Financial IT Design for Strategic Management (Global Competitive Skill of Strategic Management)
Typically, a small group of customers embrace a disruptive innovation as early adopters and then a critical mass of customers builds over time. An example is digital cameras. Few photographers embraced digital cameras initially because they took pictures slowly and offered poor picture quality relative to traditional film cameras. As digital cameras have improved, however, they have gradually won over almost everyone that takes pictures. Interestingly, niche products have returned, such as polaroid instant cameras with self-developing film, and vinyl records.
Executives who are deciding whether to pursue a disruptive innovation must first make sure that their firm can sustain itself during an initial period of slow growth. In warfare, many armies establish small positions in geographic territories that they have not occupied previously, probably because it is a lot to mount an attack on land than from the water.
A beachhead can provide valuable competitive information at a relatively low cost as compared to a full expansion strategy. These footholds provide value in at least three ways Figure 6. First, owning a foothold can dissuade other armies from attacking in the region. Second, owning a foothold gives an army a quick strike capability in a territory if the army needs to expand its reach. And finally, a beachhead may reveal how aggressively local competition will defend their territory. Organizations may find it valuable to establish footholds in certain markets.
Swedish furniture seller IKEA is a firm that relies on footholds. When IKEA enters a new country, it opens just one store. Pharmaceutical giants such as Merck often obtain footholds in emerging areas of medicine, a different form of beachhead, often through acquisitions. Competitive moves such as these offer Merck relatively low-cost platforms from which it can expand if clinical studies reveal that the treatments are effective.
These strategic moves can create a leap in value for the company, its buyers, and its employees, while unlocking new demand and making the competition irrelevant. This strategy follows the approach recommended by the ancient master of strategy Sun-Tzu in the quote above. Instead of trying to outmaneuver its competition, a firm using a blue ocean strategy tries to make the competition irrelevant Figure 6.
Nintendo openly acknowledges following a blue ocean strategy in its efforts to invent new markets. Bricolage means using whatever materials and resources happen to be available as the inputs into a creative process. A good example is offered by one of the greatest inventions in the history of civilization: the printing press.
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Each of its key elements—the movable type, the ink, the paper and the press itself—had been developed separately well before Johannes Gutenberg printed his first Bible in the 15th century. Movable type, for instance, had been independently conceived by a Chinese blacksmith named Pi Sheng four centuries earlier. The press itself was adapted from a screw press that was being used in Germany for the mass production of wine Johnson, Compared to innovation, first mover and blue ocean strategies, frankly three other aspects far more often lead to initial success for early entrepreneurs.
As innovators, research shows a significantly higher percentage of success via improvements compared with truly new ideas, products or services. Executives apply the concept of bricolage when they combine ideas from existing businesses to create a new business. Think miniature golf is boring? This company couples a miniature golf course with the thrills of a haunted house. Many an expectant mother has lamented the unflattering nature of maternity clothes and the boring stores that sell them. Coming to the rescue is Belly Couture, a boutique in Lubbock, Texas, that combines stylish fashion and maternity clothes.
To meet the better-off test, the benefits the corporation provides must yield a significant competitive advantage to acquired units. The style of operating through highly autonomous business units must both develop sound business strategies and motivate managers. In most countries, the days when portfolio management was a valid concept of corporate strategy are past. Other benefits have also eroded. Large companies no longer corner the market for professional management skills; in fact, more and more observers believe managers cannot necessarily run anything in the absence of industry-specific knowledge and experience.
Another supposed advantage of the portfolio management concept—dispassionate review—rests on similarly shaky ground since the added value of review alone is questionable in a portfolio of sound companies. The benefit of giving business units complete autonomy is also questionable. Setting strategies of units independently may well undermine unit performance.
The companies in my sample that have succeeded in diversification have recognized the value of interrelationships and understood that a strong sense of corporate identity is as important as slavish adherence to parochial business unit financial results. But it is the sheer complexity of the management task that has ultimately defeated even the best portfolio managers. As the size of the company grows, portfolio managers need to find more and more deals just to maintain growth.
Supervising dozens or even hundreds of disparate units and under chain-letter pressures to add more, management begins to make mistakes. Eventually, a new management team is installed that initiates wholesale divestments and pares down the company to its core businesses.
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Reflecting these realities, the U. In developing countries, where large companies are few, capital markets are undeveloped, and professional management is scarce, portfolio management still works. But it is no longer a valid model for corporate strategy in advanced economies. Nevertheless, the technique is in the limelight today in the United Kingdom, where it is supported so far by a newly energized stock market eager for excitement. But this enthusiasm will wane—as well it should. Portfolio management is no way to conduct corporate strategy.
