Oliver Thylmann

(Originally published on OUBS Blog)

Corporate strategy signifies an overarching strategy, above and beyond that of one of the businesses of that corporation. The idea is to achieve superior returns through the combination of different businesses.

The book starts with a case on VWs acquisitions of Seat and Skoda and the potential benefits achieved through the integration and combination of those. For one, the company now has different brands in different market segments, but built on a standard platform to achieve economies of scale and scope. The problem that starts to appear is that the differentiation between the different brands is shrinking.

VW is saving some $500 million but this is only an advantage as long as Ford or Toyota cannot cut the costs the same amount.

All this combination stuff has come from portfolio management, which is about combining a portfolio of diversified strategic business units. Important here is also BCG’s growth-share matrix. The idea is to use internal cash flows for financing and manageing the cycle of declining businesses and growing ones. You take the stars, invest in them to make them cash cows which will provide the cash for the next stars.

The problem with portfolio management is that the only idea behind it is the management of cash flows. In the late 1980s, strategy moved back to focussing on core businesses. The thing is that in balancing cash cows and stars, the manager acts as the shareholder. The shareholder can do that himself though and it is sometimes unclear where the manager can add value or if the shareholder should not decide about his exposure to risk himself. Agency theory even suggests that portfolio diversification is bad for shareholders.

Now in the 1990s, strategy moved away from markets and more to capabilities though, which brings us to the notion of synergies.

The thing is that merely putting some companies in a portfolio does not add value, but synergy will need to be created, managed. The idea is to combine activities so that 2+2 = 5 (which can also fail and end up as 3 ). The thing is that you need to clearly identify what the capabilities will be that will be needed for the synergies to work out.

Complementary benefits can be achieved through combination of physical assets for economies of scale, higher capacity utilisation and an improved product mix. Invisible assets may also be transfered from one business to another.

Itami (1992) suggested that there are combinatorial benefits, like opening a resort for the summer in a sky resort, and synergy which is multiplicative rather than additive, e.g. that by good reputation visitors in any season might come in the other too.

The thing is that some things are limited by some thing like for example capacity. Using a Plant that is used 70% more, can only lead to 100% usage, after that it is finished. This is also unlikely to be of lasting effect as other companies can do the same thing in the end. Invisible, information-based assets will likely remain unique to the company and will not run out or be exhausted.

Adding time to the mix brings you to static combination benefits, which are the integration of two strategies at one point in time and dynamic combination benefits, where they are integrated over time (e.g. reuse of extraction ptis as waste management depositories). Beyond that we come to dynamic synergy.

Prahalad and Hamel identify companies as collections of core competencies and core products. The thing is that core competencies do not diminish with use, as they put it. Rather, they are enhanced by use. In that sense, markets should be moved in that exploit an existing or develop a new competency. To test if these are core, as yourself:
- do they provide potential access to many markets (is it transferable for combination benefits)
- do they make a significant contribution to the perceived customer benefit of the end product
- are they difficult to imitate

If all three fit, the source is likely to be dynamic. Theodore Levitt (1960) argued that many companies focus on their products instead on what the customer wants and one might even argue that they should relate their core competencies to that.

Honda for example did not exploit their products like VW but their core competencies by using the Honda brand across many different products that would not eat away each others profit margins.

Rumelt (1994) established four key components of core competence competition:
- corporate span
- temporal dominance (of products)
- learning-by-doing (to enhance them)
- competitive locus
The thing is that superior corporate performance based on core competencies allows for dynamics.

Diversification and Divestment

There are two possibilities for superior performance, entering an attractive industry or possessing a competitive advantage. What are the motives for diversification in that light?
- growth
- investment risk-spreading
- profitability (evaluated against Porter’s (1987) three tests for diversification value-creation)

Economies of scope are the main source of corporate superior performance as of Grant. These need to be more cheaply attained through internalising than out-sourcing (cost economics theory). There is a great figure (3.1) on page 9-26 to test for diversification strategies.

What if an activity does not work well, should it be divested or a recovery started? Kathy Harrigan (1988) sees declining industies as opportunities for end game strategies. In this game, you can either go for a quick sale, harvest it for cash, find a niche or go for leadership in which you believe that after the others leave, profitabilty will return.

Harrigan believes that companies either need to flee or fight. Grinyer et al. (1988) studied strategies with companies in delicne followed by dramatic and sustained improvement and found something they found sharpbenders. These will often have major management change, improved marketing, reduced production costs, improved quality and service.

Another usefulness of core competencies is that they allow you to see if you should divest and risk loosing that competency. Otherwise it might be wise to outsource.

