Corporate Strategy

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Some Notes on Corporate Strategy

Corporate Strategy1. What is strategy?2. some models3. mergers as strategy4. unresolved issue: is this really a fi eld?

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Porter: What is Corporate Strategy?

Corporate strategy, the overall plan for a diver sifi ed company, is both the dar ling and the stepchild of contemporary man age ment practice—the darling be cause CEOs have been ob sessed with di ver si fi ca tion since the early 1960s, the stepchild because almost no con sen sus exists about what corporate strat e gy is, much less about how a com pa ny should formulate it.

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Porter: A diversifi ed company has two levels of strategy: (1) business unit (or com pet i tive) strategy, and (2) corporate (or company-wide) strat e gy.

Competitive strategy con cerns how to create com pet i tive ad van tage in each of the businesses in which a com pa ny com petes.

Cor porate strategy concerns two different ques tions: what busi ness es the corporation should be in and how the corporate offi ce should manage the array of business units.

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Porter: "Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts. The track record of corporate strategies has been dismal. I studied the di ver si fi ca tion records of 33 large, prestigious U.S. companies over the 1950-1986 period and found that most of them had divested many more acquisitions than they had kept. The cor po rate strat e gies of most companies have dissi pated instead of created share hold er value."

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Some Key Terminology

1. "Value Chain" (Porter): This concept al lows the fi rm to be disaggregated into a vareity of strategically relevant activities which have dif fer ent eco nom ic char ac ter is tics. (See fi gure be low). One can use this struc ture to identify those activities which have a high potential for cre at ing dif fer en ti a tion; and those which are most im por tant in understanding cost behaviour.

From this analysis, different strategic courses of action can be derived to develop dif fer en ti a tion

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The Value Chain

Ref. Porter

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2. First-mover advantage

The notion that countries or fi rms which create new industries or products fi rst may establish a competitive advantage that makes it hard or impossible for other countries to follow in the same area.

The advantage is most likely to prevail in sectors of large economies of scale, and especially in cases where the most effi cient scale represents a high proportion of the global market. It would certainly be diffi cult for, say, China or Japan to enter wide-bodied aircraft manufacture in competition with Boeing and Airbus. The frequency with which airframe manufacture is quoted as an example of potential fi rst-mover advantage, suggests it may be one of very few special cases requiring a large supplier chain and technological depth.

It is not diffi cult to think of examples of other fi rst movers - for example, motorcycles in the UK - which have failed to sustain an early advantage.

Source: The Economist, Dictionary of Economics

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QUESTIONS:

1. Can you think of any fi rst movers who have succeeded? Why?

2. Can you think of any fi rst movers who have failed? Why?

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3. Strategic AlliancesLinkages between fi rms to achieve economic benefi ts not available through arms-length market transactions, internal develop ment or acquisition.

Factors Promoting the Rise of Alliances

All alliances are motivated by the need for risk reduction. Several environmental forces have accelerated alliance formation, including (a) sharing costs of commercializing cutting-edge technologies in research and development intensive industries, (b) shaping or transforming standards in fast-changing industries, (b) pooling resources for global economies of scale in value-adding activities, (d) speeding entry into new markets, and (e) learning skills and

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Forms of Strategic Alliances

Alliances consist of long-term supply contracts, licensing agreements, technology development pacts, joint ventures, equity ownership stakes, and cross-holding relationships. Regardless of the specifi c organization design, each alliance entails sharing knowledge among partners.

Alliances compel fi rms to balance cooperation with competition. Knowledge fl ows can unintentionally strengthen future competitors, parti cularly if underlying technologies are applicable across numerous products. Carefully managed alliances enable fi rms to learn new skills from multiple sources, thereby strengthening their core compe tencies and strategic fl exibility. Excessive dependence on alliances can “hollow out” the fi rm’s core competencies and skills.

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4. The experience curve

The concept that costs of production decrease as the level of cumulative output increases. This is also referred to as a "learning curve."

The source was originally ascribed to incerased labour productivity, but has since been expanded to include "learning by doing" at every stage of the value chain, including marketing, R&D and overhead costs.

Source: Blackwell Encyclopedia of Management.

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5. Core Competences/CompetenciesA set of differentiated skills, complementary assets, and routines that provide the basis for a fi rm’s competitive capacities and sustainable advantage in a particular business.

