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Mba Sunderland
Mba Sunderland
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Contents
How to use this workbook Introduction Unit 1 Strategy Defined and Key Concepts
Introduction Definition of Strategy Levels of Strategy Strategic Concepts Strategic Thinking Strategic Models Summary 1 2 5 7 9 12 34
Unit 3 Globalisation
Introduction What is Globalisation The Globalisation of Markets The Globalisation of Production Drivers of Globalisation The Changing Demographics of the Global Economy The Globalisation Debate: Prosperity or Impoverishment? Managing in the Global Marketplace Summary 61 61 66 68 70 73 76 78 88
Unit 9 Innovation
Introduction Innovation strategies Innovation and established companies Conclusion Summary 239 240 241 248 255
This Activity Feedback icon is used to provide you with the information required to confirm and reinforce the learning outcomes of the activity.
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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.
Preface
Corporate Strategy is a very wide and all encompassing subject area. One only has to look at the relative content of individual key texts in this area (e.g. De Wit & Meyer, Lynch, Johnson & Scholes, etc.) to appreciate the volume of material that has been written over the years. However, relatively speaking, it is the newest area of management research. Initial work in strategy took place in the early sixties. In their book Strategy Safari, Mintzberg, Alhstrand and Lampel (1998) break down strategy theory development into ten schools of thought and this provides a thoughtful starting point for the study of this module. It also indicates a wide range of divergent views on the subject. The ten schools are; 1 2 3 The Design school strategy seeks to match internal capabilities to external possibilities The Planning school strategy is a formal, planned process The Positioning school only a few key strategies are desirable in any given industry (generic strategy) and these are formulated by analytical processes The Entrepreneurial school strategy is a visionary process where an organisation is responsive to the dictating individual The Cognitive school strategy is a mental process dependant upon what the strategy process means in the mind of the strategist (human cognition) The Learning school strategies emerge as people / organisations come to learn about a situation as well as their organisations capability of dealing with it The Power school the use of power and politics to negotiate strategies favourable to particular interests The Cultural school strategy as a collective process of social interaction, based on the beliefs and understandings shared by the members of an organisation The Environmental school the business environment becomes the central actor in the strategy making process the organisation must respond to these forces
4 5
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Preface
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The Configuration school strategy making is a process of leaping from one state to another with relative stability in between
All of these schools have key writers. However, it would be erroneous to regard these schools as being separated or that it is right to look at these in isolation. Indeed, it is the opposite. Each perspective is inter-mingled with one another and interacts over time. Mintzberg, Alhstrand and Lampel use the analogy of an elephant to emphasise the holistic nature of strategy - one cannot get a clear picture of the elephant by looking at each separate part of its body. Hence, as a student of strategy, you must keep in mind ALL TEN schools. 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. Another range of key perspectives is related to your core textbook supplied with these materials. Whereas major texts such as Johnson & Scholes, and Lynch take a linear view of strategy by presenting concepts one after the other, de Wit & Meyer (2004) analyse a series of paradoxes. They define the opposite ends of a continuum, leaving the student with the tools to analyse case studies and decide for themselves the key strategic perspective for organisations. This approach is particularly important for this module. Students will be expected to produce an academic and fully referenced argument seeking to define the key strategic perspectives of organisations. The argument, and supporting evidence, produced is key stating an appropriate school of thought or positioning an organisation in relation to a strategic paradox is not the key issue. The ability to analyse (rather than describe) strategy and coming to a reasoned judgement is the overriding objective in assessment. The paradoxes addressed by de Wit & Meyer (2004) are;
(Strategy Formulation Planned vs. Incremental). Change Continuous vs. Discontinuous). Strategy Outside-In vs. Inside-Out).
The Paradox of Revolution and Evolution (Strategic The Paradox of Markets and Resources (Business Level
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Preface
The Paradox of Control and Chaos (Organisational The Paradox of Globalisation and Localisation
(International Context Global Convergence vs. International Diversity). (Organisational Purpose Shareholder Value vs. Stakeholder Values).
Naturally, many of theses dichotomies can be examined in isolation but are, similarly to the schools of thought above, likely to be interrelated and so discussing and building an academic argument in respect of one will inevitably lead to another. It would be possible to provide you with a module that deals with separate areas of an organisation individually. Indeed, this type of module has been delivered many times in the past. In other words, it is possible to look at marketing, HRM, operations, finance, etc, as separate entities and reflect the strategic aspects of these areas. However, this would not give due credence to the fact that strategy is essentially a holistic subject. That is to say, corporate strategy affects the organisation as a whole. Each element of an organisation cannot be considered in isolation. Therefore, corporate strategy must be examined in an all embracing manner. One must be careful to use the word organisation. If the word business were to be used this would tend to ignore some very productive study areas in public and not for profit organisations. Much can be learned from such organisations and, although businesses are typically used to demonstrate key points, organisations whose prime objective is not related to profitability cannot be ignored. Many contemporary issues in strategy are reflected in this module. Once again, it is erroneous to regard each of the ten themes as existing in isolation or in silos. There are links between themes that, in some case, will be pointed out in the text, but in others it will be left to your own imagination and analytical ability. Individual techniques such as those employed in marketing and finance, for example, are only touched on where necessary. This would detract from the ethos of this module.
Preface
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.
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Unit 1
Explain what corporate strategy is. Evaluate the importance of strategy to a manager in an organisation. Compare the characteristics of strategic decision making. Assess the skills required to be a strategist. Assess the holistic nature of strategy.
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? In this unit we shall define strategy, particularly as it applies to a manager. We shall also look at the various levels of strategy, and the key role of strategic thinking within an organisation. We shall examine the role of strategic models and how they can assist organisations in breaking down the complexity of strategic thinking. In particular, we shall examine the Johnson & Scholes model. Depending on the maturity of the market that a company operates within, the maturity of the company, and the corporate management culture, organisations adopt different approaches to strategy. The approach can be classified as deliberate, emergent or incremental, and we shall examine the differences between them.
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. These logical / prescriptive ideas about strategy emanate from the prescriptive approach as advocated by early strategic writers (see Preface and the text Strategy Safari (Mintzberg et al, 1998)). Many early writers continue to be widely quoted, e.g. Michael Porter. Many recent writers have challenged this view of strategy. The study of corporate strategy has moved on into softer areas and these issues need to be kept in mind. Early thinking (1960s) could be said to be modernist in view, i.e. a unitary perspective there was a single way to perform the task of strategy. There was an idea that data (both internal and external) could be fed into an analysis machine and the answer (the strategy) could be churned out. The postmodern view refuted this, saying that a strategist view should be pluralist, i.e. take many diverse things into account and this is evidenced by a number of writers. For example, the view of planning as opposed to emergence both viewpoints are supported by a wealth of academic writing (see later discussion in this unit). However, as a starting point, we will consider some prescriptive definitions and concepts to try to begin to appreciate the complexity of this subject.
vital that corporate strategy is holistic to be successful. To achieve the corporate strategy, the whole organisation must be focused on the same corporate goals and must team, execute and win in the marketplace. As with a war, a razor sharp focus is required to win in the marketplace.
VIRTUAL CAMPUS
Discuss with your colleagues how a tactical action in your work context furthered the companys strategy. In particular, how it influenced:
Competitive position. Market share. Customer satisfaction. Short-term vs. Long term profits and margins. New opportunities.
Business strategy
Some definitions of business strategy that are helpful are as follows:
Corporate strategy is the pattern of minor objectives, purposes or goals and essential policies or plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be Andrews K (1971). Page 8, Lynch. Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of its resources within a changing environment, to meet the needs of markets and fulfil stakeholders' expectations. Page 10, Johnson and Scholes
KEY POINT
Characteristics of business strategy are as follows:
Sets direction and scope over the long term to achieve goals. Designed to achieve competitive advantage. Directs business in a changing and evolving environment. Holistic and pervasive of the whole organisation; covering the
range and depth of its activities.
ACTIVITY
Read p. 1-19 of Chapter 1 and section 2.1 of the key text, De Wit, B & Meyer, R
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:
Must be holistic and define the overall purpose and scope Must be visionary in some measure. Must ensure that the different parts of the organisation
add value to the overall strategy.
markets or business areas for which the business unit has responsibility. business remit.
A further level of strategy, Network level strategy, is pertinent in todays business environment. Let us examine this in more detail. Strategic alliances or strategic networks are increasingly common in many sectors to compete effectively in the marketplace. For example, in the IT sector, gone are the days of mega-organisations that play in every aspect of computing and micro-electronics. Increasingly, companies with different specialisations or areas of dominance cooperate to compete effectively in the marketplace. An example is that of the IBM corporation. A few years ago IBM competed in practically every aspect of computing and information technology; from hardware to disk storage to micro-electronic components to software to operating systems to applications software to IT services. Today, to be cost-effective and satisfy customer requirements for open standards and best of breed, IBM has strategic partnerships with specialist hardware suppliers and software vendors (e.g. for CRM). Another example is that of the Bluetooth alliance of companies that has brought to market wireless interconnectivity of computer devices. In such strategic alliances, the different members of the network operate as separate corporate entities but their strategy is influenced and aligned with that of the strategic network. Such networks involve not only other profit-making corporate entities, but can also involve standards bodies or advisory bodies.
Operational Strategy
Corporate Strategy
Corporate Entity 1
Operational Strategy
Operational Strategy
Corporate Strategy
Corporate Strategy
Corporate Entity 2
Corporate Entity 3
ACTIVITY
Think of an example, perhaps from your own work context, of how corporate strategy translated to business unit strategy and operational strategy. Did networks or strategic alliances play a role in moulding corporate strategy?
Understand an organisations business environment. Understand the attributes of the organisation and what
makes it unique/distinctive.
Understand how the organisations advantages can be Understand and exploit the existence of any strategic
networks/alliances.
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. There are broadly two types of strategic concepts:
organisations strategy to the environment it operates in. It is really identifying opportunities that exist in the current environment and tailoring strategy to capitalise on it. Competitive advantage is achieved by correct positioning within the existing marketplace. when an organisation pro-actively stretches its resources and competencies to create new opportunities and capitalise on them. It means identifying resources and developing competencies to pre-empt and create new opportunities in the marketplace. Competitive advantage is achieved by not only meeting existing market needs but also future market needs. It is a resource-led approach with investment from the heart of the corporate centre.
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. One example of strategic stretch is the Waitrose/Ocado partnership in the UK, which provides on-line grocery shopping and home delivery service. Currently, in the UK, the market for on-line shopping is small. With the exception of Tesco, which makes a small profit on on-line deliveries, most companies providing this service make huge losses, and many are withdrawing from this service altogether. Waitrose/Ocado are also making losses currently. However, they are strategically stretching themselves, and investing considerable amounts to expand services. They forecast a huge market opportunity in a few years to come. Waitrose operates in wealthy, middle-class areas, where the average weekly spend, on groceries, is in excess of 150 a week. If on-line shopping takes off (as they predict it will, in approximately 2-3 years time), Waitrose/Ocado would have carved themselves a very lucrative market, indeed.
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. A simplistic definition of strategic thinking is finding the answers to the following:
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. Nevertheless, a role for logic is still in place. A manager still needs to be able to think rationally and be analytical in certain circumstances. However, they are bounded by their own rational thought and so are limited in what they can achieve.
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
The characteristics of bottom-up processing, in the context of strategic thinking, are:
analysis of the strategic problem, or issue under consideration, and a review of all possible solutions.
Top-down processing
The characteristics of top-down processing, in the context of strategic thinking, are:
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Strategies are derived from the experience of the success Elaborate theories are rarely applied. Simple, abstract
rule-of-thumb approaches take precedence. In practice, the majority of strategic decisions are made using top-down processing, and rely on the skills and experience of top level management. 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. Another important factor in strategic decision thinking is the role of uncertainly. Uncertainties can take the form of missing information, but other times arises simply from the unknowable. Such uncertainties can pose risks as well as new business opportunities. What makes a market leader is how that organisation predicts future opportunities from an uncertain environment. Through leadership companies are able to influence and guide the market with their own ideas and thereby create new opportunities.
technical and unit levels, as strategy must be holistic and integrated across all levels. issues and from that knowledge project strategy into the future. data/information, analysis of issues with that of experience, knowledge and understanding to predict the future renders competitive advantage.
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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. Firstly, it is helpful to recognise that strategic thinking has three dimensions to it as shown in Figure 1.3.
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Context Content
Process Strategy
Figure 1.3. The dimensions of strategic thinking.
The process, content and context of strategies define the scope of strategic thinking, and must be considered together as they are closely inter-related. Let us look at each of these in turn:
strategy is analysed, determined, implemented/executed, changed and controlled. These processes link together or interact as the strategy unfolds in what may be a changing environment. addresses the main actions of the proposed strategy.
Content: The result of the strategy process is content. It Context: Concerns the business circumstances or
environment in which the strategy operates or will be developed. This can be the inner context, referring to the organisational setting or corporate culture of the organisation. Or it can be the outer context, such as external economic, political, business, environmental factors.
ACTIVITY
Can you think of some examples of how inner context can influence strategy. Similarly, think of an example of how outer context influences an organisations strategy.
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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 doesnt 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 organisations 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. Many Western companies utilise cheap factory labour from third-world countries, such as India, Taiwan, etc. More recently, skilled jobs, such as call centre operations, have also moved to countries such as India, as it is more cost-effective. Raised environmental and ethical awareness has forced Western companies to pay fair wages and provide satisfactory working conditions in these countries. Company stakeholders often demand ethical and sound environmental practices. This is an example of outer context, where the company must comply with external influences.
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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 CHOICE
Strategic formulation.
STRATEGIC IMPLEMENTATION As the arrows indicate above, Argenti suggested that strategic analysis should precede choice, and choice precede implementation. In reality, the phases often overlap. The overlapping nature of the phases was elaborated by Johnson and Scholes. Figure 1.4 shows types of issues that should be considered within the strategy development phases.
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Expectations and purposes The environment Resources, competences & capabilities Strategic analysis Bases of strategic choice Strategic choice Strategic options Strategy evaluation and selection Managing strategic change Strategy implementation Resource allocation and control Organisation structure and design
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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. 1. Are you aware of your organisations corporate strategy? Are you aware of your business unit strategy? How is strategy formulated in your workplace? Would you describe it as deliberate, emergent or incremental? From what you have learned, can the strategy process be improved? If so how? What do you see as the major obstacles in your organisation to strategy development and strategy execution? How can these obstacles be removed?
2. 3. 4.
5.
6.
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.
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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, IKEAs 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 IKEAs 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 cafs, restaurants, wheelchairs and even supervised child-care facilities. A key feature of IKEAs 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. To deliver low-cost yet high-quality products consistently, IKEA also had 30 buying offices around the world whose prime purpose was to identify potential suppliers. Designers at headquarters then reviewed these to decide which would provide what for each of the products, their overall aim being to design for low cost and ease of manufacture. The most economical suppliers were always chosen over traditional suppliers, so a shirt manufacturer might be employed to produce seat covers. Although the process through which acceptance to become an IKEA supplier was not easy, it was highly coveted, for, once part of the IKEA system, suppliers gained access to global markets, and received technical assistance, leased equipment, and advice on how to bring production up to world quality standards. By the mid 1990s, IKEA was
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offering a range of 12,000 items, from 1,800 suppliers in 45 countries at prices 20-40% lower than for comparable goods. However, by 1998 the means of achieving low cost was receiving some critical attention. It was reported that IKEA was sourcing its goods from suppliers in eastern Europe which paid its workers poverty level wages. 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). IKEAs 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. Having to cope with widely dispersed sources of components and high-volume orders made it imperative for IKEA to have an efficient system for ordering its supplies, integrating them into products and delivering them to the stores. This was achieved through a world network of fourteen warehouses. These provided storage but also acted as logistical control points, consolidation centres and transit hubs, and aided the integration of supply and demand, reducing the need to store production runs for long periods, holding down unit costs by minimising the costs of inventory and helping stores to anticipate needs and eliminate shortages. 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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IKEA was experiencing growing competition on an international front. It had decided to implement a programme of cost savings, rationalising its supply chain and product range in order to cut purchasing costs by an overall average of 10%. The company had stated the intention of cutting what had become 2,400 suppliers by one-quarter and focusing on increased volumes with a smaller range of products and fewer suppliers. 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 arms length by trust-like organisations; the latters shares would be jointly owned by Kamprads 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, IKEAs 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. 2. Summarise IKEAs corporate strategy. Note down the characteristics of IKEAs strategy which could be explained by the notions of:
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advantage for the organisation, for example over competition. IKEA had been successful not because it was the same as all other furniture retailers, but because it was different and offered particular benefits which distinguished it from other retailers. Similarly, strategic advantage could be thought of as providing higher quality value-for-money services than other providers in the public sector, thus attracting support and funding from government. Strategic decisions are sometimes conceived of, therefore, as the search for effective positioning in relation to competitors so as to achieve advantage in a market or in relation to suppliers. organisations activities. Does (and should) the organisation concentrate on one area of activity, or should it have many? For example, for years IKEA had defined the boundaries of its business in terms of the type of product (furnishing items of good design and function) and mode of service (large retail outlets and mail order). While not owning its manufacturing, it did have an in-house design capability, which specified and controlled what manufacturers supplied to the company. There were signs by the late 1990s, however, that IKEA was extending its product scope from furnishings into other product areas, as with its experiments with housing. Over the years it had also substantially widened its geographical scope to become one of the few truly multinational retailers in the world. to the environment in which it operates. This is sometimes known as the search for strategic fit. While the market for furnishings was mature, with little prospect of overall growth, the management of IKEA had seen that the retail provision of furnishing in most countries did not meet the expectations of customers. Customers frequently had to wait for delivery of items, which were highly
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priced. The market provided another opportunity. Customer tastes were relatively common in different countries except in specialised segments of the market: buyers wanted everyday furniture which was well designed and looked good, but which was reasonably priced. IKEA also knew that it faced significant differences in its markets. By the 1990s the number of countries in which IKEA was represented was a great deal larger than in the companys early days. This meant that IKEA had to understand buying habits and preferences from a much wider base, from markets close to its Swedish home, to the USA, and even to the Far East and eastern Europe. IKEA could no longer assume that its knowledge of earlier markets would necessarily apply: for example, it had found that shopping habits in the USA differed substantially from those in Europe, and this had required a change in the way it serviced the market. Therefore, while the principles of IKEAs business idea were adhered to around the world to produce a consistent product quality and shopping experience, store management had been given a greater degree of freedom to adapt to local market needs. IKEAs management had, however, decided that there were some markets, attractive though they were, where it did not make sense to try to control IKEAs operations directly. Here the company recognised that local knowledge in fine-tuning the business to local needs was vital; or the problems of long-distance control were too great to manage the operation effectively on this basis. It had, therefore, established local joint ventures through franchise arrangements. There were wider environmental issues, which affected IKEAs fortunes; for example, IKEA was less susceptible to economic downturn than many of its competitors. This may have been because its prices were often lower; but it was also because, when a customer took a purchasing decision at IKEA, he or she walked away with the goods. In other stores, since delivery was often delayed, purchase decisions were also often delayed. Economic conditions in the different countries in which IKEA operated did, however, affect its success: for example, the growth in car ownership, particularly in less highly developed countries, determined the percentage of the population which could shop at an IKEA store.
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need to control a multinational enterprise, as opposed to a national operation, also began to require skills and control systems of a different sort. It was a problem which many retailers found difficulty coping with. A major reason has been that retailers underestimate the extent to which their resource commitments rise and how the need to control them takes on quite different proportions. Strategies, then, need to be considered not only in terms of the extent to which the existing resource capability of the organisation is suited to opportunities, but also in terms of the extent to which resources can be obtained and controlled to develop a strategy for the future.
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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: 1. Complex: especially for multinational organisations such as IKEA with a wide range of products/services. Involve uncertainty: They often involve taking decisions about the future, which is impossible for managers to be sure about. Require an integrated approach: Managers have to work across cross-functional and operational boundaries, and come to agreements with other managers who may have different interests and priorities. They also have to manage external relationships such as with suppliers, distributors and customers. Involve change: Strategic decisions often involve change. Not only is it problematic to decide upon and plan change, it is even more problematic to implement change if the organisations culture is not in line with the desired future strategy. In the case of IKEA there were the following strong influences: (i) family owned company with no shareholder/financial market influence on strategy (ii) Swedish influence, reflecting Swedish values.
2.
3.
4.
Feedback on Question 2: Decisions on whether a company takes an environment led approach (fit) or a resource based approach (stretch) is often complex. IKEA is such an example where arguments can be formed to justify both. 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. However, strategy can also be seen as building on or stretching an organisations resources and competencies to create opportunities or to capitalise on them. 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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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. In practice, organisations such as IKEA, develop strategies on the basis of environmental fit and stretch. IKEAs experiment with housing was the result of identifying a new market opportunity, but it was also an attempt to capitalise on its skills in developing kit-form products at low-cost. Feedback on Question 3: The issues to consider are:
How should IKEA deal with public pressure and use its influence to
improve working conditions and workers rights? Revisit this question after you have covered Unit 6.
