Aspects of Change in Corporate Strategy - Grand Metropolitan - Case Study Example

Name Tutor Course   Date Introduction The business environment is experiences continuous change (Agha et al. 192). The dynamic nature of the business ecosystem makes it necessary for businesses to have a flexible corporate strategy so as to adapt or at least remain competitive within their respective markets (Sheppard 113). Grand Metropolitan plc (GM) for instance had to make changes in its approaches and structure between the early 1960’s and the mid 1980’s, as a result, the company was attained the rank of the most thriving organization by market capitalization in the United Kingdom (GM 235). This paper discusses various aspects of change in corporate strategy and why they have to occur in the context of a dynamic world, with reference to Grand Metropolitan plc as a case study. During the initial stages of business growth, strategic opportunism is often a significant component of corporate strategy. According to Hodgson, opportunism in corporate strategy is closely linked to human nature and is subsequently not avoidable in Transaction Cost Analysis (402). A strategically opportunistic firm is highly entrepreneurial and follows any ideas which appear interesting for the sake of profit, as is exemplified by the GM case (Darroch 123). Since its founding in 1962 as a hotel chain, GM engaged in hotel acquisitions, while ensuring centralized buying as a way of minimizing costs. In the early 1960’s, the basic strategy involved acquisition of property assets which were exchanged for debt. The element of trading in these transactions raised profits that were used in paying off interest. Ongoing inflation ensured that Property Asset Value naturally rose, thereby gradually reducing the debt owed, hence an increase in borrowing capacity and continuation of business (GM 235-236). Strategic opportunism is a useful approach to corporate strategy, and is opted for because it leads to the generation of business energy and vitality, which is healthy especially when the Marketing and Research and development units have been decentralized, hence generation of a stream of new products. Its main advantage is that strategic opportunism leads to economies of scope so that competencies and assets within firm end up getting the support of several product lines. The approach however, has a disadvantage. One demerit is that it can end up becoming a strategic drift, where investment decisions end up being incrementally made to suit opportunities instead of the corporate vision. The outcome of this is that the company will be finding itself within a set of businesses which it does not have requisite competencies and assets for, and which will produce little synergy eventually (McLoughlin & Aaker 146). Changes in leadership and organizational culture will often result in change of corporate strategy over time. According to Flamholtz & Randle, continued alignment of culture with strategy ensures a sustainable competitive advantage and management assists in executing the corporate mission and vision. Full participation by every department is necessary, and there should be monitoring of strategy because with environmental dynamism, sometimes processes might require alteration so as to fit into implementation goals (36). Allen Shepperd’s entry as CEO at GM in 1986 created massive changes in strategy. His new corporate system was founded on core competencies and internally-driven growth. There was also an extensive portfolio rationalization, with several units being quickly sold off, as long as he felt they did not have the capability of easily facilitating attainment of GM’s strategic vision (GM 250). The new focus on core competence at GM is a reality that organizations have to increasingly embrace a new corporate strategy. According to Agha et al, there is a need for every company to be able to work efficiently in a given environment and strategy always seems to be moving away from the traditional competition for service or product leadership towards competition in organizational strengths (192). Emphasis on core competence requires less emphasis on Strategic Business Units (SBUs), as was the case before Sheppard’s appointment (Chen & Chang 5739). One or a few areas must be identified as the drivers of any firm’s core competence (Bahri et al.738). Shepperd’s new management style valued control of conflict and encouraged unlimited managerial risk-taking. There was creation of a ‘challenge culture’ which was center-driven and led by the personnel and finance departments. There was focus on questioning and monitoring of operations, so that they could be matched to emerging changes. The personnel function became more strategic, identifying challenges before they arose and reoriented strategic focus towards the workforce and managerial motivation (GM 255). With time, a business might have to diversify operations so as to benefit most from the market. According to Asrarhaghighi et al., diversification is playing a constantly growing role in business (12). Organizations diversify into