4 Concepts of Strong (or not so strong) Corporate Strategy

Image

What does corporate strategy truly consist of?

The past few weeks, I have been pouring over strategic management books and articles when my curiosity was sparked by this question.  Endeavoring to better understand what corporate strategy truly entails and how sustainable competitive advantage relates to corporate strategy, I came upon one of my now favorite articles. It is one written by Michael Porter (a pioneer in strategy) and found in a Harvard Business Review book of consolidated articles on the topic called, Strategy: Seeking and Securing Competitive Advantage. (It’s newly added to my reading list and I highly recommend this book to those who are interested in strategy and the truth behind long-held corporate myths.)  According to this article, corporate strategy can be broken down into four concepts; portfolio management, restructuring, transferring skills, and sharing activities

To begin, the most widely used concept in corporate strategy is portfolio management. Furthermore, it is also the most commonly held strategy concept in many organizations both large and small worldwide. In a nutshell, most of these activities consist of the acquisition of attractive businesses in hopes to add shareholder value and to diversify. Managers choose to add companies in order to gain a competitive advantage and to capitalize on future profits.  There are dangers and downsides to this concept that are becoming more common as markets become more and more developed. One example of the dangers of this concept is acquiring a company because of a hot trend such as in the technology industry. The best practices for portfolio businesses are to stay within the boundaries of the matching industry when looking to acquire a new company.  It is important to not just look for good companies that will add value in the short term but also ones that will add sustainable long term value. If a company is acquired because of short term benefits, it will cost in the long run…especially the sell off price (lol). According to Porter, shareholders are actually better off diversifying themselves. These days, portfolio management is becoming less fitting in advanced markets. Relying solely on portfolio management as a strategy of large company is a prerequisite to failure. Hopefully this concept will become a prehistoric dinosaur to advanced economies.

The second concept of corporate strategy may be closely related to portfolio management. If (and usually when) portfolio management fails, the next concept often comes into play (but the two may not be mutually exclusive).  When I hear the word “restructuring” I’m programmed to think downsizing or its disguise name “rightsizing”. Restructuring, (I stand corrected) is the shift of strategies or a significant change in a business unit in order to capitalize on “unrealized potential”.  A company that I know fairly well is under restructure at this time. The restructuring process brought the company to divide business units into tiers. Labor and management were changed to reflect the sales of that unit. Companies targeted for this concept of corporate strategy are usually ones with declining ROI and struggling units. The company that I spoke of is actually growing at a substantial pace so I am curious as to the basis of this decision. My assumption is that the restructure is just one part of an advanced long-term strategy that combines two or more of the four concepts. A company with a successful restructure is usually characterized by strengthened business units and reduction of costs.

These two are the most common concepts that occur outside the corporation.  The other two occur within and rely on the interrelationships between business units. Relying solely on one concept is possible but some advanced corporations may not find this such a strong strategy. A combination is ideal if corporate strategy is crafted with the long-term in mind. The first two may not be the most ideal concepts but may be necessary depending on the circumstances. 

Advertisements

6.7 and why it may not be as bad as it seems

Just a few days ago, the number 6.7 was posted in many business news headlines and business journals. The reports are chock full of phrases like “lowest since 2008” and “why 6.7% is bad news.” It seems as though most of the media is communicating our need to be concerned over the latest hare-raising number released by the Bureau of Labor Statistics.

I’m one to be easily hyped and excitable, but these reports beg reasoning. Let’s start with why 6.7% seems to be a bad number for the United States economy.  In December the unemployment rate fell to 6.7% which is the lowest it has been since the fall of 2008. Not so bad, right?…..wrong. The key reason behind this number is that the labor force participation has fallen meaning that people have stopped looking for work. (You know, that ugly phrase “discouraged workers”) Other bad news is that only 74,000 jobs were created in the US as compared to the average of approximately 212,000. These factors are ones that have analysts and economists rolling their eyes and sighing.

But…before we get too engrossed in the negative aspects of this newly released statistic, I found it is important to step back and look at the big picture. Though this snapshot is not the most appealing, it’s exactly just that; a snapshot.  Instead of this 6.7 unemployment number being one to freak out about, it needs to be communicated that this may not be as dramatic as the business news makes it out to be and why this is so.

As stated before, it is crucial to shift our emphasis to the bigger picture. Combine the statistics for the year for a broader view and the economy is still at a healthy point. In fact, it’s better than it has been.  The United States economy is expected to have expanded as much as 3.5% in 2013 versus the previously estimated 2%.

Another positive, yet very debatable point about this statistic I believe is that it may slow the Federal Reserve’s tapering. The Fed has planned to reduce the amount invested in stimulus from $85 billion to $75 billion. The tapering for consumers may mean that interest rates on mortgages and students loans and whatnot will increase. The Fed’s continuation down the road of the taper process is data dependent. If the gloomy numbers continue to be released consistently, it may end or slow the tapering of the stimulus investment.