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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. As the name of CEGB implied, the institution from which PowerGen emerged, had strong planning instincts for fulfilling its task to supply electricity to British households and industry. Therefore, it was not surprising when PowerGen started preparations for being an independent company in 1988, that a very detailed strategic planning system was installed with the help of McKinsey consultants. However, already in 1992, only two years after the operational start of the company, a substantial reorganisation was conducted, which triggered a complete change of the strategic planning system as well. When this new planning system failed to function satisfactorily in 1993, it was substantially revised for the 1994 planning cycle. In 1996 the company underwent again a major reorganisation, adjusting the company to a number of internal and external strategic developments. That also caused the strategic planning system to be substantially revised. In particular it was now broadened to include a highly sophisticated scenario development module to be conducted on the business unit level. The corporate composition did not stabilise thereafter either. In 1998 PowerGen completed a major purchase of a regional energy distribution company, merger discussions with US partners continued on and off, government interference changed the pricing arrangements of the industry and dictated strategic directions, etc. It seemed that the planning system was always several steps behind the actual conditions of the company. On the other hand, without the planning support, how could the company have assessed its choices in the rapidly changing environment of European energy markets in the 1990s? Now read the full case study (pages 709-720 of key textbook, De Wit, B & Meyer, R) with the following learning objectives in mind:
Understand the need for formal planning systems. Understand possible designs of formal planning systems. Identify the common pitfalls of formal planning systems. Conceive alternatives for formal planning systems.
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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? 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. 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.
2.
3.
In a renewed, functional structure of the organisation. Led and managed by a large, centralised planning team at the
commercial division, monopolising the strategy planning and decision making within the corporation.
Separated financial role within the Finance division for reviews and
projection of plans. Process: how and when?
Deliberate formation.
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12-month process.
Content:
Focus of strategy: the operation of the pool. Diversification and early internationalisation. Planning focused on resource implications of strategic
decisions. Phase II Occurred in 1992. To some extent decentralised formation and planning, under responsibility of rather autonomous division directors, supported by divisionalised financial staff and a downsized corporate planning team. Context: where and by whom?
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Content:
Devolution and introduction of an internal market. Diversification (first attempts of internationalisation) and early
verticalisation of the businesses required increased responsiveness at business unit level. Phase III Occurred in 1994, with a focus on regaining fit between strategy developments and financial priorities. Context: where and by whom?
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.
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From divisional structure towards clusters of business units. Shift and separation of strategy responsibilities: BU planning
process to BU finance manager; BU strategy development to other BU staff member.
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Reviews by team of BUs and corporate level. Introduction of bonus system, related to strategy process.
Reasons
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new market mechanism: the wholesale pool. To be responsive to this new market logic, production needed to be flexible. Note, however, that the very step of introducing flexible production, actually opposed the whole idea of the formalised, long and detailed planning process that was adapted by PowerGen in 1990. Because of the electricity pool, it became much harder to forecast exact production demand. 2. Leveraging of core competencies. PowerGens moved to leverage her core competencies in other energy-related areas, both vertically and horizontally (internationalisation). Examples include:
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distribution provided necessary expertise for similar future international acquisitions. 4. Merging explorations with US utility groups. Clearly, from a content point of view, the strategy and planning process focused on leveraging core competencies for expansion of its business. In fact, in the later 90s PowerGens challenge was to get individual business units to be more responsive in leveraging core competencies of PowerGen to operations in both domestic and overseas markets. One could argue that the planning process of PowerGen from 1996 successfully managed this challenge, by engaging delegated business units in the strategic management process. 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. 5. Creation of a new holding company in the US, in order to continue assessing possibilities in the US. Intended further growth of the core business required the injection of considerable capital. If the reorganised planning process (1996) is considered, one could argue that this sale is a direct effect of the setting of overall strategic and financial direction by the CEO, Finance Director and Group MD. The case reveals explicitly the causes of failure of intended mergers between PowerGen and Cinergy and Houston, two major US utility companies. Both failures are clear cases of intended, but unrealised strategic actions, for which the causes could obviously not be caught in strategic planning (strains between the two chairman and regulatory intervention). 6. Focus on power generation as a core business and becoming a low-cost producer on a world-class basis.
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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stages entrepreneurial freedom was given to managing directors of business units, especially those involved in new businesses (that formed an increasing part of the total PowerGen portfolio). Also, business units became free in choosing appropriate techniques as means to develop strategy, and MDs were given considerable influence over their own revenues, including the questioning of central purchasing of services. Scenario development too became increasingly incremental, due to the deployment of robust strategy development, inherently decreasing the extent of detail in business plans. In fact, the role of the Group MD became increasingly a role of shaping the course of action by gradually blending together initiatives into a coherent pattern of actions, rather than rigidly setting the course of action in advance. Externally, an increased amount of effort was made to manage the interface with regulatory, political and environmental developments, in order to continually absorb external perspectives and assess its implications for strategic options. Obviously, this level of market and environment responsiveness could not be incorporated into the formal planning cycle, suggesting a parallel pattern of strategic actions alongside its planning cycle. Opportunistic behaviour emerged, as a result of the numerous governmental interventions with great impact on strategic actions. The course of action, reaction and reconsideration that increasingly determined the pattern of actions of PowerGen, suggest that there was indeed a parallel course alongside the formal planning process. The major realised strategic actions of PowerGen did not result from the planning process, but were reactions to governmental rulings, market opportunities or emerging industry dynamics. The actual strategic behaviour of PowerGen increasingly showed logical incrementalism, rather than the pure deployment of the formal planning cycle.
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 todays world. We have looked at the importance of strategy to a manager, the skills required to be a strategist, and the characteristics of good strategic decision making. We considered the role of models in strategic thinking, in particular the Johnson and Scholes model. Finally, students have been presented with two contextual case studies (IKEA and PowerGen) to work through.
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To gain maximum benefit from this module, students are encouraged to apply the lessons learnt to their own work context.
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Unit 2
Strategic Capability
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Assess the importance of core competencies to an organisation. Analyse the influence synergy can have on an organisation. Judge the role divestment has on organisational performance.
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. This unit examines how businesses are combined to achieve superior performance. To obtain optimal corporate performance, a corporation may increase or reduce the number of component businesses so as to create a more effective combination. Corporations use different management styles in achieving an optimal mix. We shall examine portfolio management and core competencies as two different styles. Portfolio management was fashionable in the 1970s and 1980s, when the focus was purely on financial control, and it was thought that benefits could be obtained by holding a portfolio of diverse strategic business units. It was also felt that this approach reduced risk for the corporation. In the 1990s corporations began to see the efficiencies and benefits of focusing simply on core business, and a greater focus has come about on developing a corporations core competencies. Corporations thus started to alter their composition in order to strengthen core competencies. Whichever approach is adopted, executing corporate strategy often involves acquisitions, mergers and divestments. We shall also examine some case studies concerning strategic capability.
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Synergy
Hanson
Nestle
Canon
The paradox of responsiveness and synergy can be illustrated with reference to these three companies. Hanson PLC was well known in the 1970s for portfolio management in the purest sense. They operated very much in line with the analogy described below as an investor would in financial markets to maximise returns on their investment by the buying
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and selling of companies. The corporate centre had no wish to become involved in the management of the portfolio companies but sought to control simply by financial investment. The advantage of these companies was responsiveness to particular markets. Campbell and Gould identify this style of corporate strategy management as Financial Control. 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. Nestle can be said to lie somewhere in between. Whereas it is not important to define the precise location on the continuum, it can be said that Nestle combines the two perspectives. On the one hand they manage their geographically dispersed Business Units as remote and autonomous, passing on strategic control to them. On the other hand they maintain strong involvement in the operation of the Business Units by the application of a rigid and detailed strategic planning process managed at the corporate centre. Hence, it can be said that Nestle is a mixture of the two perspectives. Campbell and Gould identify this style of corporate strategy management as Strategic Control.
ACTIVITY
Learn about organisations and capability building by reading the following from your key text, De Wit, B & Meyer, R. Readings 5.2 and 5.3: pages 267-285. Also read Chapter 6 on Corporate Level Strategy : pages 297-318.
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 corporations 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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Corporations that adopt the extreme portfolio management position are well suited to diversification through acquisitions.
Corporate Centre
Financial control
SBU1
SBU2
SBU3
SBU4
SBU5
SBU6
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. With the parenting approach, the question must still be asked on whether the corporate centre adds value or destroys value. Those who argue the value creation case cite the following advantages: 1. Co-operation and Control:
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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. 2. 3. 4. 5. Additional cost Creates more bureaucracy Delays decision making Reduces responsiveness Buffers SBU from investment realities
They would also argue that a powerful corporate centre leads to managerial ambition and empire building. Whatever the position adopted, there must be a clear understanding of the corporate rationale. It is important right at the outset to establish the role of the corporate centre. This could be one of four types ranging from.... 1. A Portfolio Manager as a manager of a portfolio of investments (as above) which may include divestment of under-performing SBUs, acquiring under-valued assets and making them better. A Restructurer similar to 1 but managers from the corporate centre move to re-structure to create SBU fitness by intervention. A Synergy Manager enhancing value across SBUs by sharing of activities (e.g distribution networks). Knowledge transfer (see Unit 8) and sharing of competence (see below). A Parental Developer Corporate Centre develops parenting competence including establishing structural and strategic control linkages.
2.
3.
4.
Hence, it can be seen that parenting strategy can be developed from 1 (portfolio management) though 2, to 3 and then 4 which tends towards a more competence based strategic approach. Portfolio management has strong links to the views of Michael Porter (Harvard Business School, 1980) that superior profitability derives from the structure of attractive industries. It suggests that superior profitability comes from a superior resource position relative to competitors. Both the Boston Consulting Group (abbreviated as BCG) and GE/McKinsey matrices position businesses according to industry attractiveness and their relative competitive position in industry.
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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 . What conclusions do you derive from it?
ACTIVITY FEEDBACK
The BCG matrix is drawn up against two orthogonal axes; relative market share and market growth Relative market share indicates a businesss market power (one source of competitive advantage) and this is equated with its ability to earn above average rates of return. In the extreme, higher returns derive from a monopoly (100% market share). More often, however, having a large market share will coincide with cost benefits from large production runs and large cumulative volumes of production. Market growth in the BCG matrix is related to the product life-cycle concept, which suggests that growth will be minimal or negative when a product is mature.
ACTIVITY
As an introduction to this section, read the following from your key text, De Wit, B & Meyer, R. Reading 6.1: pages 319 325
In portfolio management, a corporations business can fall into one of four categories:
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Stars
Growth rate
Question marks
Cash cows
Dogs
Market share
Figure 2.3: Business portfolio.
As we see in Figure 2.3, businesses with market power in a growing market are stars. With proper investment these can become cash cows generating significant income for the corporation. A corporation can, therefore, secure its future by combining a balanced portfolio of stars and cash cows, the latter to fund the former as they grow. Portfolio management as the accepted means of managing corporate strategy coincided with the growth of diversified conglomerates in the 1970s. Often these conglomerates consisted of a portfolio of unrelated businesses, where the management of corporate cash flows between the businesses was the sole underlying rationale. This period was accompanied by a pattern of acquisitions of unrelated businesses, often followed by the divestment or liquidation of those classified as dogs, and deemed to be of no further use in generating cash for the corporation. Businesses in the category of Question marks need careful management. They exhibit the characteristics of high growth but low market share. Stars usually emerge from the category of question
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marks with proper levels of investment. As such they are an important component of the business portfolio. However, because of their high growth characteristics they require a large injection of cash. Unless they quickly capture market share and move into the stars category, they have the propensity to absorb large amounts of cash. As growth slows down they become dogs. This type of corporate behaviour still has relevance today. There is evidence of extensive merger and acquisition activity that suggests that companies remain in the market for valuable Business Units which are quite often kept separate from the corporate centre as a portfolio company. It is often the case that such activity is geared towards global expansion (see Unit 3), knowledge expansion and creation (see unit 8) or simply is the result of a combination of desirable economic conditions (see Unit 4).
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. Anglo-American ideas of the pre-eminence of shareholder interests in corporate strategy management also led to a focus on shareholder value analysis techniques as a tool for managing diversified businesses. The manager of a diversified corporation is not, however, a shareholder investing in a portfolio of stocks in the market. Portfolio theory is based on the assumption of perfect markets, and a perfect market is dependent on the availability of perfect information. Critics of corporate portfolios submit, however, that in a perfect market it is the task of shareholders to use that information to construct a portfolio according to their own risk return profiles. In a perfect market it is unclear how a corporate portfolio manager can add further value for shareholders. Indeed, diversified corporations submerge information about individual businesses in less informative corporate reports and add the transaction costs of managing corporate portfolios to the costs which a shareholder has to bear. In situations where co-operation and co-ordination are introduced (e.g. the role of the Parental Developer, described above) between autonomous SBUs, a company is then moving along the responsiveness / synergy continuum towards a more resource based view of the company. The combining of effort leads to the creation of greater efficiency or synergy in the use of resources.
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Synergy in Corporations
Synergy is often put forward as the justification for acquiring or merging businesses. But what is synergy in this context? The familiar expression of synergy is the effect by which the whole exceeds the sum of the parts. The equation 2+2 = 5 is often used to demonstrate the effect. Synergy describes a corporations ability to create value, by identifying the fit between the opportunities arising from combining activities, and the corporations ability to then exploit these opportunities. 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. The UK conglomerate Hanson is a classic example. It had no interest in achieving benefits from combining the activities of its acquired businesses. Its focus and main source of success stemmed from the imposition of centralised financial control of its corporate headquarters upon its separate subsidiaries.
The achievement of the benefits from synergy is far from simple or automatic. Synergy needs to be created. It requires tremendous management focus. If poorly managed, the combination of a corporations businesses can result in negative synergy.
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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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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. A recent example of synergy effect is from the IBM acquisition of the business consulting group, PwC Consulting, in late 2002. IBM gained strong business consulting skills from PwC, exploited synergies with IBMs complementary IT competencies and strong leadership/branding. As a result the combined consulting arm vastly increased global marketshare (compared with the sum of the individual marketshare prior to the acquisition).
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ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R. Reading 6.4, Seeking Synergies: pages 340 356.
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Resources
Resources
(physical) Held in the control of the organisation Tangible and intangible Largely independent of the organisation's members Unaffected by culture and governance structure
Intellectual capital
(skills, competences and capabilities) Affects the organisation's ability to do things effectively Intangible Inherently attributable to the organisation's members Influenced by culture and governance structure
Core competencies, in contrast to physical assets, relate to human intellectual capital. Its distinctive features (in contrast to physical assets) are summarised in Figure 2.4. Organisations adopting a core competence perspective seek to exploit its intellectual capital to the full. We shall examine this in more detail in the unit on Knowledge Management (Unit 8). Increasingly, core competencies, above products or services, are viewed as rendering competitive advantage, and perceived by customers as adding real value in the long term. The need to focus on core competencies has never been greater, particularly in the new knowledge-based economy.
ACTIVITY
Read the following paper on core competencies by Prahalad and Hamel in your key text, De Wit, B & Meyer, R. Reading 6.2: pages 325- 333
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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defined by product-market boundaries. Competencies are viewed as the root of competitiveness for the corporation across time. The tests for core competencies are: 1. 2. 3. Core competencies provide potential access to a wide variety of markets. Core competencies make a significant contribution to the perceived customer benefits of the end-product/service. Core competencies should be difficult for competitors to imitate.
VIRTUAL CAMPUS
Spend some time thinking about your organisations 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) 1. What would you consider as its core competencies? How do these competencies give access to a variety of markets (e.g. global, different industries/sectors)? How do your organisations core competencies (as opposed to products/services) benefit your customers? How do your core competencies position you better for the future?
2.
3.
Now think about your competitors..........Consider questions 1, 2 and 3 from the perspective of your competitors. In what ways are your competencies (or that of your competitors) difficult to imitate? How can the organisations core competencies be developed further? 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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was a strong correlation between superior performance and related constrained diversifications. That is, those business that draw on the same common core skill, strength or resource performed better. Rumelt (1994) further developed the core competencies perspective, and established four key components of core competence competition as follows: 1. 2. Corporate span: core competencies span businesses and products within a corporation. Temporal dominance: products/services are only the momentary expression of core competencies. Competencies are more stable and evolve more slowly than products/services. Learning-by-doing: Competencies are gained and enhanced by use. Competitive locus: product-market competition is merely the superficial expression of a deeper competition over competencies.
3. 4.
The power of the core competence approach is that it provides a coherent view of how superior corporate performance can be achieved, allows for the importance of the strategic actions of managers, and captures the dynamic nature of strategy.
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 corporations 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. Many divestments occur when subsidiary businesses show decline. But is divestment always the correct response to failing businesses?
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is that, as other competitors leave the industry, so the profitability of the firm improves. 2. Niche: niche strategies depend on the existence of defensible market segments. In such a strategy the business would focus on a niche where it is competitively strong, or where demand is likely to persist longer (or at high levels) than in the rest of the sector. Quick sale: a corporation should seek a quick sale when it is likely to realise greatest value from a weak competitive position in an unfavourable market. Harvest: harvesting assumes that value can be returned to a corporation from a business by continuing to run it to extract as much cash as possible. Further investment is not expected: the objective is to realise the maximum cash from the business.
3.
4.
Other studies (notably Slatter, 1984) have shown that successful recovery or turnaround of declining businesses is possible. Companies that achieve a sharp and sustained improvement in performance are termed sharpbenders. They invariably achieve turnaround by taking one or more of the following measures:
Major changes in management. Stronger financial control. New product-market focus. Improved marketing. Significant reductions in production costs. Improved quality and service.
Studies of such companies have shown that sharpbenders succeeded because of the effectiveness of the measures (as listed above) and timing of them. Sharpbenders rarely pursue acquisitions as a route to change.
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within
corporation,
or
by
outside
Outsourcing is a divestment strategy which recognises that improved effectiveness might come from buying in non-core competencies. A corporations effectiveness can be significantly improved by the superior skills, resources and expertise of companies for whom the activity is core business.
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. More recently, the UK government is divesting aspects of its state activities to private companies, e.g. NHS patient records and data services, army logistics, etc.
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. Rohm is a manufacturer of highly specialised integrated circuits based in Kyoto. Its profits have increased steadily over the past four years at a time when most Japanese companies have struggled to cut their losses. Rohms recurring
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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. Rohms 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 Rohms 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. Also in defiance of traditional Japanese business practice, Rohm does not employ a seniority-based system of promotion and hires as many as 20 to 30% of its employees in mid-career. Mr Hatta believes that being based in Kyoto has helped the company. Western Japan is far away from bureaucrats and politicians in the central government so we have been able to focus on business, he says.
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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 Japans 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. Note: Kansai is the western Japanese province that includes Kyoto.
Questions:
1. What were the main aspects of the environment affecting Rohm over the last four years? What strategies did Rohm adopt in order to survive and grow? To what extent are they more appropriate to medium-sized companies, rather than the large Japanese electronics giants such as Toshiba and NEC? Summarise the key points that identify Rohms strategic perspectives.
2.
3.
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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. Such strategies have an obvious attraction for smaller companies when competing against the larger electronics giants. However, the difficulties of finding an attractive niche and then exploiting the opportunity in that niche are not to be underestimated. Feedback on Question 3:
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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 corporations strategic decisions. We have looked at the role of divestments and the increasing focus on core products and core competencies. We have seen how this recent trend has led to outsourcing. To gain maximum benefit from this module, students are encouraged to apply the lessons learnt to their own work context.
REVIEW ACTIVITY
In the earlier Virtual Campus activity you were asked to think about what your organisations core competencies are. Now verify this by reading your organisations 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. 1. Does the official view (from mission statement or management team) on core competencies match your original view? If there is ambiguity, what steps can be taken to ensure that the organisation as a whole is clear on its core competencies. Now test your own department/business unit against the core competencies.
2.
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Globalisation
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Evaluate the impact drivers for change have on organisations. Assess the implications of globalisation for business. Propose solutions for managers working in a global environment.
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. We shall consider the changing nature of multinational enterprises. In particular, the rise of non-US multinationals, and now increasingly a growth in mini-multinationals. For corporations, globalisation involves radical change. Globalisation presents opportunities but also poses challenges for the management of highly distributed worldwide organisations. We shall consider some of these issues. Finally we shall look at two case studies concerning Globalisation.
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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section, we shall briefly look at the evolution of globalisation and what it actually means.
