets of strategic decisions – what business thecompany is in or is to be in and what kind of company it is or is to be.
CORPORATE AND COMPETITIVE STRATEGY
ᔡ What are the values and principles that should govern the behaviour of members of the organization? At the level of the business unit or subsidiary, however, the main strategic issue is how to achieve a sustainable competitive advantagein the particular product/market field in which the division operates.
SCHOOLS OF THOUGHT IN STRATEGIC
More recently this approach has been represented in the SWOT model (Strengths, Weaknesses, Opportunities, Threats), which effec-tively marks the position of this school in spanning the process of strategic management, from the recognition of environmental influ-ences on the business in the form of opportunities and threats, and the need for an objective appraisal of the strengths and weaknesses of thebusiness compared to competitors. In particular the watershed years bridging the 20th and the 21st centuries have seen explosive growth in a range of uses of the Internetand intranet – as an advertising medium, as a marketing tool that makes possible a greater degree of interaction between supplier andcustomer, as a means of communication with stakeholders and the public at large, and as a medium for learning and the integration ofwidely dispersed organizations.
ANTICIPATING ENVIRONMENTAL CHANGE
In the words of James D Wolfensohn, the President of the World Bank,(2001): The environmental context 45The New Economy has the potential to unleash extraordinary development benefits and real social and environmental gains,but to achieve such gains requires participation and intervention at the local, national and global level. The issues to be covered in this part are: ᔡ defining the corporation’s mission and purpose; ᔡ the role of the parent company: ᔡ building the portfolio: ᔡ strategic options: ᔡ functional strategies: 3 Clarification of purpose ormission – the starting point for strategic management INTRODUCTION Fundamental to the process of giving coherence and direction to the actions and decisions of an organization is the defining of the organi-zation’s purpose.
There is nothing in law to prevent directors fromhaving regard to the interests of third parties with whom the company has a relationship (sometimes called stakeholders) – employees,customers, suppliers, financiers and the community generally – if they judge, reasonably and in good faith that to do so is conducive to thesuccess of the company. However, he falls into a trap of his own making when he states:‘Companies are there for the shareholders, just as a school is for the children, a hospital for its patients, a trade union for its members andthe AA for its motorists.’ What if the school and the hospital are in the private sector?
THE STAKEHOLDER APPROACH
She argues that ‘Stakeholder theory is the doctrine that busi- nesses should be run not for the benefit of their owners, but for thebenefit of all their stakeholders.’ Some advocates may make such an assertion, but there is no generally accepted body of theory in which itcan be found, still less is there anything that would justify the term‘doctrine’. John Plender (1997) points out that in the stakeholder or inclusive model of corporate governance managers are seen as trustees of thewealth inherited from the past, with an obligation to preserve and enhance that wealth in the long-term interest of the company, so as toensure its sustainability.
It represents the framework for the entire business, the values that drive the companyand the belief that the company has in itself and what it can achieve.’ Some companies remain true to the ideas about purpose and values first set out by a visionary leader from the past – usually the company’sfounder. By contrast the adoption of a wider purpose, one that embraces benefits to humankind and obli-gations to stakeholders, reflects a set of humanitarian values and a desire to be of service to the community.
4 The role of the parent
company INTRODUCTION In carrying out its task the head office must normally perform certain basic minimum functions in addition to the definition of purpose andsetting of strategic goals. It must determine anorganization structure for the group as a whole, appoint the most senior executives, raise capital, deal with investor relations, and establish andoperate control processes to guard against fraud and ensure compliance with company policy.
The extent to which this aim is achieved will reflect the degree to which there is a good fit between the characteristics of the parentcompany and those of the subsidiary. ᔡ The third group consists of the central functions and services.ᔡ Skills and people make up the fourth group.ᔡ Finally, there are the ‘decentralization contracts’, which define the issues that will be influenced by the centre and those that will bedelegated.
In their initial studies Goold andCampbell identified several UK companies using this style, includingBP, BOC, Cadbury Schweppes and Lex Service Group, but in later work they reported that they found that apart from Shell relatively fewsuccessful companies in the West were following this approach and that some, such as BP and IBM, had practised it in the past but had movedaway from it. In more recent work (Goold and Campbell, 2002), the Ashridge team have looked again at the sharing of roles and responsibilities The role of the parent company 65 between parent companies and operating units in highly complex businesses and reached the conclusion that in such businesses thedistinction between parent company and business unit becomes blurred and that in consequence the emphasis on the ‘added-value’role of the parent is less relevant.
Other factors to be taken into consideration are the company’s reputation with the public atlarge, the level of satisfaction and loyalty of its customers, the quality and reliability of its suppliers and the robustness of its processes andsystems. ‘Creation and destruction of shareholder value are the result of how a companyis led, how it innovates, what commercial decisions it makes and how well it listens to and learns from its customers, employees andsuppliers.’ Companies that are built to last An important piece of research by Stanford University BusinessSchool (Collins and Porras, 1995) throws some light on the question of what policies and practices contribute to the achievement of asustainable business.
HARDWARE SOFTWARE SUPPLIES EUROPE AMERICAS FAR EAST
Kotter and Heskett (1992) argue that having a strong culture can be both a strength and a weakness in that astrong culture may inhibit an organization’s ability to change in line with important changes in its competitive environment. It will be inter-esting to see what will be the outcome, in terms of its impact on culture, of the acquisition of Compaq by Hewlett Packard – an acqui-sition that was strongly opposed by the Hewlett and Packard families, largely on the grounds of cultural incompatibility.
