Report on strategic options open to Elite Plastic Packaging Introduction Elite Plastic Packaging (EPP) from the financial data given is clearly out performing other companies in the Print and Packaging division – indeed 20X6 has seen it, apparently, become the only profit maker. The operating margins you are generating(40. 3% in 20X6), although not excessive for a manufacturing firm looking to cover significant overhead costs, are way beyond those gained by other companies in the division and the group as a whole.
This should provide a sound basis for arguing your case for the move into America and Asia but the conservative nature of the Group Executive and your own Divisional Chief Executive make a careful and well prepared and argued case for such a strategic move an imperative. Consideration of alternative market entry strategies EPP has achieved significant growth to date through a combination of product and market development. Importantly, this has not led to diversification away from the core business which is important bearing in mind the 1990s experience of the Group Chairman and Chief Executive to previous geographic diversification.
The move to becoming a global operator does inevitably involve taking on more risk – which ever the preferred route. The generic strategy of Elite Packaging to date has been that of a focused differentiator, specializing in plastic packaging for food, drink and confectionery manufacturers solely within the European market. From the information given I assume that growth has been largely organic with little experience of growth via acquisition or strategic alliances.
This lack of experience of alternative routes to growth may influence your own perception of risk between the four entry strategies but there may be experience and expertise within the Sigma Group that you can use, both prior to making a decision and once the decision is made. It is important to examine your own and your superiors’ assumptions about the options available. As presented the options are very much ‘black and white’ but a combined or ‘hybrid’ option, e. g. entry into the American market via subcontracting and into the Asian market via a green field site route may be the preferred route to global operation.
I have considered each option against the three tests of suitability, acceptability and feasibility and this in turn reflects my perceptions of the key stakeholders who will take the decision(s) – namely, Tim Sterling, your immediate superior and the Sigma Group Executive. Entry strategy 1 – License technology In terms of your personal ambition to be a truly global player this option is less likelyto achieve this, as there will be no global recognition for the Elite brand and high dependency on the choice of partner.
This choice may be limited, as they will require similar technology know-how and access to an appropriate customer base. It also fails to establish a global presence for the business for new opportunities in the future. This is unlikely to be seen as acceptable to you, but clearly it has relatively few resource implications – though the managing of the licensee will require a different set of skills – and feasibility is, therefore, reasonably good.
In terms of presenting are as one d case to your superiors, you are likely to get a positive response in terms of acceptability of its being low risk and relatively quick to implement, though the low return may cause adverse comment. Once you have licensed, control passes to the licensee and there will be no guarantee of commitment or performance. The strategic management style of the Group Executive places the responsibility for showing feasibility in the hands of the sponsoring firm and division but the low resource demands of this option may appeal to Archie Williams.
Entry strategy 2 – Greenfield sites By inference this would seem to be your preferred option but one that will take some considerable time and effort to convince the Group Executive and Tim Sterling at divisional level. Capital investment requirements are significant and the time taken to produce a return on that investment considerable – a combination that spells high risk to the key decision makers. Growth of sales revenue is likely to be slower as it may be necessary to build up customer relationships from a zero base.
You should be careful to draw attention to any global customers whose needs you currently supply in their European markets. Your ability to convincingly argue against these strongly held perceptions will be a real test of your powers of persuasion – however the fact that EPP’s performance in Europe has produced returns significantly above those of the division and group as a whole will work in your favor where proof of profitability is the key to approval. As indicated above a hybrid strategy where entry into the Americas is via strategic alliance and entry into Asia by green field site may be a ‘win-win’ solution for all parties.
The overall approach is high risk but maintains full control. It also establishes the business for future development in the regions over and above the current opportunity. Entry strategy 3 – Subcontracting In many ways this is a more difficult option to consider for all the parties concerned. Strategically, you may dislike the loss of control but it will achieve a global presence relatively quickly, and though returns are shared so are risks. This is a lower risk option but means a partial loss of control over both quality and lead times.