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.
A fundamental shift has been occurring in the world economy. There has been a move away from a world in which national economies were relatively isolated from each other by barriers to cross-border trade / investment; by distance, time zones, language and by national differences in government regulation, culture and business systems. We have been moving toward a world in which national economies are merging into an interdependent global economic system, commonly referred to as globalisation. The rate at which this shift is occurring has been accelerating and is set to continue to do so. Globalisation is the phenomenon by which industries transform themselves from multi-national to global competitive structures. Global companies operate in the main markets of the world, and do so in an integrated and co-ordinated way. There are broadly three elements to globalisation: 1. International Scope, the spatial dimension:
World is viewed as one tightly linked system. Process of increasing international interconnectedness.
The emerging global economy raises a multitude of issues for businesses. It creates opportunities for businesses to expand their revenues, drive down their costs and boost their profits. While the global economy creates opportunities such as this for new
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entrepreneurs and established businesses around the world, it also gives rise to challenges and threats that yesterdays business managers did not have to deal with. For example, managers now routinely have to decide how best to expand into a foreign market.
Should they export to that market from their home base? Should they invest in production facilities in that market,
producing locally to sell locally?
Managers have to decide how to customise their product offerings, marketing policies, human resource practices and business strategies to deal with national differences in culture, language, business practices, and government regulations. In addition, managers have to decide how best to deal with the threat posed by efficient foreign competitors entering their home marketplace.
KEY POINT
Globalisation is the phenomenon by which industries transform themselves from multi-national to global competitive structures It refers to the shift toward a more integrated and interdependent world economy and has two main components:
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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. Unit 6: section on Value Management 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. Unit 7: section on Ethics 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.
Globalisation forces
Bulk chemicals
Civil aircraft
Figure 3.1: Global integration vs. Local responsiveness grid for various sectors.
Business success in the international context is increasingly a case of finding the right balance between the forces of globalisation vs. localisation. This balance varies depending on the industry you operate
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in. See Figure 3.1. For example, if you a microchip manufacturer, localisation bears little meaning; one size fits all in the global marketplace. However, if you are a food retailer, localisation forces are significant and cannot be ignored. 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 factors
e.g. standards, e-business, communications
Commercial factors
Localisation
Legal factors
e.g. regulations
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product flows, e.g. crude oil, foreign currency markets competing on a worldwide basis, e.g. automobile, consumer electronics.
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 worlds economies, the issues concern:
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converge on some global norm, thereby helping to create a global market, e.g. McDonalds hamburgers. This type of firm is more than just a benefactor of this trend; they are also instrumental in facilitating it. By offering a standardised product world-wide, they are helping to create a global market. However, it is important to understand that national markets are not giving way to the global market in all sectors of the economy. Significant differences still exist between national markets, e.g. consumer tastes and preferences, distribution channels and culturally embedded value systems. These differences frequently require that marketing strategies, product features and operating practices be customised to best match conditions in a country.
ACTIVITY
Read the following article on the globalisation of markets from your key text, De Wit, B & Meyer, R. Reading 10.1: pages 557-561
In many global markets, the same firms frequently confront each other as competitors in nation after nation, e.g. Coca-Colas and Pepsi, Ford and Toyota, Boeing and Airbus, Caterpillar and Komatsu, and Nintendo and Sega. Thus, diversity is replaced by greater uniformity. As rivals follow rivals around the world, these multinational enterprises emerge as important drivers of the convergence of different national markets into a single, and increasingly homogenous, global marketplace.
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. Reading 10.2: pages 562-569
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As with markets, it is important not to emphasise the globalisation of production too much. It is still difficult for firms to achieve optimal dispersion of their production activities to locations around the globe. This is due to formal and informal barriers to trade between countries, barriers to foreign direct investment, transportation costs and issues associated with economic and political risk. Nevertheless, there is an increased level of globalisation of markets and production. Modern firms are playing a key role in this and increase globalisation by their actions. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment.
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. There is also another aspect the distributed globalisation of production. This is particularly so in the IT sector, where companies are increasingly distributing the production of software across geographies. Companies such as IBM run projects where aspects of the same software is developed in China, other aspects in India and yet others in South America. The whole system may then be integrated in yet another country (e.g. US). This achieves round-the-clock productivity. Not only do huge cost savings result from cheaper professional rates from non-Western countries, but also round-the-clock productivity enables corporations to achieve aggressive time-lines. Effectively work is being carried out throughout the 24-hour clock. However, this is not the panacea it sounds. There are challenges with such globally distributed production, and such practices require strong management control, standards and robust IT and communication infrastructures. These are some of the management challenges of globalisation which we shall examine later in this unit.
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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 Moores 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. An important factor and, possible the most critical factor, contributing to globalisation has been the Information Technology revolution. The emergence of standards in IT has made our world inter-connected through high-speed computers. The American defense institutions were largely instrumental for the rise of standards and protocols in communications, messaging and IT. Through the adoption of standards, heterogeneous computer systems (from India to Beijing to Europe to US) are able to communicate seamlessly and securely. This has led to open and interoperable applications. IT infrastructures are now essential pre-requisites for modern global corporations. These developments have accelerated the pace towards globalisation in many sectors of the global economy.
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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Secondly, let us look at the implications of technological change for the globalisation of markets. In addition to the globalisation of production, technological innovations have also facilitated the globalisation of markets. Low cost transportation has made it more economical to ship products around the world, thereby helping to create global markets. Low-cost global communications networks such as the World Wide Web are helping to create electronic global marketplaces. In addition, low-cost jet travel has resulted in the mass movement of people between countries. This has reduced the cultural distance between countries and is bringing about some convergence of consumer tastes and preferences. At the same time, global communications networks and global media are creating a world-wide culture, e.g. television. In any society, the media are primary conveyers of culture. As global media develop, we must expect the evolution of something akin to a global culture.
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US dominance in world foreign direct investment. The dominance of large, multinational US firms on the
international business scene.
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 United States Japan Germany France United Kingdom Italy Canada China South Korea
Share of World Output, 1963 40.3% 5.5% 9.7% 6.3% 6.5% 3.4% 3% NA NA
Share of World Output, 1996 20.8% 8.3% 4.8% 3.5% 3.2% 3.2% 1.7% 11.3% 1.7%
Share of World Exports, 1997 12.6% 7.76% 9.9% 5.46% 4.94% 4.76% 3.81% 2.85% 2.45%
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. Reading 10.3, The Competitive Advantage of Nations, pages 569-577
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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: The website of the World Trade Organisation (WTO) for pro-globalisation viewpoints: www.wto.org For anti-globalisation viewpoints refer to the following websites: www.southcentre.org www.wtowatch.org
There is no doubt that globalisation has deep social, political and environmental consequences, as you will have noted from the previous student activity. Leaving aside the social and ethical issues that we have illuded to above, there are a number of other criticisms of the impact of globalisation: 1. Impact on jobs and incomes 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. 2. Labour Policies and the Environment A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities to less developed
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countries. Countries that lack adequate regulations to protect labour and the environment from abuse by the unscrupulous. Adhering to labour and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace compared with firms based in developing nations that do not have to comply with such regulations. 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 A final concern is that in todays increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organisations such as the World Trade Organisation, the European Union and the United Nations. It can be perceived that un-elected bureaucrats are now able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states. In this manner, the national states ability to control its own destiny is being limited.
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. From your organisations viewpoint and also geographical viewpoint, identify on the Virtual Campus whether globalisation has had a levelling-up or levelling-down effect. Elaborate. 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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business in many ways. Let us examine some of the differences and complexities: 1. Country differences At the most fundamental level, managing in the global marketplace requires an understanding and appreciation of the simple fact that countries are different. Countries differ in their cultures, political systems, economic systems, legal systems and levels of economic development. Many of these differences are very profound and enduring. A lack of appreciation of these country differences has led to the failure of many American companies in expanding into foreign territories. 2. Complexity of international and distributed businesses A further way in which international business differs from domestic business is the greater complexity of managing an international and distributed business. A manager in an international business is confronted with a range of issues that the manager in a domestic business never faces. A business must decide where in the world to site its production activities to minimise costs and to maximise value added. Then it must decide how best to co-ordinate, monitor and control its globally dispersed production activities. 3. Choice of markets to compete in Decisions about which foreign markets to enter and which to avoid must be made. Also the appropriate mode for entering a particular foreign country must be chosen as it has major implications for the long-term health of the firm. Is it best to;
Export its product to the foreign country? Allow a local company to produce its product under
licence in that country?
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5. Cross-border transactions and currency risk Cross-border transactions require that money be converted from the firms home currency into a foreign currency, and vice versa. Since currency exchange rates vary in response to changing economic conditions, an international business must develop policies for dealing with exchange rate movements. A firm that adopts a wrong policy can lose large amounts of money. 6. Complexity of a global organisational structure Global organisations, inevitably require more complex, matrix organisational structures. In particular, the management roles are quite different and require higher calibre managers. Global organisations generally have four types of differentiated management roles:
Global business managers; responsibility for strategy. Country managers; expert knowledge on opportunities,
threats and competitive landscape in local geography. developments and knowledge sharing and leverage across the global company.
ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R. Reading 10.4, Transnational Management, pages 577-586
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and Japan concentrate on commuting bikes, the designers in the Netherlands contribute ideas from the European racing bike tradition, while in the US they are more likely to be working on variants of mountain bikes. In Taiwan, we try to incorporate all of the ideas, working on new materials such as carbon fibre to reduce the weight of the frame. Our designers can talk on the phone and swop ideas using computer-aided design, but they get together twice a year in Taiwan to review their work. The common language we use is English. One of the developments we are particularly enthusiastic about is electric battery-powered bikes, which we have been selling from mid-1998. We expected to sell around 2000 in the first year with considerably more afterwards, particularly in Europe. Theres an increasing environmental need for such machines to reduce traffic congestion. At the same time, they make the job of a cyclist easier. During normal travel they should have a range of about 40km. And when the battery runs out, its not a huge problem all you have to do is pedal home."
Questions:
1. What benefits does the company gain from its global strategy? And what have been the problems? The opening paragraph of the case states that Giant Bicycles is a global company. Do you agree with the statement within the definitions explored in the lecture?
2.
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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:
Higher sales than would be possible in Taiwan alone. Ability to keep in contact with different market trends and latest
designs.
Production from high-efficiency workforces, e.g. Netherlands. R&D costs spread over much wider base of sales than just Taiwan.
Problems include:
Geographical coverage (broad international scope). International similarity of demand (standardised products). Interconnectedness of the world (increased linkages between
countries, seeing the globe as a single market). With the above definitions in mind, one could consider a range of issues;
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personal loans. In 1997 this business served 50 million consumers in 56 countries through a global network of 1,200 retail branches and generated revenues of $15 billion. 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 Citicorps 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 McDonalds of financial services. The basic belief underpinning Reeds consumer banking strategy is that people everywhere have the same financial needsneeds that broaden as they pass through various life stages and levels of affluence. At the outset customers need the basicsa 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 McDonalds 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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A key element of Citigroups 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 companys 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 Citicorps 1,200 retail locations, and it is being rapidly introduced elsewhere. Another element of standardisation, less obvious to customers, is Citigroups 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 Citigroups 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 Citigroups global retail bank? In 1997 the World Trade Organisation brokered an agreement to liberalise cross-border trade and investment in global financial services. What will be the impact of this deal on competition in national markets? What would you expect to see occur? Does the 1997 WTO agreement represent an opportunity for Citigroup or a threat? How is Citigroup trying to build a global retail brand in financial services? What assumptions is this strategy based on? Do you think the assumptions and strategy make sense?
2.
3.
4.
Reference: Chapter 1 International Business in the Global Marketplace (2000) by Charles W.L. Hill
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Cross selling of products to all customers (regardless of wealth). Standard livery of banks.
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Staff uniforms. Standards of service the same globally. Also (not mentioned in case) standardised training and staff
development. Assumptions based upon:
Standard service designed is acceptable to customers. Globalised product implies a global strategy and, therefore,
decreases cost due to homogenised product.
World travelers want the same service wherever they go. Creation of global brand is positive.
Does it make sense?
What about localisation issues, e.g. law, culture? The company openly try to attract wealthier customers. If
you have lots of money, will you not require a personal service?
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. We have considered the drivers of globalisation, the changing world order and the implications for businesses from the globalisation phenomenon. We have also touched on the globalisation debate considering the opposing views. Finally, we have looked at the particular challenges faced by managers when managing in the global marketplace.
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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). Your paper should address the following: 1. 2. Your current global capability. The impact globalisation has had on your organisation with respect to production (including supply chain), markets, operations and management processes. Global competition. A SWOT analysis in the context of globalisation.
3. 4.
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Evaluate available options for global expansion. Analyse strategy for forming and making alliances work in a global
environment.
Explain the terminology associated with business combinations. Assess the factors which influence success or failure of M&A activity. Propose a process for the successful integration of different
organisations.
Introduction
Globalisation and the advent of the new economy, has led to big changes in todays 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. In this unit we shall look at strategic alliances, and mergers and acquisitions; the two vehicles through which many organisations aim to globalise. Mergers and Acquisition (abbreviated as M&A) activity has grown in pace since the 1990s. In this unit we shall look at some of the terminology used in the context of M&A. We shall then look at some of the drivers for M&A activity and potential benefits. We shall then assess the factors that give rise to successful mergers and acquisitions, and briefly consider an integration process.
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(3)
Any firm contemplating foreign expansion must first decide which foreign markets to enter, and the timing and scale of entry. This choice should be driven by an assessment of relative long-term growth and profit potential. What are the objectives of International Strategic Alliances? Preece put forward a framework that examined the reasons for alliances. The 6 Ls gave a range of reasons that a company may wish to enter into such arrangements as follows:
Leaning to replace value-chain activities or fill in parts Leveraging to integrate operations of partners to create
scope and / or size advantages. customers.
Linking to create closer links with suppliers and Leaping to pursue a radically new area of endeavour. Locking out to reduce competitive pressure from non
partners and maintain existing competitive position.
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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An alliance can involve two or more companies. Companies in a strategic alliance co-operate by sharing capabilities to enhance their competitive edge and creating new business opportunities. Companies in an alliance will retain their own strategic autonomy.
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.
The size of the market (in terms of demographics). The present wealth (purchasing power) of consumers in
that market.
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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. There are the following advantages associated with entering a market early, known as first-mover advantages;
Entry Methods
The choice of method for entering a foreign market is another major issue. Options are;
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Exporting
Advantages
Avoids the substantial costs of establishing operations Helps a firm achieve location economies. By
(particularly so for manufacturing) in the host country. manufacturing the product in a centralised location and exporting it to other national markets, the firm may realise substantial scale economies from its global sales volume.
Disadvantages
High transport costs can make exporting uneconomical, Tariff barriers can make exporting uneconomical. Problems arise if a company delegates its marketing
activities in each country to a local agent. Foreign agents often carry the products of competing firms and so have divided loyalties.
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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of
which
use
complex,
expensive
production
conventional FDI. In a country with unstable political and economic environments, a longer-term investment might expose the firm to unacceptable political and/or economic risks (e.g. the risk of nationalisation or of economic collapse).
Disadvantages
experience and customer relationships in the foreign country. e.g. Western firms that sold oil refining technology to Middle East countries now find themselves competing with these firms in the world oil market competitive advantage to potential and/or actual competitors.
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-Xeroxs 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
commit substantial financial resources to an unfamiliar or politically volatile foreign market. in a foreign market but is prohibited from doing so by barriers to investment. intangible property that might have business applications, but it does not want to develop those applications itself (e.g. software components).
Disadvantages
manufacturing, marketing and strategy that is required for realising experience curve and location economies. Licensing typically involves each licensee setting up its own production operations. co-ordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. By its nature, licensing limits a firms ability to do this. know-how to foreign companies. Technological know-how constitutes the basis of many multinational firms competitive advantage. Most firms wish to maintain control over how their know-how is used, and a firm can quickly lose control over its technology by licensing it.
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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. The franchiser will also often assist in running the business on an ongoing basis. As with licensing, the franchiser typically receives a royalty payment, which amounts to some percentage of the franchisees revenues. Franchising is used mainly by service firms. McDonalds is a good example of a firm using a franchising strategy. Advantages The advantages of franchising as an entry method are very similar to those of licensing. The firm is relieved of many of the costs and risks of opening a foreign market on its own. Instead, the franchisee typically assumes those costs and risks. This creates a good incentive for the franchisee to build profitable operation as quickly as possible. Using a franchising strategy, a service firm can build up a global presence quickly and at a relatively low cost and risk. Disadvantages The disadvantages are less than licensing. Since franchising is used mainly by service companies, experience curve and location economies are less of an issue. But franchising may inhibit the firms ability to take profits out of one country to support competitive attacks in another. A more significant disadvantage of franchising is quality control. The foundation of franchising is that the firms brand name conveys a message about the quality of the firms product. This can be overcome by setting up a subsidiary in each country (wholly owned company or joint venture). The subsidiary assumes the rights and obligations to establish franchises throughout the particular country or region, e.g. McDonalds establishes a master franchisee in many countries. Further examples are Kentucky Fried Chicken and Hilton International.
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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
market are high, a firm might gain by sharing these costs and/or risks with a local partner. ventures the only feasible entry method. Research suggests joint ventures with local partners face a low risk of being subject to nationalisation or other forms of government interference. This appears to be because local equity partners, who may have some influence on host-government policy, have a vested interest in speaking out against nationalisation or government interference.
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. and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be.
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Advantages
technological competence, a wholly owned subsidiary arrangement reduces the risk of losing control over that competence. necessary for engaging in global strategic co-ordination is maintained (i.e. using profits from one country to support competitive attacks in another). trying to realise location and experience curve economies (as firms pursuing global and trans-national strategies try to do).
Disadvantages
foreign market. Firms doing this must bear the full costs and risks of setting up overseas operations. The risks associated with learning to do business in a new culture are less if the firm acquires an established host-country enterprise. However, acquisitions raise additional problems, e.g. marrying divergent corporate cultures.
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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:
Is there a strategic fit? Is there a capabilities fit? Is there an organisational fit? Is there a cultural fit?
A good partner;
Alliance Structure
Having selected a partner, the alliance should be structured so that the firms risks of giving too much away to the partner are reduced to an acceptable level.
impossible) to transfer technology not meant to be transferred. For example, in the case of software applications, shrink-wrapped, black box packaging. agreement to guard against the risk of opportunism by a partner, e.g. IPR protection. skills and technologies that the other covets, thereby ensuring a chance for equitable gain. Cross-licensing agreements are one way to achieve this.
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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)
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Cultural risk
Strategic alliances
M&A If this fails, as there is a permanence to the transaction, it risks putting the whole organisation in trouble. Alliances agreements can apportion financial risks between partners, but the rewards are also shared. Internal Development (organic) there is a level of flexibility to the amount of money invested this can be gradual and re-appraised over time.
High M&A Market failure vs. Cultural risk
Cultural risk
Strategic alliances
Figure 4.1: Market failure vs. Cultural risk for expansion options.
M&A there is a finality to this linkage of companies and so the cultural risk is large. However, this should be balanced against a low risk of market entry as the purchase normally relates to a package which is established and proven in the market.
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Alliances there is a level of optionality to these the package may be unproven but when partners work together they should reduce the risk. Internal Development there is a low cultural risk as it is their own culture (organic growth). However, an unproven package and a lack of relevant experience leads to high market entry risk.
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. There are several types of merger:
Vertical mergers involve different stages of production Conglomerate mergers involve firms engaged in
unrelated business activity.
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. Acquisitions are sometimes described as mergers to be politically correct. This is especially so in the early stages of a merger.
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.......... IBM Corporation/PwC Consulting: The merger (or in reality, acquisition) of PwC Consulting by IBM Corporation in 2002 is often thought of as a horizontal merger, but is more accurately a vertical merger. Although both companies overlapped in a significant part of their business (IT services and consulting), it could be argued that IBM had little business consulting skills an area of high value and top of the value chain in services contracts. By acquiring PwC Consulting, IBM gained first-class and global business consulting skills and also PwCs existing lucrative contracts. PwC gained the IBM brand, as well as access to the breadth of IBMs product and IT skills to facilitate the implementation and delivery of projects following a consulting engagement. HSBC/Midland Bank, UK The acquisition of the UKs Midland Bank by HSBC is an example of a horizontal merger. The acquisition gave the HSBC bank a significant UK presence. 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 SONYs highly profitable VCR manufacturing business and Columbias film-making business. Columbia is still part of Sonys 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.
its shares distributed to existing shareholders of the parent company in the same proportions as in the parent company. the firm to an outside party with cash or equivalent consideration received by the divesting firm.
