Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Global Corporate
Strategy
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The University of Sunderland
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Contents
Introduction
Unit 1
Strategy Defined and Key Concepts
Introduction 1
Definition of Strategy 2
Levels of Strategy 5
Strategic Concepts 7
Strategic Thinking 9
Strategic Models 12
Summary 34
Unit 2
Strategic Capability
Introduction 37
The Different Management Perspectives 38
Portfolio Management 39
The Core competencies perspective 48
Divestment 51
Summary 57
Unit 3
Globalisation
Introduction 61
What is Globalisation 61
The Globalisation of Markets 66
The Globalisation of Production 68
Drivers of Globalisation 70
The Changing Demographics of the Global Economy 73
The Globalisation Debate: Prosperity or Impoverishment? 76
Managing in the Global Marketplace 78
Summary 88
Unit 4
‘Altering the Boundary’ – Alliances and Mergers
Introduction 91
Paradox of Competition and Co-operation 92
Global Strategic Alliances 92
Mergers and Acquisitions 104
Summary 131
Unit 5
Value Management
Introduction 133
Paradox of Profitability and Responsibility 134
The Concept of Value 134
Value Management 137
What is a Value-Driven Approach 141
Summary 151
Unit 6
Corporate Governance and Ethics
Introduction 155
Corporate Governance 156
Business Ethics 173
Summary 188
Unit 7
Managing Complexity
Introduction 191
Paradox of Control and Chaos 192
Systems Thinking 193
Soft Systems Methodology (SSM) 200
Strategic Control? 204
Summary 207
Unit 8
Knowledge Management
Introduction 209
Theoretical Concepts on Knowledge 210
Knowledge 212
Knowledge Transfer 215
Practical steps to promote Knowledge Management 218
Summary 237
Global Corporate Strategy Global Corporate Strategy – Contents
Unit 9
Innovation
Introduction 239
Innovation strategies 240
Innovation and established companies 241
Conclusion 248
Summary 255
Unit 10
Strategic IT and e-Business
Introduction 259
The Link between Business and IT Strategy 260
IT Strategy Methodology 264
Summary 275
References 276
5
How to use this workbook
This workbook has been designed to provide you with the course
material necessary to complete Global Corporate Strategy by distance
learning. At various stages throughout the module you will encounter
icons as outlined below which indicate what you are required to do to
help you learn.
This Activity icon refers to an activity where you are required to undertake a
specific task. These could include reading, questioning, writing, research,
analysing, evaluating, etc.
This Activity Feedback icon is used to provide you with the information
required to confirm and reinforce the learning outcomes of the activity.
This icon shows where the Virtual Campus could be useful as a medium for
discussion on the relevant topic.
This Key Point icon is included to stress the importance of a particular piece
of information.
It is important that you utilise these icons as together they will provide
you with the underpinning knowledge required to understand concepts
and theories and apply them to the business and management
environment. Try to use your own background knowledge when
completing the activities and draw the best ideas and solutions you can
from your work experience. If possible, discuss your ideas with other
students or your colleagues; this will make learning much more
stimulating. Remember, if in doubt, or you need answers to any
questions about this workbook or how to study, ask your tutor.
i
Global Corporate Strategy
Preface
iii
Preface Global Corporate Strategy
The ten schools can be split into two ‘types’. Schools 1-3 can be seen as
‘prescriptive’, that is to say they are based on the belief that Corporate
Strategy is a planned, analytical hard data process. On the other hand,
Schools 4-10 can be seen as ‘descriptive’. In these areas, writers believe
that strategy is a complex, uncertain, subjective and ‘soft’ data process.
There is a range of theory and academic writing to support all of these
perspectives.
iv
Global Corporate Strategy Preface
v
Preface Global Corporate Strategy
Due to the nature of the subject area it is impossible to cover all aspects –
simply think about how long it would take to read one of the key texts
from cover to cover! The topics omitted are still important – the study
time allocated to this module is not enough to cover everything.
Therefore, it is in your interests to read more widely than the specified
reading dictates.
The module will enable you to recognise and describe many different
features of organisations. However, the module will encourage you to
analyse these issues and be able to understand why organisations do
what they do and look critically at their strategic decisions. You should
be able to recognise and understand the importance of the various
aspects of strategic decision making and implementation processes.
You should remember that it is a Masters level module and you will
only reap the full benefits if you put in the effort. This means preparing
well and fully utilizing other arrangements to enhance your learning,
e.g. tutor support and contributing to remote discussion and chat via
available virtual learning environments.
vi
Unit 1
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The term corporate strategy can bring to mind various aspects of
corporate management. Vision, competition, competitive advantage,
new markets, managing for shareholder value, moulding corporate
culture, operational processes for execution, strategic plans all come to
mind. But what exactly is strategy?
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
Finally, we shall look at two case studies to understand how the key
concepts of strategy apply practically within organisations.
Definition of Strategy
There is no universal definition of strategy. Strategy applies to many
disparate fields such as gaming strategy, economic strategy, investment
strategy, military strategy, marketing strategy and indeed corporate
global strategy. Taking a conventional approach, strategy can be
thought of as a long term plan of action or execution designed to achieve
a particular goal, such as achieving competitive advantage for an
organisation. It reflects the values, expectations and goals of those who
are in power within the organisation.
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
VIRTUAL CAMPUS
Discuss with your colleagues how a tactical action in your work context
furthered the company’s strategy. In particular, how it influenced:
· Competitive position.
· Market share.
· Customer satisfaction.
· New opportunities.
Business strategy
Some definitions of business strategy that are helpful are as follows:
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
KEY POINT
Characteristics of business strategy are as follows:
· Sets direction and scope over the long term to achieve goals.
ACTIVITY
Read p. 1-19 of Chapter 1 and section 2.1 of the key text, De Wit, B & Meyer, R
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
Levels of Strategy
Strategy can be distinguished by the levels at which it occurs. Refer to
Figure 1.1.
Operational Strategy
Corporate Strategy
Corporate Strategy:
Operational Strategy:
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
Corporate Strategy
Corporate Entity 1
Operational Strategy
Operational Strategy
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
ACTIVITY
Think of an example, perhaps from your own work context, of how corporate
strategy translated to business unit strategy and operational strategy.
Strategic Concepts
A number of factors influence the type of strategy an organisation
adopts. These factors include the maturity of an organisation, maturity
of the market sector it operates in, its corporate management culture,
and market leadership goals.
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
ACTIVITY
Can you think of an example of strategic fit?
Now can you think of a company that has or is adopting strategic stretch?
ACTIVITY FEEDBACK
You probably thought of many examples of strategic fit, but perhaps had more
difficulty with examples of strategic stretch.
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
Strategic Thinking
Where previously (in the 1970s and 1980s) the focus was on managerial
skills in strategic planning, now the emphasis is on strategic thinking.
Strategic thinking has creativity at its heart, and encourages the entire
organisation to be involved. It minimises the risks associated with
management power over strategy.
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
De Wit & Meyer discuss the paradox of Logic and Creativity. They see
strategy as a ‘wicked’ problem, i.e. ambiguity, complexity and
uncertainty prevail in making strategic decisions. The implication is that
creative (or generative) thinking is crucial to enable managers (and their
organisations) to move beyond the obvious, from the comfortable to the
uncomfortable to be successful. This is often termed ‘lateral’ thinking or
‘thinking out of the box’.
ACTIVITY
Learn more about Strategic Thinking by reading the introductory section to
Chapter 2 (p 51-67) in your key textbook, De Wit, B & Meyer, R
· Bottom-up processing.
· Top-down processing.
Bottom-up processing
The characteristics of bottom-up processing, in the context of strategic
thinking, are:
Top-down processing
The characteristics of top-down processing, in the context of strategic
thinking, are:
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
Neither approach lends itself well to less routine and novel strategic
decisions (such as entering a new market or bringing to market a novel
product/service). Such decisions require vision, creativity as well as
business realism.
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
· Rigour.
· A varied approach to information processing.
· A balance between theory and practice to cross-check
validity.
ACTIVITY
It is good practice for strategic decisions to be evaluated against set criteria.
From your own work experience, can you identify the criteria (in the form of
bullet points) against which strategy can be judged.
ACTIVITY FEEDBACK
You would have come up with a number of ideas. Some of which may be
specific to the industry/sector in which you operate. A good list of evaluation
criteria is outlined in the key textbook, De Wit, B & Meyer, R, ‘Criteria for
Evaluation’, pages 74-75.
Strategic Models
Strategic thinking is a complex area. As such there is a role for strategic
‘models’ that can enable analysis. However, they should be used with
caution, noting that theoretical models can over-simplify the practical
and complex issues faced by organisations in the real world.
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
Context
Content
Process
Strategy
ACTIVITY
Can you think of some examples of how inner context can influence strategy.
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
ACTIVITY FEEDBACK
You may have thought of one or two examples of how inner context influences
strategy. Here is another example.
Shell and Exxon are giant oil corporations. However, they are organised very
differently. Shell has a structure that favours and devolves power to national or
regional management. Whereas, Exxon has a strong corporate focus with an
emphasis on functional and product lines of structure.
In the Shell structure, strategic thinking is carried out at the regional level (e.g.
by operating companies such as PDO in Oman, Brunei). The corporate
headquarters at The Hague does influence strategy at regional levels, but
doesn’t dictate business unit-level strategy.
In the Exxon example, the corporate body defines strategy. Strategy is then
cascaded to the functional units. Processes and standards (e.g. IT standards and
software applications) are defined by the corporate body.
ACTIVITY
Can you now think of an example of how outer context influences an
organisation’s strategy?
ACTIVITY FEEDBACK
Increasingly environmental and ethical factors strongly influence strategy. Such
factors are outside the control of the organisation, but nevertheless the
organisation must adhere to it.
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
ACTIVITY
Reinforce your understanding of the dimensions of strategy by re-reading
p.5-11 of the key text, De Wit, B & Meyer, R.
STRATEGIC ANALYSIS
· Target Setting.
· Gap Analysis.
· Strategic Appraisal.
¯
STRATEGIC CHOICE
· Strategic formulation.
¯
STRATEGIC IMPLEMENTATION
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
Expectations
and purposes
Resources,
The competences
environment & capabilities
Strategic
analysis
Bases of Organisation
strategic structure
choice and design
Strategic Strategy
choice implementation
Resource
Strategic
allocation
options
and control
Strategy Managing
evaluation strategic
and selection change
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
REVIEW ACTIVITY
Learn more about the above by reading the section ‘The paradox of
Deliberateness and Emergentness’ in your key text, De Wit, B & Meyer, R,
p.111-116.
Also learn about the strategic planning perspective vs. strategic incrementalism
by reading p.117 – 123 of your key textbook, De Wit, B & Meyer, R.
Now apply what you have learned in this unit to your own work context.
4. From what you have learned, can the strategy process be improved? If
so how?
Share your thoughts on the questions above with colleagues, either on the
Virtual Campus or at your workplace. Solicit their input and ideas also,
especially on items 4 and 6 above.
(Source: Johnson & Scholes; Chapter 1 pages 6,7 & 229 and Sunday Times, 22
February 1998.)
In 1953, just four years after Ingvar Kamprad had produced his first mail order
catalogue featuring locally produced furniture, he opened his first store in
Almhult, Sweden. Since then, he and his successors have created a global
network of stores in 28 countries. Initially, stores were opened only in
Scandinavia, but as greater levels of success were experienced, stores were
built in countries further afield where the rewards, but also the risks of failure,
were much higher. In all these countries the retailing concept of Ingvar
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
Kamprad remained the same: ‘to offer a wide range of furnishing items of good
design and function at prices so low that the majority of people can afford to
buy them’.
In the 1980s, Anders Moberg became the chief executive. However, the
influence of Ingvar Kamprad could still be found. IKEA had always been frugal in
its approach. In its early years it had relocated to Denmark to escape Swedish
taxation. Echoes of the same philosophy and style could be seen in Anders
Moberg. He would arrive at the office in the company Nissan Primera, dressed
in informal clothes, and clock in just as other employees did. When abroad he
travelled on economy class air tickets and stayed in modest hotels. He
expected his executives to do likewise. Such prudence was extended to the
company whose shares were held in trust by a Dutch charitable foundation and
not traded. Furthermore, IKEA’s expansion plans envisaged only internal
funding with 15% of turnover being reinvested.
The 1980s saw rapid growth. IKEA benefited from changing customer
attitudes, from status and designer labels to functionality, encouraged by an
economic recession. It also developed a number of unique elements which
came to make up IKEA’s winning business formula: simple, high quality
Scandinavian design, global sourcing of components, knock-down furniture kits
that customers transported and assembled themselves, huge suburban stores
with plenty of parking and amenities such as cafés, restaurants, wheelchairs and
even supervised child-care facilities. A key feature of IKEA’s concept was
universal customer appeal crossing national boundaries, with both the
products and shopping experience designed to support this appeal. Customers
came from different lifestyles: from new homeowners to business executives
needing more office capacity. They all expected well styled, high quality home
furnishings, reasonably priced and readily available. IKEA met this expectation
by encouraging customers to create value for themselves by taking on certain
tasks traditionally done by the manufacturer and retailer, for example the
assembly and delivery of products to their homes.
IKEA made sure that every aspect of its business system was designed to make
it easy for customers to adapt to their new role. For example, information to
assist customers make their purchase decisions was provided in a 200-page
glossy catalogue; during their visit to the store customers were supplied with
tape measures, pens and notepaper to reduce the number of sales staff
required; furniture was displayed in 100 model rooms; and sales staff were
expected to involve themselves with customers only when asked.
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
IKEA was the subject of a hard-hitting article in the Sunday Times in February
1998. The article concerned the working and living conditions in Romanian
furniture factories. Although IKEA did not own any of the 25 factories which
produced furniture for its stores, it had provided collateral for at least one
factory to be bought from the state in 1992. In fact, there were allegations from
the Federation of Wood Workers that the directors of the factory used
money from IKEA and disregarded the law under which Romanian employees
are entitled to be given the option of buying their own factory as a cooperative.
The article observed that the appalling conditions in Romania flew in the face of
the politically correct image of IKEA fostered by Ingvar Kamprad who regularly
wrote memos to staff which started with ‘Dear IKEA family’.
The managing director of this factory admitted that he kept a competitive edge
by paying employees an average of about 20p per hour (about one-fortieth of
the pay levels in Sweden). IKEA’s response to these issues was that it had no
management responsibility for any Romanian factory. It accepted, however,
that conditions were poor and that it had provided the collateral necessary for
the purchase of one factory. It also restated its financial support for the
Romanian furniture industry through credits which allowed new buildings with
better working conditions. It believed that trade was better than aid and that it
intended to continue to assist with financial and technical support and by
expanding orders.
By the end of the 1990s, IKEA was turning its attention to new opportunities
for growth. It had opened stores in eastern Europe and the one-time Soviet
republics, believing these represented great future potential. In 1997, it
announced its plan to open twelve new stores a year internationally in cities
such as Frankfurt, Shanghai, Chicago and Roclab in Poland and to double
manufacturing capacity by building up to twenty factories in eastern Europe by
2002. There were also plans to develop new areas of business. In partnership
with a building contractor, IKEA was market testing, in Sweden, ‘flat packed’
housing which could be assembled by two men and a crane in a week at prices
about 30% less than the going rate. It was also developing new sources of
supply, entering into an agreement with a timber company to develop new
wood material for furniture. However, the company was also facing problems.
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
In 1996, Ingvar Kamprad announced that IKEA would be split into three,
comprising the retailing operations, an organisation holding the franchise and
trademarks, and a third arm involved mainly in finance and banking. The first
two would form the core of the group, controlled at arm’s length by trust-like
organisations; the latter’s shares would be jointly owned by Kamprad’s three
sons. The structure was devised in an effort to ensure that the privately held
organisation should not be broken up or sold off in a succession battle after
Ingvar Kamprad retired. He also wanted to ensure that it would not be put
under the sorts of external pressures for continual growth often faced by
publicly quoted companies. Internally, IKEA’s strategy was managed at
different levels. A committee of senior executives at headquarters in Denmark
was responsible for overseeing investment in new markets and stores;
responsibility for product development and purchasing lay with IKEA of
Sweden; and country managers tailored the presentation and marketing of
products to home territories.
Questions:
1. Summarise IKEA’s corporate strategy.
(You may wish to revisit this question after you have completed Unit 6. Unit 6
covers corporate ethics in more detail)
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
These are some of the considerations on strategy and strategic decisions in the
context of the IKEA case study.
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
critics pointed to what they saw as a disregard for the well-being and
welfare of the low-paid workers of suppliers in the name of keeping
down costs.
The conclusion from the above case study is that strategic decisions often
exhibit the following characteristics:
Feedback on Question 2:
Taking a strategic fit approach means, as in the case of IKEA, trying to identify
the opportunities which exist in the environment and tailoring the future
strategy to capitalise on these, for example by locating in particularly
favourable markets or seeking to appeal to attractive market segments.
The product range IKEA had designed and developed was not only low cost
but unique, not only because of its kit form but also in its style and image. IKEA
benefited from years of design experience dedicated to its operation and
markets. The logistics of the operation, from sourcing of products to control
of stock and the immediate supply of the product to take away, had been
learned over many years and provided not only a quite distinct way of
operating, but a service greatly appreciated by customers. In short, both the
resources and experience built up over the years had been consciously
developed to service the evident opportunity in the market place.
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
IKEA then ‘stretched’ its capabilities, using its experience in the furniture
market, to create a different market opportunity. It set out to reinvent value,
and experimented with housing in the late 1990s. It started to think about
value in a new way; one in which consumers are also suppliers, suppliers are
also customers, and IKEA itself is not so much a retailer but as a central hub for
services, goods, design, management, support and even entertainment.
Feedback on Question 3:
· How should IKEA deal with public pressure and use its influence to
improve working conditions and workers rights?
CASE SYNOPSIS
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
opened for further new entrants as well. Along with the privatisation
and liberalisation, the government introduced completely new
mechanisms of matching supply and demand, such as an electricity pool
or the creation of a separate transmission company, and the
installation of new regulatory institutions. All market players needed
to learn how to operate an energy market, where before there was
only a central planning agency.
Now read the full case study (pages 709-720 of key textbook, De Wit, B &
Meyer, R) with the following learning objectives in mind:
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
Questions:
1. Identify four different development stages of the strategy planning
system that PowerGen was using between 1990 and 1996. Catalogue
the key changes from one stage to the next. What were the reasons
for these particular changes? Which reasons are attributable to
foreseeable circumstances, and which reasons are attributable to
unforeseeable circumstances?
2. What were some of the major strategy decisions that were taken at
PowerGen? Speculate to what extent the results of the strategic
planning system were used for making these various corporate
strategy decisions.
3. Collect the hints in the case, which suggest that there is also a parallel
strategy formation process in place that operates in a more
incremental, emergent fashion.
Phase I:
· Separated financial role within the Finance division for reviews and
projection of plans.
· Deliberate formation.
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
· 12-month process.
Content:
Phase II
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
Content:
Reasons:
Phase III
· Responsibility for the plan and for managing the corporate planning
process was passed to the director of finance, effectively increasing
the influence of financial considerations in the planning process.
Reasons
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
Phase IV
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
· Five-year horizon.
Content
Organisational systems
Reasons
Feedback on Question 2:
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
Note, that the allocation of the strategy and planning process to the
commercial division in 1990, might indeed have affected the strategic
choices made by PowerGen. Identification of strategic issues by this
division might be completely different when the strategic management
function was allocated to the finance department (as in 1992), for
example.