But tapering or not, I’ll have to side with Aesop on this one and agree that slow and steady wins the race. An important strategy is not to engross ourselves in the gloomy snapshots, but in the big picture. So I’ll choose to see this “hare”-raising statistic as another step (shaky, but still a step) on the road to recovery.

Image

Number of the Day: 49

Image

49%: It’s a number that makes Dearborn, MI smile.

 A number dear to me as well because I like to see businesses in my home state thrive. Ford Motor Company, a late comer to the Chinese market, reported that it increased sales in China by forty nine percent in 2013. What is fascinating to me is how numbers like this jump and the basis for these numbers. In this particular case, behind the numbers may be a very strong global strategy.  I’ve dug into the topic a bit and found that two crucial components of Ford’s China strategy seem to be the revised product offering and investment in other motor companies in China.

Ford took a transnational approach to make this increase as a strategy of global expansion. This approach is a happy medium between multidomestic and global strategies. Multidomestic approach is one in which a company decides to tailor its products to the specific country in which it is doing business. On the other hand, a global strategy is one in which product offering does not vary and a standard product is maintained in each country that it does business.  With transnational, Ford is choosing to revise some parts of it product offering in order to fit the culture in which it does business. For example, the company came out with a Chinese version of the Fusion called Mondeo (see image above) which is designed which for Chinese roads and gasoline. In Ford’s case, this smart strategy to think global yet act local seems to have been successful last year.

The next facet of Ford’s approach is its investment in JMC or Jiangling Motors Corporation which specializes in commercial vehicles. This investment helps spread risk of global expansion across other channels. Specialization in the commercial vehicle seems to be even more brilliant because it helps bring balance with a different segment. Current joint ventures with dealership networks have brought similar results.  

Nevertheless, there is another critical question to ask about this 49% growth as it greatly affects the trade of Ford. Simply put, is this growth sustainable? Was the increase in sales due to a well crafted strategy, a little bit of luck, ability to react fast, or a combination of all of them? Ford knows the rising demand for small cars in Asian countries, especially China and India. One thing that could have affected the growth for Ford is the political unrest in Japan. Maybe Chinese consumers are choosing not to buy Japanese cars because of the violent protests and boycotts happening in that industry. Maybe we benefited from the political turmoil of another company?  Possibly.

Regardless, 49% is a strong step in the right direction for Ford’s goal of 6% market share in China by 2015. In 2013, market share was just over 3%. I’m a fan of BHAGs (Big, Hairy, Audacious Goals) but this seems quite aggressive.  I hope to see Ford collaborate more with dealerships in China and grow the dealership network for sustained growth.  

Keep on driving growth Ford.

Image

Five Tips for Recent Grads

As 2014 commences, it is a time many think about finances in preparation for creating strategies for the upcoming year.  It is also a time for many students to pack their bags and head back to their last semester, or for those recent grads, transition into a new post-college life. The time of transition is one in which we must focus energy to create strategy for the next chapter. As a recent grad myself, I’m interested in how grads adjust to the working world and begin to put theory into practice. Here are five important tips I’ve learned regarding finances for grads heading towards or amidst transition.

1. As a rule of thumb, don’t take out anymore in loans then you expect to earn your first year of your career when you graduate. Keeping this in mind can give you an idea of the manageability of your loans. There may be those whose loans exceed this amount for the average salary in their industry already, such as those who may be putting themselves through college. As a plan B, students in this situation may want to consider Income based repayment plans for federal loans. Check out Finaid.org for more information on how to get that taken car of.

2. “Know what you owe” you may have several loans from different places, such as federal loans and private loans. Federal loans include Perkins Loans, Stafford loans, Direct loans, and etc. You may even have private loans (watch out for that girl Sallie Mae). A great resource to check out is nslds.ed.gov to get a measurable amount of what you owe. 

3. Prioritize. You may not know what to pay back first when you graduate. As another quick tip, it is best to focus on paying off those private loans first mainly because of the high, fluctuating interest rates. You may even want to make a few smalls payments during the grace period if you want to save more down the road on interest. At this point in time, as briefly discussed in the next tip, it is important to hit the ground running when it comes to investing early.

4.  Time is money. One of the most valuable things you have as a graduate other than your education is time. The power of compounding in your twenties is great.  Put money into your 401k as soon as you are employed with that first great gig. You can even set it so that it automatically deducts from your account. It’s simple yet powerful.

5. Don’t forget to give. The stress of finances can be overwhelming and the antidote is balance. Don’t focus too much on repayment and finances that you neglect giving. Having an unbalanced view of finances can have a negative impact and build stress. Ironically, you can release some of that stress through giving to others. According to the New York Times, giving helps strengthen bonds between friends and family and is an important part of the human interaction. You may not have much to give now but good habits start early. You can give time by volunteering for a worthy cause or an organization that you are passionate about.