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© Andrey Medvedev
THE SUBSIDIARY-LEVEL STRATEGY
Responsibilities of International Manager:
Design an MNC’s organisational chart
Define a role and strategy of an MNC’s subsidiaries
Develop control and reporting system
for the subsidiaries
© Andrey Medvedev
CORPORATE STRATEGY: CONCEPTS & TOOLS
© Andrey Medvedev
1 BOUNDARIES OF THE FIRM (three scopes)
2THE STRATEGIC ROLE
OF THE CORPORATE MANAGEMENT
3 ROLES OF MNCS’ SUBSIDIARIES
4VALUE-BASED APPROACH
TO CORPORATE PORTFOLIO PLANNING
© Andrey Medvedev© Andrey Medvedev
SCOPE OF THE FIRM
SINGLE-BUSINESS STRATEGY
MULTI-BUSINESS STRATEGY
– MULTI-PRODUCT FIRM (PRODUCT SCOPE)
– VERTICALLY INTEGRATED FIRM (VERTICAL SCOPE)
– MULTINATIONAL FIRM (INTERNATIONAL SCOPE)
RELATIONS BETWEEN BUSINESSES
– DOMINANT-BUSINESS STRATEGY
– STRATEGY OF RELATED DIVERSIFICATION
– STRATEGY OF VERTICAL INTEGRATION
– CONGLOMERATE STRATEGY
© Andrey Medvedev© Andrey Medvedev
STRATEGIC DIRECTIONS:
ANSOFF’S MATRIX (1)
Market development
Increased penetration
of existing markets
Diversification strategy
Product development
Products
Existing
New
Markets
Existing New
© Andrey Medvedev
STRATEGIC DIRECTIONS:
ANSOFF’S MATRIX (2)
© Andrey Medvedev
Products
Existing
New
Markets
Existing New
New segments,
new users,
new geography
Limited extension
in firm’s scope,
greater innovation
Radical increase
in firm’s scope
(conglomerate)
Defending
consolidation
© Andrey Medvedev© Andrey Medvedev
REASONS FOR DIVERSIFICATION
Potentially value
creating
Economy of scope
Stretching corporate
parent capabilities
Increasing market
power through cross-
subsidising
Reasons for diversification
Less obviously
value creating
Responding to market
decline
Spreading risks
Expectations of
powerful stakeholders
© Andrey Medvedev© Andrey Medvedev
MULTIDIVISIONAL STRUCTURES
WILLIAMSON’S EXPLANATION OF M-FORM RATIONALE– DISPERSION OF DECISION-MAKING
– SEPARATING STRATEGIC AND OPERATING DECISION-MAKING
– MINIMISING CO-ORDINATION COST
– AVOIDING GOAL CONFLICT
ALLOCATION
OF RESOURCES
RESOLUTION
OF AGENCY PROBLEM
Centre
Divisions
Businesses (BU)
© Andrey Medvedev© Andrey Medvedev
CORPORATE PARENT AND BUSINESS UNITS
THE CORPORATE PARENT OCCUPIES THE LEVELS
OF MANAGEMENT ABOVE THAT OF THE BUSINESS UNITS,
AND THEREFORE WITHOUT DIRECT INTERACTION
WITH BUYERS AND COMPETITORS
Centre
Divisions
Businesses (BU)
© Andrey Medvedev© Andrey Medvedev
THE STRATEGIC ROLE
OF THE CORPORATE MANAGEMENT
Value-adding and value-destroying activities of corporate parents
Portfolio managers
Restructurers
Synergy managers
Parental developers
© Andrey Medvedev© Andrey Medvedev
CORPORATE PARENT AND VALUE CREATION
CORPORATE PARENTS NEED
TO CREATE MORE VALUE THAN THEY COST
COMPANIES WITH SHARES TRADED FREELY ON THE MARKETS