Feedback on Question 3:
In order to cope with the limitations of the various planning processes that
were effective at PowerGen during the 1990s, an ‘unofficial’, parallel formation
process emerged, on different dimensions. If the planning processes of the first
and fourth phase are compared, to some extent the planning process in itself
underwent change. The planning process became less formal and it was
recognised it could not be sequential. Over the years, the results of the
process became increasingly dependent on coalition forming, lobbying and a
constant discussion between the different planning process levels of
PowerGen. The extent of freedom to business units in developing strategy
increased significantly. Whereas in the early '90s all strategy development and
planning activities were performed by almost a single department, in later
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Unit 1 – Strategy Defined and Key Concepts Global Corporate Strategy
Summary
In this module we have described what corporate strategy entails. We
have noted that strategy must be holistic, and that strategic thinking
must dominate an organisation and influence its daily actions. We
examined the various levels of corporate strategy, and also considered
network level strategy; increasingly relevant in today’s world.
Finally, students have been presented with two contextual case studies
(IKEA and PowerGen) to work through.
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Global Corporate Strategy Unit 1 – Strategy Defined and Key Concepts
35
Unit 2
Strategic Capability
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
Corporate strategy is the overarching strategy that applies to a number
of businesses combined within a single corporation. This is more than
aggregating the individual strategies of its various component
businesses. There must be definite and identifiable benefits from
combining the businesses together in a single corporation to make
corporate strategy worthwhile.
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Unit 2 – Strategic Capability Global Corporate Strategy
· Portfolio management.
· Strategic planning by Core Competencies.
Responsiveness Synergy
Corporate Level Strategy
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Global Corporate Strategy Unit 2 – Strategic Capability
Canon had the opposite strategic approach. They use their expertise
(capability) across a diverse range of products and markets. For
example, the technology used to develop the Canon photocopier was
the same as that used for their other optical products – hence, the
technology is completely different in a Canon copier than, for instance, a
Xerox. Their advantage came from efficient (synergistic) use of
capabilities and resources. Campbell and Gould identify this ‘style’ of
corporate strategy management as ‘Strategic Planning’.
ACTIVITY
Learn about organisations and capability building by reading the following from
your key text, De Wit, B & Meyer, R.
Portfolio Management
In portfolio management, in the strictest sense and at the very extreme
position, the corporate centre acts solely as an investor with financial
stakes in the standalone businesses. The corporation’s main philosophy
is to leverage financial control. See Figure 2.2. In this extreme position,
there is very little co-ordination between the various business units, and
there is ‘fuzzy’ co-operation. Each business unit has its own
characteristics and market demands.
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Unit 2 – Strategic Capability Global Corporate Strategy
Corporate
Centre
Financial control
£
As we move to the right along the ‘continuum’ (see Figure 2.1), various
strategic approaches can be described that are still essentially
portfolio-based. But the corporate centre takes more of a ‘parenting’
role, and can add value in some of the following areas: efficiency
improvements, leverage, provision of expertise, investment and
competence building, fostering innovation, mitigation of risk, provision
of image and networks, collaboration/co-ordination across SBUs,
standards and performance measurements, vision.
- Information sharing
- Co-operation of directors/managers
- Real time decision making
2. Exploitation of:
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Global Corporate Strategy Unit 2 – Strategic Capability
Those who argue that parenting destroys value would make the case
that SBUs would be better off on their own, because the corporate centre
creates:
1. Additional cost
2. Creates more bureaucracy
3. Delays decision making
4. Reduces responsiveness
5. Buffers SBU from investment realities
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Unit 2 – Strategic Capability Global Corporate Strategy
ACTIVITY
Study the BCG matrix and GE business screen as shown on Figure 6.2, p. 299
of the key text, De Wit, B & Meyer, R .
ACTIVITY FEEDBACK
The BCG matrix is drawn up against two orthogonal axes; relative market
share and market growth
ACTIVITY
As an introduction to this section, read the following from your key text, De
Wit, B & Meyer, R.
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Global Corporate Strategy Unit 2 – Strategic Capability
· Stars.
· Cash cows.
· Dogs.
· Question marks.
Stars Question
marks
Growth rate
Cash Dogs
cows
Market share
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Unit 2 – Strategic Capability Global Corporate Strategy
Shareholder portfolios
Many of the ideas relating to portfolio management stemmed from the
management of shareholder portfolios in the field of finance and
economics. In particular, risk reduction by spreading investment across
a portfolio of shares with different patterns of dividend payments and
capital appreciation. In trying to balance stars and cows the corporate
strategy manager acts like a shareholder, reducing the unique risk that
comes from owning one business.
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Global Corporate Strategy Unit 2 – Strategic Capability
Synergy in Corporations
Synergy is often put forward as the justification for acquiring or
merging businesses.
Not all corporations will seek to exploit all available synergies, nor are
they able to. Some corporations may look to exploit only certain
synergies, e.g. financial, technical, mass production, capital assets.
ACTIVITY
Can you think of an example of a corporation that, following a merger or
acquisition, focused on exploiting synergies in just one area?
ACTIVITY FEEDBACK
You may have come up with a number of examples. Here is one.
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Unit 2 – Strategic Capability Global Corporate Strategy
Negative Synergy
Managers should be alert to the dangers of negative synergy – the
potential disadvantages and costs of a poor combination. In an
inappropriate or badly handled diversification, value can be destroyed,
rather than created. In these instances, the negative synergy effect can be
described as the sum of the parts being greater than the whole, or ‘2+2 =
3’.
Many conglomerates in the late 1980s and early 1990s have been
devalued by investors to reflect such negative synergy.
· Physical assets
‘Complementary’ benefits can be obtained from the
simple combination of physical assets such as factories
and machinery. These can be achieved when physical
assets are under-utilised, incapable of being fully utilised
(e.g. due to seasonal cycles), or because combining them
reduces risk/uncertainty. Such benefits may include
economies of scale, higher capacity utilisation, improved
cash flow and improved product line and mix.
Itami quotes the example of bulk carrier vessels, which
carry Japanese cars to the US West Coast, loading up with
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Global Corporate Strategy Unit 2 – Strategic Capability
· Invisible assets
Invisible assets are assets such as corporate culture,
technical expertise, a strong corporate or brand image, or
expert knowledge of the marketplace. It is hard to
quantify in $ terms the value of these, and this
combination benefit is described by Itami as the ‘synergy
effect’.
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ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R.
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Global Corporate Strategy Unit 2 – Strategic Capability
Resources
ACTIVITY
Read the following paper on core competencies by Prahalad and Hamel in your
key text, De Wit, B & Meyer, R.
Prahalad and Hamel have explored the role that competencies play in
corporate strategy. They view the corporation as a collection of core
competencies and core products, rather than a portfolio of businesses
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Unit 2 – Strategic Capability Global Corporate Strategy
VIRTUAL CAMPUS
Spend some time thinking about your organisation’s core competencies. If you
feel that the company you work for is not suitable for this activity, select a
services company, e.g. IT or Business Consulting Services (e.g. Accenture)
3. How do your core competencies position you better for the future?
In what ways are your competencies (or that of your competitors) difficult to
imitate?
Now share your answers, where appropriate, with your colleagues on the
Virtual Campus. In the interests of confidentiality, it is not necessary to name
the company you have considered.
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Global Corporate Strategy Unit 2 – Strategic Capability
Divestment
As we have seen achieving superior corporate performance often results
in divestments – that is, the sale or disposal of one or more of a
corporation’s activities. Divestments may occur when corporate
synergies no longer exist, under-utilised corporate assets can be better
deployed elsewhere or core competencies can not be enhanced by
leverage across the corporation.
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Global Corporate Strategy Unit 2 – Strategic Capability
ACTIVITY
Can you think of some high-profile example of outsourcing, which has
delivered, or will deliver, massive cost savings.
ACTIVITY FEEDBACK
You may have thought of a number of examples. Many oil companies, financial
institutions, energy companies and banks have outsourced their IT activities to
the likes of EDS, IBM, Logica.
CASE STUDY
Rohm, Japan – strategy in a medium-sized Japanese company
surviving in a difficult environment.
Even as the Japanese economy has been battered by one of the worst recessions in
memory, some Japanese companies have bucked the national trend. This case
explores the Japanese company Rohm which has stood out not only for its strong
performance in a depressed market but also for its defiance of traditional Japanese
corporate behaviour.
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Unit 2 – Strategic Capability Global Corporate Strategy
profits in the year to March 1998 came to Y110.1 billion (US$917 million), or
nearly one-third of sales at Y335.9 billion and a fivefold increase from the Y21.6
billion it made in 1994.
Its return on equity, at 16.5%, would be the envy of many blue-chip Japanese
companies for whom return on equity has tended to be a single-digit figure.
Although profits were expected to be flat in 1998, Rohm intended to increase
its recurring income to sales ratio to 33.1% in 1999 from 32.8% in the year
ended March 1998.
Like many of its successful neighbours, Rohm has been able to put in this
remarkable performance by maintaining the entrepreneurial spirit of its
founder and a rigorous focus on profitable niche markets. Rohm’s strength is
its company policy of focusing its resources on products that stand out and
that it can differentiate from those of its competitors, explains Nobuo Hatta,
the director in charge of overseas sales. To that end the company has adopted
policies that are almost diametrically opposed to those that have ruled most
large, well-established electronics companies in Japan.
Rather than pursue mass volume businesses, such as the memory chips which
have been huge profit-earners for the likes of Toshiba and NEC, Rohm has
been happy to stick to niche markets where it can offer unique products. It is a
policy to which Rohm’s founder and president, Kenichiro Sato, has steadfastly
adhered.
Mr Sato started the company 40 years ago after giving up his dream of
becoming a professional pianist. His first successful product was a miniature
resistor he invented, not in his garage but in the family bathroom. At the time
most of the large electronics companies were making only large resistors to
put into the large radios. But then the transistor boom hit and Rohm found
itself ahead of the game on miniature transistors.
From that time on, Rohm has focused its energies on products that slipped
through the net of the large electronics companies, such as customised chip
parts. ‘I never fight battles I cannot win’, Mr Sato declares. That concentration
on core skills has shielded Rohm from the devastating effects of both the
bubble economy and the downturn in semiconductor prices. The company
even develops its own manufacturing facilities, not only in order to ensure it
can make profits out of small-lot customised products but to ensure that it can
make its products quickly and reliably.
Some chip parts made by the company are priced at less than Yl. This means
that even if they sell a million of them it only generates Yl million in income.
Rohm is able to make a profit on these products because it can produce them
quickly, reliably and at low cost.
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Global Corporate Strategy Unit 2 – Strategic Capability
‘There is also a feeling among Kansai people that they would rather be big fish
in a small pond’, he notes. ‘Many Kyoto companies have something they can
claim is number one in the world.’ In its focus on core skills, its pursuit of
profits rather than market share and its emphasis on employee performance
over seniority and lifetime employment, Rohm may sound more like a US
company than a company based in one of Japan’s most tradition-bound cities.
But Mr Hatta, who spent some years in the USA, believes that the Japanese
emphasis on taking a long-term approach to things is one strength that
provides Japan with an advantage over the USA. ‘We believe the model we
provide is based on the best of both worlds’, Mr Hatta says.
Questions:
1. What were the main aspects of the environment affecting Rohm over
the last four years?
Feedback on Question 1:
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Unit 2 – Strategic Capability Global Corporate Strategy
Feedback on Question 2:
Rohm decided that it would never be able to compete with the large basic
electronics companies in terms of costs and prices. Its chosen strategy was
therefore to avoid head-on competition with the leaders by finding niche
markets that would not be attractive to the larger companies. It was therefore
aware of its capabilities as an organisation, and consequently its competencies
within the groups of people working for the company – a core competence
approach as opposed to a ‘market driven’ environmental approach.
However, the strategy went further. Rohm deliberately set out to produce
products for its chosen niches that were reliable, low cost and available
quickly. In other words, the company set out to dominate the niche into which
it had chosen to enter. Looking at it another way, the strategy focused on
‘customised’ rather than mass produced products. It was not enough just to
identify the special market opportunity: Rohm still had to perform better than
any potential competitors.
Feedback on Question 3:
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Global Corporate Strategy Unit 2 – Strategic Capability
Summary
In this unit we have looked at the different styles in corporate strategic
management. In particular the portfolio management and core
competencies perspectives. We have also examined the influence of
synergy on a corporation’s strategic decisions.
REVIEW ACTIVITY
In the earlier Virtual Campus activity you were asked to think about what your
organisation’s core competencies are. Now verify this by reading your
organisation’s mission statement. Identify any references to core
competencies. If this is absent in the mission statement, consult a broad
spectrum of senior managers and identify what the core competencies are.
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Unit 2 – Strategic Capability Global Corporate Strategy
(Given the confidential nature of this information, you may wish to anonymise it. )
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Unit 3
Globalisation
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The phenomenon of globalisation is accelerating in pace. Globalisation
has received much publicity in recent years – both positive and
promoted by large global corporations and organisations such as the
WTO, but also negative coverage from the anti-globalisation movement
highlighting some of the issues. But what exactly is globalisation? In this
unit we shall consider exactly what globalisation is. We shall consider
the globalisation of markets and the globalisation of production.
What is Globalisation
The concepts of ‘globalisation’, ‘global strategies’, ‘global corporations’,
‘global markets’, ‘global production’, ‘global productisation’ and
‘global branding’ are widely used. Sometimes these terms are used
synonymously, and their meaning is not well understood. In this
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ACTIVITY
As an introduction to this section read Chapter 10, The International Context,
pages 534-556 in your key text, De Wit, B & Meyer, R.
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Global Corporate Strategy Unit 3 – Globalisation
KEY POINT
Globalisation is the phenomenon by which industries transform themselves
from multi-national to global competitive structures
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ACTIVITY
This topic links with subjects that are to be covered in other units. At this point
briefly scan the following sections, ahead of studing the units in detail.
Point to note: Many companies are relocating to other countries to save costs.
Classic examples of this have been in call centres. A further example has been
Dyson who switched their production to Malaysia saving 25% on production
costs. The explanation for this was to spend the money on R&D and to keep
the company afloat. However, a customer backlash resulted in a 5% reduction
in the number of vacuums sold.
Point to note: Similar behaviour by major companies has seen them fall foul of
globalisation protestors who see such behaviour as exploitative, e.g. Nike and
Ikea. However, is this simply good business and in accordance with the
principle espoused by Milton Friedman who stated that the only responsibility
a company has is to its owners.
High
Micro chips Automobile Military aircraft Pharmaceuticals
Bulk chemicals
Globalisation forces
Retail banking
Food retailing
Low
Low Localisation forces High
Figure 3.1: Global integration vs. Local responsiveness grid for various sectors.
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The factor that works against globalisation is the localisation push; the
demand for flexibility to deliver customer-oriented products/services
rapidly and in close geographical proximity to the customer.
Localisation push has four main categories; cultural, commercial,
technical and legal. See Figure 3.2.
Cultural
factors
e.g. attitudes,
tastes, social
practices
Technical Commercial
factors factors
e.g. standards, Localisation e.g. customer
e-business, responsiveness,
communications customisation,
networks
Legal
factors
e.g. regulations
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At the meso level, for businesses, the issues concern markets and
industries, as follows:
Major changes from globalisation at the meso level include the more
even distribution of Foreign Direct Investment (FDI), and waves of
cross-border mergers, acquisitions and strategic alliances. There has
also been a notable expansion in the services sector at the expense of
manufacturing.
At the macro level, for the world’s economies, the issues concern:
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Global Corporate Strategy Unit 3 – Globalisation
ACTIVITY
Read the following article on the globalisation of markets from your key text,
De Wit, B & Meyer, R.
In many global markets, the same firms frequently confront each other
as competitors in nation after nation, e.g. Coca-Cola’s and Pepsi, Ford
and Toyota, Boeing and Airbus, Caterpillar and Komatsu, and
Nintendo and Sega.
ACTIVITY
Can you think of products that simply cannot be standardised for the
worldwide market? Or products for which marketing attempts at global
standardisation have failed?
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ACTIVITY FEEDBACK
You may have thought of a number of examples ranging from differing tastes in
cars (North America vs. Europe) to foods. One example is that of coffee,
where tastes vary vastly from continent to continent. Latin Americans prefer a
bitter taste, Europeans like strong blends, and Americans can only ‘tolerate’
weak blends. So, for example, Nescafe markets different variations under the
same brand to different countries.
Now, as a follow-on to the above activity, read the following article in your key
text, De Wit, B & Meyer, R., that critically examines the notion that success in
international markets requires adoption of global products and brands.
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ACTIVITY
Can you think of an example of globalised production that has yielded
enormous cost and other business benefits?
ACTIVITY FEEDBACK
There are many examples of corporations outsourcing specific activities (e.g.
call centres) to one country. For example, many financial institutions have
outsourced their call centres to India.
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Drivers of Globalisation
Two main factors seem to underlie the trend toward greater
globalisation:
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technologies, and now the Internet and the World Wide Web. These
technologies rely on the microprocessor to encode, transmit and decode
the vast amount of information. The cost of microprocessors continues
to fall, while their power increases (a phenomenon known as Moore’s
Law, that predicts that the power of microprocessor technology doubles
and its cost of production halves every 18 months). As this happens, the
costs of global communications are plummeting, which lowers the costs
of co-ordinating and controlling a global organisation.
Transportation technology
In addition to developments in communications technology, several
major innovations in transportation technology have occurred since
World War II. In economic terms, the most important are probably the
development of commercial jet aircraft and super-freighters and the
introduction of containerisation, which simplifies trans-shipment from
one mode of transport to another. The advent of commercial jet travel,
by reducing the time needed to get from one location to another, has
effectively shrunk the globe.
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All four of these qualities either have changed or are now changing
rapidly. Refer to Table 3.1 for the changes in world output and trade, for
example.
Country Share of World Output, Share of World Output, Share of World Exports,
1963 1996 1997
Table 3.1. Changing World Output and Trade (Source: Export data from World Trade Organisation, International Trade Trends
and Statistics, 1996. World Output data from CIA Factbook).
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ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R.
In 1997 and 1998 the dynamic economies of the Asian Pacific region
were hit by a serious financial crisis that threatened to slow their
economic growth rates for several years. Despite this, their powerful
growth may continue over the long run, as will that of several other
important emerging economies in Latin America (e.g. Brazil) and
Eastern Europe (e.g. Poland). Thus, a further relative decline in the
share of world output and world exports for long-established
developed nations seems likely.
Most forecasts now predict a rapid rise in the share of world output
from developing nations such as China, India, Indonesia, Thailand,
South Korea and Brazil, and a commensurate decline in the share
enjoyed by rich industrialised countries such as Britain, Germany, Japan
and the United States.
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By 1997, however, US firms accounted for 32.4 percent of the world’s 500
largest multinationals, followed closely by Japan with 25.2 percent.
France was a distant third with 8.4 percent. Although the two sets of
figures are not strictly comparable (the 1973 figures are based on the
largest 260 firms, whereas the 1997 figures are based on the largest 500
firms), they illustrate the trend. The globalisation of the world economy
together with Japan’s rise to the top rank of economic powers have
resulted in a relative decline in the dominance of US (and, to a lesser
extent, British) firms in the global marketplace. Looking to the future,
the growth of new multinational enterprises from the world’s
developing nations is inevitable. Indeed companies such as the Tata
conglomerate in India are already multi-national players, and have
activities ranging from IT to cars to heavy engineering.
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On the other hand, China’s new firms are proving to be very capable
competitors, and they could take global market share away from
Western and Japanese enterprises. We see evidence of this already.
Thus, the changes in China are creating both opportunities and threats
for established international businesses.
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are agents of globalisation – companies that have the most to gain from
globalisation. Some of these companies (e.g. Starbucks, Nike) have
become front-line targets of critics who blame globalisation for a variety
of ethical and social issues, e.g. global warming, pollution, exploitation
of labour in poor countries, encroachment on human rights, etc.
Globalisation is challenged on grounds that it widens the gap between
the rich and the poor.
ACTIVITY
To read the arguments for and against globalisation, refer to the following
websites:
www.wto.org
www.southcentre.org
www.wtowatch.org
One frequently voiced concern is that far from creating jobs, falling
barriers to international trade actually destroy manufacturing jobs in
wealthy advanced economies such as the United States and United
Kingdom. Falling trade barriers can allow firms to move their
manufacturing activities offshore to countries where wage rates are
much lower. Supporters of globalisation argue that the benefits
outweigh the costs. They argue that free trade results in countries
specialising in the production of those goods and services that they can
produce most efficiently, while importing goods that they cannot
produce as efficiently.