Unlike its passive role as a portfolio manager, when it serves as banker and reviewer, a company that bases its strategy on restructuring becomes an active restructurer of business units. The new businesses are not necessarily related to existing units. All that is necessary is unrealized potential. The restructuring strategy seeks out undeveloped, sick, or threatened organizations or industries on the threshold of significant change. The parent intervenes, frequently changing the unit management team, shifting strategy, or infusing the company with new technology.
Then it may make follow-up acquisitions to build a critical mass and sell off unneeded or unconnected parts and thereby reduce the effective acquisition cost. The result is a strengthened company or a transformed industry. As a coda, the parent sells off the stronger unit once results are clear because the parent is no longer adding value and top management decides that its attention should be directed elsewhere.
A conglomerate with units in many industries, Hanson might seem on the surface a portfolio manager. In fact, Hanson and one or two other conglomerates have a much more effective corporate strategy. Although a mature company suffering from low growth, the typical Hanson target is not just in any industry; it has an attractive structure.
Its customer and supplier power is low and rivalry with competitors moderate. The target is a market leader, rich in assets but formerly poor in management. Hanson pays little of the present value of future cash flow out in an acquisition premium and reduces purchase price even further by aggressively selling off businesses that it cannot improve.
In this way, it recoups just over a third of the cost of a typical acquisition during the first six months of ownership. Like the best restructurers, Hanson approaches each unit with a modus operandi that it has perfected through repetition. Hanson emphasizes low costs and tight financial controls. To reinforce its strategy of keeping costs low, Hanson carves out detailed one-year financial budgets with divisional managers and through generous use of performance-related bonuses and share option schemes gives them incentive to deliver the goods.
If it succumbs to the allure of bigness, Hanson may take the course of the failed U. When well implemented, the restructuring concept is sound, for it passes the three tests of successful diversification. The restructurer meets the cost-of-entry test through the types of company it acquires. It limits acquisition premiums by buying companies with problems and lackluster images or by buying into industries with as yet unforeseen potential.
Intervention by the corporation clearly meets the better-off test. Provided that the target industries are structurally attractive, the restructuring model can create enormous shareholder value. To work, the restructuring strategy requires a corporate management team with the insight to spot undervalued companies or positions in industries ripe for transformation. The same insight is necessary to actually turn the units around even though they are in new and unfamiliar businesses.
These requirements expose the restructurer to considerable risk and usually limit the time in which the company can succeed at the strategy. The most skillful proponents understand this problem, recognize their mistakes, and move decisively to dispose of them. The best companies realize they are not just acquiring companies but restructuring an industry.
Unless they can integrate the acquisitions to create a whole new strategic position, they are just portfolio managers in disguise. Another important difficulty surfaces if so many other companies join the action that they deplete the pool of suitable candidates and bid their prices up.
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Perhaps the greatest pitfall, however, is that companies find it very hard to dispose of business units once they are restructured and performing well. Human nature fights economic rationale. Size supplants shareholder value as the corporate goal. The company does not sell a unit even though the company no longer adds value to the unit.
While the transformed units would be better off in another company that had related businesses, the restructuring company instead retains them. Gradually, it becomes a portfolio manager. The perceived need to keep growing intensifies the pace of acquisition; errors result and standards fall.
The restructuring company turns into a conglomerate with returns that only equal the average of all industries at best. The last two concepts exploit the interrelationships between businesses. In articulating them, however, one comes face-to-face with the often ill-defined concept of synergy. If you believe the text of the countless corporate annual reports, just about anything is related to just about anything else!
But imagined synergy is much more common than real synergy.
Such corporate relatedness is an ex post facto rationalization of a diversification undertaken for other reasons. Even synergy that is clearly defined often fails to materialize. Instead of cooperating, business units often compete. A company that can define the synergies it is pursuing still faces significant organizational impediments in achieving them. But the need to capture the benefits of relationships between businesses has never been more important.
Technological and competitive developments already link many businesses and are creating new possibilities for competitive advantage. In such sectors as financial services, computing, office equipment, entertainment, and health care, interrelationships among previously distinct businesses are perhaps the central concern of strategy.
To understand the role of relatedness in corporate strategy, we must give new meaning to this ill-defined idea. I have identified a good way to start—the value chain. I call them value activities.
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It is at this level, not in the company as a whole, that the unit achieves competitive advantage. I group these activities in nine categories. Primary activities create the product or service, deliver and market it, and provide after-sale support.
The categories of primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities provide the inputs and infrastructure that allow the primary activities to take place. The categories are company infrastructure, human resource management, technology development, and procurement.
The value chain defines the two types of interrelationships that may create synergy. The second is the ability to share activities. Two business units, for example, can share the same sales force or logistics network. The value chain helps expose the last two and most important concepts of corporate strategy. The transfer of skills among business units in the diversified company is the basis for one concept.