REPUTATION, IMAGE AND BRAND IDENTITY
Not in the formal sense of pieces of paper or certificates, although these are issued in certain cases(such as the airline industry or the operator of the National Lottery), but in the informal sense of whether people are willing to accept and dealwith the organisation. Among the cases at the end of the book, that of Tesco has been included to illustratehow this process has been carried out with considerable success by a UK supermarket, while the tragic case of Marks and Spencerserves as an object lesson of what can happen as a result of complacency, arrogance and short-term thinking.
5 Building the portfolio (1):
analyzing industry and competition INTRODUCTION Before starting a new business or making an acquisition in a new industry, it is essential to know something about the industry that isbeing entered. In particular, it is important to know about the attrac- tiveness of the industry being entered in terms of its profit potentialand how competitive advantage is obtained.
ANALYZING INDUSTRY ATTRACTIVENESS
Bargaining power of suppliers The balance of power between suppliers and firms within the industry depends on the same factors that determine the balance of powerbetween firms in the industry and buyers – we are simply shifting the focus of attention upstream. For example, a travel agency considering opening up a new branch in a new location should analyze the attractiveness of that local market interms of: ᔡ the number of competitors; ᔡ the extent to which they offer differentiated services; ᔡ their service capacity relative to market demand; ᔡ the power of local property landlords; ᔡ the power of corporate customers to demand discounts; ᔡ the likelihood of additional entrants.
CHANGING INDUSTRY STRUCTURE
By understanding how industry structure affects competition and profitability, it is also possible to identify how a firm can influence theindustry structure in order to improve the balance of competitive forces, and so enhance industry profitability. During the 1960s, for example, British food processing companies were instrumental in encouraging US can makingcompanies to enter the UK market to counter the supplier power of theMetal Box Company.
Analyzing industry and competition 93SUMMARY At any one point in time industries vary in their attractiveness; also the attractiveness of any particular industry to an investorwill vary over time, owing to such things as the state of the economy, government regulation and market conditions. Vertical integration can occur in two directions: ᔡBackward integration where the firm takes ownership and control of producing its own inputs (eg the Body Shop’s production of many of its own toiletries and cosmetics); ᔡForward integration where the firm takes ownership and control of its own customers (eg Coca-Cola acquiring many of its local bottlers within the US).
COSTS OF USING THE MARKET
If the quality of the wood can onlybe detected after sawing the trees, there may be incentives for the tree grower to grow poor quality trees and for the sawmill owner tomisrepresent the quality of the sawn wood. In January 2002 Hanson created an integrated building materials business in Europe by combining its quarry products and bricksoperations into a new division called Hanson Building Materials 108 Corporate strategy Today, Hanson is one of the world’s leading building materials companies and is the largest producer of aggregates and the thirdlargest producer of ready-mixed concrete in the world with over31,000 employees and operations in 19 countries across four continents.
THE CASE FOR RELATED DIVERSIFICATION
In a number of consumer goods industries the ability to extend brand equity into related markets has provided a rationale for diversification, for example Gillette’s diversification fromrazor blades into men’s toiletries, Mars’ diversification from confectionery into ice-cream, and American Express’s intro-duction of a wide range of financial products and travel services under the ‘American Express’ trademark. The value added by corporatemanagement in these companies tends to be through the application of common systems of financial control and asset management, as wasthe case with Hanson, the strategic management of businesses subject to rapid technological change (United Technologies), and the abilityto acquire assets at low cost and make astute investment decisions where projects are large and long term (Trafalgar House).
DIVERSIFICATION AND SYNERGY
The choice of diversification or licensing depends on the costs associated with negotiating and enforcing licensingcontracts and the effectiveness of these contracts in exploiting the full value of the Disney name and characters, compared with the costs andreturns from entering and managing a different type of business. Similarly, the developers of the Dolby sound reduction systems and the Wankelrotary engine chose to market their patents rather than engage directly in the manufacture of audio systems and motor vehicles.
DIVERSIFICATION AND PERFORMANCE
Diversification through acquisition is normallyjustified on the basis of cost savings from eliminating duplication in corporate services, the integration of related facilities, the transfer ofknow-how and other capabilities, and the infusion of efficiency and dynamism from the managerially stronger to the managerially weakercompany. Among the recent evidence on the success of diversification, the following findings are worthy of note: ᔡ Among UK industrial companies it was found that profitability was positively associated with diversity up to a point, but fromthen on increased levels of industrial diversity were associated with lower levels of profitability (Grant, Jammine and Thomas,1988).
PORTFOLIO PLANNING MODELS
If the competitiveness of one business depends on synergies withother businesses, then the techniques which view the diversified company as a portfolio of independent businesses are simply not Diversification 119 120 Corporate strategySUMMARY Among the different areas of strategic management, diversifi- cation stands out as the most fraught with danger and mostclosely associated with failure. Executive leadership and communication In the excitement of being involved in huge financial transactions and conscious of the need for confidentiality in the early stages, it is easyto overlook the importance of full and clear communication.
Some of the mainreasons why companies form alliances are: ᔡ to avoid barriers to entry; ᔡ to create synergy by pooling resources and sharing expertise; ᔡ to reduce/share risk; ᔡ to gain access to new markets; ᔡ to source raw materials; ᔡ to undertake development projects that are too big for a single company to fund. Three main barriers to successful alliances can be summarized as follows: ᔡ a failure to understand and adapt to a new style of management – one that involves negotiation, persuasion and patience and negatesthe use of position power; ᔡ failure to understand cultural differences leading at the least to misunderstandings and in some cases damaging relationships; ᔡ lack of commitment to succeed, often the result of attitudes of mind that favour competing rather than collaborating.
For a partnership to work there must be a genuine commitment from the top of both organizations and a clear understanding by bothparties of what is expected in principle and in detail. The customer expects the supplier to meet The demands model specifications for a limited range of products and to meet schedules, but does not engage in joint development or long-termsupply agreements.