The concept of core competences is associated with the resource-based view of the fi rm. Rather than emphasizing (as in traditional approaches to strategy) products and markets, and focusing competitive analysis on product portfolios, the resource-based approach regards fi rms as bundles of resources which can be confi gured to provide fi rm-specifi c advantages.

Core competences are typically characterized as:• unique to the fi rm• sustainable because they are hard to imitate or to substitute• conferring some kind of functionality to the customer (in the

case of products and some services) or to the provider (in the case of other services)

• partly the product of learning and, hence, as incorporating tacit as well as explicit knowledge

• generic because they are incorporated into a number of products and/or processes

Source: Blackwell Encyclopedia of Management

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6. SWOT Analysis

INTERNAL EXTERNAL- - -PLUS Strengths Opportunities- - -NEGATIVE Weaknesses Threats- - -

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Some Models of Strategic Analysis

1. Boston Consulting Group2. McKinsey's 7-S3. Porter's 5 Forces4. Porter's Clusters

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1. The Boston Consulting Group Model

?

- A framework for portfolio planning in a diversifi ed company

High Mkt share Low Mkt share

High Mkt

Growth

LowMkt

Growth

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The BCG Matrix

Each business is located on a 2-dimensional grid. One dimension represents industry attractiveness, summarized by the real annual rate of market growth. The other dimension represents the business' competitive position, summarized by its market share relative to its largest competitor.

The strategic message is to invest in high-share businesses in high-growth markets ("stars") and divest low-share businesses in low-growth markets ("dogs"). Most profi t and cash is gnerateed by "cash cows" (high share, low growth). Much debate is about whether to continue investing in low share businesses in high-growth markets ("question marks").

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The McKinsey 7-S Model

7 characteristic factors in a corporation interrelated in a hub-and-spoke

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McKinsey’s primary objective in developing the 7-S framework was to put a new spin on manage ment style and suggest that soft issues could and should be managed. Further, the use of the wheel, a format borrowed from Porter, also emphasizes the idea that a fi rm is the comprehensive, inextricable sum of its parts. McKinsey made two key fi ndings: (1) the consultants learned that a man ager’s effectiveness was determined by both the strat-egy and the structure of the organization, and (2) there was no linear relationship governing these components, although they are interdependent.

In reality, the management, structure, and strategy of an organization are related through a complex net work of seven characteristic factors in the organization. Managers who try to run the fi rm as if it were a collec tion of several independent units soon learn about the spoke-and-hub concept of the wheel. A wheel is nothing more than a collection of spokes when there is no hub, and vice versa. Neither part alone can replicate the functions of a wheel. Similarly, an organization without common goals and strategy cannot function in the way it was intended.

Source: The Portable MBA by Paul A. Argenti

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The McKinsey study also found that most successful organizations, regardless of line of business, had several practices in common:

1. Maintain a bias for action. 2. Learn from customers by staying close to them. 3. Encourage autonomy and entrepreneurship in man-

agement by management. 4. Respect contributions of all employees, especially

those traditionally undervalued. 5. Use a hands-on, highly visible management

approach. 6. Stick to the knitting.7. Keep the organizational structure simple and staff

only as much management as is required for bare minimum.

8. Allow core values to govern.

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Michael Porter's "Five Forces" of Competition

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Porter's Cluster Model

"Clusters are geographic concentrations of interconnected compa nies, specialized suppliers, service providers, fi rms in related industries, and associated institutions in particular fi elds that compete but also cooperate. Critical masses of unusual competitive success in particular business areas, clusters are a striking feature of virtually every national, regional, state, and even metropolitan economy, especially those of more economically advanced nations.

"The tendency has been to see location as diminishing in importance. Globalization allows companies to source capital, goods, and technology from anywhere and to locate operations wherever it is most cost effective. Governments are widely seen as losing their infl uence over competition to global forces. This perspective does not accord with competi tive reality."

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"The cluster concept represents a new way of thinking about national, state, and city economies, and points to new roles for companies, govern ments, and other institutions striving to enhance competitiveness. The presence of clusters suggests that much of competitive advantage lies outside a given company or even outside its industry, residing instead in the location of its business units.

"The importance of clusters creates new management agendas that are rarely recognized. Companies have a tangible stake in the business environments where they are located in ways that go far beyond taxes, electricity costs, and wage rates. The health of the cluster is important to the health of the company. A company may actually benefi t from the presence of local competitors.