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Supporters of free trade argue that firms are not the amoral
organisations that critics suggest. While there may be a few exceptions,
the vast majority of enterprises are committed to ethical behaviour.
They would be unlikely to move production offshore just so they could
pump more pollution into the atmosphere or exploit labour.
3. National Sovereignty
VIRTUAL CAMPUS
Globalisation on the one hand can have a levelling-down effect, and on the
other hand a levelling-up effect. So for instance, in the outsourcing context
(e.g. call centres) there is a view that Western countries (e.g. UK and US) have
lost out in this sector, whereas developing countries such as India have
benefited.
Now look at the opposing views (posted on the Virtual Campus) and try to
understand their perspective from a rational viewpoint. Assess whether your
viewpoint has changed.
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1. Country differences
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7. Operational processes
ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R.
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The Giant Bicycles Company is based in Taiwan and is one of the world’s
biggest bicycle manufacturers with annual sales of around US$400 million, 93%
outside Taiwan. According to Mr Lo:
“Because of the small market for bicycles in Taiwan, we don’t have any choice –
we have to be a global company. The biggest markets are in Europe and the US,
which account for just over half our sales. We started manufacturing in the
Netherlands because of the attractive market in Europe, where we expected
to sell more than 400,000 bikes in 1997. That’s out of a demand for bikes in
Europe of about 15 million annually.
To start with, we will be making just 100,000 bikes a year from our European
factory, but we envisage this climbing threefold by early next century. The main
reason for transferring some production from the Far East to the Netherlands
is to increase flexibility.
Fashions are changing quickly and market trends must be followed closely.
Having a production base next to the market means that we should be able to
satisfy our customers better. Wage costs in the Netherlands are 60% higher
than in Taiwan but because we should get better productivity in Europe, this
will not affect overall costs too much.
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Questions:
1. What benefits does the company gain from its global strategy? And
what have been the problems?
They will also learn a little about the increased complexity and costs of
international operations and selling. However, few details are given on this in
the case and, in any event, the details will probably vary with each company and
its type of business. In addition, some aspects of the company’s international
development remain essentially obscure. How did they start internationally?
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Global Corporate Strategy Unit 3 – Globalisation
Why did they pick Europe rather than the USA? (The high usage of bicycles in
Holland makes it clear why they would pick this market within Europe.) How
did they cope with the great geographical distances and the selling task in their
chosen country? And so on.
Thus other medium-sized companies can learn something from Giant Bicycles
but the full case for international expansion remains unclear.
Feedback on Question 1:
Benefits include:
· R&D costs spread over much wider base of sales than just Taiwan.
Problems include:
Feedback on Question 2:
With the above definitions in mind, one could consider a range of issues;
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Before the merger, Travelers Group was the largest property-casualty and life
insurance business in the United States. In addition, Travelers had considerable
investment banking, retail brokerage and asset management operations.
Travelers’ insurance operations were almost exclusively domestic in their
focus, although its investment banking and asset management business had
some foreign exposure.
Citicorp was one of the world’s most global banks. Citicorp had two main legs
to its business, its corporate banking activities and its consumer banking
activities. The corporate banking side of Citicorp focused on providing a wide
range of financial services to 20,000 corporations in 75 emerging economies
and 22 developed economies. This business, which always had an international
focus, generated revenues of $8.0 billion in 1997, over half of which came from
activities in the world’s emerging economies. What captured the attention of
many observers, however, was the rapid growth of Citicorp’s global consumer
banking business. The consumer banking business focuses on providing basic
financial services to individuals, including checking accounts, credit cards and
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The merger talks were initiated by Travelers' CEO, Sandy Weill. Given the
rapid globalisation of the world economy, Weill felt it was important for
Travelers to start selling its insurance products in foreign countries. Until
recently, the barriers to cross-border trade and investment in financial
services were such that this would have been difficult. However, under the
terms of a deal brokered by the World Trade Organisation in December 1997,
over 100 countries agreed to open their banking, insurance and securities
markets to foreign competition. The deal, which was scheduled to take effect
on March 1, 1999, included all developed nations and many developing nations.
The deal would allow insurance companies such as Travelers to sell their
products in foreign markets for the first time. To take advantage of this
opportunity, however, Travelers needed a global retail distribution system,
which is where Citicorp came in. For the past 20 years, the central strategy of
Citicorp has been to build just such a distribution channel.
The architect of Citicorp’s global retail banking strategy was its longtime CEO,
John Reed (Reed is now co-CEO of Travelers, a position he shares with Weill).
Reed has been on a quest to establish “Citicorp” as a global brand, positioning
the bank as the Coca-Cola or McDonald’s of financial services. The basic belief
underpinning Reed’s consumer banking strategy is that people everywhere
have the same financial needs—needs that broaden as they pass through
various life stages and levels of affluence. At the outset customers need the
basics—a checking account, a credit card and perhaps a loan for college. As
they mature financially, customers add a mortgage, car loan and investments
(and insurance). As they accumulate wealth, portfolio management and estate
planning become priorities. Citicorp aimed to provide these services to
customers around the globe in a standardised fashion, in much the same way as
McDonald’s provides the same basic menu of fast food to consumers
everywhere. With the merger with Travelers, the company will be able to push
this concept further than ever, cross-selling insurance products and asset
management services through its global retail distribution system.
Reed believes that global demographic, economic and political forces strongly
favour such a strategy. In the developed world, ageing populations are buying
more financial services. In the rapidly growing economies of many developing
nations, Citigroup is targeting the emerging middle classes, whose needs for
consumer banking services and insurance are rising with their affluence. This
world view got Citicorp into many developing economies years ahead of its
slowly awakening rivals. As a result, Citigroup is today the largest credit card
issuer in Asia and Latin American, with 7 million cards issued in Asia and 9
million in Latin America. As for political forces, the world-wide movement
toward greater deregulation of financial services allowed Citigroup to set up
consumer banking operations in countries that only a decade ago did not allow
foreign banks into their markets. Examples in the fast-growing Asian region
include India, Indonesia, Japan, Taiwan, Vietnam and the biggest potential prize
of them all, China.
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Unit 3 – Globalisation Global Corporate Strategy
A key element of Citigroup’s global strategy for its consumer bank is the
standardisation of operations around the globe. This has found its most visible
expression in the so-called model branch. Originally designed in Chile and
refined in Athens, the idea is to give the company’s mobile customers the same
retail experience everywhere in the world, from the greeter by the door to the
standard blue sign overhead to the ATM machine to the gilded doorway
through which the retail-elite “Citi-Gold” customers pass to meet with their
“personal financial executives.” By the end of 1997 this model branch was in
place at 600 of Citicorp’s 1,200 retail locations, and it is being rapidly
introduced elsewhere. Another element of standardisation, less obvious to
customers, is Citigroup’s emphasis on the uniformity of a range of back-office
systems throughout its branches, including the systems to manage checking
and savings accounts, mutual fund investments and so on. According to
Citigroup, this emphasis on uniformity makes it much easier for the company
to roll out branches in a new market. Citigroup has also taken advantage of its
global reach to centralise certain aspects of its operations to realise savings
from economies of scale. For example, in Citigroup’s fast-growing European
credit card business, all credit cards are manufactured in Nevada; printing and
mailing are done in the Netherlands; and data processing is done in South
Dakota. Within each country, credit card operations are limited to marketing
people and two staff units; customer service and collections.
Questions:
1. What is the rationale for the merger between Travelers and Citicorp?
How will this merger create value for (a) the stockholders of Citigroup
and (b) the customers of Citigroup’s global retail bank?
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Global Corporate Strategy Unit 3 – Globalisation
Feedback on Question 2:
Feedback on Question 3:
Feedback on Question 4:
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Unit 3 – Globalisation Global Corporate Strategy
· Staff uniforms.
Summary
In this unit we have considered the impact of globalisation on
multinational enterprises. We have looked at the definition of
globalisation, and have considered the different dimensions –
globalisation of markets and globalisation of production.
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Global Corporate Strategy Unit 3 – Globalisation
REVIEW ACTIVITY
Consider the following situation. Imagine that your organisation is reviewing
its strategy, and that you have been seconded by the team to focus and report
on the ‘impact of globalisation’. You have to carry out the necessary research
and prepare a paper (in no more than 1000 words).
3. Global competition.
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Unit 4
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
Globalisation and the advent of the new economy, has led to big
changes in today’s business landscape. Consolidation through mergers
and acquisitions is rife in many industries, as corporations seek to
increase their global reach and competitiveness. There is a recognition
that to compete effectively in the global market, cross-border alliances,
sometimes with competitors, is necessary. This has also led to a rise in
global strategic alliances.
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The motives for entering strategic alliances are varied, but they often
include market access. The biggest danger is that a company will give
away more to its ally than it receives. However, firms can build alliances
that benefit both partners.
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Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
ACTIVITY
See how collaboration with competitors can result in a win-win scenario by
reading p. 383-387, Reading 7.1, in your key textbook, De Wit, B & Meyer, R.
Read p. 388-396, Reading 7.2, in you key textbook, De Wit, B & Meyer, R, to
see how companies like Sun Microsystems have been able to achieve high
market growth by working with (and effectively managing) a web of alliances.
KEY POINT
The term ‘strategic alliance’ refers to an arrangement, generally between
actual or potential competitors, to co-operate.
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Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers Global Corporate Strategy
ACTIVITY
Read p. 359 – 382 (Network level strategy) in your key textbook, De Wit, B &
Meyer, R, to learn more about how companies in strategic alliances co-operate
together, and co-ordinate their strategies to work as a team.
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Timing of entry
Entry is early when a business enters a foreign market before other
foreign firms and late when it enters after other international businesses
have already established themselves.
Entry Methods
The choice of method for entering a foreign market is another major
issue. Options are;
· Exporting.
· Turnkey Projects.
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· Licensing.
· Franchising.
· Joint Ventures.
· Wholly owned subsidiaries.
Exporting
Advantages
Disadvantages
Turnkey projects
In a turnkey project, the contractor agrees to handle every detail of the
project for the client, including the training of operating personnel. At
completion of the contract, the client is handed the “key” to a plant that
is ready for full operation. This is a means of exporting process
technology to other countries. Turnkey projects are most common in the
chemical, pharmaceutical, petroleum refining and metal refining
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Advantages
Disadvantages
Licensing
A licensing agreement is an arrangement whereby a licensor grants the
rights to intangible property to another entity (the licensee) for a
specified period. In return the licensor receives a royalty fee from the
licensee. Intangible property includes patents, inventions, formulas,
processes, designs, copyrights and trademarks.
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been renegotiated and extended several times since. The licensing agreement
between Xerox and Fuji-Xerox also limited Fuji-Xerox’s direct sales to the
Asian Pacific region (although Fuji-Xerox does supply Xerox with
photocopiers that are sold in North America under the Xerox label).
Advantages
Disadvantages
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Global Corporate Strategy Unit 4 – ‘Altering the Boundary’ – Alliances and Mergers
Franchising
Franchising is similar to licensing but involves longer-term
commitments. Franchising is basically a specialised form of licensing in
which the franchiser not only sells intangible property to the franchisee
(normally a trademark), but also insists that the franchisee agree to
abide by strict rules as to how it does business.
Advantages
Disadvantages
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Joint Ventures
A joint venture means establishing a firm that is jointly owned by two or
more otherwise independent firms. Fuji-Xerox, for example, was set up
as a joint venture between Xerox and Fuji Photo. Establishing a joint
venture with a foreign firm has long been a popular method for entering
a new market. The most typical joint venture is a 50/50 venture.
However, some firms have sought joint ventures in which they have a
majority share and tighter control.
Advantages
Disadvantages
· A joint venture does not give a firm the tight control over
subsidiaries that it might need to realise experience curve
or location economies.
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Advantages
Disadvantages
1. Partner selection
2. Alliance structure
3. Alliance management
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Partner selection
The partner selection process must consider whether a potential
partnership is viable and whether it actually adds value. The following
assessments are pertinent in this regard:
A good partner;
Alliance Structure
Having selected a partner, the alliance should be structured so that the
firm’s risks of giving too much away to the partner are reduced to an
acceptable level.
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Alliance Management
Many alliances fail because the issues concerning the management of
the alliance have been underestimated. The key issues include;
Reference: Internatio nal Business in the Glo bal Mark etp lace (2000) by
Charles W.L. Hill
ACTIVITY
As further background to this section read p. 402-409, Reading 7.4, ‘How to
make strategic alliances work’, in your key textbook De Wit, B & Meyer, R.
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ACTIVITY
For up-to-date articles and thinking on alliances go to the McKinsey Quarterly
website:
http://www.mckinseyquarterly.com/
Select ‘Alliances’ under the Function menu on the home page. (Registration to
this site is free, and many articles can be accessed free of charge)
However, mergers and acquisitions can pose serious risks for acquiring
firms. These arise from uncertainties about the value of the target
company’s assets and liabilities and unanticipated challenges in
integrating the target to achieve planned synergies. The big advantage
of M&A, in the context of global expansion, is that it gives companies
ready market access, particularly in new geographies. However, in
comparison to strategic alliances and internal expansion, it poses
serious financial and cultural risks. See Figures 4.1 and 4.2 for a
comparison of risks for the options of strategic alliances, M&A and
internal expansion. Recent studies indicate that, as a result of these risks,
approximately 50% of all M&A combinations do not create value for the
acquiring firm’s shareholders.
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High
Financial vs. Cultural risk M&A
Cultural risk
Strategic
alliances
Internet development
Low
Low Financial risk High
High
Market failure vs. Cultural risk
M&A
Cultural risk
Strategic
alliances
Internet
development
Low
Low Market-entry risk High
Figure 4.1: Market failure vs. Cultural risk for expansion options.
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Mergers
A merger is defined as the joining of two or more companies to form a
single legal entity. Generally, the assets of the smaller company are
merged into those of the larger, surviving company and shareholders of
the target company are either bought out or become shareholders in the
acquiring corporation. A merger usually requires approval by the
shareholders of both the acquiring corporation and the target entity.
Acquisitions
An acquisition is the purchase of more than 50% of the voting shares of
one firm by another. Following the acquisition the two companies can
continue as separate legal entities, with the acquiring company referred
to as the parent company and the target as a subsidiary. The parent
company can be termed a Holding Company.
ACTIVITY
Identify examples of a horizontal merger, a vertical merger and a conglomerate
merger. In this context, you may use acquisition synonymously with merger.
Identify the benefits resulting from the merger/acquisition.
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ACTIVITY FEEDBACK
Here are a few examples..........
HSBC/Midland Bank, UK
BP/Amoco/Arco:
The merger of BP, Amoco and Arco was a billion-dollar horizontal merger.
The driver for the merger was the search for economies of scale. Following
consolidation and completion of the integration phase, huge cost savings have
been achieved in capital-intensive areas such as refining, and exploration and
production activities. Cost savings have also been achieved in aligning their
respective IT strategies and having a common IT and centralised services
infrastructure.
SONY/Columbia:
In the late 1980s SONY acquired Columbia Pictures in the US for $3.4 billion.
This is an example of a conglomerate merger, pursued for purposes of
diversification by SONY. Columbia operated in a totally different business
sector. However, the management at SONY felt there were synergies to be
exploited between SONY’s highly profitable VCR manufacturing business and
Columbia’s film-making business. Columbia is still part of Sony’s business, but
the integration of Columbia into Sony was plagued with several problems. In
practice, there were huge differences between running a hardware
manufacturing company and a film studio. These issues were further
compounded by enormous organisational and cultural differences between the
two companies.
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Other Terminology
There are a number of other terms associated with ‘M&A’ activity.
Leveraged buy-outs
Leveraged buy-outs (LBOs) involve the purchase of the entire public
stock interest of a firm, or division of a firm, financed primarily with
debt.
Joint Ventures
Joint ventures involve the joining together of two or more firms in a
project or enterprise. In these cases, equity participation and control are
decided by mutual agreement.
Sell-offs
Sell-offs are considered the opposite of mergers and acquisitions. The
two major types of sell-offs are spin-offs and divestitures.
ACTIVITY
Can you think of examples of other M&A related transactions, and identify the
possible motivation for the transaction and benefits (if any).
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ACTIVITY FEEDBACK
Here are a few examples.
Joint Venture:
In 2001, thirty years after its creation, Airbus formally became a single
integrated company. The European Aeronautic Defence and Space Company
(EADS), (resulting from the merger between Aerospatiale Matra SA of France,
Daimler Chrysler Aerospace AG of Germany and Construcciones
Aeronauticas SA of Spain), and BAE SYSTEMS of the UK, transferred all of
their Airbus-related assets to the newly incorporated company. In exchange,
they became shareholders in Airbus with an 80 per cent and 20 per cent stake.
Spin Off:
MOBILE phone giant mmO2, was part of British Telecom until it was spun-off
in 2001. The spinoff was the result of the breakup of the BT monopoly. Today,
mmO2 is Europe’s sixth-largest mobile network operator. As well as its core
UK market called O2, the group runs mobile services in Germany and Ireland,
and has a joint venture with supermarket giant Tesco. It has just posted its
financial results, with maiden pre-tax profits of £95 million.
Divestiture:
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framework of taking however much time and money it took to get things done
right. The new AT&T had to learn how to find out and deliver what its
customers wanted, when its customers wanted it, in competition with others
who sought to fill the same customers’ needs. Although AT&T had great
technological and personnel strengths upon which to build, the transition
proved far more complex than anyone imagined in 1984.
M&A Activity
ACTIVITY
From what you have learnt so far, try to identify some of the drivers for M&A
activities. Why do companies pursue external expansion, through mergers and
acquisitions, over internal growth?
ACTIVITY FEEDBACK
Here are some of the drivers. The list, although not exhaustive, does indicate
the principal reasons for external expansion through M&A activities.
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· A firm that has suffered losses and has a tax-loss carry forward may
be a valuable merger candidate to a company that is generating
taxable income. If the two companies merge, the losses may be
deductible from the profitable company’s taxable income and hence
lower the combined company’s income tax payments.
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Revaluation
It is not uncommon during merger negotiations or joint venture
planning, for the revaluation of the ownership of shares to occur. The
revaluation arises as a result of new information generated during
negotiations. For example:
One of the key benefits that shareholders often look for is in sharper
management. Management efficiencies can arise from:
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Here we go again?
Global M&A*, announced deals, $bn
1,750
1,500
1,250
1,000
750
500
250
0
95 96 97 98 99 2000 01 02 03 04**
Source: Dealogic * By country of target
** To Feb 17th annualised
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If the successes and failures are probed further by looking at the rates by
type of acquisition, a company acquiring another company in a related
business has a greater chance of success than one acquiring a company
in an unrelated business.
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· Due diligence.
· The value creation logic (how is it valued?).
· Negotiation of the deal.
ACTIVITY
With the increase in globalisation, and a push to achieve marketshare quickly in
foreign markets, cross-border M&A activity is on the rise.
What are some of the challenges for cross-border M&A activities. How would
you expect the success rate for cross-border acquisitions to differ from the
overall figures quoted above?
ACTIVITY FEEDBACK
Cross-border M&A are more complex, and pose further management
challenges for successful execution and post-merger integration. The
complexities arise in both the pre- and post-acquisition phases.
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Listed below are many of the common reasons for failure in M&A:
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VIRTUAL CAMPUS
Microsoft revealed recently that it tried to buy SAP, the German software
giant, in late 2003. If the merger had been successful it would have made
Microsoft a dominant force in the enterprise software market, dealing a blow
to Oracle and even IBM. However, the merger attempt failed.
Research this failed merger attempt (Internet, FT article under Comments &
Analysis on 14 June 2004, company statements, etc).
Now divide yourselves into two groups. Those with last name beginning A-M
should wear the Microsoft hat, and the others the SAP hat. Now carry out the
following on the Virtual Campus:
3. Both groups: analyse why the merger went wrong (cultural, political,
other issues). Could Microsoft have handled it better.