Strategies for corporate structure

In Book 7 Alfred Chandler’s (1962) thesis was that ‘structure follow strategy’. Rumelt (1974) argued that for some ‘structure follows fashion’. Divisionalised structure was very in fashion until the 1970s, when the advantage of adopting it was removed as everybody was doing that. Corporate strategy as a management activity originated from the structure though.

The thing is that co-ordination and decentralisation are not easy to reconcile. Especially when leveraging invisible assets or core competencies, or at least trying too. You should also not forget the national interest and government policy when thinking about corporate strategy and the potential structure it entails or brings with it.

Chandler’s work (1962) was born out of the thesis that the devisionalised corporation evolved out of diversification and growth strategies of large enterprises. The thing is though that in different social and economic conditions things work very differently, which is examplified in a case about russias emerging conglomerate corporations. Here the setting that things were taking place in, needed some specific strategies which resulted in some specific structures.

This leads us to the idea that corporations need to understand values and norms behind competitors’ strategies. In the UK and USA there is a market oriented relationship between shareholders and corporations. In the Rhenish model banks play a more important role for long-term loan and equity, bringing more friendly capital and stability. In Japan, companies often have their origins in diversified, family-controlled zaibatsu merchant houses of the seventeenth century. Here the subsidiaries raise 49% of the cash needed for the company letting the family maintain control. These zaibatsu have evolved into keiretsu, involving interconnected members with support from keiretsu banks with interlocking minority shareholding.

You therefor need to understand regulation, government, socio-economics and cultural context to really see the structures in their full bloom.

Multidivisional structure removed the responsibility for the entire enterprise from routine operational tasks. Responsibility was often pushed down with minimal interconnections between different parts of the same corporation, with profit centers being decentralized resulting in less gains from scale and scope and less coherence of the corporation as a whole.

The thing is that if superior performance is about synergy and compination, then decentralisation might be a bad move. Management can managed the corporate portfolio, invididual business or internal linkages. This is not an easy dilemma and managers will always have to choose between centralisation or decentralisation and integration or independence and control or collaboration.

Networks and Corporations

One thing you can do is to accept this tension and get away from it (Sloan, 1963). In Japan instead of a formal hierarchy there are informal networks based on trust and relationships. A simple choice of make or buy is not enough here, even though the structures can be critized for less than free flow of information and capital in the general market.

Kay (1993) identified co-operative relational contracting as an alternative to classical or spot contracts. In Europe these might be:
- network of italian suppliers for benetton
- professional service firms who link complementary skills or locations

Four main drivers might encourage the formation of networks:
- rising global competition
- deepening industry convergence
- battels over technical standards
- positioning

In the end, we need to extend ‘make or buy’ to ‘make, buy or co-operate’. The corporate management needs to include network co-ordination then, co-ordinating joint decision-making. For alliances to fulfil their obligations Gomes-Cassares identified two main methods:
- establishing group norms and standards
- leadership in group decision-making (network leader or agreed compromise or consensus method)

The tighter the collaboration, the blurrier the boundary, the more the joined the firms are and the more will they put their economic weight into the battle as one unit.

Potential sources of advantage for networks come from:
- flexible capabilities
- specialisation and division of labour
- learning
- increased options

Remember though that networks are very complex, in itself and to be managed.