several aspects of operations as a way of reducing the risk of failure, as it has been proven that corporate-level diversification enables shielding against deteriorations in the industry environment (Sheppard 113). Organizations that diversify end up ensuring the leveraging of existing capabilities, skills and resources, and therefore tend to perform better than those which get into unrelated areas or fail to diversify (Darroch 123). While GM was initially focused on the hotel business, its acquisitions later enabled it to diversify into other kinds of business. As from 1966, it started this by getting into the food and drinks market through the purchase of a large catering venture, Levy and Franks. There was also the later acquisition of Empire catering, Midland Catering and Bateman Catering (GM 236). Divestiture later became a major part of GM operations. The company invested widely, from the hospitality industry, to alcohol, tobacco, gambling, fitness and even healthcare. For instance, According to GM, in 1983 there was a considerable change in GM’s areas of interest as it sought to take advantage of demographic and social trends of the time. The company further acquired Pearle Optical, an optician service chain, Children’s World, a Kindergarten Center group and Quality Care, a home healthcare provider (242). Diversification seeks to protect a firm, for instance through vertical integration in which there is a guaranteeing of market and supplier access, enabling of company expansion where anti-trust regulations limit it, better utilization of management talent and ensuring business economies of scale (Sheppard 114). M&A leads to change processes that in turn alter corporate strategy with time. According to Gupta, they are an increasingly popular strategic growth device in ensuring competitiveness and extension of market share dominance (60). M&A is driven by a belief that when two companies are together, their value increased unlike when separate (Alam et al. 1). Acquisition involves taking up another firm’s assets, effective control, or just taking over management through shares without physically combining businesses (Gupta 63). GM for instance in 1969 bought Express Dairy, a family business which had about 25% market share of Britain’s dairy product and milk distribution. In 1970, it bought off Berni Inns, a 130 hotel and restaurant outlet chain in the United Kingdom and later Mecca, a gaming company. Most of the acquisitions were friendly, with former top managers or owners being allowed to join the company’s board, and most continued running as before, without interference from GM management. In 1981, GM acquired the Intercontinental Hotel chain and between 1984 and 1988, the company also sold away more than 25% of its operations, amounting to $ 1.3billion (GM 234-242). The idea behind mergers and acquisitions has however not been static. According to Alam et al., they were originally aimed at controlling undervalued assets of businesses so as to repay debt as was the case at GM. However, they later became highly operational and strategic, aiming at the purchase of distribution channels, established customer bases, organizational competencies, talents and geographical boundaries (2). M&A help to create operational synergy which involves rationalization and subsequent sharing of facilities and common services, market synergy where there is lesser marketing cost due to shared strategies, financial synergy. The result was the combination of the two firms’ balance sheets. The move lead to a lower Weighted Average Cost of Capital (WACC) and tax synergy where for previously loss-making firms, the profitable side gets tax benefits through writing off of some losses incurred by the other side (Gupta 65). Conclusion The environment within which businesses operate is dynamic, and this is also reflected in corporate strategy. At Grand Metropolitan for instance, the original business approach involved strategic opportunism, but this changed as its operations became more advanced. Opportunism seeks to provide economies of scope and more business vitality and profitability in entrepreneurship. Changes in leadership and culture also affect strategy because management and leadership provide measures that it considers best for the attainment of set objectives. Diversification, mergers and acquisitions further bring in new businesses, models, structures and circumstances which require adjustments strategy as a way of ensuring market competitiveness. Works Cited Agha, Sabah, Alrubaiee, Laith and Jamhour, Manar. Effect of Core Competence on Competitive Advantage and Organizational Performance. International Journal of Business and Management, 7.1 (2012): 192-204 Alam, Ayesha, Khan, Sana and Zafar, Fareeha. Strategic Management: Managing Mergers & Acquisitions. International Journal of BRIC Business Research, 3.1 (2014): 1-10 Asrarhaghighi, Ebrahim, Rahman, Azmawani, Sambasivan, Murali and Mohamed, Zainal. Diversification Strategy and Performance Studies: Results, Measures, and Sampling Design. 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