(This Virtual Campus activity also interlocks with the units on Innovation and Strategic
IT & e-business)
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not “fit” with their own company (i.e. too big, too small,
availability.)
3. Valuation. The objective for the acquiring company should be to
pay only marginally more than the value to the next highest
bidder and an amount that is less than the value to the acquirer.
In determining the value to the acquirer, McKinsey suggests that
the value of the acquiring company be added to the value of the
target company “as is.” The value of realistic synergies must then
be added while taking into account how long it will take to
capture them. The transaction costs for doing the deal are then
subtracted. The result is the value of the combined post-merger
company. The value gain is the combined value less the value of
the acquiring company.
4. Negotiate. A key point in this part of the process is for the
acquiring company to decide on a maximum reservation price
and to stick to it. A negotiation strategy is established by
considering the following factors:
The case describes the rise and development of the LoJack Corporation
(NASDAQ: LOJN), the acknowledged global leader in stolen vehicle recovery
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The challenge presented in this case has to do with a defining moment in the
alliance, examining the issue of continuing value creation if the relationship
between LoJack and MicroLogic is pursued. The management of the LoJack
Corporation is committed to a growth strategy of geographic expansion of its
historically successful system, while MicroLogic has changed its strategy and is
now committed to entering a new marketplace with its own products and
services. LoJack is asked to join and supply both marketing capability and
capital to finance Micro Logic’s expansion. The key issue for LoJack is now
whether it should revise its strategy, grasp this opportunity and build on what
had been a very successful alliance, or whether it should seek new strategic
partners and move forward on its own. The LoJack management team needs to
determine whether the new alliance with MicroLogic would leverage to the
utmost LoJacks’ strengths and whether this alliance would again be successful,
given MicroLogic’s new strategy.
Points to Highlight
(extracted from Teaching Note 13, Lojack and the MicroLogic Alliance, Leonard
Zyistra)
This case, used in conjunction with Chapter 7 and Readings 7.1-7.4 of your key
text, De Wit & Meyer, can be used to understand the following key points:
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Questions:
1. (i) Which are the relational actors relevant to the technical and
commercial success of the Stolen Vehicle Recovery System?
(ii)Which relational objectives, power positions and arrangements
exist between LoJack corporation and the actors?
3. What advice would you give the LoJack management team on the joint
venture proposal by MicroLogic to join them in introducing a new
monitoring and maintenance system for construction equipment?
Part i
· MicroLogic. When the original founder of LoJack, Bill Reagan, met for
the first time with Sheldon Apsell, founder and president of
MicroLogic, it was still a small product development firm, which
specialised in developing electronics products for others. Reagan
and Apsell immediately hit it off. With only a hand-shake to
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Part ii
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Feedback on Question 2:
While the cooperation between LoJack and MicroLogic evolved over time,
MicroLogic shifted its strategic focus and decided that the company should
develop and market its own products. After a number of false starts, the
management finally settled on an information service business which would
initially provide information about the location and operating parameters of
expensive construction equipment. Other potential market segments to be
attacked after construction equipment included other mobile high-value assets
such as vehicle fleets, rail cars and trailers. The system would produce
standard reports or use sophisticated mapping software to produce easily
understandable graphic information that could be communicated to personal
computers. The original tracking and positioning technology, developed for
the LoJack system, formed the backbone. Up to this point, MicroLogic had self
funded the product development, testing and marketing of the new business
while continuing to operate the traditional business. However, MicroLogic’s
decision to change the essence of the organisation had brought marketing and
sales of the original product development business to a halt. Cash flow would
soon be inadequate to support further development and marketing.
Meanwhile, the competitive landscape was changing. Many more companies
were entering the construction equipment asset management marketplace.
MicroLogic viewed this activity with mixed feelings. On the one hand,
excitement in the industry about such a system validated MicroLogic’s concept
and educated potential customers. On the other hand, it narrowed the
window of opportunity for capturing a large enough share of the market to
make implementation worthwhile. Additional capital and marketing capability
were essential if MicroLogic was going to be the market leader. Analysing how
MicroLogic had changed its strategy and finding itself in the situation as
described above, would lead to the conclusion that the company had been
successful in developing concepts for new markets, but in essence remained a
product development firm. To introduce a new concept successfully, it needed
LoJack to supply capital and marketing capability. This situation we recognise
from the start of their alliance.
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For LoJack, things developed also in a different way. While expansion of the
LoJack System into new geographic areas and markets with improved
marketing efforts and strengthening the sales force was a logical growth
strategy, the development of a new generation LoJack system was necessary to
reduce the cost of the hardware and improve efficiency of the installation
process. The success of this third generation system would allow LoJack to
enter the highly competitive market for stolen vehicle recovery. The cost of
hardware had been dropping fast and improvements in technology such as GPS
had encouraged new entrants that also offered total asset management
capabilities. LoJack management hoped that they could stay in this market with
its new unit that would be compatible for application in a non-powered
environment at a pricing attractive to the industry. Alternatively, LoJack was
also exploring cellular and satellite technologies to enhance its opportunities in
this market. But all in all, its competitive edge was no longer the same as it had
been when the first LoJack system was introduced to the market. LoJack
management, therefore, thought that there might be even greater
opportunities in leveraging LoJack’s connections with law enforcement agencies,
reputation, brand awareness and distribution muscle. All this could be leveraged in
the mobile asset management-market, starting with construction equipment.
This could be done in a joint venture with MicroLogic, but also with a new
partner or may be go it alone.
Analysing this opportunity for LoJack and comparing it with the company in the
late '70s, it can be concluded that its competitive advantage had changed,
broadening its commercial capabilities.
Feedback on Question 3:
2. Will the new alliance leverage to the utmost LoJacks’s strengths or is its
marketing capability only of limited use in this new marketplace? Also,
considering MicroLogic’s changed strategy to develop and market its
own products, is the compatibility in objectives not only temporary
and predominantly focused on obtaining the LoJack’s venture capital?
3. Will the concept that was developed by MicroLogic for the construction
equipment asset marketplace be competitive enough? Will it secure the
alliance to capture a large enough share of the market to make
investment and implementation worthwhile? Considering that other
major competitors were well positioned in the consolidation and
outsourcing trends and given the business model that MicroLogic
wanted to employ (short term revenues, by selling equipment at
break-even or a very small profit, and long term revenues and the
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majority of profits from monthly fees plus individual charges for special
services).
This merger brief shows why true mergers of equals are rare. The union of Citicorp
and Travelers, initially equal partners, became a takeover as one of its co-chief
executives took sole command
As if that were not enough, the marriage was structured as a genuine “merger
of equals” – a phrase often used, but usually only to soothe the ego of the boss
of a company that is being taken over. In this case, every effort was made to
ensure that both sides really were equal partners, starting at the top, with the
bosses of the two merging firms becoming co-chairman and co-chief executive.
But the omens were bad. Announcing the merger, Sandy Weill (of Travelers)
quipped that he was used to “sharing power and responsibility as I’ve been
married to my wife for 43 years”. This metaphor may have jarred on John
Reed, who had divorced in 1991 and married a stewardess on the Citi
corporate jet.
Barely 15 months after the deal was done, the two co-heads agreed, under
pressure from shareholders, to separate their roles. Divorce followed in April
this year, when Mr. Reed retired, at the request of the board, leaving Mr. Weill
as lone chief executive.
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Mr. Weill admits only that “we have taken longer to get places than we might
have.” In fact, the costs may have been greater than that implies, not least in
missed opportunities. Citigroup’s management is now dominated by people
from Travelers. The loss of the Citibank talent may yet cause problems,
especially outside America. The stellar performance hoped for by the
stockmarket may not happen.
Citi and Travelers came to the altar with different experiences of mergers. In
the 1990s Citi, which traces its origins back to 1812, went from near
bankruptcy to being the leading global consumer bank. But big mergers were
not central to this success. Indeed, the mergers it undertook went badly –
notably the acquisition of Quotron, a securities data firm.
Mr. Weill’s merger technique was based on having a clear strategy – including
cutting fat out of under-managed businesses – and implementing it fast. He
tried to minimise cancerous uncertainty by selecting the management team to
run the merged businesses as soon as possible, usually on merit and loyalty to
him.
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expel them soon after. Mr. Weill is guided more by gut instinct than by briefing
papers, and relies on a small group of loyal managers.
Indecision at the top soon led to trouble in the global corporate and
investment bank: Travelers’ Salomon Smith Barney investment bank, plus Citi’s
corporate relationship bank. Integration had been half-hearted: SSB’s well-paid
investment bankers regarded their new colleagues as stuffy corporate folk.
Staff in the Citi operation were proud of the 1,500 leading global firms that
were their main customers, and looked down on traders at Salomon, with
their lower-grade corporate-bond clients. They wanted their services to
continue under the Citi brand, not to be switched to SSB. They were aghast at
the huge losses run up by Salomon during the financial-market crisis in 1998.
Meanwhile, Salomon itself resented Mr. Weill’s decision to close its American
bond-arbitrage operation only a few months after buying the firm.
Things came to a head in late October 1998 at a weekend of golf and spouses in
West Virginia, where senior executives complained about how the merger was
proceeding. Scuffles broke out. The two leaders reacted with unusual
decisiveness. A week later, a new management team was appointed. Mr.
Dimon left the company, his ambition having reportedly annoyed Mr. Weill.
Mr. Menezes was joined as co-head of global corporate and investment banking
by Michael Carpenter, a Weill loyalist. The pair at once set about fully
integrating the two businesses, selecting a new top management team and
identifying a dozen big issues that needed urgent action.
In July, after Citi’s biggest shareholder, Prince Alwaleed bin Talal of Saudi
Arabia, fretted in public about the relationship between the firm’s co-heads,
Mr. Weill took charge of day-to-day operations. Mr. Reed was left with
strategy. In October 1999, Robert Rubin, a former Treasury secretary and
co-head of Goldman Sachs, was appointed to the “office of the chairman”,
apparently to broker peace between the two bosses.
By now, the tensions at the top were public. Mr. Reed had told the Academy of
Management that, although the “wisdom of the merger is even more
compelling” than when it began, it “is not 100% clear to me that it will
necessarily be successful”. He drew telling comparisons with step-parenting.
“Sandy and I both have the problem that our ‘children’ look up to us as they
never did before, and reject the other parent with equal vigour, saying ‘Sandy
wouldn’t want to do this, so what do I care about what John wants?”’
The reality was that Sandy’s children were increasingly winning the top jobs,
and John’s were quitting in droves. Citigroup was rapidly becoming Mr. Weill’s
creature. One top-notch Travelers person did leave, however: Heidi Miller,
Citi’s chief finance officer, quit for Priceline, an e-commerce firm. Mr. Weill
blamed her departure on irritation with Mr. Reed. But that was the last straw:
the board asked Mr. Reed, 61, to retire. The 67-year-old Mr. Weill became
sole boss, supported by Mr. Rubin. All Mr. Reed salvaged was a promise (which
few now believe) that Mr. Weill would go within two years, and that the search
would begin for a successor.
Mr. Weill soon completed his domination of Citi. In July, the last of the
post-merger top-job splits ended. Mr. Carpenter became sole head of the
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global corporate and investment bank; Mr. Menezes, the last remaining
Citibanker at the top, was packed off to head corporate and consumer banking
in emerging markets. Mr. Lipp, another Weill loyalist and head of consumer
banking, joined the office of the chairman, with a brief to co-ordinate
cross-selling.
As for cross-selling, the vision that ostensibly motivated the merger, this has
worked better in some parts of
Before and after the merged company than in
Citicorp Citigroup others. The greatest success has
Travellers been achieved where it was least
Employees Net profit expected – in corporate and
'000 $bn investment banking. Wall Street
180 10 analysts initially hated the
decision to axe Mr. Dimon and
160
to promote Mr. Carpenter. In
8
140 the event, it proved inspired.
Aided by the link with Nikko
120 Securities and a merger with
6 Schroders, a British investment
100
bank, in January 2000, the now
80 Schroders Salomon Smith
4 Barney has moved from being a
60 middle-ranking firm to the brink
of – or even into – the so-called
40 2 “bulge bracket” of top global
20 investment banks.
0 0 Blurred vision?
1997 1999 1997 1999
Citi claims a few modest achievements. Some wealthy Salomon Smith Barney
customers have been given 100% mortgages by Citibank, secured against their
brokerage accounts. Salomon Smith Barney mutual funds have been sold to
Citibank branch customers. Within months of the merger announcement,
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Travelers annuities were selling in the Citibank branch network, and now
generate revenues of $750m a year.
300
Citigroup
MERGER
250
200
Citicorp
150
100
Travellers
50
0
1996 97 98 99 2000
Adding to the frustration has been the group’s muddled Internet strategy. Mr.
Reed, who took sole charge of it in July 1999, believed that Citi’s Internet
potential would best be fulfilled by developing from scratch an entirely
self-contained, state-of-the-art online retail financial-services provider. More
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than $500m was spent developing “e-Citi” – a classic example of the big-bang
innovation strategy pursued by Mr. Reed decades earlier when he installed
thousands of ATMs, in Citi branches, and transformed the way people used
their bank.
Despite the infighting, strategic mishaps and delays in integration, Citigroup has
prospered, with both profits and the share price soaring. Mr. Weill has, as
usual, cut costs and made under-managed assets sweat. New managers from
Travelers have instilled a more aggressive sales culture in Citibank branches.
But the Travelers people who now lead Citibank lack experience in overseas
markets, where the group expects its main growth. Citibank’s institutional
memory, which gave some protection from bad lending decisions, has gone. So
has Mr. Reed’s vision. Mr. Weill is skilled at fixing and then expanding
under-managed companies. But he has yet to show that he can fix and expand
an already successful global giant.
Questions:
1. What are the problems that have become apparent after the merger?
3. How do you think the company could have overcome these problems?
Summary
In this unit we have considered the options available for global
expansion; strategic alliances and mergers and acquisitions (M&A).
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pooled resources, know-how and shared risk, but also noted that there
can be conflicting goals and there is the potential loss of know-how.
REVIEW ACTIVITY
We have noted that one of the main pitfalls in M&A is the integration phase.
When a company acquires another, what is the best recipe for assimilation?
· How can the right balance be struck between the need for
organisational autonomy vs. strategic interdependence.
Prepare your responses to the above, and then read p.334 (Reading 6.3) in the
key textbook De Wit, B & Meyer, R.
*Highly recommended
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Unit 5
Value Management
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The term value can bring to mind different things. It can mean one thing
in the public sector and have a different focus in the private sector.
Economists think of value in quantitative terms, in a strict monetary
context. Shareholders think of future potential. Increasingly, and
particularly in the knowledge-based economy, there is an emphasis on
intangible and intellectual capital assets.
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ACTIVITY
Consider the definition of ‘Value’ in the context of an organisation. Draw up a
list of the different aspects of the word ‘value’, e.g. value-added.
ACTIVITY FEEDBACK
Your list may have included some of the following:
· Shareholder Value.
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· Value Chain.
· Value System.
· Value Cycles.
· Value Management.
· Stakeholder Value.
Stakeholder Value
Whether in the private sector or public sector, value should be judged
by the organisation’s key stakeholders.
Public Sector
Strategic management is, of course, just as important to the public sector
as it is to commercial entities. For example, the notion of competition for
a public organisation is usually concerned with competition for scarce
resource inputs, typically in a political arena. However, the emphasis on
value concepts can be different in the public and private sectors. The
overarching need is for public bodies (e.g. central government, local
government, health service organisations) to demonstrate Value for
Money in outputs. Many of the developments in management practices
and theories in the public sector (e.g. changes to internal markets,
performance indicators, competitive tendering) have been used to
attempt to introduce competition to encourage improvements in value
for money.
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Private Sector
Stakeholder value is a critical factor for strategy and management in the
private sector.
The key work in this area of strategy was carried out by Michael E Porter
in 1985 and 1990.
Key Stakeholders
It could be argued that the key stakeholders to any commercial
organisation are the shareholders (particularly where the company is
publicly owned). If shareholders become disenchanted with a company
and sell their shares in sufficient quantities, the law of supply and
demand dictates that the share price will fall. The ultimate consequence
of this is that the market capitalisation (the value of the company on the
stock market) falls to such a level that the company finds it more
difficult to borrow money or may be taken over by another organisation
who buys up a majority of the shares.
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Value Management
How do companies adopt strategies to deliver shareholder value. What
is value? Business models and definitions of value that worked well
until the early 1990s, are now being challenged. Why is sensitivity to
stock price now a critical lever for managing the future?
ACTIVITY
As background to the next sections, learn about the shareholder value
approach by reading, ‘Shareholder value and corporate purpose’, Reading 11.1,
p. 610-615 in your key text, De Wit, B & Meyer, R.
Creation of Value
Value is added to a firm when profits increase, operational or financial
risks are reduced or when greater efficiencies are produced. Decisions
which add value to a company, add value to the shareholders – either in
the form of dividends, value of the share holdings or both.
Various ratios and tools have been introduced into business for
analysing financial statements, e.g. Return on Capital Employed
(ROCE). But any measure of shareholder value must include the
following considerations:
· Cash flow.
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EVA is the difference between the Return o n Cap ital Em p lo yed and the
Co st o f Cap ital Em p lo yed by a company. A simple, but flawed, analogy
is to compare the annual cost of your mortgage with the annual increase
in value of your house. If your house has risen in value by 10% and your
mortgage is only costing 6%, then you are ahead. The same logic applies
with a company. If it gets more out of its capital than it is paying for it
then it is adding value.
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What is EVA
EVA is a measure of profit, but not the accounting profit seen in a
corporate profit and loss account. It is profit as economists define it.
Both are measured net of operating expenses but they differ in the
treatment of capital costs. While accountants (in P&Ls) recognise only
out-of-pocket costs, such as the interest paid to bankers, EVA recognises
all capital costs, including the o p p o rtunity cost of shareholder funds.
The value of any business must equal its net assets (the sum of fixed
assets, cash and net working capital) plus the present (in other words,
discounted) value of future EVAs. Therefore, as stock market
expectations of corporate EVA increase, so too do share prices.
Senior managers were put on an EVA bonus plan. Within a year, 4,700
managers were in the programme, including non-executive directors. By 1999,
SPX was transformed into an EVA company, with a positive effect on the share
price. When EVA was implemented, SPX’s share price was under $16. Within
five years of implementation it was selling for $180. What makes this
company’s experience instructive is that it was able to create a culture that put
value creation at the centre of management systems. As the company
explained in its 1998 annual report: “EVA is the foundation of everything we
do. It is a common language, a mindset, and the way we do business.”
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SPX divested several businesses that were profitable, but strategic reviews
revealed the businesses were worth more to others, and therefore should be
sold. Of course, well-managed companies have always done this, but
EVA-based compensation systems create stronger incentives for managers to
seek such opportunities.
EVA’s most important contribution to the turnaround was its central role in
management compensation. The actions taken by SPX to improve
performance were neither unusual nor dramatic. The key lesson to be learned
from SPX is not whether managers are capable of delivering superior
performance, but whether they are motivated to do so.
The net assets are the sum of all fixed assets, cash and working capital.
Note the EVA component is the present value of future EVAs; it is
discounted back.
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Methodology:
Reward Systems:
Implementation:
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ACTIVITY
Value innovation is said to be the essence of strategy in the knowledge
economy. Learn more about this by reading ‘Strategy, value innovation and the
knowledge economy’ in your key textbook, De Wit, B & Meyer, R.
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Step 5: Step 1:
Inform stakeholders Identify value
and develop investor performance
relations and value drivers
Increase
shareholder
Step 4: Step 2:
Adapt value Implement
compensation value creation
systems programmes
Step 3:
Extend
management and
control systems
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This represents the results of the analysis carried out above for each
SBU. From this, the following questions can be answered;
SBU 4
Deviation SBU 7
from risk-
adjusted Sell Optimise or discontinue
market SBU 3
returns E.g. have all efficiency
E.g. has this unit enhancement options
achieved critical been exhausted?
mass?
