1. 9-10-11-12 Corporate Strategy: Implementation And Diversification

2. Copyright © Houghton Mifflin Company. All rights reserved.9 - 2 Seven-S Framework From In Search of Excellence, Peters and Waterman, 1982 S’s are interrelated Need to be developed and maintained to support each other and implement the overarching strategy.

3. Copyright © Houghton Mifflin Company. All rights reserved.9 - 3 Details of Seven-S Framework StrategyAnalysis of environment, competition, customers, leading to a plan for future firm actions StructureOrganization chart, patterns of status and control and how relevant groups are tied together SystemsProcesses, procedures, reward/control/information/ manufacturing systems, quality programs StaffCharacteristics and capabilities of people working in firm’s groups StyleDecision making processes, nature of interpersonal interactions/communications, behavioral expectations Shared Values Culture, central beliefs and ambitions of organization, priority objectives SkillsKey knowledge and capabilities that are relied on to compete successfully

4. Copyright © Houghton Mifflin Company. All rights reserved.9 - 4 Strategic Change: Improving Performance Changing the leadership –New leader is often from outside the company –New leader must make difficult decisions, motivate, listen, and delegate Changing the strategy –Redefine strategic focus –Divest unwanted assets –Improve profitability –Make acquisitions

5. Copyright © Houghton Mifflin Company. All rights reserved.9 - 5 Strategic Change: Improving Performance (cont’d) Changing the organization –Unfreezing the organization Big bang theory of change Senior managers must be committed to it –Movement Speed Involving employees –Refreezing the organization Culture, socialization, management education programs Hiring policies, control and incentive systems

6. Copyright © Houghton Mifflin Company. All rights reserved.9 - 6 Building Blocks of Organizational Structure Grouping tasks, functions, and divisions –Organizational structure follows the range and variety of tasks that an organization pursues –Companies group people and tasks into functions and then functions into divisions –Bureaucratic costs

7. Copyright © Houghton Mifflin Company. All rights reserved.9 - 7 Building Blocks of Organizational Structure (cont’d) Allocating authority and responsibility –Hierarchy of authority (chain of command) –Span of control (number of subordinates) –Tall and flat organizations –Drawbacks of taller organizations Less flexibility and slower response time Communication problems Distortion of commands Expense

8. Copyright © Houghton Mifflin Company. All rights reserved.9 - 8 Tall and Flat Structures

9. Copyright © Houghton Mifflin Company. All rights reserved.9 - 9 Allocating Authority and Responsibility (cont’d) –The minimum chain of command To combat an organization that is too tall Hand responsibility up and empower those below –Centralization or decentralization? Delegating responsibility reduces information overload and enables managers to focus on strategy Empowering lower-level managers increases motivation and accountability Empowering employees requires fewer managers Centralized decisions allow easier coordination of activities Centralization means that decisions fit broad organizational objectives

10. Copyright © Houghton Mifflin Company. All rights reserved.9 - 10 Building Blocks of Organizational Structure (cont’d) Integration and integrating mechanisms –Direct contact among managers across functions or divisions –Liaison roles Gives one manager in each function or division the responsibility for coordinating with the other –Teams

11. Copyright © Houghton Mifflin Company. All rights reserved.9 - 11 Implementing Strategy Through Organizational Structure, Control, and Culture Organizational structure –Depicted in organizational chart –Assigns employees to specific value creation tasks and roles and specifies how those are linked to increase efficiency, quality, innovation, and responsiveness to customers –To coordinate and integrate the efforts of all employees

12. Copyright © Houghton Mifflin Company. All rights reserved.9 - 12 Implementing Strategy Through Organizational Structure, Control, and Culture (cont’d) Control system –A set of incentives to motivate employees to increase efficiency, quality, innovation, and responsiveness to customers –Provides feedback on performance so corrective action can be taken Organizational culture –The collection of values, norms, beliefs, and attitudes shared within an organizations and that control interactions within and outside the organization

13. Copyright © Houghton Mifflin Company. All rights reserved.9 - 13 Strategic Reward Systems Based on strategy managers must decide which behaviors to reward A control system measures those behaviors and links the reward structure to them PERHAPS MOST IMPORTANT ASPECT OF IMPLEMENTATION

14. Copyright © Houghton Mifflin Company. All rights reserved.9 - 14 Organizational Culture Culture and strategic leadership Traits of strong and adaptive corporate cultures –Bias for action –Nature of the organization’s mission (sticking with what the organization does best) –How to operate the organization (motivating employees to do their best)

15. Copyright © Houghton Mifflin Company. All rights reserved.9 - 15 Corporate Level Strategies Portfolio or “mix” of businesses of a company Parallels investment portfolio concept from finance Focuses on owner/stockholder as main stakeholder—creation of value for owners through “mix” of businesses Diversification

16. Copyright © Houghton Mifflin Company. All rights reserved.9 - 16 A Company as a Portfolio of Distinctive Competencies Reconceptualize the company as a portfolio of distinctive competencies rather than a portfolio of products Consider how those competencies might be leveraged to create opportunities in new industries Existing vs. new competencies Existing industries in which a company competes vs. new industries