(Originally published on OUBS Blog)
The organisational paradigm are the beliefs and assumptions that make up “an organisation’s view of itself and its environment” (Johnson, 1988). Together with:
- stories and myths
- symbols
- rituals and routines
- control systems
- organisational structures
- power structures
- symbols
it builds the “cultural web” or an organisation.
Deal and Kennedy (1982) defined culture as ‘the way we do things around here’. Some of the elements of the cultural web are formal mechanism and others are informal. The meaning of those are what is significant. This is again made visible through the stories and myths, often used for sensemaking of events and hence not always accurate but more about getting the point across. Stories can be enhanced through rituals and routines.
A richer culture definition comes from Wilson and Rosenfeld (1990, p.229):
…the basic values, ideologies and assumptions which guide and fashion individual and business behaviour. These values are evident in more tangible factors such as stories, ritual, language, and jargon, office decoration and layout and prevailing modes of dress among staff.
This shows that organisational culture (what the “other” members value) is a very difficult to define beast, with corporate culture (what the dominant members value) being a small part of it. Often the values of the dominant are more important than of other individuals or even of society.
Culture can also be a capability or resource, also because in case it is a strong and homogeneous one, you might need less formal systems and procedures as control. To homogeneous can also mean group think though, which combined with a limited corporate (rather than organisational) view of culture can lead to too narrow horizons. A strong culture will include commitment to a strategic intent over a long time, making subsequent strategic shifts harder. A culture is a “sticky” factor that locks in an organisation.
In the public sector it is often tried to make responsiveness to the citizen part of the culture.
Many of our deep routed values have been shaped when we were young, teaching us what is right and what is wrong. Not all of them have to be codified in law. The question is whether working ethically will lead to success and Hosmer (1994) argued that equitable acts lead to trust, which leads to commitment. This commitment, when it is co-operative and innovate, can lead to success. To behave ethically you need to go above the law though, to work within norms and values in a worldwide community/society.
There is a close link between national cultures and organisational cultures, which can be seen in the difference between Japanese and Western way of doing things. The Japanese are using something called ‘simultaneous loose-tight coupling’ meaning that they have tight conformity to core values with looser control systems. These differences are not only rooted in culture though, but include financial, investment and policy for example. An analysis of 116000 IBM employees in the same or similar jobs found that culture, in relation to nationality, has some distinct dimensions that influence it:
- Power Distance: Acceptance of unequal power distribution
- Uncertainty Avoidance: Tolerance of uncertainty
- Individualism: Personal over Group achievement
- Masculinity: Dominance of masculine tendencies
The paradigm is empirically driven, built on experiences rather than a model of how things should be. They are built on beliefs that have repeatedly been validated. How can managers use this? In a top-down system the manager only pays attention to what he or she wants to pay attention to. In a bottom-up system, the management does not interfere with data.
As strategy making is a collective activity, we need to share each others maps and models of the corporation and the environment to find a collective course of action. This shows again that strategy is not linear and rational but more of a social and cultural contruct. The paradigm defines environmental ‘reality’. This makes it a powerful tool for coping with complex situations but also something that is a liability under change conditions. When performance of a company does not work out, we can fist find tighter control of our implementation, then we might reconstruct the strategy and only then would we attack and change our paradigm.
A knowledge creating company needs a special kind of culture and power structure. An example in the book is the middle-up-down process of knowledge management suggested by Japanese economics (Nonaka, 1991; Nonaka and Takeuchi, 1995).
Top down management assumes that only top managers are able to create knowledge and it only exists to be processed and/or implemented. It is good for dealing with explicit knowledge. Buttom-up management makes work autonomous allowing knowledge to be created at the bottom. It is good for tacit knowledge but due to the inherent autonomy this knowledge is extremely hard to communicate.
In the top-down model the fate of the company might be aligned with the fate of a few top managers and bottom-up knowledge creation can be very slow as it rests on the patience and talent of the individual.
Japanese companies seem to create knowledge in the middle management through a spiral conversion process involving top and front-line employees. They serve as the strategic knot. Knowledge can be interpreted differently in a different context and middle-management is used to orient knowledge creation towards a purposeful end, making available frameworks to sense making of new knowledge. Top management creates a dream and middle management develops concrete concepts for the front-line.
Culture, Power and Change
The paradigm is the outcome of all elements of the cultural web and cultural change likely needs to attack this paradigm head on, it must be challenged, discredited and devalued. This can be done by:
- use of an outsider who has little commitment to the current paradigm
- exposing the paradigm
- power reconfiguration
- advocating and legitimising dissent
- powerful advocacy
Senge sees leadership as culture-formation through building shared vision.
In terms of recovery and turnaround strategies there are a few things that generally are done (Slatter, 1984):
- change of management
- strong central financial control
- organisational change and decentralisation
- product-market re-orientation
- improving marketing
- growth via acquisitions
- asset reduction
- cost reduction
- investment
- dept rstructuring and other financial strategies
Important here is cash flow. It is also important to focus on those 20 per cent of the factors involved that have 80% of the impact (Pareto principle).
Power
Mintzberg (1983): Power is the capacity to effect (or affect) organisational outcomes
A relationship is needed for power to be present. This relationship leads to interdependencies and then one can argue that power is about the degree of dependence on the othe part of the relationship. The power of a unit can be seen in:
- the importance of the resource
- the control over allocation
- the substitutability of the resource
Important relationships are your stakeholders and the most important ones as of a study chaired by Sir Anthony Cleaver are:
- shareholders
- employees
- customers
- suppliers
- community
The power of any of those relationships depends on your paradigm and the setting of your cultural web.
Remember the following about managing strategy and power:
- power is present in all ofrms of the organisation
- understand power structures and how to management them
- restructure dependencies and resource allocation to manage power
- long-term external relationships are gaining importance and shared expectations are needed here
- you need to balance power
Lord Acton (1887): Power tends to corrupt and absolute power corrupts absolutely.