E.g. would this unit not SBU 2 "Dogs"
be better off in someone
else's hands?
SBU 8
- SBU 6
Low High
Cirecle diameter = capital employed Strategic fit with corporate vision
Figure 5.3. Value portfolio chart, Ref: Stefan Botzel & Andreas Schwilling, Managing for Value
1999.
The ‘Stars’ in the value portfolio are those businesses that create
shareholder value by;
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Strategic management
Let us now deal with each ‘window’ of the value portfolio in turn;
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· Increase Revenues.
· Increase Margins.
· Optimise Investments.
· Minimise the cost of capital through Financial
Engineering.
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For example, a sales growth of, say, 10% is not a valid strategic goal (as
far as VM is concerned) because;
· Stocks.
· Stock options.
· Convertible bonds.
· Bonuses.
· Combined forms.
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EVA bonus plans don’t just motivate managers to think about current
EVA. If they did, managers would focus entirely on short-term
performance at the expense of the future. Value-creating investments
might be avoided because their immediate effects on EVA are negative.
The solution is to give managers a direct economic stake in future EVA,
not just the current period. The figure above shows how such an
approach can work.
Remember that the value of the company (that is, the value of debt and
equity) equals net assets plus the present value of future EVAs. This
means that the market capitalisation of a company’s shares is based on
expectations of future EVA performance. Share price increases when
these expectations are exceeded.
Note, however, that the payout is not capped. This is the second basic
principle of EVA-linked compensation. If manager and shareholder
interests are to be aligned, management pay should more closely
resemble payouts received by owners.
Typically, the payout rule for the bonus bank is the full bonus bank
balance (if positive), up to the target bonus, plus one-third of the bank
balance in excess of the target bonus. When the bonus bank is negative
(which is possible if under performance is great enough), no bonus is
paid. The EVA interval determines the sensitivity of the bonus earned to
excess EVA improvement, and is chosen by senior managers based on
the degree of upside potential and downside risk they wish to inject into
the plan.
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from annual payouts. Stock options add to the EVA bonus plan by
providing long-term incentives.
But something was missing. The results weren’t showing up on the bottom line
and so the company decided that a tool was needed to help focus their efforts.
They implemented EVA as a measurement and management tool.
Employing the same amount of capital as in 1995, sales moved from $1 billion
to $1.5 billion. In 1997, EVA was $40 million – an increase of nearly 300% over
the $10 million generated in 1996. The share price has gone from a low of $11
at the end of 1995 to a high of $36 at year-end 1997.
EVA analysis enables the company to identify waste in both costs and use of
capital. Inventories across the country reduced by 24% or $17.2 million from
1995.
Outstanding accounts receivable (that is, the money owed by customers) have
been reduced 22% from 55 days in 1995 to 43 days at the end of 1997. Over
the past two years, sales have increased 38%. The cut in receivables is
especially interesting because the impetus for this came from operating
managers, not the accountants.
The 13% operating margin is much improved from five years ago with scope
for further improvement. At the same time, the total square footage of building
space has been reduced by more than 15%.
EVA analysis demonstrated that debt capital was cheaper than equity capital.
So the board set a new debt to capital ratio of 30% to 35% and $100 million
was raised in a private placement. In 1997, $110 million was returned to
shareholders in share repurchases and dividends.
Using EVA, Miller’s business has grown and people have grown in their
commitment and contribution. EVA is the backbone of the company-wide
incentive and bonus system.
As one observer explains: “When they went on EVA and began focusing on
capital costs like receivables, Miller employees in the divisions attacked the late
payment problem on their own and discovered that the cause of overdue
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Communication tools may be split into direct and indirect with varying
degrees of importance to investors, e.g. Annual Reports are more
indirect whereas meetings and presentations are direct communication
tools.
Is EVA Appropriate?
All companies can benefit from the shareholder value perspective and
the value-creating incentives offered by EVA, but some are more likely
to benefit than others.
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Summary
In this unit we have looked at the concept of value, what it means to
different stakeholders, and how our ideas of value and its measurement
are changing.
We have looked at EVA as a measure of value, and have seen how EVA
is influencing the management philosophy of value-based companies.
We have also looked at the components of a value-driven approach.
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have looked at two case studies where EVA has made a significant
impact.
REVIEW ACTIVITY
In the late 1990s high-tech stocks soared in value, and there seemed to be an
unsustainable wave of dot.com mania. The dot.coms invaded every sector of
commerce; e-business seemed be to overturning established relationships, and
attacking long-established price points. The year 2000, however, saw the
collapse of many dot.com shares. What went wrong?
2. Now identify a survivor from the dot.com period. Spend some time
researching the company. Find out about its strategy, during the
dot.com period – specifically with regard to e-business. Comment on
its market valuation during the dot.com period and on what premise
these valuations were made. Identify the hallmarks of their success
In effect, many of the dot.com management were guilty of hyping the worth of
future EVAs. Market analysts egged on the hysteria; some cynics go as far as to
say that some market analysts materially benefited from this deception (an area
of on-going investigation).
The EVA situation resolved itself over time, and many of the dot.com stocks
crashed.
The lesson from the crash is that there are no shortcuts in business. For many
dot.coms, the “e” in e-business came to stand for “easy”; easy money, easy
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success, easy life. A real business is serious work and must have a realistic
business plan for break-even and profitability thereafter; profitability in the
not-too-distant future. In addition to future potential (and by future potential is
meant realistic future EVA) profits and cash flow do matter.
*Highly recommended
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LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
Globalisation has heightened the awareness of social responsibility.
There has been much debate about its adverse impact on social, political
and environmental issues. Furthermore, recent high-profile corporate
scandals, such as Enron, Worldcom and Parmalat, have led to an
increased focus on corporate governance and the tightening of
accounting procedures.
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Profitability Responsibility
Organisational purpose
Also, investors who invest for the longer term may expect the company
to be profitable and also behave ethically, showing good standards of
corporate governance.
Corporate Governance
The term ‘corporate governance’ has been used in a variety of contexts,
particularly in relation to the boards of companies listed on a stock
exchange. Governance is at the heart of the role that all boards of
directors play. The range of issues is varied, e.g. company performance,
individual performance, role of directors, roles of shareholders.
Corporate governance came to the fore in the early 1980s in the United
States during extensive corporate take-over activity. Perceiving little
support from their institutional shareholders, numerous company
boards began to introduce protective practices to ward off undesirable
take-over bids. These measures were seen by some shareholders,
especially public pension funds, as acting against their best interest.
Accordingly, shareholders began to take a greater interest in their
investments. Out of this, corporate governance was born.
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ACTIVITY
How does a company achieve its organisational purpose by balancing the often
conflicting demands of profitability and stakeholder responsibility? Learn about
this and the paradox of profitability and responsibility by reading the following:
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1. The Anglo Saxon Model (e.g. in the UK, USA and Australia)
which is a single tier structure and often reflects a widespread
number of small shareholders alongside large investment houses
who are intermediaries owning shares on behalf of investors.
This limits the power of the individual shareholder and heightens
that of organisations such as pension funds. This can lead to a
short term approach as investors seek to obtain a quick return on
investment.
2. The European Model (e.g. Germany) comprises a two tier
structure where the upper tier is supervisory over the lower tier.
Share ownership is normally in the hands of institutions who use
protective mechanisms such as preference shares. This system
has strengths and weaknesses. The two tier system is seen as a
‘counterbalance’ to management power where the single tier is
dominated by senior management. However, whereas the system
has long term views, it suffers from slower decision making and
a lack of flexibility.
3. The Asian Model (e.g. Japan) is single tier but ownership is very
different to the Anglo Saxon model. Banks and other companies
own most of the shares. Hence the larger companies hold shares
in each other and co-operate very closely (known as a ‘kieretsu’).
Composition of boards is heavily in favour of executive
managers. In fact, it is in effect the top layer of management.
Accordingly, the share ownership patterns can lead to weak
accountability and secretive governance procedures.
Average %
30
28
Venezuela
Indonesia
26 Columbia Thailand
Malaysia
24
Brazil Korea
22 Italy
Mexico
Argentina Germany
Taiwan
20 Chile France
Japan
Spain
18 US
Switzerland
UK
•0
Latin America Asia Continental Anglo-Saxon
Europe
Source: McKinsey
Figure 6.2: Average premiums investors would be willing to pay for a well-governed
company
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Figure 6.2 suggests that investors are willing to pay more for shares
where the perception is that the companies are ‘governed’ in a sound
and ethical way. It can be seen as a measure of perceived ‘ethical’
governance.
Scrutiny in the area of governance (as we shall see in the next sections)
has led to the establishment of strategic principles relating to corporate
governance. These include:
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The focus was again on the systems and structures which could control
directors, ensuring that, as far as possible, their interests were aligned
with those of the shareholders. Both Cadbury and Greenbury, therefore,
focused most of their work on the elements of the debate relating to
accountability, not enterprise.
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ACTIVITY
Read the latest version of the Combined Code on the following website:
http://www.fsa.gov.uk/pubs/ukla/lr_comcode2003.pdf
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ACTIVITY
Read the Summary and Recommendations section of the Higgs Review from
the following website:
http://www.dti.gov.uk/cld/non_exec_review/pdfs/higgsreport.pdf
The chairman, playing a pivotal role and potentially holding the balance
of power, will be required to be independent at the time of his
nomination but it is assumed he will “go native”, given the time spent
working closely with the management.
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No individual should chair more than one large company nor should a
full-time executive take on more than one non-executive role.
No limit has been set for the number of roles that non-executives can
hold, though individuals should make sure they have enough time to
fulfil their duties.
“If things are going seriously wrong the committee may have no
alternative but to explore the issues exhaustively. ”If the audit
committee is drawn into a line of questioning about the handling of a
controversial issue, it cannot let go until it is satisfied with the answers."
The Smith report says at least three independent non-execs should serve
on the audit committee, and suggests that they should get extra pay to
reflect the importance of their work.
The Smith report will lead to revisions to the best practice code on
corporate governance for listed companies.
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Director Accountability
Placing accountability at the heart of corporate governance inevitably
led the general debate on the issues of to whom are directors
accountable. Developing the Cadbury definition of corporate
governance a similar committee set up in Canada suggested a wider
definition:
This definition retains Cadbury’s systems focus, but suggests that the
structures and processes chosen by directors must take into account
parties other than shareholders.
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Enron and other high-profile scandals have highlighted problems with corporate
governance. How can boards be actively encouraged to challenge managers?
With the dawn of the modern large-scale corporation in the second industrial
revolution of the late nineteenth century, there came a new potential for
managerial abuse, as corporate stockholding in such large entities became
fragmented and detached from management. Stockholders’ interests were not
automatically aligned with those of managers.
Why did the Enron board fail, and what does that failure tell us about possible
reforms that could improve corporate governance? One idea that has been
popular among some is the need for board “independence”. Independent
board members – that is, board members who are not involved in company
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management – should be able to exert more effective oversight since they are
disinterested parties.
Able, perhaps, but not necessarily willing. Independent board members are
busy people; they are chosen because of their name recognition, not because
they have either the time or the inclination to discipline management, or the
technical knowledge to perform adequate audits. And their very independence
may be compromised if their seat on the board depends on continuing
management support, as it often does.
How can we establish a process for selecting and rewarding board members
that will place stockholders’ interests above those of managers? Here,
economics teaches us that incentives are as important as skills. The key to
effective board leadership is establishing a process that selects board members
who have both the ability and the incentive to be dogged pursuers of the
stockholders’ interest. There are three approaches to ensuring such a process
of board selection.
1. Concentration of ownership
First, if board members and managers both own sufficiently large amounts of
stock, the conflict of interest between managers and stockholders may be
largely overcome by the direct incentives of board members to protect their
own wealth. The positions of board members with sufficiently large
stockholdings are secure, and they have strong incentives to discipline
managers to pursue value maximisation.
A 2002 study found that countries with the weakest legal protections for
outsider stockholders also saw the greatest concentration of stock in the
hands of insiders. In both the US and UK, where legal protections are relatively
strong, the median insider ownership share of the largest 150 corporations is 1
per cent. In France and Germany, where legal protections of stockholders are
weak, the proportions are 55 per cent and 61 per cent.
During the first industrial revolution of the early nineteenth century, when the
scale of manufacturing production was relatively small, ownership and
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Finally, there are enormous social benefits from broad public participation in
stock ownership. Those benefits transcend the obvious social gains from
portfolio diversification, and include the political economy benefits that come
from a broad alignment of interests between large corporations and the public,
which encourages growth-oriented tax and regulatory policies. The booming
“investor class” in the US in recent decades, for example, has restrained
populist impulses in public policy toward corporations, and spurred
constructive reforms of accounting, disclosure and governance regulation.
2. Intermediaries
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Scholars have argued that the relationships between German universal banks
and client companies, and the discipline over management provided by
bankers, permitted industries to access external finance easily and thus grow
rapidly, especially in new product areas that required large minimum efficient
scale of operation (such as electricity generation). Although postwar Germany
has been known for its reliance on debt as the main source of external finance,
that was not true of pre-First World War Germany; in fact, equity finance was
much larger a proportion of industrial funding there than in the US prior to the
First World War.
In the US, banking regulations limited the geographic scope of banks, and
therefore also the scale of banks. Those regulations constrained the role of
banks in financing industrial growth by large-scale corporations during the
second industrial revolution. As the scale and geographic scope of industry
increased, industry outgrew banks, and bankers turned mainly to commercial
finance. Commercial banks were also constrained from participating in
underwriting, not by law prior to 1933, but rather by their small size and
regional isolation, which made it hard for them to operate German-style
networks for the sale of shares or the aggregation of voting rights.
Despite its benefits, and even though its role in the economy was quite limited,
J.P. Morgan’s brand of finance capitalism was too much for populist US
sentiment against the concentration of power. Successive acts of legislation
constrained investment bankers’ abilities to establish control through
networks of skilled partners acting as disciplinarian board directors, and forced
the separation of commercial and investment banking.
Yet the postwar history of Germany and the past decade in Japan suggest that
concentrating stockholder influence by means of universal banks and main
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The role of the Japanese bank system in resisting corporate reform over the
past decade is one case. Another is the change in the role of German banks in
the postwar era. The largest German banks used their network of trust
accounts to engineer mutual control over their own stocks. They control, as a
group, more than 50 per cent of any one large bank’s stock. That lack of
competition may help explain why postwar German banks have played such a
small role in equity underwriting, or in spurring innovation and new industrial
growth, in the postwar era, compared to the role they played prior to the First
World War.
The history of Japanese and German financial systems suggests that financial
system concentration during the later stage of industrialisation may offset the
benefits of corporate discipline that result from the concentration of
stockholder power in those intermediaries during earlier stages of
development. The policy lesson seems to be that vigorous antitrust policy
toward the financial sector should be pursued in order to ensure the
continuing benefits of good corporate governance that concentration of
control through intermediaries permits.
To what extent can intermediaries such as pension funds and mutual funds
substitute for the Morgan collar, the universal bank or the Japanese main bank?
So far, in the US, they have played a limited role. There is some evidence that
institutional investor holdings of stock can improve corporate governance, but
most commentators view these influences as weak and unreliable.
Franklin Edwards and Glenn Hubbard point out that legal impediments limit
the amount of institutional ownership in any one company, and legal and
regulatory risks to fund managers limit their incentives to own concentrated
blocks of shares or to join boards of directors.
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oversee the restructuring of those enterprises. Each NIF was given a lead role
(and a 33 per cent stake) in approximately 30 companies. Shares in NIFs were
allocated to the public and traded. Although the privatisation process was
bumpy in Poland, as elsewhere, observers tend to regard its successes as partly
reflecting the positive role of NIF managers in rationalising the restructuring
process.
3. Hostile takeovers
But recently enacted legal obstacles to takeovers have protected managers and
captive boards of directors from that external discipline. Takeovers were
never easy, even during the 1980s. Acquirers had long been required by law to
announce their intention of purchasing the company through tender offers,
thereby reducing the gain to acquirers of improving corporate efficiency, and
thus discouraging some efficient takeovers.
Conclusion
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QUESTION:
1. How do you think the Enron scandal (and indeed Worldcom and
Parmalat) could have been avoided?
The following measures in the US would have helped avoid such a scandal:
Some of the above measures (and many more) are receiving attention by the
Securities and Exchange Commisison, New York Stock Exchange, NASDAQ,
Public Company Accounting Oversight Board in the US. Some rules have
already been enacted and others are at the proposal/discussion stage. Details
may be found in the paper ‘The Post Enron Corporate Governance
Environment: Where are We Now? ‘ found on:
http://www.ffhsj.com/cmemos/031017_post_enron.pdf
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Other articles that you will find helpful in this area are:
Benston, G.J. and Hartgraves, A.L. (2002) “Enron: what happened and what we
can learn from it”, Journal of Accounting and Public Policy 21, 105-27.
Business Ethics
Many ethicists say that there is always a right thing to do based on moral
principle and others believe the right thing to do depends on the
situation. Ultimately it’s up to the individual. Many philosophers
consider ethics to be the ‘science of conduct.’ Ethics includes the
fundamental ground rules by which people live their lives.
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Many people do not take business ethics seriously saying that business
ethics only states the obvious (“be good,” “don’t lie,” etc.). These
‘principles of the obvious’ disappear during times of stress.
1. Managerial mischief.
2. Moral mazes
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When Nokia hosted a media lunch in a small London restaurant last week, the
aim was not to publicise its latest mobile telephones but gently to draw
attention to the time its employees are devoting to schoolchildren in need
around the world.
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Nokia’s Make a Connection campaign, launched this year, is about to make its
presence felt in some UK schools. The Finnish telecommunications company
has entered a global partnership with the International Youth Foundation, to
provide teaching packages to children with learning difficulties, and to offer
volunteers from its own workforce.
The campaign is operating in South Africa, China, Mexico, Brazil and Germany,
as well as in the UK. It is tailored to local needs, with social exclusion and
education the predominant themes.
Nokia has not ruled out giving employees time off to participate but it has
apparently assured the IYF that hundreds of its employees will use their flexible
working arrangements to take part in the scheme.
Nokia plans to spend £7.5m on the campaign during the next three years and
says it should help up to 1m children and young people. The campaign will not
feature the Nokia brand or free mobile phones, the company insists. But it
raises questions about whether behind it lies a subtle ploy to use good works
to strengthen its market position among the younger generation.
Mr Stoneham puts a different business case for Nokia’s campaign: “We hope
people will see this as a sincere community issue. Sustainable global success
demands respect for our stakeholders – our staff, current and potential, want
to see good citizenship and our investors and customers want us to behave
ethically,” he says.
The US still leads the way in philanthropy, with foundations holding more than
$330bn (£224bn) in assets and contributing more than $20bn annually to
educational, humanitarian and cultural organisations.
Traditionally, Europe has lagged behind the US. This is partly because the state
has tended to play a more central role and partly because the act of giving has
never been regarded as conferring high status.
The notion of corporate citizenship has developed during the past decade in
both the US and Europe as more companies address social accountability,
social auditing, social investment, corporate governance and business ethics.
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Such an approach is a far cry from that of the corporate citizens of the late 19th
and early 20th centuries, when the personal considerations of the donor,
rather than a cost-benefit analysis, were the main impetus for giving.
Doug Miller, managing director of Environics, says companies are being forced
to market themselves differently in response to changing attitudes and a new
“aspirational agenda”: “We are living in a period of great expectations, with
people expecting to improve the quality of their lives and believing they can get
it all.”
“I visit 75 boardrooms a year and I can tell you, the members of the board are
living in fear of getting their corporate reputations blown away in two months
on the Internet,” he says.
For Shell, still smarting from the adverse publicity of the 1995 Brent Spar
fiasco, the effect of this further blow was to make the company even more
determined to project a caring image. In a guide sponsored by the company,
Tim Hollins, head of group social investment, wrote: “The challenge for the
21st Century Company is to bring all the developments in corporate
citizenship together . . . into a coherent framework of practice that makes
good business sense as well as benefiting society.”