MUST DEMONSTRATE THAT THEY CREATE MORE VALUE
THAN ANY OTHER RIVAL COULD CREATE
IF THE RIVAL’S BID IS MORE ATTRACTIVE
THAN WHAT THE CURRENT PARENT CAN PROMISE,
SHAREHOLDERS WILL BACK IT
AT THE EXPENSE OF INEFFECTIVE MANAGEMENT
© Andrey Medvedev© Andrey Medvedev
VALUE-ADDING AND VALUE-DESTROYING
ACTIVITIES OF CORPORATE PARENTS
•Providing clear strategic
vision for BUs
•Coaching and facilitating
•Providing central
services and resources
•Intervening to improve
performance of BUs
Corporate
parent
•Adding management
cost
•Adding bureaucratic
complexity
•Obscuring financial
performance
Value adding Value destroying
© Andrey Medvedev© Andrey Medvedev
PORTFOLIO MANAGERS / RESTRUCTURES
PORTFOLIO MANAGERS ARE ACTING AS AGENTS
ON BEHALF OF FINANCIAL MARKETS AND SHAREHOLDERS
THEY SET CLEAR FINANCIAL TARGETS FOR BUs’ EXECUTIVES
VALUE-CREATING ACTIVITIES
– IDENTIFYING AND ACQUIRING UNDERVALUED ASSETS
– IDENTIFYING AND IMPLEMENTING
RESTRUCTURING OPPORTUNITIES
– DIVESTING LOW-PERFORMING BUSINESS UNITS
– DIVESTING GOOD PERFORMERS AT A PREMIUM
CORPORATIONS TYPICALLY ADOPT
A CONGLOMERATE STRATEGY
THE COST OF THE CENTRE IS LOW
© Andrey Medvedev© Andrey Medvedev
SYNERGY MANAGERS
SYNERGY MANAGERS SEEKTO ENHANCE VALUE ACROSS BUSINESS UNITSBY MANAGING SYNERGIES ACROSS BUSINESS UNITS
SYNERGIES ARE PARTICULARLY RICHIN THE CASE OF RELATED DIVERSIFICATION
VALUE IS CREATED THROUGHFACILITATING CO-OPERATION ACROSS BUSINESS UNITSAND PROVIDING CENTRAL SERVICES AND RESOURCES
PROBLEMS
– COST INCLUDES INTEGRATION COST AND MANAGEMENT TIME
– RESISTANCE OF BU MANAGERS TO CO-OPERATE(ESPECIALLY IF THEY ARE REWARDEDACCORDING TO THE PERFORMANCE OF THEIR OWN BU)
– BADLY DEFINED SYNERGIES
© Andrey Medvedev© Andrey Medvedev
PARENTAL DEVELOPERS
PARENTAL DEVELOPERS SEEK
TO EMPLOY THEIR OWN COMPETENCES
TO ADD VALUE TO ITS BUSINESS
AND BUILD PARENTING SKILLS THAT ARE APPROPRIATE
FOR THEIR PORTFOLIO OF BUSINESS UNITS
ABILITY TO NEGOTIATE WITH GOVERNMENTS,
HIGH-LEVEL INTERNATIONALLY MOBILE EXECUTIVES
SUPPORT OF INNOVATIVE CORPORATE CULTURE
MARKETING EXPERTISE
© Andrey Medvedev© Andrey Medvedev
PARENTAL DEVELOPERS: IMPLEMENTATION
IDENTIFYING PARENTAL VALUE-ADDING CAPABILITIES
FOCUSING ON VALUE-ADDING ACTIVITIES
AND OUTSOURCING SOME CENTRAL SERVICES
TO SPECIALIST COMPANIES WHO CAN DO IT BETTER
THE “CROWN JEWEL” PROBLEM
CORRECT UNDERSTANDING OF EACH BUSINESS
IN THE PORTFOLIO
© Andrey Medvedev© Andrey Medvedev
RATIONALE OF CORPORATE PARENTS
Portfolio manager Synergy manager Parental
developer
Parent’s role Financial market
agent
Integrator Competence
transferor
Portfolio of
businesses
Conglomerate Relatively
diversified
Suited to parent’s
expertise
Value
creation
Acquiring assets,
restructuring BUs,
divesting low-
performing BUs
Facilitating BU
co-operation and
providing services
Employing parent’s