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: The Airbus consortium, established in 1970, is an example of a successful Joint Venture. The European consortium of French, German and later, Spanish and U.K. companies was established, as it became clear that only by co-operating would European aircraft manufacturers be able to compete effectively with the U.S. giants. By overcoming national divides, sharing development costs, collaborating in the interests of a greater market share and even agreeing a common set of measurements and a common language, Airbus changed the face of the business and brought airlines, passengers and crews the benefits of real competition. 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 Europes 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: Perhaps the most famous example of a divestiture is the divestiture of the Telecoms giant AT&T, from Bell Labs. The divestiture was forced by the US Department of Justice following an anti-trust suit against Bell Labs for illegal actions to perpetuate a monopoly in telephone service and equipment. The United States woke up on January 1, 1984 to discover that its telephones worked just as they had the day before. But AT&T started the day a new company, having been divested from Bell Labs. Of the $149.5 billion in assets it had the day before, it retained $34 billion. Of its 1,009,000 employees it retained 373,000. Success required the most drastic change in corporate culture ever undertaken by a major American corporation. The old AT&T the Bell System as a regulated monopoly had been largely insulated from market pressures for most of its history. Its culture venerated service, technological excellence, reliability and innovation within a non-competitive, internally-driven
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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
Drivers for M&A activity
M&A activity is rife in many industry sectors today, e.g. finance & banking, oil exploration & production, telecoms, IT services, pharmaceuticals, car manufacturing. There are push and pull factors driving M&A activity. Push factors arise from stakeholders who may have concerns about the companys strategic direction or its management, and view an acquisition or a merger as a solution. Pull factors arise from companies making strategic moves to increase marketshare or increase shareholder value.
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 companys taxable income and hence lower the combined companys income tax payments.
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the principal driver for Mercedes who had limited marketshare in the US. There is also the perception that the increased marketshare will give rise to market dominance thus enabling increased profitability. Hence, shareholder value often increases.
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: 1. 2. Management may be stimulated to implement a higher-valued operating strategy. Negotiations or tendering activity may involve the dissemination of new information or lead the market to judge that the bidders have superior information. The market may then re-value previously undervalued shares.
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Corporate will (the companys goals and strategy). Funding. Relative values of the two companies. A conducive economic environment.
Factors affecting M&A activity can be categorised as external and internal. Global M&A activities tend to occur in waves, in response to external factors see Figure 4.3. External factors include monetary policy, general economic activity, political issues and regulatory policy (competition policy, foreign investment policy).
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Monetary policy affects M&A activity because, generally speaking, when interest rates are high, stocks are out of favour (valuations are low) and well-funded companies can buy others at a good price. The internal factors (e.g. management capabilities, type of product, etc.) vary from company to company and from industry to industry. Combining the internal and external factors results in an M&A cycle. The predominant influence at any one peak or trough may differ. However, typically a peak is a time when company valuations are low, interest rates are low and bank financing is available.
announcement) to shareholders of the acquired company is 20% while the average return to the acquiring company is 0%. company makes a public offer to the shareholders of a target company), the acquired companys shareholders receive an average return of 30%, while the shareholders of the acquiring company receive 4%.
In an analysis conducted by McKinsey consultants (1994) of 116 acquisition programs undertaken between 1972 and 1983, 61% were failures, 23% were successes and 16% unknown. (An acquisition was deemed successful if it earned its cost of equity capital or better on funds invested in the acquisition program.) 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. Therefore, statistics suggest high failure rates of mergers and acquisitions. There are a number of reasons for the failure of acquisitions (McKinsey, 1994 and Balmer & Dinnie, 1999). Success or failure arises from the quality of the pre-acqusition and post-acquisition processes. The pre-acquisition process includes the following:
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Due diligence. The value creation logic (how is it valued?). Negotiation of the deal.
The post-acquisition process is about how the integration is managed. This is considered the most important source of success or failure.
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. At the pre-acquisition phase, due diligence and valuation are particularly complex. Emerging markets, in particular, suffer from the problem of unreliable marketing and strategic information, and the due diligence may not be entirely accurate in this respect. Furthermore, local accounting standards may not be compatible with international standards. Political and nationalistic attitudes may also make an unbiased assessment difficult. In the post-acquisition phase, transition management and integration management are the biggest challenges because of the geographical distribution. Despite the compounded problems of cross-border M&A, studies focusing just on cross-border M&As suggest that the success rate is no worse than domestic, and, if anything, slightly better. John Kitching (in 1973) looking at cross-border acquisitions in Europe, found that 25% were straight failures and 25% not worth doing, giving a success rate of 50%. A further study by McKinsey focusing just on cross-border M&As found a 57% rate of success. The slightly higher success rate may be simply because most cross-border acquisitions are horizontal (i.e. in core business) and all studies show that horizontal acquisitions tend to be more successful than others.
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Listed below are many of the common reasons for failure in M&A: 1. Acquirers pay too much. This happens for a variety of reasons:
- Over-estimation of the synergies that the merged - Simply that the acquiring company overbids. In the
heat of the deal, the acquirer may find it all too easy to bid up the price beyond the limits of reasonable valuations. difficult and during this time, relationships with customers, employees, and suppliers can easily be disrupted during the process, and this disruption may cause damage to the value of the business.
2.
Corporate identity and corporate communication issues are not properly managed:
- Inadequate recognition of the impact of leadership - Unresolved naming issues. - Integrated identity and communication structures
are rarely in place early in the M&A process.
- Consultants are brought in too late. - Dominant players give little attention to cultural
issues, particularly at the outset. 3. 4. 5. Failure to secure good will of a wide range of stakeholder groups in both companies. Potential conflict between individual and corporate objectives is not given sufficient recognition and isnt managed. Reputations can be damaged, maintained or enhanced during the merger process.
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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: 1. Microsoft group: put forward to SAP management the benefits of the merger to SAP. Consider the various SAP stakeholders in putting forward the benefits. SAP group: counter the Microsoft proposals, where appropriate. Both groups: analyse why the merger went wrong (cultural, political, other issues). Could Microsoft have handled it better.
2. 3.
(This Virtual Campus activity also interlocks with the units on Innovation and Strategic IT & e-business)
2.
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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. 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:
4.
- acquisition value to the acquirer - value of the target to the existing owners and other
potential buyers
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technology, headquartered in Westwood, Massachusetts. The company was founded in 1978 by former Navy pilot Bill Reagan, who unable to sleep one night, conceived a unique patented system, designed to assist law enforcement personnel in locating, tracking and recovering stolen vehicles. Lacking the specific knowledge and technical skills for his concept to materialise, Bill Reagan turned to MicroLogic, a product development firm which specialised in developing electronics products for others. MicroLogic helped refine the LoJack product specifications, designed the entire system and worked with various government agencies to obtain the appropriate approvals. When everything was in place, a contract was signed for MicroLogic to manufacture the police tracking computers. It made MicroLogic the technical backbone of LoJack and hence, this product development firm became a significant ally and an instrumental partner in the success of LoJack. But as time progressed, LoJack separated somewhat; in-house people were hired to do a lot of the work formerly handled by MicroLogic and eventually the LoJack Corporation ended up doing much of their own work, with the exception of brand new design work or work on the base software that MicroLogic designed originally. 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 Logics 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 MicroLogics 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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executive and legislative bodies). Car dealerships would sell the system as an option, providing a high margin add-on to any car sale. Licensees in countries outside the United States would use the stolen vehicle recovery system technology. Motorola was asked to manufacture the police tracking computers and had to agree to a long-term payment plan. Financial institutions and insurance companies were involved in designing joint offerings. In order for the LoJack system to be manufactured and find its way to the customer, LoJack and MicroLogic had to define the business ecosystem in which it would flourish and design several relational arrangements, determining the level of co-operation they wished to pursue. This allows for a discussion on the various relational arrangements that can be implemented and the different levels of inter-organisational dependence that they entail (link to Introduction and Reading 7.3, James Moore).
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relationship. Both parties had become more independent over time and had benefited from this growing independence. Both parties however, were also tempted to explore new market opportunities on the basis of the stolen vehicle recovery technology. They could go separate ways, each pursuing their own strategic direction, but the question is, had they become independent enough to be successful without the old alliance partner? To answer this question in an affirmative way, this view would be in line with the discrete organisation perspective. However, a number of issues should be taken into consideration as well, such as the opportunity to leverage some of LoJacks strengths or the fact that, from a (shareholder) value creation perspective, the MicroLogic new market entry could be more successful and rewarding. This view would be in line with the embedded organisation perspective (link to all).
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? Do you think the arrangements between LoJack and MicroLogic changed their competitive advantage over time? 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?
2.
3.
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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consummate the deal, MicroLogic helped refine the product specifications, designed the entire system, worked with various governments agencies to obtain the appropriate approval and performed the required fieldwork to prove to the FCC that the assigned radio frequency would not interfere with that assigned to a television channel. With everything in place, a contract was finally signed for MicroLogic to manufacture the police tracking computers. (Upstream vertical relation)
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their relationship matured. At first, in return for its initial contribution, MicroLogic received a total of $350,000 and 90,000 shares of LoJack. A contract was signed for MicroLogic to manufacture the police tracking computers. This type of arrangement between LoJack and MicroLogic can be described as that of a bilateral combination of Equity-based and contractual arrangements. The intent of these; the contracts will organise procedures and routines at MicroLogic to manufacture the computer, constituting advantages of hierarchy, while the equity-based part places MicroLogic in the situation where it has an entrepreneurial incentive. Conducive to spurring risk-taking, innovation and change. This worked like the benefits of the market. The alliance can therefore be seen as a nice example of co-specialisation, where LoJack is focusing on marketing and sales, while MicroLogic focuses on manufacturing and technology development in the area of tracking and positioning. This co-specialisation had progressed to the point where LoJack hired a MicroLogic engineer. Over time, while the relationship was still trusting, it became more and more business like with more written documents and formal contracts because there were more people involved. The MicroLogic role changed also and the companies became far more independent. MicroLogic was no longer involved in all the technical decisions and LoJack had its own technical staff. However, MicroLogic was still involved in the long term technology strategy, and there to pitch in when LoJack staff needed help. Later on, MicroLogic and LoJack had entered into a joint venture to develop the third generation of the LoJack system. However, MicroLogic had difficulty meeting some of the initial specifications of the product. The direction of the project was altered and Motorola was engaged.
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strong on flexibility and the ability to adapt to changing circumstances when early predictions did not come out. Although LoJack was resource dependent on MicroLogic to develop and test the technology at the beginning of their relationship, it could be viewed that this relationship was still in balance, because ultimately it was LoJack which held the patent of the system. Without that, MicroLogic could not do anything with the concept or the technology. Their relationship can therefore be described as balanced interdependence. Moreover, LoJack had ordered Motorola to manufacture other parts, ensuring it became not entirely dependent of MicroLogic. Alternatively, as we do not know the alternatives available to Bill Reagan back in 1978, it could also be argued that the relationship initially was based on unbalanced dependence in favour of MicroLogic. For LoJack, the technology was key to the success of the system and hence to its value proposition, for MicroLogic it was just one contract. So MicroLogic was independent to the extent that it did not infringe the patent (limitations) and LoJack was dependent but able to steer the product specifications (influence). 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, MicroLogics 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 MicroLogics 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 LoJacks 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: Basically, LoJack has three major issues that it should contemplate: 1. Will further development of the third generation LoJack system, exploring new geographic markets and improved marketing and strengthened sales force, become profitable enough in the long run and create sustained shareholder value or should a new marketplace be sought? Considering the highly competitive market for stolen vehicle recovery with more and more pressure on margins and distribution channels. Will the new alliance leverage to the utmost LoJackss strengths or is its marketing capability only of limited use in this new marketplace? Also, considering MicroLogics changed strategy to develop and market its own products, is the compatibility in objectives not only temporary and predominantly focused on obtaining the LoJacks venture capital? 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
2.
3.
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majority of profits from monthly fees plus individual charges for special services).
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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. Citigroups 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. By contrast, a knack for acquisitions enabled Mr. Weill to build up Shearson Loeb Rhodes, a brokerage, which he merged with American Express in 1981. He quit in 1985, after falling out with James Robinson, the boss of Amex, thereby learning a valuable lesson: do not be the junior partner in a merger. In 1986, he bought Commercial Credit, a small consumer-lending firm, which through mergers became Travelers, an insurance and brokerage conglomerate. And even as the merger with Citi was announced, the recently acquired Salomon Brothers investment bank was still being integrated with Travelers Smith Barney. In June 1998, Mr. Weill added a stake in and a joint venture with Nikko Securities, a Japanese stockbroker. Mr. Weills 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. Yet integrating Citigroup was never going to be straightforward. Citibank was not flabby or under-managed or, at least, did not see itself that way. It was possible that the merger would be called off by regulators, a danger that fostered hesitancy over integration. In the event, the Citigroup merger helped secure the scrapping of Americas Glass-Steagall Act, which had separated commercial banks, insurers and investment banks. But above all loomed the problem of this being a genuine merger of equals. Two heads better than one? The to-be-merged company quickly adopted a Noahs Ark approach to top management- everything in twos. As well as Messrs Weill and Reed, half the new boards members came from Citibank and half from Travelers. The global consumer business was headed by Bob Lipp (Travelers), and William Campbell (Citi). The global corporate and investment banks had three heads Victor Menezes (Citi), Deryck Maughan (Salomon Smith Barney) and Jamie Dimon (Travelers), long regarded as Mr. Weills heir apparent. As a result, every decision became a lengthy philosophical discussion. This partly reflected the personalities of the two co-chief executives. Mr. Reed is the sort who loves to discuss management with academics. A loner in leadership, he tended to invite people into his inner management circle only to
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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 Citis corporate relationship bank. Integration had been half-hearted: SSBs 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. Weills 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 Citis biggest shareholder, Prince Alwaleed bin Talal of Saudi Arabia, fretted in public about the relationship between the firms 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 wouldnt want to do this, so what do I care about what John wants? The reality was that Sandys children were increasingly winning the top jobs, and Johns were quitting in droves. Citigroup was rapidly becoming Mr. Weills creature. One top-notch Travelers person did leave, however: Heidi Miller, Citis 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 Citigroup Citicorp others. The greatest success has Travellers been achieved where it was least expected in corporate and Employees Net profit '000 $bn investment banking. Wall Street 10 180 analysts initially hated the decision to axe Mr. Dimon and 160 to promote Mr. Carpenter. In 8 the event, it proved inspired. 140 Aided by the link with Nikko 120 Securities and a merger with 6 Schroders, a British investment 100 bank, in January 2000, the now Schroders Salomon Smith 80 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 investment banks. 20
1997 1999 0 1997 1999 0
Blurred vision?
Mr. Carpenter says his business was involved in some 300 transactions during 1999 that both Citi and Salomon folk agree could not have been done without each other, and that the firm is now in the top four in every product category, in every geographical region of the world. This may be stretching it SSSB is still not a first-tier adviser on mergers and acquisitions, for example, though it is gaining on rivals such as Goldman Sachs and Morgan Stanley by using its huge balance sheet to offer corporate clients credit lines during mergers.
Source: Company Reports
The potential for cross-selling was supposedly greatest in consumer finance. Citis strong global brand provided a superb platform for selling Travelers and Salomon Smith Barney products through its branch network, which spans over 100 countries, and to Citis 42m credit-card account-holders (more than any other credit-card provider). But cross-selling is something that many financial institutions, across the globe, have attempted, with little success. 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. Travelers has now pre-underwritten all of Citis credit-card customers, and whenever somebody with an attractive risk profile calls to discuss his credit card there are 80m such calls a year he is invited to buy a Travelers home or car insurance policy. Travelers says that sales by this channel have minimal incremental cost, making them particularly profitable. It now sells almost 5,000 policies a month, and expects $200m in premiums by 2002 (6% of current revenues). Travelers has started to expand abroad, primarily in emerging markets rather than in the already highly competitive continental European market. Once only a domestic American insurer, Travelers now expects to win the lions share of the $400m a year in commissions currently earned by the global Citibank branch network from selling competitors products. According to Mr. Weill, integration in the corporate and investment-banking business happened faster than in retail because it had to. If wed gone slower, we would have lost a lot of people." There have been huge technology challenges, such as incompatible computer systems. Citi remains confident that retail cross-selling will bear more fruit, but progress has been slow. It has been hard to integrate systems, and business units have warred over which brands to cross-sell and which to ditch.
MERGER
Citigroup
Citicorp
Travellers
100 50
97
98
99
2000
Adding to the frustration has been the groups muddled Internet strategy. Mr. Reed, who took sole charge of it in July 1999, believed that Citis 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. E-Citi attracted few customers, and was resented by Citis established businesses. Since Mr. Reeds retirement, it has been downgraded to a sort of incubator, and 1400 of its employees have been despatched to other Citigroup brand businesses. Now, ownership of Internet strategy is left with the top executives in individual businesses. This caution may be a mistake. Asked in June whether Mr. Weill could take Citi into the Internet age, Mr. Reed said, This isnt Sandys deal. He is not going to personally design the Internet company that is going to do this. Mr. Reeds boldness might eventually have brought rewards as did his huge spending on ATMs, which initially meant huge losses. 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. Citibanks institutional memory, which gave some protection from bad lending decisions, has gone. So has Mr. Reeds 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. 2. What are the problems that have become apparent after the merger? What impact have these problems had on the core competences of the newly formed organisation? How do you think the company could have overcome these problems? Do you think this merger has been successful?
3. 4.
Summary
In this unit we have considered the options available for global expansion; strategic alliances and mergers and acquisitions (M&A). Firstly we considered the role of strategic alliances, and the paradox of co-operation and competition. We noted the advantages arising from
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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. We then considered mergers and acquisitions, and other M&A related transactions. We saw how M&A can give ready-access to markets, know-how and management capability. We looked at some of the drivers for M&A activity. Noting the high rate of failure of M&A, we identified some of the common pitfalls of M&A, and finally concluded with the McKinsey five-step program for successful mergers and acquisitions.
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:
Analyse the concept of value from a stakeholders perspective. Assess strategy from a value creation perspective. Explain the principles relating to EVA and its impact on strategy. Debate the validity of adopting a value driven approach.
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. Whichever business context you operate in, value should be determined by your key stakeholders. In commercial organisations, the key stakeholders are the companys shareholders. Increasingly executives and managers are overhauling their understanding of shareholder value. There is now the recognition that what was thought to be true about valuation is, in fact, only situationally true. Traditional approaches can, in fact, be misleading in certain contexts particularly in the knowledge-based economy, in the area of new and emerging technologies. In this unit we shall look at the concept of value from a stakeholders perspective. We shall look at current thinking with regard to the creation of value and consider the merits of a corporation adopting a value-driven approach. Two case studies are also presented to highlight the issues.
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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:
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Value Chain. Value System. Value Cycles. Value Management. Stakeholder Value.
We shall look at some of these concepts in more detail in this unit.
Stakeholder Value
Whether in the private sector or public sector, value should be judged by the organisations key stakeholders. In this unit we shall focus our attention mainly on commercial organisations. However we shall now briefly look at some of the differences between the private and public sectors in relation to value.
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. Overall, the role of ideology in strategy development in the public sector is probably greater than that in a commercial organisation. This is because the type, range and position power of Stakeholders interested in an organisations strategic choice is greater. Therefore, the acceptability to stakeholders of strategic choice is probably of greater significance in the public sector than in the commercial sector. The measurement of value to stakeholders in the public sector is difficult to quantify, because it is essentially a perception by the stakeholder of the value for money in the service they have received.
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Private Sector
Stakeholder value is a critical factor for strategy and management in the private sector. Theoretically, all managerial actions should be carried out only when they can add value to the company. This introduces the concept of the Value Chain in an organisation, i.e. the internal linkages that exist within the boundaries of an organisation. In addition to this, to fully understand the concept of value, linkages to the entire supply chain, upstream with suppliers and downstream with distributors and customers, must be taken into account. This overall picture of value to an organisation can be termed the Value System. Clearly, the value system can be different from company to company depending upon their strategic choice. Value chains and systems can establish significant competitive advantage. For example, two competing firms with equivalent internal value chains can be differentiated in terms of value by better suppliers and/or distributors. The value system is therefore better for that company. Some organisations, particularly those with several business units, have very complex value chains and systems making strategic analysis difficult and time consuming. 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. For this reason, companies try to avoid shareholder dissatisfaction and regard shareholders as key stakeholders. This is logical as the shareholders own the company and employees have traditionally answered to the owners. All employees have a fiduciary duty to preserve and build upon the owners investment in the firm. This raises the issues of Value Management how can a company manage itself (strategically) to maximise shareholder value? In addition to that, how can shareholder value be measured?
