Global Strategic Management

Nguyễn Hiệp – The University of Danang, University of Economics

Chapter 3

Global Strategic Development

3.3. The Headquarter-level Strategy

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 Learning Outcomes
After this lecture you should be able to:
• Understand the four major headquarter-level strategic
management roles
• Select appropriate control mechanisms
• List and discuss the different diversification strategies
• Understand global sourcing strategies
• Discuss the advantages and disadvantages of vertical
integration strategy
• Discuss the advantages and disadvantages of global
outsourcing
• Develop a global market portfolio matrix
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Levels of global strategy

Corporate level and subsidiary level

strategies
• Corporate-level strategy deals with the question of
what business or businesses to compete in, and the
overall game plan of the multinational firm.
• Subsidiary-level strategy refers to the game plan
of each subsidiary and is concerned with the
question of how a subsidiary positions itself
among local and international rivals to achieve its
strategic goals.

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 Roles of corporate parent

Three key issues facing the headquarter

• Directional strategy: Orientation toward growth,

stability, retrenchment
• Portfolio strategy: The industries or markets in
which the whole firm competes
• Parenting strategy: The manner in which it
coordinates activities and transfers resources and
cultivates capabilities among product line and
business units/subsidiaries

Directional Strategy

Three Grand Strategies:

• Growth strategies
• Stability strategies
• Retrenchment strategies

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 Growth Strategies

External mechanisms:
• Mergers: Transaction involving two or more
firms in which stock is exchanged but only one
firm survives.
• Acquisition: Purchase of a firm that is absorbed
as an operating subsidiary of the acquiring firm.
• Strategic Alliance: Partnership of two or more
firms to achieve strategically significant
objectives that are mutually beneficial.
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Growth Strategies

• Concentration (focused) strategies: Current

product line in one industry
 Vertical growth
 Horizontal growth
• Diversification strategies: Into other product lines
in other industries
 Concentric diversification
 Conglomerate diversification

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Concentration Strategies

 Vertical growth
– Vertical integration
• Full integration
• Taper integration
• Quasi-integration
– Backward integration
– Forward integration
 Horizontal growth
– Horizontal integration

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 Diversification Strategies

 Concentric Diversification
• Growth into related industry
• Search for synergies
 Conglomerate Diversification
• Growth into unrelated industry
• Concern with financial considerations

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Types of diversification strategies

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Related Diversification

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 Unrelated Diversification

Development of products/services beyond the

current capabilities or value network
– Generally unfavourable
• No economies of scope
• Cost of headquarters
– Can succeed in some cases
• Exploit dominant logic
• In countries with underdeveloped markets

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Three tests for judging a diversification move

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The eight synergy killers

• Inhibiting corporate strategy

• Infighting between the barons
• A culture of secrecy
• Misaligned incentives
• Excessive performance pressure
• Insulation from performance pressure
• Domineering corporate staff
• Mistrust
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 Six criteria that firms should use to select an
industry into which to diversify
1. Can the new business meet corporate targets for profitability and
return on investment?
2. Does the new business require substantial infusion of capital to
replace out-of-date plants and equipment, fund expansion, and
provide working capital?
3. Is the business in an industry with significant growth potential?
4. Is the business big enough to contribute significantly to the parent
firm’s bottom line?
5. Is there a potential for union difficulties or adverse government
regulations concerning product safety or the environment?
6. Whether there is industry vulnerability to recession, inflation, high
interest rates, or shift in government policy?