While each business unit has a separate value chain, knowledge about how to perform activities is transferred among the units.
For example, a toiletries business unit, expert in the marketing of convenience products, transmits ideas on new positioning concepts, promotional techniques, and packaging possibilities to a newly acquired unit that sells cough syrup. Newly entered industries can benefit from the expertise of existing units and vice versa. These opportunities arise when business units have similar buyers or channels, similar value activities like government relations or procurement, similarities in the broad configuration of the value chain for example, managing a multisite service organization , or the same strategic concept for example, low cost.
Even though the units operate separately, such similarities allow the sharing of knowledge. Of course, some similarities are common; one can imagine them at some level between almost any pair of businesses. Countless companies have fallen into the trap of diversifying too readily because of similarities; mere similarity is not enough. Transferring skills leads to competitive advantage only if the similarities among businesses meet three conditions:.
The activities involved in the businesses are similar enough that sharing expertise is meaningful. Broad similarities marketing intensiveness, for example, or a common core process technology such as bending metal are not a sufficient basis for diversification. The resulting ability to transfer skills is likely to have little impact on competitive advantage.
The transfer of skills involves activities important to competitive advantage. Transferring skills in peripheral activities such as government relations or real estate in consumer goods units may be beneficial but is not a basis for diversification. The skills transferred represent a significant source of competitive advantage for the receiving unit. The expertise or skills to be transferred are both advanced and proprietary enough to be beyond the capabilities of competitors.
The transfer of skills is an active process that significantly changes the strategy or operations of the receiving unit. The prospect for change must be specific and identifiable. Almost guaranteeing that no shareholder value will be created, too many companies are satisfied with vague prospects or faint hopes that skills will transfer. The transfer of skills does not happen by accident or by osmosis.
The company will have to reassign critical personnel, even on a permanent basis, and the participation and support of high-level management in skills transfer is essential. Many companies have been defeated at skills transfer because they have not provided their business units with any incentives to participate. Transferring skills meets the tests of diversification if the company truly mobilizes proprietary expertise across units.
This makes certain the company can offset the acquisition premium or lower the cost of overcoming entry barriers. The industries the company chooses for diversification must pass the attractiveness test. Even a close fit that reflects opportunities to transfer skills may not overcome poor industry structure. Opportunities to transfer skills, however, may help the company transform the structures of newly entered industries and send them in favorable directions.
The transfer of skills can be one-time or ongoing. If the company exhausts opportunities to infuse new expertise into a unit after the initial postacquisition period, the unit should ultimately be sold. The corporation is no longer creating shareholder value. Few companies have grasped this point, however, and many gradually suffer mediocre returns. Yet a company diversified into well-chosen businesses can transfer skills eventually in many directions.
If corporate management conceives of its role in this way and creates appropriate organizational mechanisms to facilitate cross-unit interchange, the opportunities to share expertise will be meaningful. By using both acquisitions and internal development, companies can build a transfer-of-skills strategy. The presence of a strong base of skills sometimes creates the possibility for internal entry instead of the acquisition of a going concern.
Successful diversifiers that employ the concept of skills transfer may, however, often acquire a company in the target industry as a beachhead and then build on it with their internal expertise. By doing so, they can reduce some of the risks of internal entry and speed up the process. Two companies that have diversified using the transfer-of-skills concept are 3M and Pepsico. The fourth concept of corporate strategy is based on sharing activities in the value chains among business units.
McKesson, a leading distribution company, will handle such diverse lines as pharmaceuticals and liquor through superwarehouses. The ability to share activities is a potent basis for corporate strategy because sharing often enhances competitive advantage by lowering cost or raising differentiation. But not all sharing leads to competitive advantage, and companies can encounter deep organizational resistance to even beneficial sharing possibilities. These hard truths have led many companies to reject synergy prematurely and retreat to the false simplicity of portfolio management.
A cost-benefit analysis of prospective sharing opportunities can determine whether synergy is possible. Sharing can lower costs if it achieves economies of scale, boosts the efficiency of utilization, or helps a company move more rapidly down the learning curve. Sharing can also enhance the potential for differentiation. A shared order-processing system, for instance, may allow new features and services that a buyer will value. Sharing can also reduce the cost of differentiation. A shared service network, for example, may make more advanced, remote servicing technology economically feasible.
Often, sharing will allow an activity to be wholly reconfigured in ways that can dramatically raise competitive advantage. Sharing must involve activities that are significant to competitive advantage, not just any activity. Conversely, diversification based on the opportunities to share only corporate overhead is rarely, if ever, appropriate. Sharing activities inevitably involves costs that the benefits must outweigh. One cost is the greater coordination required to manage a shared activity.
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