"Clusters also create new roles for government. Government’s more decisive infl uences are often at the microeconomic level. Removing obstacles to the growth and upgrading of existing and emerging clusters should be a priority. Clusters are a driving force in increasing exports and magnets for attracting foreign investment."

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Porter's "Diamond"Sources of Locational Competitive

Advantage

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Example: California Wine Cluster

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Major U.S. Clusters

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1. Are there any current clusters in Southwest B.C.?

2. Are there any potential clusters in Southwest B.C.?

GVRD employment by sector 1996

# %

Agriculture and related 11,675 1.3%Fishing and trapping 2,335 0.3%Logging and forestry 2,900 0.3%Mining, quarry and oil well 2,960 0.3%Manufacturing 99,070 11.3%Construction 67,560 7.7%Transportation & Communication 80,515 9.2%Wholesale trade 59,975 6.8%Retail trade 115,810 13.2%Finance, insurance & real estate 71,405 8.1%Business service 87,530 10.0%Government service 41,920 4.8%Educational service 66,440 7.6%Health & social service 89,730 10.2%Accommodation, food & beverage 76,845 8.8%TOTAL 876,670 100.0%

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Cluster Check List

End-product or service companiessuppliers of specialized inputs, components, machinery & servicesfi nancial institutionsfi rms in related industriesfi rms in downstream industries (I.e. channels or customers)producers of complementary productsspecialized infrastructure providersuniversitiesthink tanksvocational training providersother providers of specialized training, education, information, research and technical support standard-setting agenciestrade associations

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How About High Tech?

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(year)

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SIC = standard industrial classifi cation code (now replaced by NAICS or North American Industrial

Classifi cation System)

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SIC INDUSTRY

Manufacturing Industries

$789.6

3192 Construction and Mining Machinery confi dential3211 Aircraft and Aircraft Parts Industry $99.73359 Other Communication and Electrical Equipment $116.93361 Electronic Computing and Peripheral Equipment $186.0

337 group Electrical Industrial Equipment Group $52.83711 Industrial Inorganic Chemicals confi dential3911 Indicating, Recording & Controlling Instruments $54.7

Other High Technology Manufacturing $249.9

Service Industries

$1,887.7

772 Computer And Related Services $794.477523 Engineering Services $711.877593 Scientifi c and Technical Services $291.3

868 Medical and other Health Laboratories $90.3

High Technology Sector Total

$2,677.3

BC Industrial Aggregate

$96,216.4

High Technology as % of Total

2.8%

GDP by industry - BC - 1998 (million $)

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SIC INDUSTRY

Manufacturing Industries

$860

3211 Aircraft and Aircraft Parts Industry $820 335 Communication and Other Electronic Equipment $890 336 Offi ce, Store and Business Machines $1,040

3372 Electrical switchgear and protective equipment $1,040 3379 Other electrical industrial equipment industries $1,040 3911 Indicating, Recording & Controlling Instruments Industry $620 3912 Other instruments and related products industry $620 3192 Construction, Mining Machinery & Materials Handling Equipment $830 3194 Turbine and Mechanical Power Transmission Equipment $830 3199 Other Machinery and Equipment Industries, NEC $830

37 group Chemical and chemical products group $720 3 group Other manufacturing group $830

Service Industries $870

772 Computer And Related Services $900 7752 Engineering Services $880 7759 Scientifi c and Technical Services $880

868 Medical and other Health Laboratories $640

High Technology Sector Total

$870

BC Industrial Aggregate

$630

Hi-Tech Average Weekly Earnings (including overtime) - 1999 - BC (million $)

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(million $)

SIC INDUSTRY

Manu-factur-ing Indus-tries $860

3211 Aircraft and Aircraft Parts Industry $820 335 Communication and Other Electronic Equipment $890 336 Offi ce, Store and Business Machines $1,040

3372 Electrical switchgear and protective equipment $1,040 3379 Other electrical industrial equipment industries $1,040 3911 Indicating, Recording & Controlling Instruments Industry $620 3912 Other instruments and related products industry $620 3192 Construction, Mining Machinery & Materials Handling Equipment $830 3194 Turbine and Mechanical Power Transmission Equipment $830 3199 Other Machinery and Equipment Industries, NEC $830

37 group Chemical and chemical products group $720 3 group Other manufacturing group $830

Service Indus-tries $870

772 Computer And Related Services $900 7752 Engineering Services $880 7759 Scientifi c and Technical Services $880

868 Medical and other Health Laboratories $640

High Tech-nology Sector Total $870

Hi-Tech Average Weekly Earnings (including overtime) - 1999 - BC

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Some Notes on Corporate StrategyB.C.