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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? There is an increasing recognition that the market, over time, represents a brutally honest evaluator of performance. This has led to the recognition that management, and indeed employees at large, need to view their company from the outside in. They need to act like long-term shareholders themselves, and feel the pressure from the marketplace in order to deploy assets and adopt strategies wisely. To achieve this, value-based corporations are increasingly basing compensation packages on value-based parameters. Value-based corporations place customers at the heart of their business (the view from the outside in). Value chains and value cycles are pertinent in this discussion. Increasingly companies are adopting a value cycle approach, as opposed to the traditional value chain approach. A value chain is seen to deliver value to the customer, whereas a value cycle approach views the process as an interaction with the customers. Many forward-looking companies view their key customers as critical partners in setting business direction.
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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Corporate functions must be informed by value-based thinking planning, capital allocation, operating budgets, performance measurement, incentive compensation and corporate communication. EVA is a tool for measuring performance. When implemented properly, and especially if tied to management compensation, it is a powerful way to promote shareholder 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. Companies can therefore use EVA targets to motivate managers to deliver the financial results the stock market wants. This approach is especially useful for executives one or two levels below top management who have little direct influence over share price and for whom stock options are less effective. Their compensation and bonus schemes can be tied to specific financial objectives and can be cascaded down to employees all the way down the company.
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sourcing initiatives, caused a 12.5% improvement in operating profit in 1997 (the second year after EVA was implemented). 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. EVAs 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.
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and, in particular, the influence of institutional investors. high potential for company acquisitions.
Take a long term rather than short term perspective. Take a company specific rather than a generalised
approach.
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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.
Company specific strategy Industry-specific success factors Specific tools Tailored implementation
Opportunities and threats Structure and dynamics of industry Value drivers Product cycles Success factors
Value system/corporate philosophy and policy Strategy Organisation/structures Production processes Resources
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their stakeholders. This can be achieved by creating a computer based financial model containing all of the key value management variables. In adopting a Value Management strategy, the method of corporate valuation must be Discounted Cash Flow (DCF) which sees the value of a company as being the sum of the cash flows it will earn in the future, discounted back to the present value. This reflects the fact that on the purchase of a company, the purchaser acquires the right to future cash flows. The whole process is based on careful Business Planning, which should reflect a forecast horizon of at least five, but preferably ten years. Each strategic business unit (SBU) should be calculated separately with a summarising routine to reflect overall portfolio value. Value drivers can be identified by using the above computer based financial model by changing core assumptions and observing the impact on shareholder value. This develops a tool for Sensitivity Analysis, which identifies and evaluates key value drivers.
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A value portfolio chart plotting potential market returns (adjusted for risk) against strategic fit with corporate vision is recommended. See Figure 5.3. The portfolio distinguishes between stars and dogs;
Retain without strategic investment E.g. can profitability be maintained without further investment?
SBU 1
"Stars"
SBU 7
Sell
SBU 4
Optimise or discontinue
SBU 3
E.g. has this unit achieved critical mass?
E.g. would this unit not be better off in someone else's hands?
"Dogs"
SBU 6 Low
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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level of value creation then the company needs to restructure through acquisitions, alliances, new ventures. changed.
Cash producers and value drivers. The goal of corporate strategy should be to position core
businesses in this window.
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SBUs retained but without further investment. Focus on risks attached to the poor corporate fit. Possibly look to sell to harmonise corporate vision. Possibly adapt corporate strategy to remain attractive to
the market and adopt a growth strategy. Dogs that fit the corporate vision
These SBUs destroy value because of; - Low cash flow due to thin margins, low sales growth - Investment has been excessive or inappropriate - Cost of capital is too high Strategically, need to be optimised or run down. Money to be invested only if the returns are above cost of
capital. Dogs that DO NOT fit the corporate vision
These SBUs destroy value. Generally, such SBUs should be sold, to lay a solid
foundation for successful growth strategies. In summary, a value creation strategy must seek to:
Increase Revenues. Increase Margins. Optimise Investments. Minimise the cost of capital through Financial
Engineering.
A forward looking approach based on future cash flows. A focus on cash flows rather than numbers in financial
statements.
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A view which acknowledges the time value of money. Reflection of the risk faced by different SBUs in capital
rates. Management control processes and communication systems must be clearly defined and capable of being used as a basis for a Value Based Compensation System. Management reports must be recipient based and include value measurements. Strategic Planning and Control European countries tend to base strategic planning upon traditional metrics such as market share, competitive position, sales growth and results. Value management dictates that increasing the value of the company in its SBUs is the single most important measure. For example, a sales growth of, say, 10% is not a valid strategic goal (as far as VM is concerned) because;
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EVA bonus plans dont 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 companys shares is based on expectations of future EVA performance. Share price increases when these expectations are exceeded. This insight yields the first principle of EVA-linked compensation: the key performance measure is not EVA itself, but excess improvement. To derive this measure, companies must first set targets based on market expectations. Then, a target bonus, usually stated as a percentage of salary, is paid if the target level of EVA improvement derived from the companys share price is earned. 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. As a result, there is no ceiling on the EVA bonus, but there is also a downside. The bonus earned in any year is the sum of the target bonus plus a fixed percentage of excess EVA improvement (which can be positive or negative). This bonus is credited to a bonus bank, and the bonus bank balance, rather than the current year bonus earned, determines the payout. 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. The bonus bank component adds a critical dimension to the scheme by extending managerial planning horizons beyond the short term. The bank allows for a negative bonus, wiping out at least a portion of EVA bonuses earned in previous years. This practice forces managers to think not only about what they need to do in the short term to boost performance but also what they must do to increase it in future years. Otherwise, part of the bonuses they earn in the current year might be forfeited. In other words, the bonus bank provides medium-term incentives for value creation, in addition to the short-term incentives
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from annual payouts. Stock options add to the EVA bonus plan by providing long-term incentives.
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receivables was incomplete orders. When an order arrived missing a piece or two, the customer would withhold all payments until the last items arrived. So the Millerites got receivables down by speeding up production of missing items and making sure shipments were complete as well as on time. The result: improvements in EVA and customer satisfaction.
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. An important part of EVA is that it can provide value creation incentives for divisional managers, not just for top executives. This suggests that companies with autonomous business units benefit more than companies that operate as one large unit. Also, matrix organisations tend to derive fewer benefits because of the difficulty of establishing accountability. Companies with substantial shared resources are less likely to benefit from EVA. For example, if common manufacturing facilities or sales staff serve multiple business units, and if these units are not forced to buy this capacity, investment accountability, EVA measurement and management incentives can be undermined. Another difference between successful and unsuccessful users is that the former rely on strong managerial wealth incentives tied to business
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unit performance. The latter tend to place heavier emphasis on stock options. Successful EVA companies use stock options, but recognise that the strongest incentives for divisional managers come from measures based on divisional performance, not corporate measures such as stock price. Unsuccessful users are also more inclined to exercise discretion in paying managers. In other words, they override the bonus plan, probably because of low tolerance for differences in business unit compensation. In successful EVA users, the chief executive is an enthusiastic advocate, whereas in unsuccessful users, the CEO may not have realised what he or she signed up for. Maybe the CEO thought EVA was what the markets wanted. Or perhaps there was a failure to appreciate the effort needed for full implementation. As a result, implementation is erratic. Another feature of successful users is that they try to establish and maintain accountability for business unit heads. This, in turn, requires that these managers stay put for extended periods. In unsuccessful adopters, job tenure for business unit managers is short. This difference is crucial because if managers move around, there is no long-term accountability. Without accountability, deferred compensation is not possible. Deferred compensation, in the form of a bonus bank, plays a critical role in ensuring the EVA bonus plan forces managers to think beyond the current year. EVA is no panacea, and it is no substitute for sound corporate strategies. But when EVA is at the centre of a companys performance measurement system, and when management bonuses are linked, alignment between the interests of managers and shareholders improves. The effect is that when managers make important decisions, they are more likely to do so in ways that deliver superior returns for shareholders. Reference m anaging fo r Value (1999) by Bo tzel S. & Schw illing A
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. We have noted that EVA is no panacea, or substitute for sound corporate strategies. We have considered the characteristics of companies for which the shareholder value perspective and value-creation incentives offered by EVA is most likely to succeed. We
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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? 1. 2. Consider what went wrong. What are the lessons to be learned? 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
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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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Unit 6
Explain the attributes of good corporate governance. Appreciate the attributes of an ethical organisation.
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. What is clear is that companies can no longer pay lip-service to good corporate governance and business ethics. Profitability cannot be the sole corporate driver. Undoubtedly, there is a paradox between profitability and stakeholder responsibility. See Figure 6.1. Profitability will always be driven by the shareholder view, and guided by value management principles. But stakeholder responsibility must also be a part of organisational purpose. Stakeholder responsibility is not just responsibility to the shareholders, but to the stakeholders (including employees, suppliers, customers and the community) at large. Stakeholder responsibility must be guided by good corporate governance and business ethics.
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Profitability
Organisational purpose
Responsibility
It should be noted, however, that in todays business/political environment with very powerful lobby groups, profitability and responsibility are not always paradoxical; profitability can indeed be adversely affected by the apparent lack of social responsibility. Shell found this to their great cost with the Brent Spar episode where Shell appeared to go against their own stated ecological and environmental stance. 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. In this unit we shall look at the area of corporate governance, and examine recent developments in the UK relating to this. We shall then consider the area of business ethics. We shall look at the benefits arising from adopting strong ethical principles, and look at the factors that set apart a highly ethical organisation.
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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As mentioned in the introduction, there is undoubtedly a paradox between profitability and stakeholder responsibility. Conflicting demands, between economic profitability and social responsibility, are placed on a company by its shareholders, employees, suppliers, customers, governments and communities.
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: 1. 2. p. 590-609 of Chapter 11 in your key text, De Wit, B & Meyer, R. p. 616-638, Readings 11.2-11.4, in your key text, De Wit, B & Meyer, R.
The problems associated with the split between shareholders and company directors were first raised by Berle and Means, in their 1932 book, The Mo d ern Co rp o ratio n and Private Pro p erty . The issue of the agency problem was highlighted, i.e. the tension created when the directors running the company were not the major shareholders. In the 1980s, institutional (professional) shareholders were much more likely to address these issues and debate possible solutions. Corporate activity is under a more intensive media spotlight today. Board decisions are more public and annual meetings can be high-profile as shareholder activists raise questions about board decisions. In the UK, the corporate governance debate started to receive emphasis due to several high-profile corporate failures such as Polly Peck and Coloroll. World-wide, and in the last three years, there have been further dramatic and spectacular failures including Enron, Worldcom and Parmalat. Directors were seen as acting against the shareholders interests and in dereliction of their duties to the company. As a result of failures such as the ones mentioned, investors are willing to pay a premium for companies with good corporate governance. To understand the workings of governance systems, it is important to be able to identify the different types that exist globally. Often, governance systems are developed from tradition and ideology. In recent years, it has become more difficult to generalise about the different types of system. For example, there is possibly a trend in central Europe to move towards a more Anglo Saxon approach. The different types of governance system are;
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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. 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. 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.
2.
3.
Average % 30 28 26 24 Brazil 22 20 18 0 Latin America Source: McKinsey Asia Continental Europe Anglo-Saxon Mexico Argentina Chile Korea Italy Taiwan Japan Germany France Spain Switzerland US UK
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:
Responsible use of power assigned to senior officers. Responsible conduct in relation to information relayed to
stakeholders.
Focus on principles of conduct rather than hiding behind Equitable distribution amongst stakeholders of the value
of assets generated by the company.
The case for establishing audit committees. The principal responsibilities of auditors. The links between shareholders, boards of directors and
auditors.
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The report contained a Code of Best Practice, most of which was adopted as part of the London Stock Exchanges Listing Rules for all quoted companies. The report states that Corporate governance is the system by which companies are directed and controlled. Whereas the corporate governance debate in the US had focused on shareholder rights, the emphasis in the UK was on structure and processes. Despite the reports own definitions, the aspects of governance relating to control dominated the debate in the UK and added little to the issues of best performance.
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The report has identified the friction created when talking of accountability and business prosperity; The importance of corporate governance lies in its contribution both to business prosperity and to accountability. In the UK the latter has pre-occupied much public debate over the past few years. We would wish to see the balance corrected (Final Report from the Committee on Corporate Governance, 1998) This raises the question, what is the difference between accountability and responsibility? Some have used these words as being synonymous. However, their distinct meaning is important in developing the issues relating to governance.
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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The Higgs Review was commissioned by the Chancellor and the Secretary of Sate for Industry to review the role and effectiveness of non-exec directors, and the report was published in January 2003.
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
As the Higgs review makes clear, the boardroom remains largely a preserve of ageing white men. Mr Higgs package of reforms will see non-executives take a much more active role and become far more accountable in carrying out their duties. The changes will represent a fundamental shift in the boardroom. The power of executives on the board will be balanced by independent non-executives providing a check on management. At least half the board will comprise independent non-executives. This goes far beyond previous requirements that a third of the board be non-executives, independent or otherwise. 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. The review says: A non-executive is considered independent when the board determines that the director is independent and there are no relationships which could affect, or appear to affect, the directors judgement. Factors that could affect independence include employment with the company in the past five years, having a material business relationship in the past three years, family ties, receiving additional remuneration apart from a directors fee, and participation in the companys share option or pension scheme. The review also recommends that a senior independent director be appointed to act as a conduit for shareholders to raise issues if they are not resolved through the chairman or through the chief executive. This proposal, more than anything else in the review, has concerned business. The concern is that if the senior non-executive holds separate discussions with shareholders it could lead to mixed messages emerging from the board. Mr Higgs is at pains to point out that senior non-executives will not be champions of shareholder interests but will be more a listening post. They will attend meetings with
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shareholders, largely only to listen to shareholder concerns. In addition, if problems arise with a chairman and chief executive, they could be a contact point for shareholders. Other measures ensure that boards do not become bound by personalities or tradition. These include requiring the chief executive not becoming chairman. Non-executive directors should normally be expected to serve a tenure of two three-year terms, although a longer term would be appropriate in exceptional circumstances. After nine years, annual re-election of non-executives is appropriate, and after 10 years on a board a non-executive is not considered independent. Non-executive directors also should meet at least once a year without the chairman or other executive directors present. To widen the gene pool of talent in the boardroom, Mr Higgs recommends a more formal, transparent recruitment process. Research by the review showed that 48% of non-executive directors were recruited through personal contact with a board. 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.
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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: Corporate governance means the process and structure used to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business. The process and structure define the division of power and establish mechanisms for achieving accountability among shareholders, the board of directors and management. The direction and management of the business should take in account the impact on other stakeholders such as employees, customers, suppliers and communities. Where w ere the d irecto rs? To ro nto Sto ck Exchange (1994) This definition retains Cadburys systems focus, but suggests that the structures and processes chosen by directors must take into account parties other than shareholders.
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Bringing together many of the themes raised in the corporate governance field, the Institute of Directors report, Stand ard s fo r the Bo ard (1995) states that: The key purpose of the board is to ensure the companys prosperity by collectively directing its affairs and meeting the legitimate interests of the shareholders and other interested parties. The report highlights four key tasks for the board:
Establishing vision, mission and values. Setting strategy and structure. Delegation to management. Exercising responsibility to shareholders and other
interested parties. All of the elements of the governance debate highlighted above are reflected in these tasks. Individual directors must be aware of the role they play in determining the companys future and in setting the strategy and structure to meet desired objectives. They must also be aware of the issues raised under the guise of corporate governance which, as stated at the beginning, are many and varied. However, if the board is to be the guardian of good governance, as proposed by Hampel, a more appropriate starting point for defining corporate governance may be the role of the board. Perhaps a new definition might be: Corporate governance focuses the board on its key purpose: to ensure the companys prosperity by collectively directing its affairs and meeting the legitimate interests of the shareholders and other interested parties. It must account to shareholders for its record in this regard. This definition implies that, in essence, corporate governance should highlight the corporate responsibilities of a board of directors, and distinguish the directors role from those of shareholders and managers.
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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. Enrons board was almost entirely independent, and composed largely of highly skilled and experienced corporate managers. It included chair Robert Jaedicke, a professor of accounting and dean of Stanford Business School, and Wendy Gramm, former Chair of the Commodity Futures Trading Commission. Yet they and their colleagues seem to have been asleep at the switch. Evidence is mixed on the question of whether the independence of directors improves corporate governance. Recent studies suggest that board independence may matter, but that effective independence (measured by the boards ability to restrain executive compensation) is influenced by a variety of other board attributes, including the size of the board (smaller is better), the number of boards on which board members serve (fewer is better), the age of board members (younger is better), and whether the independent member was chosen by the chief executive (which reduces effectiveness). 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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management were typically closely aligned. Naomi Lamoreauxs study of the period shows that industrial insiders also leveraged their equity financing by using banks that they controlled to sponsor industrial growth. Banks operated like industrial credit co-operatives for their board members. Because the same group of people owned and controlled the industrial borrowers and the banks, interests were closely aligned, and companies and banks, along with their outside investors, prospered together. Managerial opportunism was constrained by the direct oversight of investors with a material vested interest in the value of the company. But concentration of ownership in the hands of insiders can be very costly, especially in a modern industrial economy. When owner-managers and directors hold most or all of their wealth in the stock of one company, they suffer from extreme lack of diversification. Consequently, they will pay less for corporate stock and require much higher managerial compensation if they must hold such an undiversified portfolio, which will limit corporate growth opportunities. Also, the supply of billionaires is somewhat limited. If many corporations have natural economies of scale that warrant global reach, it will be hard to staff all of them with billionaires. And, those lucky billionaires may lack the skills that are needed to best guide the corporations. The best managers typically dont begin life as billionaires. 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 A second approach to aligning the incentives of board members and stockholders is to rely on third-party intermediaries to aggregate the voting power of stockholders and thus provide a formidable counterweight to incumbent managers. Historically, during the second industrial revolution, Germany and the US both used this approach to corporate governance, although its use in the US was much more limited in its scope. In Germany, nationwide universal banks that combined lending, deposit-taking, underwriting and trust account management in a novel way were able to support growing industrial companies. They did so first with credit, financed by deposits, but, later in the companys life cycle, by underwriting stock offerings that were placed in the internal networks of accounts managed by those universal banks. Through their management of trust accounts, universal banks retained authority over stockholders proxies and thus controlled boards of directors of their industrial clients.
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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. Thus, US-style finance capitalism typified by J.P. Morgans famous network of partners who held seats on various boards of directors was a very limited phenomenon reserved for the largest, established companies, which usually became Morgan companies as the result of consolidations of mature companies, rather than through public underwriting of equity to finance new investments. Morgans role was typically as a reorganiser or a bond, not a stock, underwriter, and its authority came from the network of influential stockholders that relied on its advice and corporate governance skills. Research by Bradford DeLong and others argues that corporate chief executives who wore the Morgan collar wore it proudly and to great effect. They were better able to finance their growth and to weather financial storms than their competitors. Despite its benefits, and even though its role in the economy was quite limited, J.P. Morgans 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. The role of intermediaries in controlling corporate boards took a third form in postwar Japan, as part of the keiretsu system, in which a company surrounds itself with a permanent structure of subsidiaries, banks and suppliers. Main banks of keiretsus controlled blocks of a client companys shares, both directly and through other companies in which they owned interests, and acted as an effective check on managers. By 1990, many US academics were writing paeans to the virtue of Japanese corporate governance, praising the high level of managerial turnover and the fact that bank-sponsored corporate governance helped companies economise on the costs of external finance. 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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bank-controlled keiretsus may also hinder corporate governance. That is especially true when banking systems become non-competitive. The managers of a highly concentrated and non-competitive banking system may collude to feather their own nests at the expense of both the stockholders and the managers of client companies. 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 banks 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. Further, fund managers incentives to discipline companies may be weak and regulation of their fee structures discourages shareholder activism. In a perfect world, the efforts of fund managers to discipline portfolio companies managers would be rewarded by their account holders. But regulation effectively prevents setting mutual fund and pension fund managers fees to rise with profits. Thus, the fund managers rewards are small and indirect, confined to increased asset inflows into funds in response to corporate profits. Poland is an interesting case of a country that, during privatisation, consciously designed its network of institutional investors to improve corporate governance in newly privatised companies. Authorities there saw the desirability of concentrating some voting power for any portfolio company in the hands of a small number of intermediaries. In 1993, Poland created 15 National Investment Funds (NIFs) to own 60 per cent of the shares in 512 medium- to large-scale enterprises and to help
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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 A third approach to disciplining directors and managers is the threat of a hostile takeover. In the presence of a credible threat, managers know that if managerial rent seeking gets sufficiently large, it will pay raiders to buy up shares to unseat them. That, in turn, encourages better corporate governance; and there is evidence that the hostile takeovers of the 1980s did, in fact, improve governance in target companies. The social gains from these takeovers were even larger, as many companies were encouraged to avoid takeovers by reducing managerial rent extraction. 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. In the 1980s, in response to many successful takeovers, incumbent managers developed poison pills (corporate charter clauses that dilute the stock of hostile acquirers), which have succeeded in discouraging hostile takeovers. Courts in the US have upheld these techniques, while various states stakeholder statutes have also served to discourage takeovers. In effect, the broadening of corporate goals makes it impossible to hold managers accountable to stockholders, or to any other constituency, for that matter. The alternative means to wrest control from incumbent managers a proxy fight is no more attractive to would-be acquirers, owing to the many obstacles that boards can use to reduce the chance of success. The most popular of these is the staggering of board terms, which often limit the number of board members coming up for re-election at any one time to only a third or a fourth of the board. Would-be acquirers have to be willing to fight many proxy battles over many years before being able to take control of the target. Conclusion It is unrealistic to expect board members to serve the function of disciplining management and protecting shareholders investments when we have designed a system that prevents boards from having the incentive to do so. The central problem limiting the effectiveness of boards, and of corporate governance more generally, is the lack of political will to place the interests of stockholders first when considering the rules under which corporate governance occurs.