It also presentspotential difficulties in maintaining a long-term relationship with the sub-contractor. Itmight be a more attractive option in the USA where such relationships are relativelycommon. Global customers may insist that any packaging product that is unique andprotected by patents is either licensed or subcontracted to a second source of supply. The risk against return issue will concern your superiors and the crucial factor will bethe impact of profit sharing on achieving a return in excess of what is being currentlyachieved.
The success of this option is very much dependent on the choice of partner – Elite may be creating a competitor for itself. Entry strategy 4 – Acquisition The acquisition would need to be in a related technology and provide access to therelevant sales channels to achieve growth. Acquisition is seen as being speedier with the investment bringing an immediatereturn. It increases the risks typically associated with any acquisition, through beingoverseas and operating in another market sector.
However, there may be operationalsynergies through technology transfer and/or access to new product/market sectors. One thing in its favour is that with the key decision makers, apart from yourself, allbeing accountants, they are more likely to view this as being lower risk than organicgrowth, despite the higher costs involved. Their experience and expertise may makethem more pre-disposed towards an option where the value of the deal is moresusceptible to financial valuation. Interestingly, three out of the four entry strategies involve some sort of strategicalliance.
Operational cost savings and synergies will be crucial to the viability of thisoption and the effectiveness of integrating the acquisition into EPP’s culture, structureand systems will determine its success. Clearly if the Sigma Group has had previousexperience in acquisitions, a preferred business model to guide the choice of suitableacquisition candidates and their subsequent integration may be available. In lookingto acquire ‘assets rather than management’ the Sigma Group looks to its existingmanagement to lead the integrated companies.
Conclusion Each entry strategy has its unique combination of risk and return against which thetests of suitability, acceptability and feasibility can be used. The Sigma Group’sstrategic planning process means that you must prepare your case very thoroughlyand justify your recommendation in ways that acknowledge that the key decisionmakers may have goals that are different to yours. Your leadership of EPP over thepast five years and the company’s importance at both divisional and group levelshould be used to good effect. b) Michael Porter is one of the fiercest critics of groups, such as the Sigma Group, whodiversify through acquisition into many different businesses and industries and who,as a consequence, add little, if any value, to the companies in the group actingindependently. He suggests such groups ask themselves what value does an individual company getthrough being part of the group and, in particular, what value does the corporate HQ add to their activities. Executives in such groups often claim that their diversificationstrategies lessen risk for their shareholders by creating a portfolio of companies.
Porter dismisses this arguing that any risk spreading should be left to the shareholder – having companies in a group, with little synergy with one another, or even worse, negative synergy, actually destroys shareholder value. Acquisition of a company mayachieve significant one-off re-organisation benefits, through cost savings, but thesebenefits are not sustained over a period of time. Importantly, he argues that costreduction is not a strategy in itself but must be part of a strategy designed to achievecompetitive advantage – in his terms by either cost leadership or differentiation.
Realvalue through acquisition will only be achieved if the enlarged group is then able toshare resources or transfer learning from one part of the organisation to another. Onthe face of the financial data provided there is little evidence of value being added bythe grouping of disparate activities and companies under the Sigma Group umbrella. Goold and Campbell in their work on strategic management styles point to twovariables shaping the value added and strategic style adopted by the corporate HQ.
First, the extent to which the centre gets involved in the strategic planning process(see figure below) should be considered. Archie Williams explicitly seeks little involvement in the development of an individualcompany or division’s strategy – such involvement as there is, comes through whatthey say at Divisional Executive Boards. This may have a positive effect. By not gettinginvolved in strategic planning, the centre does not fall into the trap of making strategicdecisions without the detailed insights into competitors and customers held bymanagers in the operating companies.
The second variable is the type of control thecentre exerts over the operating divisions and companies. This control ranges fromflexible control where the operating units have maximum flexibility to pursuestrategies they feel appropriate to their competitive environment and the centre actsmore or less as a holding company funding the operating units on the basis of theirfinancial performance. At the other extreme are groups exercising tight financialcontrol where the centre exerts considerable short-term pressure on the operatingunits to perform against demanding budgets.