competences;
building new
parent’s skills
Organisation Autonomous BUs Collaborative BUs Effective control
from parent to BUs
Problems High cost;
resistance of BU
managers; weekly
defined synergies
Wrong identification
of parent’s value-
adding capabilities;
the “crown jewel”
© Andrey Medvedev
THE ROLES OF FOREIGN SUBSIDIARIES
ACCORDING TO BARTLETT & GHOSHAL
STRATEGY ROLE OF FOREIGN SUBSIDIARY
MULTI-DOMESTIC SENSING AND EXPLOTING LOCAL
OPPORTUNITIES
INTERNATIONAL ADAPTING AND LEVERAGING PARENT
COMPANY COMPETENCIES
GLOBAL IMPLEMENTING PARENT COMPANY
STRATEGIES
TRANSNATIONAL DIFFERENTIATED CONTRIBUTIONS
BY NATIONAL UNITS TO INTEGRATED
WORLD-WIDE OPERATIONS
© Andrey Medvedev
ROLES OF FOREIGN SUBSIDIARIES:
BARTLETT & GHOSHAL CONCEPT
Strategic
importance of
local
environment
Level of local resources and capabilities
Low
High
Low High
Black hole Strategic leader
Implementer Contributor
© Andrey Medvedev
ROLES OF FOREIGN SUBSIDIARIES
STRATEGIC LEADER
– A HIGHLY COMPETENT NATIONAL SUBSIDIARY LOCATED
IN A STRATEGICALLY CRITICAL MARKET
CONTRIBUTOR
– A COUNTRY ORGANISATION WITH A DISTINCT COMPETENCE;
IT MAY SERVE AS A SOURCE OF NEW PRODUCTS AND A WORLD-
WIDE CENTRE OF EXCELLENCE FOR A PARTICULAR PRODUCT
IMPLEMENTOR
– PROVIDES A CRITICAL MASS FOR THE INTERNATIONAL
MARKETING EFFORTS AND ECONOMIES OF SCALE AND SCOPE
BLACK HOLE
© Andrey Medvedev
OTHER TYPOLOGIES
OF FOREIGN SUBSIDIARIES
INTERNATIONAL FINANCIAL REPORTING STANDARDS
– SELF-SUSTAINING FOREIGN ENTITY
– INTEGRATED FOREIGN ENTITY
WHITE & POYNTER APPROACH
– MINIATURE REPLICA (AS ADOPTER, ADAPTER OR INNOVATOR)
– MARKETING SATELLITE
– RATIONALISED MANUFACTURER
– PRODUCT SPECIALIST
– STRATEGIC INDEPENDENT
JARILLO & MARTINEZ APPROACH
– RECEPTIVE SUBSIDIARY
– ACTIVE SUBSIDIARY
– AUTONOMOUS SUBSIDIARY
© Andrey Medvedev
INTEGRATION OF SUBSIDIARIES
ACQUISITION OF AN EXISTING RUSSIAN COMPANYCOULD BE A WAY TO ESTABLISH SUBSIDIARY
– IT MAY BRING BENEFITS FOR THE LOCAL COMPANY (ACCEPTING THE CORE COMPETENCE, FINANCING DEVELOPMENT PROCESS)
LOCAL MANAGERS NORMALLYPARTICIPATE IN NEGOTIATING ACQUISITION TERMS
– COST OF ACQUISITION, RECONSTRUCTION PROGRAMME, STAFFING POLICY, TOP MANAGERS FUTURE
AFTER ACQUISITION, THE RUSSIAN COMPANYHAS TO BE INTEGRATED INTO THE MNC
– ADMINISTRATION MIX; CHANGES IN MANAGEMENT
– SELECTING AND TRAINING PEOPLE
– RUSSIAN MANAGERS HAVE GOOD CAREER CHANCE
– PEOPLE MIX; SKILLS & STYLE MIX
– CONVERGENCE OF MANAGEMENTAND BUSINESS CULTURES
© Andrey Medvedev
SUBSIDIARY ROLE: UNILEVER
By the end of 2007, the Anglo-Dutch home and personal care giant Unilever
has shifted its entire European stick deodorant production from its Leeds plant
in Britain to Russia. Unilever started exporting deodorants from its Severnoye
Siyaniye plant in St. Petersburg to countries around Europe and the CIS.