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Mergers as Corporate Strategy

3 types of mergers:

1. horizontal - between 2 fi rms in the same business

2. vertical - between 2 fi rms that are suppliers or customers of one another

3. conglomerate - between 2 fi rms in totally different industries

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Merger evaluation matrix

PRO CONHORIZONTAL Increase in allocative ef-

fi ciency due to economies of scale

Anti-competitive effects

VERTICAL May increase security of supply or markets for par-ticipant companies; easier to transfer assets

Potential anti-competi-tive effects

CONGLOMERATE Risk reduction through diversifi cation; economies of scope

No anti-competitive effects. However, risk of poor fi t; rent-seeking through fi nancial manip-ulation (Buffett); some concern over potential political power (Garten)

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In just the past few years corporate giants have emerged across all industries. Citibank and Travelers, Bank of Amer i ca and Nationsbank, and Deutsche Bank and Bankers Trust are among the major mergers that have reshaped banking. In oth er industries, Daimler-Benz has linked up with Chrysler; AT&T with Mediaone; British Petroleum with Amoco; Aetna with Prudential Health. Still awaiting regulatory approval are some of the biggest com bi na tions of all, including those between Exxon and Mobil, MCI Worldcom and Sprint, and Viacom and CBS.

The big problem is not with how these businesses are af fect ing competition, but with the inability of our political system to respond to potential problems resulting from eco nom ic glo bal iza tion. Business leaders understandably op er ate on a global stage, while government leaders act in a way that fails to recognize the new global economy.

Here is some of the fallout. Mega-banks like Citigroup or the new Bank of America have become too big to fail. Were they to falter, they could take the entire global fi nan cial system down with them.

Many mega-companies could be beyond the law, too. Their deep pockets can buy teams of lawyers that can stymie pros e cu tors for years. And if they lose in court, they can af ford to pay huge fi nes without damaging their operations.

Moreover, no one should be surprised that mega-com pa nies navigate our scandously porous campaign fi nancing system to in fl u ence tax policy, environmental standards, Social

Security fi nanc ing and other issues of national pol i cy. Yes, companies have always lobbied, but these huge cor po ra tions often have more pull. Because there are fewer of them, their infl uence can be more fo cused, and in some cases, the country may be highly dependent on their survival.

For example, corporate giants can have enormous le ver age when they focus on America’s foreign and trade pol i cy. Defense contractors like Lockheed Martin, itself a result of a merger of two big fi rms, were able to exert ex traor di nar i ly powerful force to in fl u ence legislation that ap proved en larg ing NATO, a move that opened up new mar kets for Amer i can weapons sales to Poland and the Czech Republic.

Companies like Boeing, which not long ago acquired McDonnell Douglas, have expanded their already for mi da ble in flu ence on trade policy toward countries like China. Boeing is now the only American commercial aircraft man u fac tur er.

Corporations like Exxon-Mobil will negotiate with oil-pro duc ing countries almost as equals, conducting the most pow er ful private diplomacy since the 19th century, when the British East India Company wielded near-sovereign in fl u ence in Asia.

But sooner or later — perhaps starting with the next serious economic downturn — the United States will have to confront one of the great challenges of our times: How does a sovereign nation govern itself effectively when

Excerpts from "Mega-Mergers, Mega-Infl uence," By JEFFREY GARTEN, Dean of the Yale School of Management, New York Times, October 26, 1999

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When it comes to restructurings and merger accounting, many man age ments pur pose ful ly work at ma nip u lat ing numbers and deceiving investors. Many major cor po ra tions still play things straight, but a sig nif i cant and growing number of oth er wise high-grade man ag ers have come to the view that it’s okay to manipulate earnings to satisfy what they believe are Wall Street’s desires. These managers start with the as sump tion, all too com mon, that their job at all times is to encourage the highest stock price pos si ble (a premise with which we adamantly disagree). When op er a tions don’t pro duce the result hoped for, these CEOs resort to unadmirable

ac count ing strat a gems. These either man u fac ture the de sired “earnings” or set the stage for them in the future. Managements now fre quent ly use merg ers to dis hon est ly rearrange the value of assets and li a bil i ties in ways that will al low them to both smooth and swell fu ture earnings. In a landmark speech last Sep tem ber, Arthur Levitt [chairman of the U.S. SEC] called for an end to “earn ings man age ment.” He correctly ob served, “Too many corporate managers, au di tors and analysts are participants in a game of nods and winks.” And then he laid on a real in dict ment: “Man ag ing may be giving way