17. Copyright © Houghton Mifflin Company. All rights reserved.9 - 17 Free Cash Flow What is it? How to use it?

18. Copyright © Houghton Mifflin Company. All rights reserved.9 - 18 Diversification Reasons Continuum Least Power to Create Value Most Power to Create Value Reducing Risk Maintaining Growth Balancing Cash Flows Sharing Infrastructure Increasing Market Power Capitalizing on Core Competencies Not Recommended as a Reason to Diversify Recommended as a Reason to Diversify

19. Copyright © Houghton Mifflin Company. All rights reserved.9 - 19 Transfer of Competencies at Philip Morris

20. Copyright © Houghton Mifflin Company. All rights reserved.9 - 20 Sharing Resources at Proctor & Gamble

21. Copyright © Houghton Mifflin Company. All rights reserved.9 - 21 Overview of Forms of Corporate Strategy Horizontal integration –The process of acquiring or merging with industry competitors Acquisition and merger Vertical integration –Expanding operations backward into an industry that produces inputs for the company or forward into an industry that distributes the company’s products Strategic outsourcing –Letting some value creation activities within a business be performed by an independent entity

22. Copyright © Houghton Mifflin Company. All rights reserved.9 - 22 Benefits of Horizontal Integration Reducing costs Increasing value –Product bundling –Cross selling Managing industry rivalry Increasing bargaining power –Market power (monopoly power)

23. Copyright © Houghton Mifflin Company. All rights reserved.9 - 23 Drawbacks and Limits of Horizontal Integration Majority of mergers and acquisitions do not create value Implementing a horizontal integration strategy is not easy Mergers and acquisitions often fail to produce the anticipated gains Can bring the company into conflict with antitrust law

24. Copyright © Houghton Mifflin Company. All rights reserved.9 - 24 Vertical Integration: Stages in the Raw Material to Consumer Value Chain

25. Copyright © Houghton Mifflin Company. All rights reserved.9 - 25 The Raw Material to Consumer Value (Supply) Chain in the Personal Computer Industry

26. Copyright © Houghton Mifflin Company. All rights reserved.9 - 26 Full and Taper Integration

27. Copyright © Houghton Mifflin Company. All rights reserved.9 - 27 Increasing Profitability Through Vertical Integration Building barriers to entry Facilitating investments in specialized assets Protecting product quality Improved scheduling

28. Copyright © Houghton Mifflin Company. All rights reserved.9 - 28 Arguments Against Vertical Integration Cost disadvantages –Company-owned suppliers that have higher costs than external suppliers Rapid technological change –Tying a company to an obsolescent technology Demand unpredictability –Difficulty of achieving close coordination among vertically integrated activities Bureaucratic costs

29. Copyright © Houghton Mifflin Company. All rights reserved.9 - 29 Alternatives to Vertical Integration: Cooperative Relationships Short-term contracts and competitive bidding Strategic alliances and long-term contracting Building long-term cooperative relationships –Hostage taking –Credible commitments –Maintaining market discipline Parallel sourcing policy

30. Copyright © Houghton Mifflin Company. All rights reserved.9 - 30 Strategic Outsourcing of Primary Value Creation Functions

31. Copyright © Houghton Mifflin Company. All rights reserved.9 - 31 Benefits of Outsourcing Reducing costs –The specialist company is less than what it would cost to perform the activity internally Differentiation –The quality of the activity performed by the specialist is greater than if the activity were performed by the company Focus –Distractions are removed; the company can focus attention and resources on activities important for value creation and competitive advantage

32. Copyright © Houghton Mifflin Company. All rights reserved.9 - 32 Identifying and Managing the Risks of Outsourcing Holdup –The company can become too dependent on the provider of the outsourced activity so that the provider can raise prices Scheduling of activities –Loss of control can result in distorted signals in the supply chain Loss of information –Contact with the customer may be lost

33. Copyright © Houghton Mifflin Company. All rights reserved.9 - 33 Restructuring Reducing the scope of the company by exiting business areas Why restructure? –Not competitive –Diversification discount: investors see highly diversified companies as less attractive Complexity and lack of transparency in financial statements Too much diversification or for the wrong reasons –Response to failed acquisitions –Innovations have diminished the advantages of vertical integration or diversification

34. Copyright © Houghton Mifflin Company. All rights reserved.9 - 34 Restructuring Strategies Exit strategies –Bankruptcy –Divestment Spinoff Selling to another company Management buyout (MBO) –Harvest –Liquidation

35. Copyright © Houghton Mifflin Company. All rights reserved.9 - 35 Restructuring and Reengineering Restructuring involves –Streamlining hierarchy of authority and reducing number of levels –Downsizing the workforce to reduce costs Reasons –Change in the business environment –Excess capacity –Organization grew too tall and inflexible; bureaucratic costs –To improve competitive advantage and stay on top

36. Copyright © Houghton Mifflin Company. All rights reserved.9 - 36 Restructuring and Reengineering (cont’d) Reengineering –Fundamental rethinking and radical redesign of business processes to achieve dramatic improvements –Focuses not on functions, but on processes (which cut across functions)