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Populist revulsion to concentrations of power, and special interest politics, have often resulted in the political decision to hobble the financial system as an instrument for disciplining corporate managers. The first step toward avoiding future Enrons is deciding that the overriding objective of the board is to maximise the value of the company. The second step is to enact laws that hold managers and board members accountable to that objective, and that encourage the concentration of stock in the hands of those who would ensure that the voices of stockholders are heard in the boardroom and, if necessary, in the courtroom.
QUESTION:
1. How do you think the Enron scandal (and indeed Worldcom and Parmalat) could have been avoided?
3. 4.
5.
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. Himmelberg, C., Hubbard, R.G. and Love, I. (2002) Investor Protection, Ownership, and the Cost of Capital, World Bank Finance, Development Research Group Working Paper, 2834, April. Edwards, F. and Hubbard, R.G. (2000) The growth of institutional stock ownership: a promise unfulfilled, Journal of Applied Corporate Finance 13, 92-104. Baums, T. and Scott, K. (2002) Taking shareholder protection seriously: corporate governance in the United States and Germany, working paper, Stanford Law School, October.
Business Ethics
What is Business Ethics?
Ethics involves learning what is right or wrong, and then doing the right thing. However the right thing is not straightforward. Most ethical dilemmas in the workplace do not comprise a simple set of issues, decisions and choices. 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 its 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. Many ethicists consider emerging ethical beliefs to be related to future legal matters, i.e. what is an ethical guideline today is often later translated to a law, regulation or rule. Values that guide how we ought to behave are considered moral values, e.g. respect, honesty, fairness, responsibility, etc. Statements around how these values are applied are sometimes called moral or ethical principles. Business ethics has come to mean various things to various people. Generally, its coming to know what is right or wrong in the workplace, and doing whats right. This is in regard to effects of products/services and in relationships with stakeholders. Business ethics are critical during times of fundamental change. This is because there may be no clear moral compass to guide leaders through
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complex dilemmas about what is right or wrong. Attention to ethics in the workplace sensitises leaders and staff to how they should act. Also, ethics help ensure that when leaders and managers are struggling in times of crises and confusion, they retain a strong moral compass. Many people do not take business ethics seriously saying that business ethics only states the obvious (be good, dont lie, etc.). These principles of the obvious disappear during times of stress.
Madsen and Shafrits, in their book Essentials o f Business Ethics (Penguin Books, 1990) explain that managerial mischief includes illegal, unethical or questionable practices of individual managers or organisations, as well as the causes of such behaviours and remedies to eradicate them. Moral mazes of management refer to the numerous ethical problems that managers must deal with on a daily basis, e.g. potential conflicts of interest, wrongful use of resources, mismanagement of contracts and agreements, etc. Business ethics has come to be considered a management discipline, especially since the birth of the social responsibility movement in the 1960s. In that decade, social awareness movements raised expectations of businesses to use their massive financial and social influence to address social problems such as poverty, crime, environmental protection, equal rights, public health and improving education. An increasing number of people asserted that because businesses were making a profit from using our countrys resources, these businesses owed it to our country to work to improve society. Many researchers, business schools and managers have recognised this broader definition and in their planning and operations have replaced the word stockholder with stakeholder, meaning to include employees, customers, suppliers and the wider community. Organisations have realised that they needed to manage a more positive image to the public and so the recent discipline of public relations was born. Organisations realised they needed to better manage their human resources and so the recent discipline of human resources was born. As commerce became more complicated and dynamic, organisations realised they needed more guidance to ensure their dealings supported the common good and did not harm others and so business ethics was born.
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Ethics in the workplace is managed through use of codes of ethics, codes of conduct, roles of ethicists and ethics committees, policies and procedures, procedures to resolve ethical dilemmas, ethics training, etc. Business ethics in the workplace is about prioritising moral values for the workplace and ensuring behaviours are aligned with those values. Many people are used to reading or hearing of the moral benefits of attention to business ethics. However, there are other types of benefits, as well, such as:
Ethics programs cultivate strong teamwork and Ethics programs support employee growth. Ethics programs help ensure that policies are legal. Ethics programs help avoid criminal acts of omission. Ethics programs help manage values associated with Ethics programs promote a strong public image. Managing ethical values in the workplace legitimises
managerial actions, strengthens the coherence and balance of the organisations culture, improves trust in relationships between individuals and groups, supports greater consistency in standards and qualities of products, and cultivates greater sensitivity to the impact of the enterprises values and messages. quality management, strategic planning and diversity.
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Nokias 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. Projects range from internet-related newspaper schemes among aspiring young journalists in China to mentoring programmes in East Germany. 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. Involvement could range from giving time to organise fundraising events, to having our engineers help set up websites and CD-Roms, says David Stoneham, Nokia UKs senior communications manager. 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 Nokias 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. This may be changing, however, as the European Commission encourages business to form social partnerships and the UK government implements tax changes to increase donations. 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. According to the Institute of Directors, the potential for enhancing corporate reputation and, in turn, business competitiveness is being recognised by some of the largest UK companies.
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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. According to Jamie Camplin, author of The Rise of the Rich: Hospitals, libraries and museums were the main objects: all built in a style that re-affirmed the principles of conspicuous waste rather than public benefit. A survey conducted towards the end of last year by Environics International, the Toronto-based consultancy group, in co-operation with the Prince of Wales Business Leaders Forum, highlighted the fact that business is no longer only about personal aggrandisement or simply making profits. It found that six out of 10 consumers form impressions of a company based on broader responsibilities such as labour practices, business ethics, responsibility to society at large and environmental effects. 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. He says businesses have to be seen to be responding to the agenda set by aid agencies after black eyes over issues such as child labour and environmental disasters. 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. While Nokia has encountered no negative publicity from its socially responsible efforts, the same cannot be said for Shell, a company that has received more than one black eye from the media. Last October Anita Roddick, founder of the Body Shop, attacked Shells ethical advertising campaign. Ms Roddick publicly denounced the vast gap between the companys humane image and the reality of human rights violations in Nigeria. 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. In fairness, Shell had committed itself in its Business Principles to sustainable development well before Ms Roddicks outburst. It had reorganised and changed reporting processes in 1997 so that environmental and social achievements sat alongside financial data in the annual report.
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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. If corporate social responsibility is to prove sustainable in the long term, governments must meet their responsibilities and regulate to provide an ethical framework, he says. Save the Children recently outlined the measures a socially responsible company and its suppliers could take to tackle the issue of child labour, which caused an outcry in the 1990s and dented Nikes reputation. The charity recommends in a new report that social responsibility criteria should be incorporated into management processes and procedures, specifically into job competences and performance assessments. 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. According to Mr Miller, some companies worry about taking a bigger leadership role than governments in the area of social responsibility: There is a concern that the high-profile philanthropic approach might backfire and that the public might begin to look at business [as if it were] the new feudalism. Nokias discreet lunch last week and its insistence that its marketing of mobile telephones is kept separate from its social work may be a reflection of this.
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individuals assuming personal responsibility for actions of the organisation. is a way of operating that members of the organisation highly value. And purpose ties the organisation to its environment. the organisation.
There is a clear vision and picture of integrity throughout The vision is owned and embodied by top management. The reward system is aligned with the vision of integrity. Policies and practices of the organisation are aligned with
the vision; no mixed messages.
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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. Confronted with such a bout of consumer activism supported by American unions in the early '90s, Nike began to take a few halfhearted measures to improve standards at its suppliers. But Nike had already become the lightning rod of a fervent labour practices movement and kept on being pilloried for being an imperialist profiteer. With the campaigns beginning to have an impact on Nike, Nike became one of the founding members of the Apparel Industry Partnership launched by President Clinton, encompassing several textile companies, unions and humanitarian NGOs. In long drawn negotiations the ALP attempted to establish industry-wide accountable minimum standards for supplier factory conditions. 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. In April 2000, a committee comprised of students, professors and administration of the University of Oregon, voted that UO should join the WRC for one year, under the condition that WRC would give companies a voice in its operations. It had been a very difficult decision for the university, because Phil Knight was alumni of UG and had been a generous benefactor of his alma mater. He had given more than $ 50 million to the school, and was about to donate his largest contribution yet for renovating the football stadium. After the decision of UO, Knight broke off all contact with the university saying the bonds of trust have been shredded. The university had lost a major source of discretionary income! Points to Highlight (extracted from Teaching Note 22, Nike and the University of Oregon, Peer Ederer and Jaco Lok)
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possible solutions. Depending on ones own personal bias, reading the case will quickly lead to a judgement on who is right and who is wrong. However, assignment of blame will not solve the strategic problem at hand, which the four main participants have. Employing a stakeholder analysis will yield a map of the conflicting interests, and may eventually also lead to resolution.
Questions:
1. Identify the four main protagonists. What are the financial interests of their owners and/or sponsors? Identify the other stakeholder interests involved, including customers, employees, suppliers, governments, competitors and any other stakeholders that you find relevant. 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%? Wouldnt just a little more to them, say 5% or 6% do tremendous good to them, while being barely noticeable to the final consumer? Did Nike do enough with supporting FLA to solve its stakeholder problems? How much does Nike stand to lose, if the issue enters, say, American presidential elections and trade restrictions are introduced? 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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of Conduct in April 1997 progress slowed as disagreement arose over the monitoring process and over workers rights to bargain collectively. A subgroup of nine centrist participants including Nike began meeting separately in an effort to move forward and announced an agreement on a monitoring system in November 1998, which was quickly endorsed by the Clinton Administration. They then formed the FLA to oversee compliance with its Workplace Code of Companies. The FLA was funded by participating companies and by affiliated colleges and universities, who both stood to benefit from participation. Manufacturers could benefit through 3-year FLA certification and institutional buyers, such as universities, could warrant to their students that the apparel and athletic gear they used and sold were manufactured according to fair labour standards. It is clear then that the FLA mainly represented the (financial) interests of manufacturers and colleges and universities, which both had to convince their customers that their products were sweat free.
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Feedback on Question 2:
Nikes own employees. The case does not analyse the situation
from the perspective of Nikes 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 companys actions by their friends and families during dinner parties and social events at a time when Nikes 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 companys work practices in Asia. Only those who fully believed in minimising the cost price of Nikes products in the face of Nikes 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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Investment in the labour intensive textile industry is generally seen as one of the first and necessary steps in the economic development of a country, and it can therefore be expected that local governments would not do anything that would make it more difficult for manufacturers to set up shop in their countries. The increase in minimum wages for example, which the WRC desired, could not be expected to be supported by local Asian governments as they risked undermining the base of their efforts to develop their economies by risking to lose not only textile manufacturers but also other industries that relied on cheap labour.
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wages amount to living wages. These governments, of course, are also in competition with one another, and know that if they were to unilaterally increase their minimum wages this could seriously harm their economy, meaning that their people would be even worse off. Of course, a redistribution of wealth from richer to poorer nations would do billions of people around the world a lot of good, without necessarily affecting the living standards of the richer nations all that much. However, the global capitalist system in which we live does not provide the clear means to make this possible. The ability for constituents to shift the responsibility on to other links in the complex chain makes it very difficult to make even the smallest improvements. Feedback on Question 4: By reversing its hands-off attitude towards labour practices deployed by its subcontractors to a more pro-active stance, actively pushing for better standards in its industry, Nike has come a long way in solving its stakeholder problems. It managed to secure the backing of many of the more centrist participants of the AIL for its FLA proposal, including the U.S. government and many universities. It can effectively use this backing to defend itself against continued criticism from activists who believe Nike is not going far enough. It is also likely that customers, who already did not appear to be overly ready to change their purchasing behaviour, will be more than happy with the government backed FLA seal to quiet their conscience, whether WRC agrees with the FLA label or not. However, the real damage to Nikes 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 Nikes 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 cant 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 Nikes 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. Unless, of course, shareholders themselves become more actively involved in the way their funds are invested. If pension and insurance holders were to collectively demand their fund trustees to invest in socially responsible companies even if that means lower returns on their investments, then it would also allow companies like Nike to improve their practices without running the risk of financial harm. Of course, no matter how dominant Nike may be in terms of market share in its own industry, it is in no position whatsoever to convince individual investors across the country to demand and pay for more socially responsible investments.
Summary
In this unit we have considered the importance of corporate governance, and have looked at recent developments in the UK in this area. We have also considered business ethics; particularly relating to managerial mischief and moral mazes. We have seen the importance of prioritising moral values and aligning behaviour with those values. In addition to complying with legal requirements there are business benefits arising from adopting strong business ethics. We have looked at these benefits, and at what characterises a highly ethical organisation.
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REVIEW ACTIVITY
Consider your own organisation (private or public sector). How do you rate your organisations 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. Now consider the following: 1. 2. Does your organisation have a written code of business conduct? Do employees explicitly sign up to the code of business conduct on joining the organisation? Do they annually renew their commitment (by signature) to the code of business conduct, and agree to abide by any changes? Are independent escalation, and complaints and grievances procedures in place?
3.
4.
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:
Explain the usefulness of systems thinking in managing complexity. Apply the principles of a systems methodology to a given scenario. Assess the validity of the application of chaos theory to
organisations.
Appreciate the importance of Performance Measurement. Apply a contemporary methodology of strategic control.
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. Systems thinking can help managers look at organisations from a broader perspective and take a holistic view to help interpret patterns and events. It models an organisation as a system; an interdependent network of units forming a unified pattern. Too often in organisations, management break down complexity by decomposing the system and dealing with its individual units separately. Thus, managers have focused on and scrutinised a particular part of the organisation (perhaps a poorly performing unit) before moving on to the next unit and so on. System thinking reminds us that even if units can be perfected by themselves this does not imply that they integrate well together. It encourages managers to diagnose problems by looking at larger patterns of interaction within the organisation, and the process interdependencies.
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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.
In both perspectives, organisations need to be controlled therefore chaos does not imply lack of control, rather an organisation is in a constant state of flux. The application of complexity theory to organisations states that simple deterministic rules apply, i.e. there is a clear objective that the organisation (or system) is trying to achieve.
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Understanding these rules enables control and makes the complex simple. It can be said that the dynamic of success is chaotic, i.e. turbulent in nature. If this is true then long term planning is ineffective (see Mintzberg) and managers tend to develop strategies to react to unexpected and unanticipated events. This leads to emergence and organisational learning.
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 systems 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. Systems analysis grew simultaneously with systems engineering throughout the 1950s. Systems analysis as an approach and a methodology is closely associated with the RAND (Research and Development) Corporation. It emerged from a post-war contract between the US Army Air Forces and the Douglas Aircraft Co. The RAND Corporation, established in 1948, was funded by the Ford Foundation and several banks. It began as a non-profit advisory organisation. 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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engineers have been involved in the provision of many civilian applications such as communication, transportation and manufacturing systems. Cybernetics is another discipline that developed about the same time and was defined as the science of control and communication in the animal and the machine. It introduced control systems ideas such as positive and negative feedback.
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: Chapter 8 - pages 155-166
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The business modelled as a system is a purposeful system. Purposeful systems include education systems, political systems, transportation system and communication systems, etc. The purpose of an education system may be to provide for the development of the individual, e.g. understanding and analysis of facts, principles and theories or the application of skills. A political system may provide for the management of the affairs and resources of a community (local or national). Clearly an organisation is purposeful with business goals and objectives. But who sets these goals? For whose purpose and why? These are some of the issues addressed by contemporary methodologies when applied to management. In business the system boundary is often blurred. The complexity of relationships (supply chain, customer, stakeholders, competitors) and often multiple roles in relationships add to the blurring. For example, companies may have employees working in Brussels monitoring the European Unions activities. Others may have a good trading partnership with the main companies in their supply chain, or major customers, all of which blur the view of the boundary of an organisation. There may be complexity implicit in investment options. For example, shareholders of a company may invest in their main competitors in order to know what they are doing. Yet this company could be both a competitor and a main supplier or customer.
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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.
Customer
Client system Employment system Profit making system Growth-potential system Share value management system
The above table of world views is very broad-brush and simplistic. In reality, capturing the business actors world view is not as straightforward as it may seem. It is sometimes necessary to adopt formal methodologies (and mapping tools such as UML) to map individual business actor ideas into their perceived real-world. This is an iterative process for complex problems. See Figure 7.1
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Ideas
used in
METHODOLOGY
generates
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cold of winter and the bodys metabolism can use up existing calories converting fats into sugars in order to keep the temperature at around o 37 C. Do businesses then have to emulate homeostatic systems? In a tactical way an organisation already does so. Once aware of a particular entity in the environment causing turbulence a company finds ways to measure the effects and take action accordingly. The company tends to adapt or influence the causes of the turbulence, if known. Unfortunately, symptoms rather than causes are identified and the wrong things are measured in total ignorance of what should be measured. But, unlike the physical problems such as that bull elephant in the parable, companies are dealing with abstractions, concepts and expectations which cannot be touched and for which there are poor measurements. A homeostatic system reacts to its environment and adapts to survive. This reactive approach is not strategic but tactical; strategic ideas are based on proaction not reaction. Professor Max Boisot, a leading figure in strategic thinking, states that there are two assumptions within strategic planning: 1. 2. Environmental data can be captured and processed, and that action can be taken faster than it changes. Turbulence is only minor fluctuations in an otherwise stable environment which will hold up to rational analysis. That is to say, turbulence is noise or interference, as if somewhere behind such fluctuations is an unchanging order; some universal, objective truth.
How stable then is an organisation? If it is a homeostatic system in dynamic equilibrium with its environment then learning and adaptation should occur naturally, and keep the organisation in overall balance. However, this applies, if and only if, the fluctuations are relatively small or short-lived. There is a cybernetics principle called the law of requisite variety which says that rate at which a system learns must match or be better than the rate of change in the systems environment.
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. In order to decide on appropriate performance measures, it is crucial to understand the complex relationships of cause and effect, delay, feedback and so on. From this understanding, key performance drivers can be identified and a performance measurement strategy devised. The Balanced Scorecard Approach for measuring performance is particularly pertinent in this context, and will be examined later in this unit in the section on Strategic Control. Corporate planning can also exploit methods such as SWOT analysis to evaluate corporate performance and the contributions of each individual unit against defined objectives such as profitability, market-share, deployment of knowledge assets, etc. Following performance analysis, if problem areas are identified then the principles of systems thinking (e.g. openness, eliciting world views, etc.) can be applied again to the problem domain, and objectives revised, where appropriate.
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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. In business one fundamental resource, itself a soft system, is a person. Individual views or discipline-oriented views are somewhat blinkered and narrow in scope. The shared view provides a richer picture. If there is dialogue rather than a missive about the systems purpose; if the individuals involved in the dialogue participate in the derivation of the systems purpose, perhaps negative synergy will be reduced, perhaps the emergent properties of the whole will be value added, providing creative advantage or positive synergy. As learning or adaptive systems appear to be of a higher order than others, then the more the people in the organisation continue learning, the more likely the emergent purpose of the business will reflect this. If every employee sees the turbulence in a learned way, the more likely, through dialogue, the company will clarify its position with regard to the turbulence and progress. As mentioned earlier, soft systems thinking focuses on human activity systems. The problem, recognised by Checkland and so many others, is that each person has his/her own world view or weltanschauung of the problem area and that such views must be shared in an open way in order that a deeper understanding of the problem can be realised.
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group of activities that would give the system some emergent properties. SSM does not attempt to analyse sections of the whole that are considered to be particularly relevant to the study, but uses the concept of the whole being more than the sum of its parts. Therefore, once the emergent properties are identified, the set of activities required becomes clear. If just one activity is removed from the system, the emergent properties are lost. The Checkland methodology, or the seven-stage model, is considered by most people to be the SSM. However, SSM covers a range of methodologies developed to deal with different situations.