Excerpts from BERKSHIRE HATHAWAY INC. 1998 ANNUAL REPORT,Chairman’s Letter (Copyright © 1999 By Warren E. Buffett)

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U.S. Mergers & Divestitures(billion $)

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U.S. MERGERS AND ACQUISITIONS OF U.S. COMPANIES - 1996

# $ million %

Total activity 2,670 $556,308 avg value 100%

Telecommunications 58 $77,815 $1,342 14%

Electric, gas, water distribution 41 $40,355 $984 7%

Radio & television broadcasting stations 178 $32,065 $180 6%

Business services 263 $28,633 $109 5%

Transportation and shipping (except air) 51 $28,266 $554 5%

Oil and gas; petroleum refi ning 138 $26,018 $189 5%

Commercial banks, bank holding companies 185 $21,259 $115 4%

Measuring, medical, photo equip; clocks 92 $21,065 $229 4%

Aerospace and aircraft 10 $19,628 $1,963 4%

Insurance 86 $15,266 $178 3%

Electronic and electrical equipment 59 $14,296 $242 3%

Hotels and casinos 135 $13,991 $104 3%

Investment & commodity fi rms, dealers, exchanges 73 $12,974 $178 2%

Real estate, mortgage bankers and brokers 122 $11,077 $91 2%

Prepackaged software 84 $9,951 $118 2%

Drugs 27 $9,437 $350 2%

Chemicals and allied products 33 $9,208 $279 2%

Mining 17 $6,797 $400 1%

Repair services 13 $6,763 $520 1%

Communications equipment 33 $6,580 $199 1%

Transportation equipment 28 $6,495 $232 1%

Food and kindred products 8 $5,497 $687 1%

Printing, publishing, and allied services 34 $5,393 $159 1%

Sanitary services 27 $4,890 $181 1%

Wholesale trade—durable goods 86 $4,783 $56 1%

Metal and metal products 66 $4,307 $65 1%

Retail trade—general merchandise and apparel 19 $4,178 $220 1%

Machinery 49 $3,763 $77 1%

Computer and offi ce equipment 39 $3,643 $93 1%

Wood products, furniture, and fi xtures 20 $3,243 $162 1%

Agriculture, forestry, and fi shing 16 $3,140 $196 1%

Motion picture production and distribution 17 $2,507 $147 0.5%

Paper and allied products 15 $2,329 $155 0.4%

Holding companies, except banks 1 $2,251 $2,251 0.4%

Amusement and recreation services 41 $1,756 $43 0.3%

Textile and apparel products 19 $1,342 $71 0.2%

Construction fi rms 18 $1,284 $71 0.2%

Stone, clay, glass and concrete products 7 $936 $134 0.2%

Advertising services 14 $844 $60 0.2%

Personal services 5 $715 $143 0.1%

Public administration 3 $408 $136 0.1%

Air transportation and shipping 2 $264 $132 0.05%

Tobacco products 2 $200 $100 0.04%

Other fi nancial 2 $19 $9 0.003%

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U.S. MERGERS AND ACQUISI-TIONS TOP 10

$ million

1996 1994

Total activity $618,499 Total activity $358,718

Telecommunications $79,302 Drugs $26,419

Electric, gas, water distribution $49,927Commercial banks, bank holding companies $23,629

Business services $34,177 Food and kindred products $19,451Radio & television broadcasting sta-tions $32,580 Insurance $18,175

Oil and gas; petroleum refi ning $30,271 Business services $16,702Transportation and shipping (except air) $28,873

Radio & television broadcasting stations $15,064

Measuring, medical, photo equip; clocks $22,260 Health services $14,760Commercial banks, bank holding companies $21,328 Oil and gas; petroleum refi ning $14,545