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The group has chosen to continue its high-profile campaign and to risk attacks
by organised pressure groups. Last month, it circulated the latest information
about the activities of the Shell Foundation, a UK-registered charity established
in June with the aim of “supporting efforts worldwide to advance the goal of
sustainable development”.
Yet for aid agencies such as the World Development Movement, much more
has to be done before hardened campaigners can be convinced that
enlightened self-interest is delivering results in a way that truly benefits society.
Barry Coates, director of WDM, feels too many companies fall outside the
new ethical agenda and stand to take advantage of unregulated markets.
But a study last year of 78 FTSE 350 companies and non-quoted companies of
equivalent size, conducted by Arthur Andersen and the London Business
School, showed that one in five companies with a code of ethical conduct had
not issued the code to all its staff and nearly half had failed to make the code
publicly available on request.
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Case Synopsis
Labour conditions in Nike’s contract factories were not even close to any
labour laws and compensation practices in the industrialised countries, let
alone the US. Work there meant 70-hour workweeks performing hazardous
and/or monotonous routines under abusive supervision and with appalling
equipment. Until the early l990s, Nike never felt that to be its responsibility.
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Ever since the early 19th century in England, industrial development started
with large scale textile factories. Workers there would stay for two to three
years and then either return to the countryside or “graduate” on to higher
value added, more sophisticated factories such as household goods
production, followed by machinery assembly and ultimately followed by
precision machining for high tech goods. This pattern remained remarkably
unchanged over almost two centuries: throughout all times and places of
industrial development, textile factories have served the critical function of
“breaking in” the poor, illiterate and non-urbanised farm surplus workers into
the industrial age. The alternative would usually be starvation in the
countryside. And ever since Charles Dickinson and Emile Zola, this course of
events has always attracted the ire of many whose fortune of life it was to grow
up in the more economically advanced part of society.
Eventually the differences proved too far to bridge between the members. The
group split into a Fair Labour Association, carried by the textile companies,
espousing a certain set of minimum conditions, and the student-led, union
supported Workers Rights Consortium, who wanted measures to be a lot
more stringent and better controlled. The key stick that the WRC could wield
was to convince universities to purchase their $2.5 billion of sports apparel
(2% of the US textile market) for their varsity teams only from WRC approved
vendors. If WRC was successful it could harm profits at the textile companies,
including Nike quite seriously, because production costs would probably rise
significantly.
Points to Highlight
(extracted from Teaching Note 22, Nike and the University of Oregon, Peer Ederer
and Jaco Lok)
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Questions:
1. Identify the four main protagonists. What are the financial interests of
their owners and/or sponsors?
3. What seems to be the core problem behind the fact that 500,000
human individuals are working under such poor conditions, even as
their input to the overall value of the final product is only 4%?
Wouldn’t just a little more to them, say 5% or 6% do tremendous
good to them, while being barely noticeable to the final consumer?
5. With 45% global market share, is there an option for Nike to recreate
the industry rules for a better deal to all stakeholders? What might
that option look like?
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Feedback on Question 2:
· Nike‘s own employees. The case does not analyse the situation
from the perspective of Nike’s own employees in the U.S., but
we can imagine that it is not a lot of fun to work for a
company that is widely known to exploit labour in developing
countries. Imagine the number of times Nike employees will
have been forced to justify their company’s actions by their
friends and families during dinner parties and social events at a
time when Nike’s exploitative practices were all over the
news! Although their own work environment may actually be
very satisfactory, we can therefore reasonably assume that it
was in the personal interest of many Nike employees to
oppose their company’s work practices in Asia. Only those
who fully believed in minimising the cost price of Nike’s
products in the face of Nike’s aggressive competitors could be
expected not to buckle under the social pressures in their
private lives.
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· South Korean and Taiwanese suppliers. When Nike moved from one
location to another, often its Taiwanese and South Korean factory
operators followed, bringing their management expertise with them.
Subcontractors, of course, generally had no choice but to follow
Nike, because they were highly dependent on Nike financially. Nike
used over 500 different suppliers and could easily switch suppliers
who were operating in a highly competitive market across the
whole of South East Asia. Of course, it was in the Taiwanese and
South Korean owners’ interests to maximise the financial returns
from their businesses by deploying low cost, mass production
systems using cheap, manual labour. Ensuring consistent, high output
quality was of crucial importance in maintaining the supply
relationship with Nike. Because of the intense regional competition
between different suppliers with low barriers to entry, suppliers
could not be expected to improve labour practices on their own
accord, if that meant increasing their cost price and thus risking
their relationship with Nike. Both local governments and local
employees welcomed their presence as an important source of jobs.
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Feedback on Question 3:
The core problem seems to be that the responsibility for improving the plight
of the thousands of workers in developing countries can and is constantly being
shifted from one party to the next. The customer can relieve him or herself of
responsibility by claiming that he/she doesn’t have any real choice and that it
can’t be up to them to know how all the goods that they buy are produced to
ensure that their manufacturers are socially responsible. They should be able
to rely on the manufacturers and on the government to ensure products are
safe and “non sweat shop”. Furthermore, why should they have to pay more
for their product when manufacturers and their retailers make multi-billion
profits? These manufacturers, of course, can point to the pressure they are
under from shareholders to maximise financial returns, and to their
competitors for making it impossible to initiate changes unilaterally in a price
sensitive market. They can also shift the responsibility to the local Asian
governments, claiming that it is their responsibility to ensure that minimum
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Feedback on Question 4:
However, the real damage to Nike’s reputation was done in the 1990s and
cannot be easily reversed. Therefore, for a long time to come, it will therefore
always be relatively easy for activists to attack Nike and gain some popular
support by triggering the old, well-established image of Nike as the abusive
imperialist. Thus, although Nike has probably done enough to appease its most
important customer segments, it should not make the mistake of
underestimating the influence of a relatively small group of activists again, and
should still do as much as possible to prove to them that it is doing everything
that can be reasonably expected of them to improve the livelihoods of its
workers in developing countries.
Nike should also make sure that it continues to receive government backing
for its FLA initiatives. If the unions are successful in pressuring the government
to make it difficult for companies like Nike to rely on cheap foreign labour
through the use of tariffs, then Nike could be severely damaged. In the
American market its competitors may well face the same problems as Nike,
but globally foreign competitors would continue to use cheap labour and could
thus easily out compete Nike.
Feedback on Question 5:
Being such a dominant player in the industry, one could argue that Nike should
have the power to recreate the rules of the industry to improve the plight of all
of the stakeholders involved in the supply chain. However, the bottom line is
that the lives of Nike’s subcontractor employees can only be improved if
profits are distributed differently in which case shareholders of either Nike, its
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retailers and/or its suppliers pay, or if the customer is willing to pay more for
Nike products.
Nike could use its marketing muscle and expertise to try to convince
customers to pay more for “non sweatshop” sportswear. However, it is
questionable whether the Nike branding people would want to explicitly
associate their brand with the way its products are produced. If Nike
nevertheless were to succeed in convincing its customers to pay more without
harming its ‘cool’ brand image, major competitors may not try to undercut the
new higher prices since they could also stand to gain from charging higher
prices. Of course, Nike can’t formally agree with its competitors to raise prices
because that would amount to illegal price collusion. In fact, depending on the
nature and intensity of price competition in the industry, there is no guarantee
that competitors will follow suit, and they may instead choose to capture
market share by selling socially responsible products at the old prices. In this
case, of course, both Nike’s communications campaign and higher
subcontractor prices would have to be paid for by its shareholders. Therefore,
only in the (unfortunately unlikely) case of Nike convincing its customers to
pay more for its products and preventing competitors from undercutting these
prices at the same time, can the situation potentially be improved for all
stakeholders.
Summary
In this unit we have considered the importance of corporate
governance, and have looked at recent developments in the UK in this
area.
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REVIEW ACTIVITY
Consider your own organisation (private or public sector). How do you rate
your organisation’s ethical code of business conduct against the characteristics
identified in the section ‘Characteristics of a highly ethical organisation’? Also
look again at the benefits listed in the section ‘Two broad areas of business
ethics’.
Where your answers have been negative, what changes can be made? Will this
require a management culture change? Can it be accomplished within the
current organisational structure?
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Unit 7
Managing Complexity
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
With the tremendous change facing organisations and increasing
complexity of relationships in an organisation, some companies are
beginning to adopt systems thinking in organisational management. It
is playing a role in organisational design, diagnosis and problem
solving.
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In this unit we shall look at the role systems analysis has in managing
complexity in organisations. We shall examine the principles of systems
thinking, understand the difference between hard and soft
methodologies, and focus on a contemporary soft system methodology.
Control Chaos
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Systems Thinking
A Brief History
Systems thinking is not a new subject area. It can be traced back to
Aristotle and Plato. However, the 1940s saw the emergence of various
formal systems thinking disciplines such as general systems theory
(GST), systems analysis and systems engineering.
One of the most prominent early pioneers of GST was Ludwig Von
Bertalanffy. He referred to a system’s openness, i.e. the degree to which
a system interacts with its environment, – an open system takes or
receives things from its environment and/or provides things into its
environment. Therefore, there is clear applicability to business in terms
of the recognition of the role of market forces, the supply chain,
intervention by government institutions, etc.
Over the 1950s and 1960s RAND influenced systems thinking through
its publications on strategy and methodology in systems analysis.
RAND, in developing its advisory role, expected its clients to take into
account the social issues like welfare economics. However, the
methodology was criticised due to the lack of interest in people by
systems analysts. This may explain some of the reasons why computer
systems analysts took little account of the user during their analysis, as
the computer analysts adopted the RAND style methodology in
ignorance of this original but fundamental omission.
The Operational Research and systems ideas of the 1940s and 1950s
influenced the way engineers tackled their problems and accordingly
there has been increasing reference to “systems engineering”. Systems
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ACTIVITY (optional))
As background to this unit it is suggested that you source the following book
Stacey, R.D. (2000) Strategic Management & Organisational Dynamics – The
Challenge of Complexity (3rd Edition) – Published by: Financial Times Prentice
Hall (ISBN 0-273-64212-X), and read the following:
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World Views
Systems thinking promotes the expression of different world-views, in
order to enrich information in the problem domain. By ‘World View’ we
mean the particular perspective of an individual on the problem. (We
shall look at World Views in more detail later in this unit). In the
business context, one would identify the different business actors and
elicit their views of the system. So for perspectives on the purpose of the
organisation itself, the following business actors may view the system
from different and sometimes conflicting perspectives. See Table 7.1.
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Perceived
used in
METHODOLOGY
Ideas real world
generates
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cold of winter and the body’s metabolism can use up existing calories
converting fats into sugars in order to keep the temperature at around
o
37 C.
ACTIVITY
Chaos Theory is another discipline that is being used in organisational
management. The modern notion of chaos describes irregular and highly
complex structures in time and in space that follow deterministic laws and
equations.
Read the following article about the validity of the application of chaos theory
to organisations.
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‘Strategy as order emerging from chaos’, Reading 9.2, p. 500-505 in your key
text, De Wit, B & Meyer, R
Performance Measures
We have noted that if an organisation is a homeostatic system, then it
learns and adapts to environmental changes, thereby keeping the
overall system in balance. In the context of a business, learning and
adaptation will result in adjustments to business outputs such as
strategic plans, policies and operational systems.
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and negative synergy by some soft systems thinkers) from the purpose
of the whole. If we wish to reduce sub-optimality, or negative synergy,
the sub-systems’ purposes must in some way be congruent with that of
the whole system.
SSM deals with problem formulation at the strategic level. It partly aims
to structure previously unstructured situations, rather than to solve
well-structured problems. It deals with “fuzzy” problem situations –
situations where people are viewed not as passive objects, but as active
subjects, where objectives are unclear or where multiple objectives may
exist.
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1 6
Problem situation Change and action
unstructured to improve
2 5
Problem situation Real/systems
expressed world comparison
REAL WORLD
SYSTEM WORLD
4
3 Conceptual models
Root definition of
relevant systems
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Stages 1,2,5,6 and 7 can be regarded as working in the real world, while
stages 3 and 4 can be considered to be systems thinking about the real
world. Refer to Figure 7.2.
Stage Three
“Root definitions” are constructed for the relevant HAS identified in
stages one and two. The root definition should encompass the emergent
properties of the system in question. To define the emergent properties
one needs to consider the mnemonic CATWOE:
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Stage Four
Each root definition will result in a conceptual model. The conceptual
model identifies the minimum necessary activities for that HAS. In
addition, it represents the relationships between the activities. The
conceptual model must be derived from the root definition alone. It is an
intellectual model and must not be clouded by knowledge of the “real”
world. All of the elements of the CATWOE mnemonic must be included
somewhere in the conceptual model, otherwise the conceptual model is
incomplete. It should not be possible to take out words from the root
definition without affecting the conceptual model.
Stage Seven
Recommendations for change will be implemented. It is important to
appreciate that once these changes have been implemented, the
problem situation will be modified. In other words, the process is
cyclical. It is recognised that nothing remains static and that mere
intervention by the consultant will affect the organisation.
http://sern.ucalgary.ca/courses/seng/613/F97/grp4/ssmfinal.html
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The article includes details of a case study which Checkland took part in, with
the Shell Group. It led to a major rethink of one of Shell’s Manufacturing
functions in the late 1980s.
SSM Summary
SSM deals with problems of a fuzzy nature where objectives are unclear,
and where there may be several different perceptions of the problem.
Indeed, SSM can be applied where there is simply an area of concern,
where no particular problem has been identified, but where it is felt that
some improvement can be achieved. SSM does not aim to solve the
problems in one fell swoop but to make incremental improvements.
Using SSM as a front end provides a means for as many individuals who
have an interest in the outcome as possible, to express their perceptions
of the area of concern. These concerns can then be accommodated in the
definition of the problem area, before a hard methodology is applied.
SSM has been used in a variety of organisations ranging from a
company dealing with food products to British Airways. It has been
used to assist in a range of problem situations, such as deriving
recommendations for improvement, reorganisation and role analysis.
Given the flexibility of the methodology, it can be seen that the range of
situations to which SSM can be applied is vast. The only limitations of
SSM are the capability and adaptability to new situations, of the
consultant.
Strategic Control?
Strategic control is the process by which managers monitor the ongoing
activities of an organisation and its members to evaluate whether
activities are being performed efficiently and effectively, and to take
corrective action accordingly. Strategic control is also about keeping
employees motivated, focused on the important problems confronting
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ACTIVITY
However well managed an organisation may be, for effective strategic control,
it is also necessary from time to time to conduct an assessment of an
organisation’s state of health. This is necessary to identify the organisation’s
strengths and weaknesses and uncover information that may be essential for
the organisation’s strategy.
Read the following article on the web (by David Hussey, Visiting professor,
Nottingham Business School) about an approach to company analysis:
http://www.environmental-expert.com/magazine/wiley/1086-1718/pdf5.pdf
· Efficiency.
· Quality.
· Innovation.
· Responsiveness.
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Summary
In this unit we have looked at the role of systems thinking in managing
organisational complexity. We have considered the principles of
systems methodologies, and have looked at its applicability in a
business context. We have noted the differences between hard and soft
methodologies and have examined in detail the Checkland
Methodology.
REVIEW ACTIVITY
Now turn your attention to the organisation you work for and focus on its
culture.
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For example, such a methodology does not lend itself to traditional project
management practices. Checkland himself stated that there is no way of telling
whether a SSM project is a success or failure. Most companies will not be able
to justify costly endeavours where there are no clear success criteria.
Another criticism of SSM is that it ignores the issues of power and hierarchy
within an organisation. SSM assumes that managers and employees alike can
openly discuss and influence organisational issues. This is rarely the case in
most organisations. Thus, critics from the business world discard SSM on the
basis that its values of openness and equality are unrealistic in the real world,
and confine systems thinking to academic analysis.
* Highly recommended
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Unit 8
Knowledge Management
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The global business environment is changing rapidly. As organisations
grow in size, complexity and geographical distribution, intellectual
capital is becoming an increasingly important asset of the enterprise. By
managing its knowledge assets astutely, and rapidly deploying
knowledge gained in one geographical area or one industry across
another, corporations can improve their competitiveness, and
adaptability. Re-cycling knowledge know-how is now key to
competitiveness, particularly in the knowledge economy. In some
sectors (e.g. professional services) knowledge management is a matter
of survival.
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ACTIVITY
Now, as background to this unit, read the following from your key text, De
Wit, B & Meyer, R
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Resource-based view
A resource-based perspective highlights the need for a fit between the
external market context and its internal capabilities. In accordance with
this, a company’s competitive advantage derives from its ability to
assemble and exploit a combination of resources.
Post-modern view
Post-modern perspectives on organisations challenge the
resource-based assumption. Writers like Frank Blackler argue that
knowledge cannot exist in any absolute or objective sense.
VIRTUAL CAMPUS
Taking into account your own working experience and sphere of activity, do
you support the resource-based view or post-modern view? Debate your
views (relating it to using your work situation) with others on the Virtual
Campus.
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ACTIVITY
Here is a quote from Tony Blair from his speech at the Lord Mayors Banquet,
Guildhall, London. November 1998.
Knowledge
What is knowledge?
In the context of strategic management, it is easier to understand
knowledge in terms of what it is not. It is not data and it is not
information. Data are objective facts. Data becomes information when it
is categorised, analysed, interpreted, summarised and placed in context,
i.e. given relevance and purpose. Information develops into knowledge
when it is used to make comparisons, assess consequences, establish
connections and engage in a dialogue. Knowledge can be seen as
information combined with experience, judgement, intuition and
values.
See Figure 8.1 for a pyramid view on data, information and knowledge.
Knowledge is at the top of the value chain. Data is at the bottom. Data is
essentially meaningless on its own. It is raw data. Reasoning, perception
and interpretation are critical in transforming data into information. In
addition to reasoning, perception and interpretation, decision making
(using experience, judgement, intuition and values) is key to the
transformation of information into knowledge.
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Reasoning
Perception
Interpretation Knowledge
Decision making
Data volumes
Value chain
Reasoning Information
Perception
Interpretation
Data
KEY POINT
Knowledge is the result of deciphering and attaching meaning to facts and
information.
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Knowledge problems
Knowledge represents a source of power for an individual. Sharing
valuable knowledge with colleagues is often seen as risking reduction of
value of that individual to the company. There are, thus, psychological
issues relating to knowledge management. Davenport and Prusak
argue there are three conditions under which an individual would agree
to share knowledge.
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Barriers to understanding
It is easiest to learn about things that we already know. It is very difficult
to learn from an expert if your do not have a basic grounding in the
topic. The expert must take time to explain the context and translate the
jargon. The barriers to communication in organisations that arise
between departments typify this problem. These problems can be
ascribed to differences in the content of the knowledge bases. To
overcome these problems, particularly in larger global organisations
engaged in diverse activities, it is necessary to establish communities of
practice based on the core competencies of the organisation.
Knowledge Transfer
Much can be done within an organisation to encourage knowledge
transfer. IT-based frameworks (e.g. Lotus Knowledge Discovery
System) provide the essential infrastructure for knowledge
management, but to be used effectively and achieve widespread
take-up, other conditions are necessary to establish:
The first two points pose particular challenges for large, diverse,
globally dispersed organisations. Establishing communities of practice
(based on core competencies) is critical. Examples of such communities
of practice might be Researchers, Project Managers, Quality
Champions, Programmers, Research Chemists, Marketeers in a
particular geography, etc. The precise communities of practice would
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Nonaka and Takeuchi in their book The Kno w led ge Creating Co m p any,
identify four interrelated processes by which knowledge flows around
the organisation and transmutes into different forms.
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ACTIVITY
Identify the types of intellectual capital within your organisation.
ACTIVITY FEEDBACK
Intellectual capital is essentially any intangible asset that has potential for
re-use. The following list gives you an idea of what can be shared.
· Sales proposals.
· Market research.
· Client information.