4 Conceptual models
The seven stages are: 1. 2. 3. 4. 5. 6. 7. The problem situation unstructured The problems situation expressed Root definitions of relevant systems Deriving conceptual models Comparing conceptual models with the real world Defining feasible, desirable changes Taking action
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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. Let us now consider the various stages:
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: C: customer (people affected by the system, beneficiaries or victims); A: actor (people participating in the system); T: transformation (the core of the root definition the transformation carried out by the system); W: Weltanschauung (world view); O: ownership (the person(s) with the authority to decide on the future of the system); E: environment (the wider system). The CATWOE mnemonic can be used as a checklist to ensure that the root definition is complete. Alternatively, the root definition can be formulated from the components of the CATWOE mnemonic. Either way, the root definition will be a short paragraph that will contain all the necessary information to describe the system. Several root definitions can be constructed for each of the relevant HAS identified. Each root definition will encompass a different world view. Different individuals will perceive the same event in different ways according to their view of the world, based on their experiences, personality and situation. These different views result in inferences being made that are
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not explicit. However, these different views from different individuals must be appreciated and incorporated where possible.
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.
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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 Shells 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. SSM is often used as a front end to a hard methodology. Hard systems assume that the problem can be clearly defined with an agreed goal and that a standard format can be applied to reach a solution. SSM recognises that different individuals will have different perceptions of the situation and different preferable outcomes. Trying to work through these differences from the outset will go some way towards ensuring that the results of the intervention will be acceptable to all parties concerned. Hard methodologies, where the problem is assumed to be clearly defined, and where the individuals who will be affected have no means of involvement in the solution process, often result in resentment and rejection of the solution. 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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an organisation now and in the future, and working together to find solutions to improve the corporations performance over time.
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 organisations state of health. This is necessary to identify the organisations strengths and weaknesses and uncover information that may be essential for the organisations 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
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summarise the current and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organisation today requires that managers be able to view performance in several areas simultaneously. In the context of the balanced scorecard approach, the building blocks of competitive advantage are controlled and measured in this way: 1. Efficiency: how efficiently resources are used. There must be a management control system that allows the measure of productivity. Efficiency is measured by the level of production costs, number, grade and rates of human resources used, number of hours needed to produce a product or deliver service, the cost of raw materials, etc. It compares the units of input (resources, raw materials etc) vs. the units of output (e.g. product, services etc). Quality: Quality is now recognised as a key competitive factor. Managers must be able to measure quality in the form of the number of rejects, errors, software bugs, the number of defective products returned from the customer, product reliability over time and customer satisfaction. Focusing on and measuring quality promotes continuous improvements. Innovation: Innovation can be measured by the number of new products introduced, the time taken to develop the next generation of new products in comparison with the competition, and the expense and cost of product development. Successful innovation occurs when managers create an organisational setting in which employees are empowered to be creative, and in which authority is decentralised to employees so that they feel able to innovate and take risks. Responsiveness to customers: responsiveness can be measured by the number of repeat customers, the level of on-time delivery to customers, and level of customer service. Control systems to allow managers to evaluate how employees interact with customers can help. Monitoring employees performance/behaviour with customers can help identify areas for education and training. Furthermore, employees who know their behaviour is being monitored have more incentive to be helpful and consistent in the way they act towards customers.
2.
3.
4.
The above competitive advantage measures, together with financial measures such as cash flow, quarterly sales growth, increase in market share, and return on investment or equity, give a complete picture of organisational performance. Based on the complete set of measures in the balanced scorecard, strategic managers are in a good position to re-evaluate the companys mission and goals. They can also take corrective action or exploit new opportunities by changing the organisations strategy and structure which is the purpose of strategic control.
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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. Finally we looked at strategic control and examined the importance of performance measurements to judge the health of an organisation, and focused on a contemporary methodology of strategic control, the balanced scorecard method.
REVIEW ACTIVITY
Now turn your attention to the organisation you work for and focus on its culture. 1. From what you have learned, can systems thinking be applied successfully in your organisation? Elaborate. If your answer to 1 is Yes,
2.
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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.
2. 3.
4.
* Highly recommended
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Unit 8
Knowledge Management
LEARNING OUTCOMES
Following the completion of this unit you should be able to:
Understand the principles of knowledge transfer in organisations. Appraise the methods available to apply knowledge management
principles.
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. In practical terms, the focus on knowledge management can be attributed to two developments. Firstly, capital and labour-intensive industries in developed economies have continued to decline. Secondly, the relative importance of technology and information-intensive industries has increased. Rapid advances in information technology have enabled companies in even the most traditional industries to develop sophisticated systems for capturing new sources of information and disseminating and exploiting this information more effectively. When defining knowledge management, some emphasise the human interaction and psychological factors that impact knowledge sharing, whereas others stress the enabling infrastructure and knowledge management system. A successful deployment of knowledge management must recognise that views of knowledge are
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fundamentally human views. People are different from one another, and exhibit different temperaments. Some of these differences are profound and influence collaboration and knowledge sharing. Building intellectual capital is based on the existence of communication channels between people, on relationships that build trust and a sense of mutual obligation, and on a common language and context. Thus, it is vital that organisations foster a collaborative culture for success. Teamwork over individual excellence should be rewarded. However, it is equally important that a corporation take a strong process perspective in establishing knowledge management, and invest in the appropriate technology to facilitate the process; knowledge creation, collaboration, sharing and deployment. Enabling technology is particularly critical for geographically distributed organisations, where opportunities for face-to-face interaction is limited. In this unit we shall look at some of the theoretical concepts relating to knowledge management, examine the principles of knowledge transfer and then focus on the methods and practical issues relating to knowledge management.
ACTIVITY
Now, as background to this unit, read the following from your key text, De Wit, B & Meyer, R 1. 2. Reading 9.3, Building learning organisations, p 505-512 Reading 9.4, The knowledge-doing gap, p. 512 525
company: This clearly identifies knowledge as potentially the primary source of sustainable competitive advantage. organisations, which have challenged fundamental assumptions about the nature and meaning of knowledge within companies, industries and society as a whole.
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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 companys competitive advantage derives from its ability to assemble and exploit a combination of resources. Competitive advantage is achieved by developing existing resources and creating new resources in response to changing market conditions. Writers like Robert Grant argue that knowledge represents the most important value-creating asset. The primary function of the company is to create conditions under which many individuals can integrate specialist knowledge in order to produce goods and services. The resource-based view, therefore, suggests that knowledge, like any other asset, can be stored, measured and moved around an organisation.
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. The recognition of knowledge and how it is applied is determined by the social and organisation context in which a company operates. An innovative proposal, which may be perfectly valid to an external observer may be rejected by those inside the organisation because it fails to conform to their mental model of what constitutes valid or useful knowledge. If knowledge is a social construct, i.e. it emerges through interaction, it follows that it cannot be formally managed. Like culture, knowledge exists only in an abstract form within organisations. Also, it is affected by managerial action and its nature can change only gradually over time, through a process of interaction between the various individuals within the organisation. There is thus a debate concerning two opposing theoretical perspectives.
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. The ambition is to turn Britain into the leading knowledge-based economy in the world. That is our future: a knowledge-based, creative economy. In global markets, where products can be made anywhere and shipped anywhere, in which production technologies can soon be copied, we cannot base our future prosperity on the traditional building blocks of the old industrial economy: raw materials, land, machinery, cheap labour. We must base our competitiveness on distinctive assets which our competitors cannot imitate our know-how, creativity and talent. What do you consider to be the assets of your company? Does intellectual capital (know-how) currently feature as an important asset? Can your working practices and output turnaround be improved by re-cycling of knowledge (or better re-cycling of knowledge)? What opportunities does knowledge management present for your company and what are the barriers to implementation/wider take-up?
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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Data volumes
Information
Data
One must be careful not to confuse knowledge management systems with data and information management systems. The latter are merely efficient mechanisms for capturing, organising and retrieving information. A true knowledge management system must capture, organise and retrieve information, but also systematically create associations between corporate expertise and information resources, personalise and organise knowledge for individuals and communities, and provide a place (virtual) for teams to work, make decisions and act.
KEY POINT
Knowledge is the result of deciphering and attaching meaning to facts and information. Knowledge management is the capability of an organisation to create, capture, combine and share knowledge amongst its members. It is the process by which an organisation generates value by using its intellectual assets.
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Tacit knowledge only transfers through observation and practice. Traditional craft apprenticeships systems recognise this. However, much knowledge remains tacit because no attempt has been made to make it explicit. It is this area that presents the greatest opportunity for knowledge management within organisations. The primary goal of knowledge management systems is to identify the valuable knowledge that resides within individuals and disseminate it throughout the organisation. However, this seemingly straightforward process is in practice complex and can be fraught with difficulties.
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.
knowledge in return, either now or in the future? source of knowledge will be recognised and others will not claim the credit. self-gratification): Individuals find some subjects fascinating and want to talk to others about them.
Davenport and Prusaks analysis leads them to argue that there is in effect, an internal market for knowledge. Knowledge is exchanged between buyers and sellers, with reciprocity, repute and altruism functioning as payment mechanisms. Trust is an essential condition for the smooth functioning of the market. This trust can exist at an
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individual level, through close working relationships between colleagues, or at an organisational level, by the creation of a cultural context which encourages and rewards knowledge sharing and discourages and penalises knowledge hoarding. Noting the above issues, for successful deployment of knowledge management in organisations, the right collaborative culture must be fostered, the individual contributor of intellectual capital recognised, and the reward system must reflect a high focus on knowledge sharing. Leading knowledge-based companies include the contribution of intellectual capital as part of the employees business objectives.
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: 1. 2. Trust Face-to-face contact is important when seeking to build strong interpersonal relationships. Time exchanging information at speed may be efficient, but tacit knowledge cannot be discovered, articulated and disseminated in a hurry. Creating a common language for talking about knowledge, encouraging staff to think and talk about what they know and what they need to know
3.
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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depend on the sphere of activity of the corporation. It is then essential that people within communities of practice have the opportunity to meet and share knowledge, supported by the technical infrastructure, but also be able to share knowledge which technology cannot at present capture. Thus knowledge sharing through informal and formal gatherings, seminars, e-learning initiatives, networking and mentoring is critical. In the context of knowledge transfer, it should also be noted that it is not enough simply to manage existing knowledge. Competitive advantage is achieved when organisations adapt and evolve continuously in response to changing market conditions. Knowledge management can play a key role in this. The competitive edge arises when companies leverage knowledge, not just existing, but new knowledge across the global organisation; across horizontal and vertical divides, in a rapid, efficient and easy-to-use, codified form. Re-use of intellectual capital across geographies, industries and functions can yield enormous business benefit. 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. 1. Socialisation is the process of communicating tacit knowledge to a broader organisational context. Individuals share experiences, demonstrate skills and model behaviour in such a way that they can be observed and copied by others within the organisation. Externalisation is the process of converting tacit knowledge into explicit concepts, e.g. the simplification of complex concepts in a highly simplified form using models. Externalisation may occur at an individual level or at a collective level. Once an individual has externalised tacit knowledge, it is more easily combined with the knowledge of others. Combination is the process of analysing, categorising and integrating the explicit knowledge of a set of individuals in order to create new explicit knowledge, which can be disseminated more widely within the organisation. The above processes explain how individual tacit knowledge flows until it is widely disseminated around the organisation, but it does not fully explain how new knowledge is created. The final link in the process is internalisation, whereby individuals absorb explicit knowledge to enable the development of new forms of tacit knowledge.
2.
3.
4.
How can knowledge creation be encouraged? Nonaka and Takeuchi identify five key conditions;
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organisation and be able to create management systems that will facilitate this process.
individual must be given scope to follow initiatives and explore unexpected opportunities that emerge. creative chaos where flux and crisis cause reconsideration of established precepts at a fundamental level. Opportunities should actively be provided for even unrelated individuals to exchange knowledge. organisations internal diversity must match the variety and complexity of the external environment.
A drawback is that the knowledge creating company Nonaka and Takeuchi describe is often far removed from organisational reality, e.g. chaos and crisis are just as likely to stifle as to promote creativity by provoking anxiety and insecurity.
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.
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Case studies. Methodologies. Project plans. Client deliverables (with confidentiality safe-guards). Interpretation methods. White papers.
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knowledge collaboration externally across stakeholders (customers, supply chain) and business partners (e.g. through strategic alliances)? 2. Collaboration culture: Company-wide awareness of knowledge management, and level of integration into the business. Is collaboration, teamwork and knowledge sharing built into the ethos of the company? What is the level of senior management support? Are there senior roles in knowledge management? Knowledge processes: Is there a formal and unambiguous process for the creation/acquisition, organisation/storage, distribution, application, maintenance and QA of knowledge assets? Furthermore, to what extent have knowledge management practices been incorporated into core business processes, e.g. when selecting a project management methodology or developing project plans do Project Managers re-invent the wheel each time, or does the business process require them to check the Knowledge Management System first? Enabling Technology: What are the current technologies used for knowledge sharing? If there is no specialist Knowledge Management System (e.g. Lotus Knowledge Discover System), do you have other enabling technologies such as data-warehousing, business intelligence, data mining, GroupWare and messaging, electronic data management, workflow management, web-based technologies in the company? Do you have a corporate intranet? Knowledge Bases: To what extent have knowledge sources (explicit and tacit) been identified, captured and indexed? Knowledge Access: What level of accessibility is there to the knowledge sources? How easy is to search for information? What access rights and security measures are in place? Knowledge Quality: What Quality Assurance procedure are there in place? Are there reviews and sign-offs prior to intellectual capital being made public on the system? What procedures are in place to maintain up-to-date and relevant knowledge? Is knowledge catalogued by business area, and is there a flag to indicate importance/relevance.
3.
4.
5. 6.
7.
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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strategic partner scores highly. There are, therefore, wider collaboration opportunities across strategic alliances.
10
Company strategy
Competitor's KM capability
10 Collaboration culture
Knowledge quality 10
0 10 Knowledge processes
10 Enabling technology
10
Identify a sponsor (senior executive) for each community, Train leaders in generic KM practices (e.g. virtual
teamworking, knowledge creation, sharing).
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(meetings, seminars, workshops, etc) with informal agenda to allow tacit knowledge to be shared. skills in specified subject matters.
Build, manage and maintain a network of staff with deep Define the KM process (covering knowledge
creation/acquisition, organisation/storage, distribution, application, maintenance and QA). Define access (security, rights) model.
Evaluate and implement enabling technology. Define categories and populate with generic information,
e.g. yellow pages (who is who for what). sharing.
Train all staff in KM process, KM system and knowledge Raise team awareness of contexts through presentations,
visits, education, etc.
create new content on dedicated, short-term assignments) in early stages of deployment. successes.
Promote widespread deployment and publicise early Recognise and reward knowledge contributors.
Ref: The Challenge o f Managing Kno w led ge by Laura Em p so n Financial Tim es 4th Octo ber 1999
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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capable of continual learning. (link to Reading 3.2, Quinn, and Reading 9.3, Senge, of your key text, De Wit and Meyer)
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? 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? How does Kao go about forming strategy? What are the strategy formation processs main features? What are the advantages and disadvantages of Kaos current strategy formation process? How would Kao need to adapt or change its strategy formation process to accommodate further internationalisation? What type of action would you recommend? (You may also wish to refer to Unit 3, Globalisation, before responding to this question)
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competitive advantage and therefore needs to be carefully nurtured: The company that develops a monopoly on information, and has the ability to learn from it continuously, is the company that will win, irrespective of its business. Organisational culture. Linked to this underlying philosophy is an organisational culture that reinforces the importance of information, knowledge and its acquisition through learning. To facilitate the daily, organisation-wide, and largely intuitive learning that Kao believes is essential; the companys culture emphasises a number of principles:
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Organisational structure. To allow for the equality, openness, mutual assistance, individual initiative and proactiveness mentioned above, Kao has designed a very flat organisational structure, without significant boundaries or titles. There is relatively little hierarchy and not a strict separation of tasks the organisation functions fluidly and flexibly, with various parts interacting and assisting each other where necessary, which Kao refers to as biological self control. Information systems. As horizontally shared information is essential to Kaos organisational learning, the company has placed a strong emphasis on developing information systems so that the most up to date information is available to all members of the organisation. Everyone has access to the Logistics Information System (ordering, inventory, production and sales data) and the Market Intelligence System (market research, sales, and marketing data). Further information exchanges and networking opportunities are created through regular R&D conferences and through the open physical layout of the Kao building. Leadership roles. Finally, the way that top managers define their roles within the company has a significant impact on Kaos 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:
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Colgate-Palmolives approach to strategy formation was inspired by the planning perspective, while Kao approach was much more in line with the incrementalist perspective. When examined more closely, Kaos strategy formation process can be seen to have the following characteristics:
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to learning and can be used to adapt and further develop the strategy.
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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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Kao develop a diverse group of global managers from a variety of national backgrounds, or rely on a core group of Japanese expatriate managers that relate each foreign operation to Tokyo headquarters?
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?
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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. Nikes costs came down dramatically, allowing the company more scope for funding further product development and marketing. In sourcing production internationally from low wage countries, Nikes approach to shoe manufacture was revolutionary for its time. The company realised that sports shoe manufacture required substantial labour input, so labour costs were potentially high and justified manufacture in countries where workers were paid much lower wages. However, there were real risks in manufacturing overseas because the greater geographical distance and different national cultures made it more difficult to control production and quality. Thus, the company only switched contracts for large scale production when it could be sure that a new manufacturing contractor was able to meet its quality standards. In this context, the company had to learn how to handle overseas production, how to brief manufacturers on new designs and models, and how to set and maintain quality standards. The decade of difficulty and renewal: The 1980s 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 Nikes 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 Nikes 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. Its 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. The new heights of the 1990s Coupling the new Nike Air shoe with advertising featuring Michael Jordan was a touch of marketing inspiration. The US basketball star, top of his chosen sport, was signed up to promote the new product in a multimillion-dollar deal that added a new dimension to sports sponsorship. The marketing campaign developed links between Nike and Jordans athletic ability and image. Reebok hit back with its own design, the Reebok Pump shoe, but it was forced to use Shaquille ONeal, a major basketball star but second to Michael Jordan. Thus around the turn of the decade, Nikes market share rose from 25% in 1989 to 28% in 1990 while Reeboks share dropped from 24% to 21%. 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 Reeboks 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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Nikes sponsorship knowledge 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, Nikes 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 Nikes coverage were all totally new in sports shoe activity. Nikes market share in the USA continued to climb. It reached 43% in 1996, compared with Reeboks 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. The new millennium: the year 2000 Throughout the 1990s, Nike continued to develop rapidly in two further, related activities. It had been expanding its international sales for some time and these continued to grow rapidly. In addition, it was developing the Nike brand into non-shoe activities such as clothing and sports equipment. By 1996, Nikes total sales were US$9 billion and it was the biggest sports goods
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manufacturer in the world, although the company had suffered a setback as sports shoes gave way to brown shoes as fashion items for teenagers in the late 1990s. In addition, the Asian economic downturn had hit the company hard and there was heavy overstocking of its products in the US retail trade. 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 arent booming to ask what works and what doesnt...... Remember, were a fairly self-critical bunch. Were 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. What other resources beyond knowledge does the company possess that offer clear sustainable competitive advantage? From a consideration of this case, what conclusions can you draw on the emergent purpose of Nike in relation to its knowledge?
2.
3.
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Shoe and sportswear fashion design and development. Ability to negotiate and place manufacturing contracts with
companies outside the USA.
Marketing and selling to retail stores globally. Ability to negotiate with the representatives of major sports
stars.
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In other words, externalisation of ideas onto drawings. Link forward to innovation (Unit 9) where designers are encouraged to work together to be creative (socialisation processes to create more tacit knowledge). Feedback on Question 2: Other resources that are important to Nike include:
Its swish logo and brand name. Its contracts with sports stars like the Brazilian football team. Its reputation as a leading supplier of sportswear. Its network of contacts in global sports goods retailing: architecture. Its innovative ability to generate new marketing concepts and drive
forward the sports goods business. 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: There are three main conclusions:
Summary
In this module we have looked at the vital role knowledge management can play in todays 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 companys board to rate your knowledge management capability against your chief competitor and present your proposals for a realistic improvement plan. 1. Carry out a realistic assessment of your knowledge management capabilities. To do this, consult colleagues across different business areas and at different levels in the organisation. Prepare a Knowledge Management web diagram (as per Figure 8.2). Identify the likely position of your main competitor on the web diagram. Now identify areas where significant improvements can be made (within a 6-month period), and how they can be achieved. Identify the business benefits that are likely to arise from the improvement plan. Prepare your presentation (no more than 15 charts). information to their
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(Students are encouraged to present this manager/colleagues, and elicit their comments.)