Aerospace and aircraft $19,628 Telecommunications $14,129

Insurance $16,346Investment & commodity fi rms, dealers, exchanges $13,996

1992 1990

Total activity $125,308 TOTAL $172,319

Commercial banks $16,390 services $32,746

Electric, gas, water distribution $6,904 fi nance, insurance, real estate $28,142

Radio and television broadcasting $6,585 Transportation and public utilities $19,838

Food and kindred products $6,407 Chemicals and allied products $15,612

Security and commodity brokers $5,760 Mining $11,646

Oil and gas and petroleum refi ning $5,418 Food and kindred products $9,246

Savings and loans $5,305 retail trade $7,373

Insurance $5,169 Electrical and electronic equip-ment $6,381

Wholesale $4,595 Industrial machinery, computer equipment $5,978

Chemicals and allied products $4,572 Paper and allied products $5,682

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Some Recent Big MergersRECENT LARGE MERGERS AND ACQUISITIONS

PARTIES DATE PRICE STATUS

(billion $)

AOL Time-Warner 2000 $182 Completed

MCI Sprint 1999 $130Pfi zer Warner-Lambert 2000 $90 Contested

Glaxo Wellcome SmithKline Beecham 2000 $78The Travelers Citcorp 1998 $70 CompletedSBC Ameritech 1998 $62 CompletedBank of America NationsBank 1998 $60 Completed

JDS Uniphase E-Tek Dynamics 2000 $55Daimler-Benz Chrysler 1998 $39 Completed

Chevron Texaco 2000 $36World Com MCI 1998 $37 CompletedBP Amoco-ARCO 1999 $29 ContestedBoeing McDonnell Douglas 1997 $16 Completed

El Paso Energy Coastal Corp 2000 $15

Telefonica SA Telecommunicacoes de Sao Paulo 2000 $10

Taiwan Semiconductor Worldwide Semiconductor 2000 $6

France Telecom Global One 2000 $4

Telfonica SA Telefonica de Argentina 2000 $4

Telewest Communications Flextech 2000 $4

Source: www.securitiesdata.com

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44


Porter's 4 Concepts of Corporate Strat e gy

1.Portfolio Management2. Restructuring3. Tranferring skills4. Sharing activities

Porter's conclusion: only #3 and #4 are sound and even they depend on good industry struc ture and implementation

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Excerpts from: "How mergers go wrong"Jul 20th 2000. From The Economist print edition

A stream of studies has shown that corporate mergers have even higher failure rates than the liaisons of Hollywood stars. One report by KPMG, a consultancy, concluded that over half of them had destroyed shareholder value, and a further third had made no difference. Yet over the past two years, companies around the globe have jumped into bed with each other on an unprecedented scale. In 1999, the worldwide value of mergers and acquisitions rose by over a third to more than $3.4 trillion.

Most of the mergers we have looked at were defensive, meaning that they were initiated in part because the companies involved were under threat. Sometimes, the threat was a change in the size or nature of a particular market. Occasionally the threat lay in that buzzword of today, globalisation, and its concomitant de-mand for greater scale. Or the threat may have come from an-other predator.

When a company merges to escape a threat, it often imports its problems into the marriage.

As important as the need for clear vision and due diligence be fore a merg er is a clear strat e gy after it. As every employee knows full well, merg ers tend to mean job losses. No sooner is the an- nounce ment out than the most marketable and valuable members of staff send out their resumés.

Without leadership from its top manager, a company that is be ing bought can all too often feel like a defeated army in an oc cu pied land, and will wage guerrilla warfare against a deal.

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Some Recent High-Visibility Merger Disasters

BMW-RoverDaimler-ChryslerCompaq-Digital

AT&T-NCRMattel-Learning Company

Hypobank-Bayerische Vereinsbank

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Is bigger always better?One reaction:

November 10, 2000: British Telecommunications to split into 2 companies

November 1, 2000: Worldcom announces plan to split into two

Oct 26, 2000: AT&T to break itself into 4 businesses

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Consider some additional evidence:"The Dubious Logic of Global Megamergers"Ghemawat, Pankaj; Ghadar, Fariborz; HBR, 7/1/2000

"The almost universal belief among executives today is that bigger is better: companies are entering into huge, pricey cross-border mergers at an unprecedented rate. Common wisdom is that industries will become more concentrated as they become more global. In this article, the authors debunk the myth of increased concentration; the perceived links between the globalization of an industry and the concentration of that industry are weak. Empirical research shows that global—or globalizing—industries have actually been marked by steady decreases in concentration since World War II. The authors present the biases that managers often have about consolidation and offer alternative strategies to pursuing the big M&A deal. There are better, more profi table ways of dealing with globalization than relentless expansion, they say. Those strategies include buying up cast-off assets from merging rivals; focusing more on domestic or regional growth rather than on global expansion; taking advantage of merging rivals’ weakened market position during integration and launching an aggressive marketing campaign; and building alliances with other companies rather than buying them up."