· Competitor information.
· Contracts.
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· Case studies.
· Methodologies.
· Project plans.
· Interpretation methods.
· White papers.
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You will note that the dimensions of the Web Diagram are the
knowledge management success factors we identified during the course
of the earlier sections. It is suggested that a company score each of the
dimensions against a 10-point scale. This can be done against best
industry practices, so that a score of ten relates to best practices. A score
of zero will apply if that particular dimension does not feature at all in
the corporation. See Figure 8.2 for an example of a knowledge
management web diagram for a company. From a strategy perspective
it is also useful to score your main competitors on the web diagram and
then identify weaknesses/strengths. Additionally strategic partners can
be scored. It may be the case that where the corporation scores weakly, a
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10
Company strategy Competitor's
10
KM capability
Collaboration culture
Knowledge quality
0
10 10
Knowledge processes
Knowledge access
10 Corporation's 10
KM capability
Enabling technology
Knowledge bases 10
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ACTIVITY
Research the application, impact and business benefits of knowledge
management by reading some of the articles on knowledge management on the
INSEAD website:
http://knowledge.insead.fr/
Go to the home page and select ‘Knowldege Management’ under the menu
‘Themes’. (Registration to the website is free of charge).
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Case Synopsis
The key question raised by the case is how this strategy process and the
company’s learning ability can be maintained as they further internationalise.
The company will grow in size and complexity, while more nationalities will
become involved in strategy development. The company must learn how to
remain a learning company.
Point to Highlight:
(extracted from Teaching Note 6, Kao Corporation, Bob de Wit, Ron Meyer and
Henk van den Berg)
Note this case touches on subjects wider than just knowledge management,
and the learning organisation. It also touches on the area of strategy formation
and globalisation (linking with Units 1, 2 and 3).
Used in conjunction with chapter 3 of your key text, De Wit and Meyer, this
case can be used to understand the following key points:
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Questions:
1. What is learning and what is a learning organisation according to Kao?
How is organisational learning different from, for instance, a person
learning from reading a book?
2. How has Kao been able to build a learning organisation? What is their
corporate philosophy and what type of structure, culture, systems and
leadership roles has the company developed to become a learning
organisation?
3. How does Kao go about forming strategy? What are the strategy
formation process’s main features?
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Feedback on Question 2:
Mission setting. Most importantly, the company truly believes in the importance
of learning. Dr. Maruta, the president of Kao, states that Kao is “an educational
institution in which everyone is a potential teacher.” All employees, including
Maruta himself, are seen as students of the truth, continually seeking new
insights and better understanding. It is the company’s fundamental assumption
that such learning, drawn from scarce information, is the ultimate source of
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In short, the values and beliefs held by managers within Kao regarding learning
are very strong and are a main factor in shaping Kao as a learning organisation.
However, this culture is further reinforced by other organisational elements.
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Leadership roles. Finally, the way that top managers define their roles within the
company has a significant impact on Kao’s learning ability. As Senge (reading
9.3) argues, leaders cannot learn on behalf of their organisations, but must
assist their organisations to learn. Senge identifies three critical roles of
leadership in a learning organisation, each of which is also applicable to Kao:
Feedback on Question 3:
The remark about Kao’s joint venture with Colgate-Palmolive on page 733
really gets to the essence of Kao’s strategy process: The way the two firms
decided on strategy was totally different. We [Kao] constantly adjust our
strategy flexibly. They [Colgate-Palmolive] never start without a concrete and
fixed strategy. We could not wait for them. In other words,
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When examined more closely, Kao’s strategy formation process can be seen
to have the following characteristics:
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These points underscore that incrementalism and learning are two sides of the
same coin. When looking at incrementalism, the focus is on the strategy
development process – how organisations continually and gradually create
patterns in their streams of decisions and actions. The two are wrapped up in
one another, proceeding in unison. When looking at learning, the focus is on
the competence development process – how organisations continually and
gradually obtain information and increase their knowledge and abilities.
Feedback on Question 4:
The case writers are particularly kind toward the company and do not mention
any disadvantages encountered by using this approach. However, based on the
readings in Chapter 3, of your key text, De Wit and Meyer, the following
potential disadvantages can be identified:
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the other hand, is that many things cannot be forecast or thought out in
advance. Kao seems to be trying to combine both feedback and feed forward
to get the best possible results. However, the threat of inefficiency and
irreparable damage remains.
· Threat of slower decision making. Above, it was argued that trial and
error learning might be time-consuming. To this it can be added that
the participatory decision-making system and need for consensus
can also be relatively slow. Especially in circumstances where the
speed of decision-making is essential (a crisis or a sudden
opportunity), Kao might be at a disadvantage. In general, however, it
should be recognised that the length of the decision-making process
(“time-to-decision”) is usually less important than the length of the
total decision and implementation process (“time-to-results”).
Slower decision-making might be more than compensated by
quicker implementation. Investing time during the decision-making
process to produce high quality plans that are widely understood
and enjoy broad acceptance often facilitates rapid action, making the
total amount of time spent from issue identification, through
diagnosis, to conceiving and realising less than in other firms.
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Feedback on Question 5:
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· A formal or informal company? Kao must also wonder whether its lack
of hierarchy (the “paperweight organisation”), lack of organisational
boundaries (“biological self-control”) and lack of formalised
procedures all remain possible as the organisation grows both in
volume and geographically. How can communication be as frequent
and as informal as within the Tokyo headquarters? How can control
be exerted over subsidiaries far away from the centre? Can this be
achieved “informally” or are systems and procedure necessary to
ensure that the foreign subsidiaries remain a part of the larger
learning organisation?
When Phil Knight founded Nike with $500 in 1964, he would have had little
credibility if he had defined his purpose as being to build the world’s largest
sportswear company. Yet this is what the company had become by the late
1990s. This case examines the foundations of the company’s growth, especially
the knowledge developed and retained within the company over the years.
Back in 1958, Phil Knight was a middle distance runner in the University of
Oregon’s track team. He complained on number of occasions to his coach, Bill
Bowerman, about the lack of good US running shoes. But he continued to
study accountancy, eventually graduating and moving to teaching in his home
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town of Portland, Oregon. Then in 1964, both he and Bowerman each put up
$250 to found the Nike shoe company, named after the Greek goddess of
victory.
To start the company, Knight used his athletics contacts to sell running shoes
from a station wagon at track and field events. He bought the shoes from Japan
but always felt that there was potential for a US designed shoe. By the early
1970s, Knight was working on his new design ideas. At the same time as
exploring these, demand for Nike shoes was sufficient for him to consider
developing his own shoe manufacture. However, he was concerned to use
Japanese experience of shoe production. In 1972, he placed his first contract in
Japan to begin shoe manufacture to a Nike all-American design.
Over the next couple of years, the yen moved up against the dollar and
Japanese labour costs continued to rise. This made Japanese shoe production
more expensive. In addition, Nike itself was gaining more experience of
international manufacture and making more contacts with more overseas
manufacturers. In order to cut production costs, Nike switched its operations
in 1975 from Japan to two newly industrialised nations, Korea and Taiwan,
whose wage costs were exceptionally low at that time. Nike’s costs came
down dramatically, allowing the company more scope for funding further
product development and marketing.
By the early 1980s, Nike was profitable and continued its role as a specialist US
sports shoe manufacturer with no production facilities in its home country.
Then along came competition in the form of a new sports shoe manufacturer,
Reebok. From a start up company in 1981, Reebok went into battle against
Nike under its founder and chief executive, Paul Fireman. Reebok launched a
strong and well designed range of sports shoes with great success. By the mid
1980s, Reebok had equalled Nike’s annual sales in a fierce competitive battle.
In 1987, Reebok was clear market leader with sales of $991 million and a
market share of 30%, compared with Nike’s sales of $597 million and a share of
18%.
Part of the problem and opportunity for both manufacturers was the fickle and
design-conscious nature of the target market: young, hip teenagers and adults
buy the latest fashions. Both Nike and Reebok realised that, in order to build
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volume, it was necessary to move from the specialist sports shoe market to
wider adoption by this much larger, fashion aware teenage and young adult
market. This was the battleground that was initially captured by Reebok with
good products and a campaign of public relations that was highly disrespectful
of Nike. Mr. Fireman criticised Phil Knight as being ‘just a shoe guy’ who saw
himself as ‘a big time presence in sports’. In response, Mr. Knight said that he
‘hated’ his competitor and that the ‘most innovative piece of R&D equipment
they have is the copy machine’. One author of a book on Nike commented that
‘Paul Fireman was installed as a devil figure inside Nike and he remains a dark
presence to this day’.
To hit back against Reebok, Nike then began to invest considerable sums on
developing new and innovative sport shoe designs. The most successful of
these was begun in the late 1980s, the Nike Air shoe. ‘It was an intuitively
simple technology to understand’ said John Horan, publisher of Sports Goods
Intelligence, a US industry newsletter. ‘It’s obvious to consumers that if you put
an airbag under the foot, it will cushion it.’ But it was not until 1990 that the
Nike Air shoe was launched and began to deliver success for Nike. Thus the
1980s were both the decade of difficulty and the time for renewal. Nike had
learned about the heat of competition and the need for innovation and
continual R&D in its shoe designs.
Building on this success, Nike realised that such promotion provided powerful
support for the brand. Over the next few years, this was enhanced by the
heavy funds Nike was prepared to invest. For example, in 1995 Nike invested
almost US$1 billion in sports marketing compared with Reebok’s spending at
around US$400 million. This investment in sports marketing was much higher
than previous sums. It was developed after Nike had assessed the results of its
heavy advertising campaigns earlier in the 1990s.
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Subsequent sports sponsorship deals included the golf star Tiger Woods and,
for a previously unheard-of sum, the whole Brazilian football team. By signing a
ten-year deal in 1996 worth between US$200 and 400 million, Nike broke new
ground in football sponsorship. It bought the television rights for five friendly
games each year involving the Brazilian national team. Also, Nike’s ‘swoosh’
logo appeared around the world in many televised golf tournaments, and in the
televised final of the 1998 Football World Cup and in the year 2000 Sydney
Olympics with Brazilian footballers.
But it was not just the amount of money invested in campaigns at Nike. The
branding and the message were also important. During the 1980s and 1990s,
the company had come to understand its target market well – young, cool and
competitive teenagers. The ‘swoosh’ logo was highlighted on all its goods to
help brand the product and the main message, ‘just do it’, was developed to
express the individuality of the target group. The accompanying slogan of
‘winning your own way’ captured the aggression, competition and individual
success epitomised by the sports stars who were signed up. Its products were
sold at high prices, e.g. over US$100 for sports shoes. Such prices led to a
concerted campaign in the USA aimed at forcing Nike to pay higher wages to
workers in the foreign factories of its suppliers. Although the company was
sympathetic, Mr. Knight was unwilling to give way.
Following its success with the Air shoe, Nike also embarked on a programme
of further and extensive product development. In one year alone, some 300
new designs were launched into the US market. The company claimed that
such scientific development was a major part of its success: new materials, new
fabrics and new designs were developed. But it is also likely that Nike came to
realise that its target group craved new products that would appear more
innovative than the models of previous years. The implication was that it had to
bring out new models even if the innovative content was more a surface design
than a substantive change. Nike was not alone in this approach which was
typical of many companies bringing out variations on models in order to
capture the fashion desires of customers.
During the 1990s, the levels of Nike research activity, its marketing support, its
clarity in its targeting to teenagers and the breadth of Nike’s coverage were all
totally new in sports shoe activity. Nike’s market share in the USA continued
to climb. It reached 43% in 1996, compared with Reebok’s 16%. Moreover,
Nike had succeeded in growing the US market with sales alone exceeding
US$3 billion (compared to US$597 million in 1987). However, Nike was
criticised for its use of cheap labour in some countries and was forced to take
steps to deal with this.
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Profits were well down and painful job cuts were necessary, but the company
was still optimistic about the future. Phil Knight had become the chairman and
Mr. Tom Clarke had taken over as chief executive. Mr. Clarke was quite clear:
You grow a lot, then you need a period when things aren’t booming to ask
what works and what doesn’t...... Remember, we’re a fairly self-critical bunch.
We’re running the company for the long-term, not to keep people happy for
the next couple of quarters.
Nike had developed such a deep knowledge of sports items, clothing and
branding that it was expecting to weather the storm and remain the largest in
the world.
Questions:
1. What knowledge has Nike acquired over the years? Use the
definitions of knowledge to help you move beyond the obvious.
Feedback on Question 1:
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Tacit knowledge will include many of the less formal, unrecorded aspects of
many of the above areas:
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Feedback on Question 2:
· Its contracts with sports stars like the Brazilian football team.
These all add up to resources that move beyond knowledge, yet provide
sustainable competitive advantage. Knowledge is not the only form of advantage.
Feedback on Question 3:
Summary
In this module we have looked at the vital role knowledge management
can play in today’s knowledge economy. We have noted that in some
sectors, re-use of intellectual capital is no longer a case of gaining
competitive advantage, but survival.
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We have examined what knowledge is, and have noted the differences
between explicit and tacit knowledge. We have looked at the theoretical
perspectives, the socialisation and technology issues, and the challenges
posed to organisations. We have concluded by considering some
practical steps in the implementation of KM.
Students are encouraged to apply the lessons learnt to their own work
context, and consider how their organisations can better exploit
intellectual capital to gain competitive advantage.
REVIEW ACTIVITY
Consider the following scenario. You have been asked by your company’s
board to rate your knowledge management capability against your chief
competitor and present your proposals for a realistic improvement plan.
* Highly recommended
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Innovation
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
The ability to rapidly assimilate powerful new/emerging technologies
and processes into products/services is now an important competitive
factor in the global environment. However, disruptive technologies
pose particular problems and challenges for the established
corporations. When faced with disruptive technologies, management
teams in blue-chip companies frequently respond by vacillation, and
hide behind internal research, extensive pilot studies, lengthy internal
assessments and so on. They frequently hire external consultants to give
them the ‘answers’. They are so geared with managing continuous
innovation within established technologies, that they cannot cope with
revolutionary, new technologies.
Over the last decade, innovation has gathered increasing pace, and
significant venture capital has flown into start-ups. In this environment,
new technologies are continually emerging; some have powerful
business potential and many do not. How can established companies
discover powerful disruptive technologies more quickly, and evaluate
them more accurately? What are the problems faced by established
organisations, and what steps can organisations take to be more
responsive to innovative technologies? In this unit we shall look at some
of these issues.
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Innovation strategies
Disruptive innovations, spawned by developments in emerging
technologies, e.g. grid computing, wireless, genomics, nanotechnology,
have the potential to consume industries and make existing strategies
obsolete. Conventional wisdom says that large established companies
are likely to lose out to smaller attackers when they try exploiting these
breakthroughs. Why should incumbents (large established companies)
encounter so much difficulty? Companies such as GE, Intel and
Microsoft have embraced disruptive innovations. What can we learn
from them?
For all their advantages, incumbents are often impotent when it comes
to disruptive innovations. Their size slows them down and past
commitments restrict their flexibility. Equity markets expect continued
growth in earnings while start-ups are valued for their prospects and
rewarded with large market capitalisation they can use to fund
innovation. Incumbents are disadvantaged by their structures,
capabilities and outlook. Their finely honed instincts, established ways
of thinking and embedded skills make it tough to deal with a disruptive
innovation that requires a different approach.
· Technological uncertainties.
· Ambiguous customer signals.
· Immature competitive structures of markets for
disruptive innovations.
ACTIVITY
As background to this unit, read about the dimensions and paths of industry
development, the drivers and inhibitors of development, and how companies
can adopt an industry leadership position.
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Problem 1: Delay
When faced with uncertainty, it is tempting to wait. A watching brief
may be assigned to an internal team that monitors families of
technologies. Whether there is any value in these moves depends on
whether there is anyone who can see beyond the imperfections of the
first costly version, e.g. early electronic watches were bulky. It is natural
to underestimate developing technologies or new approaches because
they don’t measure up to the familiar alternative, or appear suitable
only for narrow applications. Other developments may be easy to
dismiss on the grounds that their small markets will not meet the
growth needs of large companies. Yet all large markets were once in an
embryonic state with their origins in limited applications.
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ACTIVITY
Microsoft currently dominates the desktop operating systems market.
However, more recently there has been a rise in focus on open systems.
Customers are demanding ‘plug and play’ interoperability across different
vendor applications, and see open systems as delivering this choice. They view
themselves as being ‘locked in’ by proprietary Microsoft systems/applications.
This development has led to the rise of Linux as an open operating system.
Linux itself was developed by a Swedish engineer as a hobby project, and was
itself a disruptive technology.
ACTIVITY FEEDBACK
Broadly, Microsoft has four options:
1. Do nothing.
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Problem Avoidance
Whilst awareness of the pitfalls described in the previous section can
help avoidance, the best defence is a good offence. There are four
approaches:
The first step in deciding which signals and trends to scan is to define
the significant technologies. This requires shifting the focus from the
characteristics of products to features that provide benefits, e.g.
customers did not want X-rays as such, but they did need more accurate
images of tissues and bones to help spot problems. Companies also can
study users who are ‘ahead of the curve’ to see the promise of a new
technology, or work jointly with lead users on the next generation of
products.
Once features are defined, how well the innovation can deliver features
that meet customer needs and budgets, relative to competing
technologies must be assessed. The relationship between performance
and development expenditure is an S-curve, i.e. initially, there is little
sign of progress, but then performance rises steeply for relatively little
effort before levelling off.
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Xerox’s strategy for estimating the potential market for fax machines in
the 1970s illustrates how customer benefits and functionality can be
used to estimate markets. Managers measured the extent and frequency
of urgent written messages, their time sensitivity and the form and size
of the message. Then they contrasted the promise of fax with mail,
telephone, express delivery and so on. With this approach, Xerox
foresaw a business market of a million units.
1. Paint the big picture: This is not the time to ask for carefully
calibrated results. The issue is simply whether the market is big
enough to support development.
2. Use multiple methods: While any one market research method
will be limited or flawed in some respect, a combination may
yield conclusions that are directionally sound.
3. Focus on needs not products: prospective customers may not be
able to visualise radical products, but they can be eloquent about
their problems and changing needs.
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VIRTUAL CAMPUS
1. If this has not already been done, post on the Virtual Campus a short
resume of the type of organisation you work for. Public or private
sector? Large, medium or small? Sector (e.g. services, manufacturing)?
2. Once all the resumes have been posted on the Virtual Campus, pair
yourself with a partner. Choose a partner who works for an
organisation which, you believe, has a very different learning culture
from yours.
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Many large companies set up separate unit dedicated to new ideas, e.g.
GM’s Saturn division, IBM’s PC unit. The objective of separating the
new business is to enable the new group to do things differently while
still permitting the transfer of resources and ideas from the parent. This
also permits separate objectives, recognition of long development cycles
and continuing cash drains, as well as different criteria so the
performance of managers in the rest of the organisation is not
jeopardised. Above all, it creates flexibility.
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ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R:
Conclusion
Success or survival in industries that are being created or transformed
by disruptive innovations requires support from senior management,
separation of the new, flexibility and a willingness to take risks and
learn from experiments. There should be a diversity of opinion to
challenge dominant attitudes and misleading precedents, so avoiding
myopic views of new ventures. The best innovators think broadly and
will entertain a wide range of possibilities before they converge on a
solution.
Reference “Do n’t Hesitate to Inno vate” by Geo rge Day and Paul
Scho em ak er (Financial Tim es Oct 9, 2000)
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Oxley is not a large company. Last year, sales came to £12m, of which about
£700,000 was the profit before tax. But the company’s story is relevant to
many businesses because of the way it has used technological ingenuity to edge
into new areas. It is a potent case study of how military technologies can be
used in civil applications. This process starts with the ten experts, identified by
Mr Edwards, a physicist who started at Oxley 32 years ago. “We deliberately
keep our researchers close to each other so they are chatting all the time,” he
says. “From this interaction we get a marvellous source of new ideas.” The
disciplines covered by the group include materials science, electronics design,
chemistry, manufacturing and test engineering, optics and software. Oxley
employs just 240 staff, of which 50 are engaged in R&D.