This is the style that the Sigma Groupexemplifies. Operating units develop their own strategies but the centre is heavilyinvolved in performance evaluation against financial targets. High Strategic planning Strategic control Planning influences Low Holding company Financial control Low Control influences High No one style of management is seen as inherently superior to another but the successof each depends on the particular set of competitive environments the group is facing. The financial control style is typically associated with rowth through acquisition andan autocratic and domineering leader at corporate HQ. Mintzberg argues that ‘aboveall, headquarters exercise performance control’ and use standardised measures of performance (ROI, growth of sales revenue, etc) to compare performance betweenthe operating divisions. Interestingly, he identifies similar roles and functions for thetypical headquarters as carried out in the Sigma Group, namely the choice of overallcorporate strategy in terms of the businesses the company is in. The headquartersestablishes, acquires, divests and closes down divisions in order to change itsportfolio. ’ It manages the allocation of funds between the divisions using profits fromone to support the development of another. It designs and operates its performance control system. It appoints the senior management of the divisions and can, whennecessary, get rid of poor performing divisional leaders and finally, provides a range of centrally supplied support services.
To add value, the headquarters has itself toperform these activities better than its competitors and in a way that the performanceof the group as a whole is better than the performance of the individual parts. (c) Archie Williams is convinced that a decentralised structure is the best way to controland co-ordinate the activities brought together under the Sigma Group. In many waysthis continues the thinking that organisational structure naturally follows the strategydeveloped by a company.
In the Sigma Group’s case at corporate level – they arepursuing a broad strategy of growth with no earnings dilution and leaving thecompanies to develop their own business strategies. This ignores the fact that oftenthe structure developed by a company profoundly influences the strategy it pursues. This would seem to be the case in the Sigma Group. The operation of a divisionalisedstructure in a large company often reflects the way it has grown and developed. Divisions are created as a means of getting close to a particular market and/orindustry with separate divisions for distinct products and/or services.
This is analternative to an integrated firm where inputs flow from one process to another andwhere typically there is only one sales and marketing unit coordinating contact withcustomers. Henry Mintzberg has argued that managers when deciding how the organisationshould be structured, have two choices to make. Firstly, how to break down theoverall product or service being produced into separate activities and secondly, howto integrate or co-ordinate these separate activities so that the product or service ismade efficiently.
The divisional form is one of the structural configurations identifiedby Mintzberg (the others are simple structure, machine bureaucracy, professionalbureaucracy, adhocracy and missionary). The choice of configuration will reflect anumber of contingent factors including its age, size, its competitive environment, therate of change in that environment, its technology and the type of ownership andcontrol. The key parts of the structure are the strategic apex, middle line, operatingcore, technostructure and support staff, which differs in significance within each of the configurations.
In the divisionalised structure the strategic apex (companyheadquarters) delegates power to the middle line, or in the Sigma Group’s case to theDivisional Executives, who in turn delegate operational control to the individualcompanies or Strategic Business Units such as EPP. EPP’s move into operating globally and the way it does it, raises key questions aroundthe levels of centralisation and decentralisation at company, division and group levels. Communication, control and co-ordination issues lie at the heart of which structureand systems are developed to handle the increased size and complexity of operation.
EPP seems to operate in a fairly well defined product range, i. e. plastic packaging andto a defined set of customers. However, its markets and those of the division andgroup are very much limited to Europe. The move into Asia and the Americas willcreate real issues of how to manage a global business. The structure will have to helpresolve the choice between giving autonomy to the new regions and yet operatingglobally to reduce costs. The tension between those managers with a responsibility forthe product and those with a responsibility for the regions will have to be resolved.
Consideration will have to be given as to whether to stay with the traditionalfunctional type of structure or move to a matrix form. There is evidence, while publicly emphasising the autonomy of the divisions in shapingtheir strategy, Archie Williams and the Group Executive exercise a considerableinfluence over the strategic planning process. EPP’s proposed move will exacerbatethe centralisation/decentralisation debate and call for clear choices of authority andresponsibility to be made at each level of the organisational hierarchy.