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So, what really is strategic management?

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Opening paragraph by Mintzberg, Ahlstrand and Lampel, 1998.

"We are the blind people and strategy formation is our elephant. Since no one has had the vision to see the entire beast, every one has grabbed hold of some part or other and “railed on in utter ig norance” about the rest. We certainly do not get an elephant by adding up its parts. An elephant is more than that. Yet to comprehend the whole we also need to understand the parts. The next ten chapters describe ten parts of our strategy-formation beast. Each forms one “school of thought.”

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The "10 Schools"

• The Design School• The Planning School• The Positioning School• The Entrepreneurial School• The Cognitive School• The Learning School• The Power School• The Cultural School• The Environmental School• The Confi guration School

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# School Strategy Formation as:

PRESCRIPTIVE SCHOOLS

1 Design a process of conception2 Planning a formal process3 Positioning an analytical process

DESCRIPTIVE SCHOOLS

4 Entrepreneurial a visionary process5 Cognitive as a mental process6 Learning an emergent process7 Power a process of negotiation8 Cultural a collective process9 Environmental a reactive process

INTEGRATIVE SCHOOL

10 Confi guration a process of transformation

The 10 Schools of Strategy

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SCHOOL Pro/Des ESSENCE TECHNIQUES PEOPLE

1 Design Prescriptive seeks to attain a fi t between internal capabilities and external pos-sibilities

SWOT analysis Christensen et al. (HBS)

2 Planning Prescriptive take the SWOT model, divide it into neatly delineated steps, ar-ticulate each of those with lots of checklists & techniques, and give special attention to the setting of objectives on the front end and the elaboration of budgets & operating plans on the back end

Planning hierar-chies

Ansoff; SRI, etc.

3 Positioning Prescriptive only a few key strategies - as positions in the economic marketplace - are desirable in any given industry; ones that can be defended against existing and future competitors. There are a limited number of basic or generic strategies; e.g., cost leadership, product differen-tiation and market scope

BCG growth-share matrix; experience curve

Porter, BCG

4 Entrepreneurial Descriptive the key concept is the leader’s vision Schumpeter

5 Cognitive Descriptive 2 forms: (1) positivist - treats the processing & structuring of knowledge as an effort to produce some kind of objective represen-tation of the world; (2) subjective - where strategy is some kind of interpretation of the world.

understanding and removing biases in decision making

Simon

6 Learning Descriptive strategy emerges as people, acting alone or collectively, come to learn about a situation as well as their organization’s capability of dealing with it. Eventually they converge on patterns of behaviour that work

incrementalism Lindblom, Quinn

7 Power Descriptive strategy formation is characterized as an overt process of infl uence, emphasizing the use of power and politics to negotiate strategies fa-vourable to particular interests. Two forms: (1) micro - use of power inside the organization; (2) macro - use of power by the organization

coalition building, bargaining, negoti-ating and jockeying for position

Allison

8 Cultural Descriptive Five propositions: (1) strategy is a process of social interaction, based on shared beliefs; (2) people acquire these beliefs through acculturation; (3) these beliefs are often tacit or nonverbal; (4) strategy is therefore perspective rather than positions; (5) culture encourages the status quo

inspired by Japanese corporate culture

9 Environmental Descriptive the organization is considered passive, something that spends its time reacting to an environment that sets the agenda. Differences in organizations are explained by environmental characteristics such as stability, complexity, market diversity and hostility.

10 Confi guration Integrative describes the relative stability of strategy within given states, inter-rupted by occasional and rather dramatic leaps (or transformations) to new ones

Mintzberg

Mintzberg et al., 10 Schools of Strategic Management

55


Returning to the question:

do we have a fi eld where there is a coherent and relatively consistent body of theory which (a) describes the world of corporate strategy, and (b) precribes certain strategic actions?

OR

is this a discipline still in its formative stages?

Corporate Strategy

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