Oxley has adapted the devices for use on cows to inform the farmer, for
instance, about health problems and milking record. Similar lateral thinking
helped Oxley to turn capacitor-based devices – made from tiny pieces of
ceramic – into sensors used by UK pollution inspectors to monitor water
quality. At the core of Oxley’s methods is its long involvement with the
Ministry of Defence and large military contractors. Defence-related work
accounts for 70% of sales. About a third of the company’s revenue comes from
outside the UK.
The company was founded in 1939, just before the 2nd World War, when
Freddie Oxley, an entrepreneurial engineer, hit on a way of making capacitors
to be used in early radar work. To escape the attentions of German bombers,
the company moved in 1942 from London to its current location in Ulverston,
on the fringe of the Lake District. Mr Oxley ran the company until his death in
1988, when he held 145 patents in a range of scientific fields. His wife, Ann,
chairs the company. She has 90% of the shares, with other staff members
holding the remainder. Mrs Oxley refuses to consider giving up private
ownership. “We run this company like an extended family,” she says. Oxley’s
products are developed rather haphazardly, with little long-term planning. But
most start with military contracts.
The company has several profitable product groups in this field. Mr Edwards
calls them the company’s “eagles”. Commanding high margins, they provide
the cash to finance new developments. Examples include sensitive optical
filters for adding to the instruments and identification lights of aircraft such as
the Tornado fighter. The filters are made of glass, coated with chemicals that
screen out infrared radiation. They enable pilots to use infrared night goggles
without being blinded by their own aircraft’s lighting. Other “eagles” include
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specialist connectors such as the ones Oxley sells to the mobile telephone
industry, based on principles developed for military radio applications in the
early 1970s.
But the company is also keen to keep edging into other markets, perhaps with
the help of partners with specific knowledge of new business fields. In the next
five years, Mr Edwards would like the company’s sales to double. “We have no
choice,” he says. “Having this kind of growth target is essential if we want to
keep the company sharp and interested in new ideas.”
Questions:
1. Strategically, how would you categorise the ‘stepping stone’ approach
to product development?
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Feedback to Question 2
VIRTUAL CAMPUS
Further points to note, from the Oxley case study, include:
Now discuss with your colleagues (on the virtual campus) innovation in
respect of :
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Post, on the Virtual Campus, what you can glean from the case study about the
above two points. Share your views. Then challenge, extend, discuss.
Students are advised to complete the next case study (Telepizza, where control of
business innovation has been removed by being publicly owned) before undertaking
this activity. The Telepizza case study has a bearing on point 2 for discussion.
Telepizza realised before its competitors that Spain was changing rapidly. Gone
were the days of siestas and elaborate family meals. Fast food was what
Spaniards wanted and needed. The company was founded in 1988 as a single
pizza parlour offering home deliveries in its immediate north Madrid
neighbourhood. By late 1995, it had nearly 200 centres spread out across 120
Spanish towns and cities. By the end of 1995, Telepizza expected to post
consolidated profits of more than Pta 800 million (US$6 million), more than
double the Pta 375 million reported in the previous year. It was forecasting
sales of Pta 19 billion for 1995, up from 1994’s Pta 12.3 billion.
‘The market was zero when we started’, says Mr Jose Maria Serrano,
Telepizza’s communications chief, ‘but there was a terrific opportunity.’ Mr
Leopoldo Fernandez Pujals, the company’s founder, spotted the gap in the
market. He owns 40% of Telepizza’s shareholder capital and was its chairman
until a boardroom coup in mid-1995. Mr Fernandez Pujals was formerly an
executive with the healthcare multinational Johnson & Johnson. He knows a lot
about marketing and consumer fads and nothing at all about fast food, but he
knew what the Spanish public was prepared to buy. When he came across
pizza home deliveries during a stay in the USA, he had found the product he
was looking for.
Market success
By 1995, Telepizza had a 54% share of the pizza home deliveries market in
Spain. Its success is as much the triumph of a concept as it is of a product. The
company’s management understood that Spain had undergone a profound
sociological change that had brought young mothers out of the kitchen and
into the workplace. Furthermore, office workers, like everywhere else, had
begun to eat at their desks.
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homework while their parents are still at their jobs or by exhausted parents
staggering home late because office hours in Spain can stretch into the night.
Telepizza also understands that although Spaniards have belatedly come round
to the concept of fast food, the domestic culture remains imbued with the
tradition of good home-made cooking. This means that the company has to
take special care over the quality of its product – fresh ingredients are
delivered daily – and over the amount of choice it offers its customers. Having
pioneered pizza home deliveries, Telepizza has stayed ahead of its competitors
by introducing the do-it-yourself pizza: clients can summon up literally
thousands of permutations of the product’s 15 basic ingredients. Its most
recent success was the Tex-Mex pizza called ‘the Jalisco’, dreamt up by its
consumer research department.
Corporate culture
The corporate culture and growth strategy are no less important. Telepizza
believes in decentralisation and cutting out bureaucracy. This ethos has set the
tone of its staff relations and franchising. Telepizza has succeeded in creating a
corporate culture and with it an expansion strategy that has multiplied its
rewards. Employees who deliver pizzas by motorcycle within half an hour of
receiving the order are, in the company’s parlance, autonomous business
people responsible for their own slice of the pizza market. These employees
are allotted a specific area. It is up to them to develop a relationship with their
clients. Spurred on by sales incentives and bonus packages, Telepizza’s
representatives will spend nearly as much time promoting the company in their
allotted area as they do delivering its products to customers. Although
numbers vary per outlet, there are approximately ten people, including five
sales representatives, employed in each pizza parlour.
About half the 195 Telepizza centres in Spain are franchises. The company
believes that this mix is the right one and that as it expands further franchises
will, for the time being, be the property of the existing 50 or so franchise
owners. ‘For a franchise system to work, you have to love the company and
what it produces’, says Mr Serrano. ‘These are exactly the sort of people that
we have got now and we want them to grow with us.’
Investment policy
Telepizza has pursued a strong investment policy, ploughing Pta 1.3 billion into
new centres and equipment in 1994. It invested a further Pta 1.5 billion in 1995.
One reason for the boardroom revolt that forced Mr Fernandez Pujal’s
resignation in October 1995 was that other shareholders were clamouring for
dividends and objected to the drive for expansion that he was masterminding.
Firmly established in Spain, Telepizza has also tested foreign waters, again
through a mixture of directly owned outlets and franchises, and has set up
around 50 centres abroad. It is operating in Poland, Portugal, Greece and
Belgium as well as in Mexico, Chile and Colombia. The focus is on Spain,
however, and its home market is far from saturated.
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Questions:
1 To what extent does Telepizza’s structure need to remain loose in
order to encourage the dynamic entrepreneurial spirit that has
characterised its growth? What are the problems with this approach?
Feedback to Question 2
The evidence of Greiner in Chapter 7 would suggest that it is likely that it will
become more bureaucratic: age and size will probably make the company less
dynamic. Hence, as the enterprise grows, there may be a need to define more
precisely the geographical territories or face the possibility that restaurants
will compete against each other. This will limit the loose nature of the
structure.
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retain the loyalty of its existing people. However, it is highly likely that some of
the initial zip will go out of the company.
Feedback to Question 3
Although full details are not given in the case, it is likely that significant
resources are devoted to the international growth in the 50 centres operating
abroad. There will inevitably come a time when further growth in Spain will be
difficult: international opportunities will then maintain the momentum of the
group. Moreover, international growth would be one way of offering an
incentive to those individual managers unable to find new outlets in Spain.
However, there is no evidence that growth has disappeared in Spain. Given its
strengths in the home market, it is surprising that so much effort seems to have
been devoted to international expansion with all its associated costs and
pressures.
Given that international expansion has now taken place, one way forward is to
find a balance between the home market expansion and foreign growth. At the
time of the case, it would appear that international growth should take second
place to completing national expansion in Spain. However, this does not mean
that international growth should stop, rather that a judgement is required on
the pace of such expansion.
The company was beginning to mature: the founder was selling part of his initial
interest and the shareholding was becoming more widely available and
institutionalised.
Summary
In this unit we have looked at the challenges posed by disruptive
technologies, particularly on established companies. We have examined
how some of the problems can be managed, and have noted the
importance of cultivating a learning culture, and the importance of
organisations adopting strategic flexibility.
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REVIEW ACTIVITY
Consider the organisation and industry that you currently work in. As we
noted in this unit, there are likely to be many signals from the periphery of your
industry (or supporting sectors) from numerous emerging technologies/ideas.
Some of these will be relevant to the future, others will be a complete waste of
time.
Identify two or three emerging/new innovations that you feel are likely to make
a significant business impact on your sphere of activity. Technologies or ideas
that could offer your organisation deep market potential.
3. Noting the culture of your own organisation, how would you go about
assessing these innovative technologies and implementing them
(where appropriate)?
Share your findings with your Manager and colleagues in your organisation.
Encourage constructive comments.
* Highly recommended
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Unit 10
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Introduction
In the age of the Internet, new markets are emerging faster than ever
before. As each new market goes through its development cycle, it gives
power to those companies that are able to harness the power of IT and
the Internet to transform their businesses, and that of their customers.
Power is shifting from what was previously a trusted source of value
creation towards something that was previously secondary.
Information has replaced assets as the source of value. This is the new
management agenda, and corporate IT strategy has become an
important determinant of stock price.
The strategic shift from assets to information, has also been coupled
with a shift from products to services. Services offerings cannot be
managed using the same IT systems as product offerings. Services
offerings are much more customer-centric and this has led to an
emphasis on ERP (enterprise resource planning), CRM (customer
relationship management) and supply chain management.
Furthermore, it is well recognised that a corporation’s own efficiency
comes from how seamlessly data, information and knowledge flows
within the company, and indeed between its supply chain and strategic
partners. Unless corporate data can get to the point of decision in time to
impact that decision, Information Management has failed. For all these
reasons IT has become a powerful influence on corporate strategy;
Strategic IT defines the very nature of the business. In this new age, IT is
not about the business, it is the business; e-business.
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IT strategy, just like any other strategy, has to take into account the
above, as this is a prerogative of any modern business. IT strategy has to
be flexible and accommodate a fast changing world. Indeed, corporate
IT systems such as Enterprise Resource Planning, Supply Change
Management and Customer Relationship Management systems allow
for a level of strategic flexibility for this reason.
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Political
factors
Economic
factors
Business Technology/IT
strategy strategy
Social
factors
Technical
factors
e-business
The advent of e-business is having a profound impact on business
strategy. The appointment of directors of e-business and the
formulation of e-business strategies recognise that IT is changing the
way companies do business. This clearly impacts upon business
strategy; it poses opportunities and threats.
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Leverage information
and knowledge
ACTIVITY
Read about the huge impact of recent technological advances (principally
e-business) on organisations’ strategic approaches, in an extract from Geoffrey
Moore’s book Living on the fault line. Find it on p. 451-464, Reading 8.3 in your
key text, De Wit, B & Meyer, R .
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VIRTUAL CAMPUS
On-demand computing or grid-computing is being touted by the major
computer vendors (IBM, Sun, HP) as delivering the next paradigm shift in
business. Is this hype or reality?
Research this area on the Internet. In particular, look at the IBM, Sun and HP
websites. Discuss these developments with IT colleagues in your own
organisation.
Now post your views on the Virtual Campus on the following topics:
Read the views of others, and pick one particular viewpoint that is contrary to
yours and challenge it.
Try to keep a business focus. Avoid technical detail and jargon in your postings
and discussions.
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IT Strategy Methodology
Strategy Framework
Companies frequently adopt formal methodologies when developing
IT strategy. There are many methodologies on the market – developed
by leading IT companies and professional services firms such as
Accenture. The principles are the same. One that has been used by ‘new
economy’ organisations is the FAST methodology. The four tasks or
elements that make up FAST are:
· Futurising.
· Assets.
· Stimulants.
· Threats.
Futurising
Some companies, such as the Swedish financial group Skandia, have
created special teams to question what the future might bring. These
teams use checklists with probing questions aimed at all parts of the
business. The answers to the probing questions highlight important
trends or significant uncertainties.
Futurising is not just raising an alarm about new technologies and their
future impact, but rather looks at the intersection of new technologies
and the shift in the business environment, and asks what is changing,
threatening or opportunity-rich. The PEST (political, economic, social,
technological) tool for environmental analysis applies in thinking about
futures, but more thorough scenarios are likely to be where these
variables interact.
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Assets
What competencies, capabilities or assets might yield opportunities?
These are “assets” because:
Stimulants
The efforts of companies that are trying to encourage entrepreneurial
behaviour can be thought of as “stimulants”. Examples of this are
internal venture capital funds and e-business divisions. Some
companies measure how much of their capital budget is being allocated
to new ventures and e-commerce. Some businesses are creating
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The theory is that there are latent entrepreneurs and e-commerce ideas
in companies. Strategy is not all top-down, but should reach through all
levels. It is the classic “let loose” cycle often employed when strategic
change is on the agenda: stimulating everybody to think and act as a
new business.
Threats
The final element is to think of threats, but not only as shock treatment.
If a company sees how a new entrant or rival can attack, why not attack
first? This has been a philosophy at General Electric, where executive
teams have been asked to think how their business could be destroyed
by e-commerce. Threats stimulate survival instincts and can be more
effective than looking for opportunities, which can seem optional.
ACTIVITY
Consider the following scenario.
Assume that you are a manager in your organisation, and that your
organisation has enjoyed significant market dominance in its particular sector.
Now pretend that a new entrant is going to attack your market share. Envision
the new entrant’s winning approach. What strategy, business and IT, is the new
entrant likely to adopt in your sector?
From the above analysis, how can your organisation retain the high-ground and
modify its strategy?
(The above activity is quite wide in scope. For purposes of this unit, restrict it as best as
possible to the impact of IT on strategy.)
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· Continuous.
· Flexible.
· Involve learning by doing.
· Rapid turnaround and delivery of quick ‘wins’.
· A ‘natural’ activity.
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Capture organisational
strategy
Link strategy,
Process
organisation
re-engineering
and processes
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ACTIVITY
Research the impact of the Internet and other IT technologies on the ‘new
economy’ by reading some of the articles on the following websites:
www.gartner.com
www.forrester.com
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CASE STUDY –
compuship.com/easy2ship.com
Problems developing a global e-commerce concept into a viable
business process.
Case study from Tayeb M (2003) International Management Theories and Practices.
Harlow: Pearson. (Chapter 8. E-commerce Worldwide by Brian M W Clements and
Monir H Tayeb)
The concept
Further benefits are the provision of cargo insurance as well as creating a new
marketing channel within the transport industry.
The history
During his research, he discovered only one fact that struck him as being a
possible area of improvement. He learned from several sources that road
transport had one particular inefficiency. This was that many journeys were
undertaken unladen and that many others were made with less than a full load.
In fact, it appeared that the industry was running at only some 60% of its
maximum capacity.
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A year later, due to the uncontrolled and unanticipated software costs he had
incurred, he lost his previously profitable computer business, his
Compuship.com and the rights to the business process he had developed.
They in turn sought external finance. Help came in the form of Ci4net.com, a
Channel Island and UK incubation company, recently launched on the
NASDAQ market, whose shares were priced at over $100 and who was
consequently in a buoyant and acquisitive frame of mind. They purchased
I-Global.com, renaming it Ci4netNA.com and financed the re-acquisition of
the freight exchange for $1 million.
But Ci4net.com was still unhappy about two factors in the proposed
operation. First, they believed that the USA was too large and amorphous a
market for the initial launch. Second, they insisted that the operation needed
professional input and control by logistics industry experts.
Two were hired, the CEO who was an expert in international logistics and
commerce, the other in UK road haulage and marketing. A wholly owned UK
company, Easy2ship.com Limited was created in early summer 2000 to
complete the exchange and launch the concept into the European
marketplace.
The two new directors then collaborated in the creation of both business and
marketing plans for the exploitation of this new exchange process. It became
apparent at the same time that other companies were working on parallel
developments, so a measure of urgency was necessary. A beta test and trial
launch were planned for October with a full launch to follow at the end of
November.
The Ci4netNA.com took responsibility for the final development and the
hosting of the exchange in the US. They eventually located a software
development company, Techspan, who are based in California’s “Silicon
Valley”. Then came the first major setback. After their analysis of the
development work originally undertaken by Compuship.com, Techspan
advised that the work completed only constituted a sketchy demonstration
and lacked the technical flexibility and robustness to be developed into a
commercially viable Internet exchange.
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This delay proved fatal. If the exchange were to be launched in February, the
earliest that a revenue stream could be generated would be May. The business
plan reflected the fact that growth to a financially self-sustaining state would
take about 18 months and that the company would require a substantial
injection of cash during the first six months of operation to finance a
pan-European marketing campaign and the expansion of the company
structure.
The problems became apparent at the end of the re-design phase of the
development. Techspan wanted payment for the work to date before they
were prepared to work on the final stage of development. They had
contracted to undertake the work with the Ci4netNA.com and expected
payment from them. The UK parent organisation, Ci4net.com, the source of all
the finance, admitted “some cashflow problems”, but that these were
temporary and would soon be resolved.
At the time that Easy2ship.com was formed, the directors were advised that £9
million was available for the UK launch. Following the preparation of the
business and marketing plans, this was formally increased to £25 million each
for the pan-European and subsequent North American launches. However,
one fact was not disclosed by Ci4net.com.
This was that they had failed to secure a second round of funding in May, which
was crucial to their development plans. They subsequently acknowledged that
they had believed that this was a temporary setback and that the second round
funding would be secured before it was needed to meet their commitments to
their 50-odd subsidiaries. In reality, Ci4net.com had insufficient skilled
managers to control the activities of all these subsidiaries. Their efforts to do
so apparently distracted their attention from events in the world’s financial
markets.
Many of the Phase 3 Internet companies had “burned” their investors’ money,
without having any realistic hope of developing an adequate revenue stream.
Institutional investors had leapt onto the bandwagon when they had seen the
immense capital gains to be made from the spectacular and much-publicised
IPO capitalisation of many “Dot.com” companies, but the bubble had burst.
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of Easy2ship.com, whose staff was laid off in December 2000 and whose UK
directors resigned shortly thereafter.
The business process is viable. The concept was professionally market tested
through focus groups and accepted with enthusiasm by both carriers and
potential users. However, due to its failure from causes outside its direct
control, as well as the current commercial suspicion of investment in
E-commerce, funds are not forthcoming.
This scenario has been repeated in many other commercial sectors, most of
which are suffering from a lack of confidence on the part of the institutional
investors. They had their fingers burned by investing heavily in E-commerce
without having either made prudent checks that the business process was
going to work or that there was the likelihood of the generation of an adequate
revenue stream in the foreseeable future.
Questions:
1. Was the development time a significant cause for the termination of
the project?
- Europe?
- Non-European countries?
In the normal course of events, the development time might have been less
critical. Obviously, it is important to keep a development period to the
minimum, since at this stage, outgoings may be heavy and there is no income.
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Feedback on Question 2:
· The elapsed time between the start of the project and the first
income.
Feedback on Question 3:
Feedback on Question 4:
Feedback on Question 5:
· Euro currencies.
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· Dispute resolution.
Summary
We have seen that in today’s world, business strategy is inextricably
linked with IT strategy. The business benefits and competitive
advantages that new technologies, and e-business, can deliver are huge;
a company should be constantly looking to exploit this potential.
REVIEW ACTIVITY
We have seen that e-business is far more than just e-commerce. Many
companies, (e.g. Cisco Systems, Airbus Industrie) have achieved supply chain
efficiencies and enormous cost savings by adopting electronic methods such as
e-procurement. Use of enterprise resource planning systems (e.g. SAP) has
also played a significant role.
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2. Address the potential over the next five years, and likely business
benefits.
* Highly recommended
References
The following are the references for your key text and supporting texts:
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