Among the brands produced there are Rexona, Dove, Sure, Brut and Lynx.
Unilever has invested 7 million euros to modernise the production line
at the Severnoye Siyaniye plant in order to double production rates
to 20 million units in 2008.
“The transfer of all European stick deodorant production to Russia is…
in line with Unilever’s global development strategy... Russia is a priority target
for business development and production,” the company said in a statement.
“Lower labour costs are only one of the key reasons for switching production
to St. Petersburg,” Irina Kurachenkova, a spokeswoman for Unilever said
Wednesday. She said the switch of production to Russia would not lead
to job losses at the company’s British plant. The Leeds factory would swap
to producing aerosol deodorants and capacity would be increased.
© Andrey Medvedev© Andrey Medvedev
TOOLS FOR PORTFOLIO PLANNING
BCG GROWTH-SHARE MATRIX
THE GE/MCKINSEY PORTFOLIO PLANNING MATRIX
THE PARENTING MATRIX
MARKET-ACTIVATED CORPORATE STRATEGY FRAMEWORK
THE MCKINSEY RESTRUCTURING PENTAGON
© Andrey Medvedev© Andrey Medvedev
BCG GROWTH-SHARE MATRIX
Market
share
Low
High
Market
growth
Low High
Dogs Cash cows
Question marks Stars
© Andrey Medvedev© Andrey Medvedev
THE GE/MCKINSEY PORTFOLIO PLANNING
MATRIX (DIRECTIONAL POLICY MATRIX)
Medium
BU competitive advantage
Low
High
Ind
us
try
att
rac
tive
ne
ss
Low High
Medium Selectivity
SelectivityHarvest/
divest
Selectivity
Selective
growth
Investment
and growth
Selective
growth
Harvest/
divest
Harvest/
divest
Size of market
Market share of BU
© Andrey Medvedev© Andrey Medvedev
THE PARENTING MATRIX
Fit between BU parenting opportunities
and the parent’s skills and resources
Low
High
Fit
be
twe
en
BU
cri
tic
al s
uc
ce
ss
fac
tors
an
d t
he
pa
ren
t’s
sk
ills
,
res
ou
rce
s a
nd
ch
ara
cte
ris
tic
s Low High
Ballast businessesHeartland
businesses
Alien businessesValue trap
businesses
© Andrey Medvedev© Andrey Medvedev
MARKET-ACTIVATED CORPORATE
STRATEGY FRAMEWORK
Medium
BU’s value creation potential
as a stand-alone entity
One of
the pack
Co
rpo
rate
pa
ren
t’s
ab
ilit
y
to e
xtr
ac
t va
lue
fro
m B
U,
rela
tive
to
oth
er
po
ten
tia
l o
wn
ers
Low High
Natural
owner
© Andrey Medvedev© Andrey Medvedev
THE MCKINSEY RESTRUCTURING PENTAGON
Currentmarketvalue
Firmvalueas is
Potential valuewith internal
improvements
Optimalrestructured
value
Potential valuewith externalimprovements
Restructuring
framework
Managing external
perceptions of a firm’s
future prospects
Making strategic and
operational improvements
to individual BUs
Making changes in the business portfolio
through disposals and/or acquisitions
Exploiting total firm
opportunities
© Andrey Medvedev© Andrey Medvedev
VALUE-BASED MANAGEMENT:
THE MAIN CONTENTS
Value-for-shareholders creation
is the primary firm’s goal
Value-measuring metrics are used
in firm’s budgeting and control
Knowing value drivers help managers
find the ways of firm’s value creation
Performance of firm’s business units
is measured as value added by these units
Managers’ rewards depend
on adding value to their units
Value-
based
management
© Andrey Medvedev© Andrey Medvedev
MEASURING EVA: BAYER
At Bayer, a German pharmaceutical company, the integrated value-
based corporate management system was introduced in 1997.