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Diversification in emerging economies

• Institutions that support key business activities are

not yet developed
• Weak educational institutions
• Unpredictable government behaviour
• Lack of information and weak law enforcement

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Related and unrelated global diversification

• Related global diversification is the dispersion of a global

firm’s activities across countries within relatively
homogeneous cluster of countries.
• Unrelated global diversification is the dispersal of the
global firm’s activities across heterogeneous geographic
regions.
• They vary on:
– Physical proximity
– Cultural proximity
– Level of economic development

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 Benefits of global diversification

• It enhances shareholder value

• Creates flexibility within the firm to respond to

changes in relative prices

• Benefits corporate managers

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Costs and risks of global diversification

• Complex to manage than that of a purely domestic

firm

• Inefficient cross-subsidization of less profitable

business units

• Risk of value-reducing diversification strategies

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Stability Strategies

• Pause/proceed with caution

Consolidate after recent rapid growth
A temporary strategy to “catch your breath”
Environment looks scary…wait to see what happens
• No change
A very predictable environment…nothing uncertain ever happens
• Profit
“Keep milking the cow, but don’t feed it”
Artificially supporting profits by cutting costs
Keeping up appearances that everything is still OK
A temporary strategy for a worsening environment

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 Retrenchment Strategies

• Turnaround
 Help subsidiaries become profitable
 Belt-tightening and consolidation

• Captive Company Strategy

 Give up independence for security…sell mostly to one large customer “angel”
 Can scale back on some functions, like marketing

• Selling out
 Sell the entire operation to someone as an ongoing business
 Divest a healthy firm that doesn’t fit our portfolio…or a low-producing
business

• Bankruptcy
• Liquidation
 The last resort…no one wants to buy the entire business
 The assets are worth more than the business…so they’re sold piece by piece

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Portfolio Strategy

• Requires the continual evaluation of a firms portfolio of

business units
• This involves:
– Assessing the attractiveness of the industries the firm competes
in
– Assessing the competitive strength of a firm's business units
– Checking the competitive advantage potential of sharing
activities and/or transferring competencies across business
units
– Checking the potential for capturing financial economies

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Portfolio Analysis

• Best Case Scenario:

– All of a firm's business units compete in attractive industries
and have strong competitive positions
and
– There are ample opportunities to capture economies of scope
and/or financial economies
• Useful Tools for Portfolio Analysis Include:
– Nine cell industry attractiveness and competitive strength
matrix
– BCG growth share matrix

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 Portfolio Analysis

• Nine cell industry attractiveness and competitive strength matrix

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Portfolio Analysis

• BCG growth share matrix

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International Portfolio Analysis

• Country’s attractiveness
• Market size, rate of growth, regulation

• Competitive strength
• Market share, product fit, contribution margin,
market support

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 A global market portfolio matrix

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Parenting Strategy
Controlling:
- To ensure that subsidiaries allocate their
resources and direct their efforts towards the
attainment of the objectives of the multinational
firms
- The process by which the parent ensures
subsidiaries act in a coordinated and
cooperative fashion.

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Types of control

• Personal control: relies on human interaction

such as use of expatriates using methods such as
direct supervision.

• Impersonal control: carried out through formal

bureaucratic and written rules and procedures such
as written manuals.

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 Focus of control

• Output: uses performance metrics measures.

• Behavioural: monitors the behaviour of staff at

the subsidiary level.

• Cultural: involves the indoctrination of

subsidiary managers and employees into the
parent firm’s norms and value systems.

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Global values: HP’s example

• We are passionate about customers;
• We have trust and respect for individuals;
• We perform at a high level of achievement and
contribution;
• We act with speed and agility;
• We deliver meaningful innovation;
• We achieve our results through teamwork; and
• We conduct our business with uncompromising integrity.

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Barriers and challenges to headquarter-

level control

• Cross Cultural Challenges

• Subsidiary-level challenges

• Headquarter-level challenges

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 Global Sourcing Strategy

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Advantages of vertical integration

• Enables multinational firms to cross-subsidize one stage of
the value chain by another in order to squeeze out
competitors
• Provides multinational firms with the opportunity to retain
control over proprietary knowledge
• Enables multinational firms to input and output markets to
competitors
• Reduces uncertainties in demand and price
• Enables multinational firms to add value at different stages
of the value chain

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Disadvantages of vertical integration

• Vertically integrated multinational firms:

– do not concentrate on their core tasks

– have higher costs relative to competitors which pursue

an outsourcing strategy

– have high barriers to exit

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Advantages and disadvantages of global
outsourcing

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