* Highly recommended
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Unit 9
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? Established companies control substantial resources: established infrastructure and processes, scale and scope, valuable brand names and entrenched relationships. They can spend heavily on technology development and market research, although most of this money is devoted to evolutionary innovations that make their current offerings perform better in ways their customers already value. 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. Many of these problems are caused by;
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. Read p. 421-436 of your key text, De Wit, B & Meyer, R .
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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 dont 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. How is Microsoft responding to the challenge of Linux? Research this area. What options does Microsoft have to safeguard its dominance?
ACTIVITY FEEDBACK
Broadly, Microsoft has four options: 1. 2. Do nothing. Actively oppose and push proprietary technology as the de facto standard. Embrace and swamp; pay lip service to standards, steer open standards to their own flavour and implement. Genuinely embrace open standards, and get ahead of the competition quickly.
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business, making it difficult to justify investments, e.g. Encyclopaedia Britannica was slow to move to CD-Rom and lost 70 per cent of its revenue between 1990 and 1997. threatening technology, only four entered aggressively and three never participated at all. Managers are focused on existing customers and new technologies may seem applicable only to small market segments they dont serve or understand. This makes them vulnerable to outsiders who use disruptive innovation as their platform. so they cannot balance the demands of familiar markets with the alien requirements of a disruptive innovation.
These explanations reinforce each other to impair decision-making, erode enthusiasm and cause managers to hesitate. Such issues do not inhibit new entrants.
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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:
Widen peripheral vision. Create a learning culture. Stay flexible strategically. Provide organisational autonomy.
The above are ingredients from which an approach can be fashioned. Let us look at each in turn:
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ill-formed, the technology is barely ready and questions of cost, availability, and performance are unresolved. Customers may not know whether they want a new product, but they can assess how much more they value its benefits relative to present offerings. Xeroxs 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. Choosing how to assess the market for a disruptive innovation should be guided by three principles. 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. 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. 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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3.
Willingness to challenge deep-seated assumptions. A climate that encourages experimentation and rewards
well-intentioned failure. Entrenched attitudes may impede thinking needed to grasp discontinuities and surprises. Changing is not easy because attitudes are grounded in experience, reinforced by commitments and protected by inertia. Before prevailing thinking can be challenged, it should be described by making the views and assumptions of managers clear. Scenario planning can help challenge deep-rooted mentalities.
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Adapting to the vagaries of disruptive innovations requires experiment and an openness to learning from failures. Sometimes experiment requires a willingness to create diverse solutions, by endorsing parallel development activities, e.g. Shell is developing renewable energy sources. It may also mean introducing prototypes into a market segment. Learning from this quickly is vital, followed by modifying the product, and trying again in a process of successive approximation, e.g. Motorola and the cellular phone market.
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)? 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. Now describe your organisations learning culture, in the context of innovation, to your partner (in no more than 1000 words max.). Get your partner to identify the strengths and weaknesses of your learning culture in relation to emerging innovative technologies. Learn from each other. Identify what improvements can be made to your own organisations learning culture based on this exercise.
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the same time, Microsoft was introducing application software, including Excel and Word, for both Windows and Macintosh. Microsoft had developed a strong hand of cards to play in a variety of worlds that might emerge. In hindsight, its portfolio of options was commensurate with the uncertainties then surrounding hardware and software development. Questions of standards, features, channels and delivery modes (PCs versus servers) were still to be settled. In addition to developing a robust hand, Microsoft developed a culture that could quickly change strategy.
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ACTIVITY
Read the following article from your key text, De Wit, B & Meyer, R: Strategy, value innovation and the knowledge economy, Reading 8.4, p.464-473.
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. These prescriptions need considerable tailoring to match each disruptive innovation and the organisation involved. Indeed, the purpose of a template for a high-commitment organisation is to enable it to cope with the tension of uncertainty while achieving commitment to the choices made. The main point is that managing disruptive innovations constitutes a different game for established companies, with its own problems and solutions. Reference Do nt Hesitate to Inno vate by Geo rge Day and Paul Scho em ak er (Financial Tim es Oct 9, 2000)
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stepping stone approach to new product development, says Geoff Edwards, Oxleys managing director. We keep one foot in the areas we know about and move the other foot so we can gradually explore new ideas. Oxley is not a large company. Last year, sales came to 12m, of which about 700,000 was the profit before tax. But the companys 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. An example of how internal discussions lead to profitable business opportunities is Oxleys use of its knowledge of capacitor technology used in military radar and telecommunications systems to produce capacitor-based data storage devices or smart tags. These tags were first sold to the British Army, which attached them to Iraqi prisoners captured during the 1990-91 Middle East conflict. The tags were encoded with information about the prisoners identities and intelligence data. 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 Oxleys 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 companys 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. Oxleys 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 companys 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 aircrafts 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. Oxley makes millions of tiny gold-plated spheres each 1mm in diameter that fit into telecoms base stations sold by Ericsson and Motorola, the two biggest forces in the mobile phone industry. The spheres are part of miniature ball-and-socket connectors. With the ball snapping in and out of the socket at high speed, the system forms part of a switch (selling for 10p) that checks whether telecoms equipment is operating at the correct wavelength. We are the only company in the world that can make the (ball and socket) devices to this kind of precision, Mr Edwards says. Oxley also produces electromagnetic screening systems for military radios. They prevent damage to the equipment from lightning strikes or radiation from a nuclear bomb. In the next few years, the company intends to keep its military focus. As the defence industry consolidates around bigger companies, Mrs Oxley says, small, specialist companies will find a niche. We think we can continue to run between the legs of the elephants, she says. 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 companys 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? Link this case to other key areas studied in this module.
2.
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VIRTUAL CAMPUS
Further points to note, from the Oxley case study, include:
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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.
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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 products 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 companys 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, Telepizzas 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 Pujals 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. Source: Corporate Strategy by Lynch (Financial Times, 16 November 1995)
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Questions:
1 To what extent does Telepizzas 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? Is it inevitable that the company will begin to lose its entrepreneurial flair as it grows larger? How is it proposing to hold on to this approach? What is your view of the companys international growth strategy sensible expansion or a waste of scarce management resources, given the continued expansion possibilities in Spain and the resource difficulties of supervising foreign operations?
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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. Case note what happended later The founder, Mr Leopoldo Fernandez Pujals, reduced his shareholding from 40% to 22 % in June 1996. The well-known large Spanish bank, Banco Bilbao Vizcaya (BBV), bought 18 % of the company. This move was a prelude to the company seeking a listing on the stock market for its shares through a public offer of 40 % of its shares in September 1996: BBV was acting as co-ordinator of the share issue, with Merrill Lynch responsible for a placing of part of the shares internationally. 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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To gain maximum benefit from this unit, students are encouraged to assess their own organisations approach to disruptive technologies, and identify what changes may be necessary to assess powerful disruptive technologies more quickly and respond faster to new opportunities.
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. 1. Prioritise the technologies/ideas and explain why you have selected them. What opportunities or paradigm shift in business do they show potential for? How could your organisation exploit these technologies/ideas? What threats do they pose for your company and the products/services you market? Noting the culture of your own organisation, how would you go about assessing these innovative technologies and implementing them (where appropriate)?
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Share your findings with your Manager and colleagues in your organisation. Encourage constructive comments.
* Highly recommended
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Unit 10
Consider impact of e-business on strategy. Understand the strategic implications for legacy systems.
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 corporations 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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In this unit we shall examine the impact of technological advances in IT on strategy. We shall also look at the definition of an e-business, and consider the impact of e-business on strategy.
The strategy may change regularly. The strategy-making process may be more emergent than
prescriptive. 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. Since the emergence of e-business, in particular, the linkage between business strategy and IT strategy has been strengthened. IT strategy is no longer solely an output from business strategy, but is a fundamental input in itself. Let us explore this paradigm shift further.
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both threats and opportunities; they pose a deep series of challenges to the business. So business strategy cannot ignore how technology is changing markets, competition and processes. Business processes, that worked well previously, break down when exposed to the self-service pressures of the web. Business processes themselves are re-engineered because of the new opportunities for efficiency that IT can deliver. A revised view of alignment is therefore necessary. In particular, it is necessary to ask the following questions: 1. 2. How does IT change business strategy? (alignment question) What IT investments does business strategy demand? (opportunity question)
The iterative relationship between business strategy and IT strategy can be summarised as shown in Figure 10.1.
Business strategy
Technology/IT strategy
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. There is sometimes confusion around the definition of e-business. Many confuse e-business with e-commerce. But e-business is far more than a business that carries out trade electronically (e-commerce). An e-business is an organisation that is transforming its interactions with customers, suppliers, strategic partners and employees by exploiting
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Web technologies, and extending its market reach to improve performance. This is at the core of business strategy. The supporting e-business strategy, the information business strategy, may radically transform business processes (internal and external) and will define applications (many web-driven) to support the business processes. Information sharing will be at the heart of the strategy. Information sharing may include customers, the companys supply chain and strategic partners. The Information Management Strategy must enable the company to leverage its knowledge, information and skills; the new value resources. The components of a companys e-business strategy can be broadly depicted as shown in Figure 10.2. Note the cyclic nature of the various components. This implies continual refinement and change.
e-business strategy
ACTIVITY
Read about the huge impact of recent technological advances (principally e-business) on organisations strategic approaches, in an extract from Geoffrey Moores 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? Very simply, on demand computing harnesses a grid of machines and other resources (distributed anywhere) to rapidly process data beyond an organisations own available capacity. It is akin to an electricity grid. Organisations pay varying prices for the computing power depending on usage and demand at the time. The business benefits are potentially far-reaching. Companies embracing the on-demand concept are said to be able to adapt dynamically to whatever business challenges arise. By integrating their business processes end-to-end, not only internally, but with their entire supply chain, strategic partners and customers, organisations can exploit this technology to respond rapidly to customer needs, market opportunities or even threats. 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:
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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
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. Some companies are constructing visions, stories, pictures and dramas of what businesses might look like or what businesses could be created. The outputs could be good questions to ask, trends to watch,
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uncertainties to explore, experiments to begin or must do ideas to develop. The main point about futurising, as Skandia calls it, is to explicitly suggest that the future may not be an extrapolation of the past, that opportunities co-exist with threats, that uncertainty is inevitable and that ignoring the future is more risky than trying to create it.
Assets
What competencies, capabilities or assets might yield opportunities? These are assets because:
They are potential sources of value creation. They should not be underestimated or left un-exploited. They may be hidden until potential is realised through
e-commerce. For example, if a company has world-class fulfilment processes, then moving into e-commerce not only builds on this strength, but might also make this capability evident to the world. In other words, existing capabilities may have even more potential for value creation. Jack Welch at General Electric has said that the companys achievements in its Six Sigma quality processes are now really paying off in e-business, where cost, speed, reliability and quality matter. As an example of underestimated assets, one conglomerate realised it had several partnership opportunities and, importantly, information threads between its businesses that might allow it to restructure part of the logistics industry. Likewise, many information-rich organisations have content that is valuable to traditional and emerging businesses. Hidden assets can become evident in many ways. For example, an engineering company realised it had a valuable asset in its parts database when a business-to-business electronic market-maker approached it about building a business-to-business exchange. The database had taken 40 years to build and was now seen as an asset to protect as well as to exploit. In other words, when you re-examine a business as an information business or rethink it as a new economy business, you may discover hidden assets.
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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FAST-track learning schemes to move people through venture capital units and back to the mainstream business. 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 entrants 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 approach of envisioning competitive threats and modifying strategy has been adopted widely. It was used with great success by General Electric during Jack Welchs reign. (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.)
The combination of the four elements, futurising, assets, stimulants and threats, suggest that both IT personnel and business executives are involved and that initiatives are prompted which involve multifunctional teams. In this way, business strategy and IT strategy are integrated.
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A positive lesson to be learned from dot.com businesses is that multifunctional teams build and evolve the business with no demarcation between functions, skills and strategies. This leads to redefining IT strategy and planning.
Continuous. Flexible. Involve learning by doing. Rapid turnaround and delivery of quick wins. A natural activity.
Today, strategy integrated IT and business strategy is revisited frequently; priorities re-evaluated, new technologies assessed and incorporated where relevant to the business. Strategy can no longer be cast in stone. The pressure to launch, the need to respond to what is learnt by doing, the uncertainty of new markets and models, and the fact that on-line business evolves in real time, mean that the formal structures of traditional IT strategy-making are inappropriate. Because IT strategy-making is business development, it is a multi-functional team effort. The chief executive and technology director should be in frequent dialogue. IT people are learning to work with marketing people and vice versa. Furthermore, strategising and planning must be closely followed by implementation. Rapid Application Development methodologies are frequently adopted. Strategy making is now an evolving, continuous, ever-changing process. (See Figure 10.3). The underlying IT architectural framework must allow for change.
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IT strategy must support the entire life cycle of the organisations information systems, and enable them to evolve over time to meet changing business demands. It must adhere to a common architecture and comply with industry standards. In broad terms, the steps in developing and implementing IT strategy can be summarised as follows: 1. 2. 3. 4. 5. 6. Capture organisational strategy. Map business processes to the organisation. Link strategy, organisation and processes. Carry out process re-engineering, where appropriate. Implement and align relevant information systems. Manage all aspects of evolution, including business domains, processes, applications and third-party systems.
Manage IT evolution
Process re-engineering
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must deliver a flexible architecture that allows new components and mission-critical legacy systems to be integrated and managed in harmony. Competitive pressures and the drive for increased efficiency and productivity demand that the integrated environment be a modern e-business environment. The e-business environment must leverage legacy systems, because organisations cant replace them quickly enough and still be responsive to business needs. Let us briefly examine the implications for legacy systems. Firstly, it is important to note that 70% of the worlds data still resides on legacy systems. Legacy systems are frequently fragile (due to poor documentation, loss of expertise, etc.), and changes to such systems are not only costly and time-consuming, but risky. For this reason legacy systems should be left unaltered as far as is possible. However, some changes are necessary to reconcile legacy systems with the new components and achieve integration on an e-platform. Todays business demands that customers and suppliers are provided with the most up-to-date information possible whether that be by Internet, e-mail, phone, etc. They also demand a familiar, easy-to-use interface. Consequently, legacy integration must support real-time access, and be fronted by familiar interfaces such as a web front-end. These changes are fairly minimal and can be achieved by use of Application Program Interfaces (APIs) and wrappers, but maintaining the core application logic. In conclusion, in the Internet age, most companies will find that it is more strategic than ever to adopt a flexible architecture and maintain many of their mission-critical legacy systems. Clearly new applications should be developed as genuine e-business applications. In this way, legacy systems can be reconciled with new technologies on an e-business platform.
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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He decided that it would be a simple matter to create an Internet exchange to manipulate a win/win situation. His belief was that the carrier would be prepared to cost price for last minute loads to fill up empty space, that shippers would benefit from lower than standard freight rates and that he would be able to charge a small margin on each transaction. He registered Compuship.com and commenced development. 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. Undeterred, he eventually found an entrepreneur who was developing a small Internet incubation company, I-Global.com, which was interested in developing the concept on his behalf. They joined forces and tried to re-acquire the rights to the project development already undertaken. However, they were also suffering from a lack of finance. 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 Californias 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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The UK directors immediately flew to California and spent some weeks re-specifying the business processes and re-designing the structure of the exchange. This delay obviously caused the date of the beta test to be postponed for the ten weeks it was now going to take to develop a working prototype. This would time the beta test for the hectic fortnight before the Christmas holiday in the UK. It was then decided that the only option was to further delay the launch until February 2001. 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 worlds 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. Ci4net.coms shares, originally valued at over US$100 on the NASDAQ market had slumped to under US$1 by early 2001. There was no realistic possibility that they would get second round funding. They divested themselves of over 80% of their subsidiaries, keeping Easy2ship.com among five or six others. However, they were not able to meet either the development costs they had incurred with Techspan or the operational costs
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of Easy2ship.com, whose staff was laid off in December 2000 and whose UK directors resigned shortly thereafter. Case study summary 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? What would an investor need to know before making a commitment to fund such a venture? Can a win/win/win scenario really exist, or is there a commercial loser? Could the concept be limited to operation within national boundaries? What are the likely difficulties of expansion into:
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4. 5.
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This negative cashflow is normally allowed for in the business plan, as it certainly was in this case. However, even though the directors were not aware of the parent companys funding shortfall, there was little that could be done to accelerate the process of bringing the company online. Therefore, the extended development period was a significant cause for the termination of the project, since the parent company could not survive without the income relied upon from this source. Feedback on Question 2: An investor would need to know:
The track record of the management. The size of the potential market. Details of all competition. The reliability of the business process and technology. The elapsed time between the start of the project and the first
income.
The elapsed time between first income and financial breakeven. Critical success factors.
Feedback on Question 3: A win/win/win scenario could exist as described in this case study. It is possible for the carrier, the shipper and the service provider to benefit from the business process. This is because of the size of the structural inefficiency in the current business process (30%+) and to the detriment of conventional bricks and mortar return load service providers. Feedback on Question 4: It would be impractical to attempt to limit this concept to a single state, unless the state concerned had no normal road transport access to and from neighbouring states. In the case of the UK, there is ferry transport to Scandinavia, Germany, Netherlands, Belgium, France, Spain and Ireland, as well as the Channel Tunnel. Feedback on Question 5: Difficulties for expanding into Europe:
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Credit rating of shippers. Credit rating of carriers. Trust and confidence in all parties. Unreliable legal systems.
Summary
We have seen that in todays 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. We have looked at the role of IT strategy methodologies, and have noted that methodologies need to allow for flexibility and responsiveness to changes in the business and in technology. We have briefly considered how to manage IT evolution within an organisation and the cyclic role of the various processes. We have noted that if e-business is the business, and if IT strategy cannot be separated from business strategy, the chief executive and technology director need to be working as partners. Strategic leadership, that pro-actively encourages multi-functional strategic effort, is vital as well as new concepts and practices of strategy formulation. Finally we have looked at the issue of reconciling legacy systems with the e-business paradigm.
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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Consider your own organisation, irrespective of whether or not in operates in the new economy; and irrespective of whether or not e-commerce opportunities present itself. What impact has e-business had on your companys strategy? What is its potential? 1. 2. Consider the changes achieved over the last five years. Address the potential over the next five years, and likely business benefits.
References
The following are the references for your key text and supporting texts: 1. Bennett R. (1999) Internatio nal Business (2nd Edition) Published by: Financial Times Pitman Publishing (ISBN 0-273-63429-1). Cummings S., Wilson D. (2003) Im ages o f Strategy Published by Blackwell Publishing (ISBN 0-631-22610-9) De Wit, B. & Meyer, R (2004) Strategy Process, Content & Context International Perspective (3rd Edition) Published by: Thomson Learning (ISBN 1-86152-964-3). (Key Text) Ferguson P.R. & Ferguson G.J. (2000) Organisatio ns A Strategic Persp ective Published by: Macmillan Press Ltd. (ISBN 0-333-74550-7). Grant R.M. (2002) Co ntem p o rary Strategic Analysis Co ncep ts, Techniques, Ap p licatio ns (4th Edition) Published by Blackwell Publishers (ISBN 0-631-23136-6)
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Haberberg A., & Rieple A. (2001) The Strategic Managem ent o f Organisatio ns Published by: Financial Times Prentice Hall (ISBN 0-13-021971-1) Johnson G. & Scholes K. (1999) Exp lo ring Co rp o rate Strategy (5th Edition) Published by: Prentice Hall (ISBN 0-13-080740-0). Joyce P. & Woods A. (2001) Strategic Managem ent A Fresh Ap p ro ach to Develo p ing Sk ills, Kno w led ge and Creativity Published by Kogan Page Limited (ISBN 0 7494 3583 6) Lasserre P. (2003) Glo bal Strategic Managem ent Published by: Palgrave McMillan (ISBN 0-333-79375-7) Lynch, R. (2003) Corporate Strategy (3rd Edition) Published by: Financial Times Prentice Hall (ISBN 0-273-65854-9). (Main supporting text) Mintzberg, H., Ahlstrand B., & Lampel J. (1998) Strategy Safari Published by: Financial Times Prentice Hall (ISBN 0-273-65636-8) Stacey, R.D. (2000) Strategic Managem ent & Organisatio nal Dynam ics The Challenge o f Co m p lexity (3rd Edition) Published by: Financial Times Prentice Hall (ISBN 0-273-64212-X) Stonehouse G., Hamill J., Campbell D. & Purdie T. (2000) Glo bal and Transnatio nal Business Strategy and Managem ent Published by: John Wiley & Sons (ISBN 0-471-98819-7). Thompson A.A., Strickland A.J, (2003) Strategic Managem ent Co ncep ts and Cases Published by McGraw-Hill Irwin (ISBN 0-07-112132-3)
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