For purposes of business planning and performance monitoring,
Bayer’s experts decided to take as a basis the cash flow surplus
(cash value added – CVA) that remains after deducting
the cash flow needed to yield a return on the capital invested
and reproduce the depleted components of it.
In 2000, gross cash flow from continuing operations amounted
to €4 031 million. The average capital invested was €35 million.
The corporate cost of capital was 9.37%.
The resulting CVA amounted to:
4 031 – 9.37% × 35 103 = €742 million
© Andrey Medvedev© Andrey Medvedev
PERFORMANCE OF BUSINESSES:
BAYER
The central profitability indicator at Bayer
is the cash flow return on investment (CFROI).
In 2000, CFROI raised to 11.48% (from 9.8% in 1999):
4,031 / 35,103 = 11.48%
CFROI is also used to measure the profitability of the business groups
individually as well as performance by regions.
Health care Agriculture Polymers Chemicals
15.4% 13.9% 11.2% 9.8%
Europe North
America
Asia/
Pacific
Latin America/
Africa/Middle East
13.4% 11.3% 13.7% 14.4%
© Andrey Medvedev© Andrey Medvedev
MEASURING CORPORATE EVA:
DAIMLER-CHRYSLER 2000
To calculate RONA and EVA for the entire DaimlerChrysler Group,
net operating income (after taxes) and net assets are used.
Net assets are defined as assets minus non-interest-bearing liabilities.
In 2000, net operating income totalled €4.384 billion. Net assets
increased to €59.5 billion. Thus, return on net assets (RONA)
for the Group amounted to 4,383 / 59.5 = 7.366% (after taxes).
Since the merger of Daimler-Benz and Chrysler in 1998,
a WACC of 9.2% after tax was used as a benchmark for the Group.
So, RONA was lower than the required rate of return:
7.4% < 9.2%
Due to the decreased net operating income and higher net assets
the DaimlerChrysler Group reported a negative value added:
4,383 – 0.092 × 59.5 = – €1.091 billion
© Andrey Medvedev© Andrey Medvedev
PERFORMANCE OF BUSINESSES:
DAIMLER-CHRYSLER 2000
For performance purposes, DaimlerChrysler differentiates
between the Group level and the operating levels of the segments
and business units. The performance measures support management
in its tasks of leading and controlling the entire group and its BUs.
For the industrial BUs, earnings before interest and taxes is used
which accurately reflects the areas of responsibility
under the control of the BU management.
The minimum required rate of return on net assets for industrial BUs
is 15.5% (before taxes).
The Mercedes-Benz Passenger Cars & smart segment significantly
surpassed this minimum required rate of return (26.3%).
The Truck and Buses division also exceeded the minimum (16%)
as well as Aero-Space (16.7%). Chrysler Group, with 2.1%,
did not achieve the minimum required rate of return, primarily
due to the unsatisfactory economic situation in North America.
© Andrey Medvedev© Andrey Medvedev
MEASURING BUSINESSES’ EVA:
DAIMLER 2007
Millions of €
* EBIT; ** Net operating profit; *** After tax
Profit Net
assets
Cost of
capital
Value
added
Mercedes-Benz Cars 4,753* 7,831 11%
Daimler Trucks 2,121* 6,127 11%
Daimler Financial Services 630* 4,268 14%
Vans, Buses, Other 1,956* 8,804 11%
All divisions 9,460* 27,030
Daimler Group 4,123** 39,187 7%***
**** €631 million in 2006
© Andrey Medvedev© Andrey Medvedev
MEASURING BUSINESSES’ EVA:
DAIMLER 2008
Millions of €
* EBIT; ** Net operating profit; *** After tax
Profit Net
assets
Cost of
capital
Value
added
Mercedes-Benz Cars 2,117* 10,475 12%
Daimler Trucks 1,607* 6,340 12%
Daimler Financial Services 677* 4,478 13%
Vans, Buses, Other (1,239)* 8,932 12%
All divisions 3,162* 30,225
Daimler Group 1,370** 39,187 8%***
860
847
95
(2,311)
(1,147)
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