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Diversification and Corporate Strategy: McLaren Group

Executive Summary

This report is focused upon the corporate strategies adopted by McLaren Group over the years of its establishment. The McLaren Group was founded in 1963 and entered Formula One racing in 1966 achieving its first victory at the Belgium Grand prix in 1968. Today, after 181 Grand Prix victories, the group owns one of the world’s leading Formula One teams and has also expanded to include six separate companies in a variety of markets.

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This initial evaluation of the group’s growth strategy in mass car market indicates that McLaren has successfully established its unique niche market within the mass car market. Its partnering with renowned component suppliers has also ensured its successful mass car market entry.

As part of its growth strategy, McLaren Groups has undergone both horizontal and vertical diversification over the years to exploit its corporate expertise and resources up to an optimum. In doing so, the group’s diversification strategy very much falls in line with the historical perspective of corporate diversification as discussed by Goold and Luchs (1993).

This report will initially analyze how McLaren Group mitigated the challenges it faced in its bid for its mass car market entry using Michael Porter’s five forces framework. Following that, the report will analyze the level of diversification achieved by the group over the years. Finally, the report will discuss whether or not McLaren’s diversification strategies coincide with the historical perspective of diversification as presented by Goold and Luchs (1993).

Mitigating Market Entry Barriers in Mass Car Market

Bargaining Power of Suppliers

One of the market entry barriers according to Michael Porter (2008) pertains to the supplier bargaining power. In the automobile business, the supplier bargaining power is very high in that there are very few specialized components providers that could confirm with the requirements of a brand. McLaren mitigated this barrier by entering into partnerships with various suppliers such as Ford, BMW and Mercedes.

Bargaining Power of Consumers

McLaren has uniquely positioned itself as an exclusive brand over the years. It is one of the well known brands of the world yet it remains very exclusive. By adhering strictly to a ‘pull strategy’ for marketing its road cars, the company has mitigated the buyers bargaining power in that its cars highly sought after.

Threat of New Entrants

McLaren had established its high brand equity through years of successful formula one racing and other competitive racing before entering into the high-end consumer car market. McLaren is only second to Ferrari in being one of the oldest active formula one racing team. This sort of brand image, experience and technical expertise possessed by the company mitigated the market entry barriers for McLaren. Since these capabilities are not easily duplicable especially in a high end consumer market, McLaren faces relatively low threat from other new entrants.

Threat of Substitutes and Competitive Rivalry

McLaren usually produces a small number of units of its consumer car variants. These cars are highly specialized road cars in that they resemble McLaren’s racing cars in their features. For these cars, McLaren has a specialized niche market which is less threatened by rivals or substitutes. Only recently, the company has decided to mass produce its MP4-12C sports car to reach 4000 units by 2015.

Level of Diversification Shown by the McLaren Group

Diversification as a Growth Strategy

Business firms must undergo continuous growth and change in order to retain their relative position in the market and in order to improve their position, they must grow “twice as fast as that” (Ansoff, 1957, p.113). According to Ansoff, there are four growth strategies namely: market penetration, market development, product development and diversification. McLaren has extensively implemented diversification strategy for the group’s growth. It has diversified its product and service offering over the years to sustain and improve its position in the automobile industry. Starting from a Woking based McLaren Formula One Team in 1966, McLaren Group now comprises of 6 distinct companies, whom the International Herald Tribune referred to as ‘a small conglomerate’ (Brad, 2000). McLaren’s group of companies include: McLaren Racing; McLaren; McLaren Automotive; McLaren Electronics Systems (MES); McLaren Applied Technologies (MAT); McLaren Marketing and Absolute Taste.

Diversification strategy requires a firm to acquire new skills, new techniques, and subsequently new amenities. Resultantly, it often leads to a physical and organizational restructuring of a business which represents a divergence from its past business experiences (Ansoff, 1957). McLaren has similarly undergone such changes in achieving its existing level of diversification. Although the ‘McLaren’ brand is still centered on its Vodafone McLaren Mercedes Formula One Racing Team, McLaren Group has ventured in various business such as road car automobile business; electronic system business for formula one teams; applied technologies, marketing, and food and hospitality business. In its effort to house all these distinct businesses, McLaren Group has built its state of the art McLaren Technology Center (MTC). MTC is the group’s corporate and production headquarters (McLaren, 2013). Operating as a privately run business, McLaren has entered into partnerships and joint business ventures with several other individuals, brands and groups of companies like Vodafone and Mercedez, Bahrain Mumtalakat, TAG Group, to support it and finance its diversification strategy.

Horizontal and Vertical Diversification

Academic literature regarding diversification strategies suggests that firms undertake two types of diversification namely horizontal and vertical. Horizontal diversification (also referred to as related diversification) involves accumulation of related or similar products/services to the current product/service profile of a company (Charles and Bamford, 2010). It can be done by acquiring competitors or through developing new products/services internally. Companies usually aim to achieve economies of scale through horizontal diversification. Businesses can also expand their offerings and/or enter new markets. Vertical diversification (also referred to as conglomerate or un-related diversification) is when a company expands its operation into products or markets beyond its existing resources and capabilities (Cole, 2003; Charles and Bamford, 2010). This strategy is usually adopted when a firms existing business has either matured or reached its peak and started to decline. Moreover, firms undertake vertical diversification also in order to mitigate cyclical fluctuations in its sales and cash flows.

McLaren has undergone both types of diversification over the years of its establishments. The company has ventured into related automobile business (horizontal diversification), in which the company developed a consumer car automotive business called McLaren Automotive. Since its early years, McLaren cars have been widely used by customer teams besides its own works team (Nye, 1988; William, 2009). McLaren’s Chairman Ron Dennis envisioned the company’s long-term future and insisted upon developing a high tech automotive production plant wherein high end consumer cars would be built. McLaren Automotive has since established itself as a worldwide brand and produced two iconic cars called McLaren F1 supercar and the Mercedes-Benz SLR McLaren in collaboration with Mercedes (William, 2009). McLaren Automotive also aims to coagulate its brand through its new MP4-12C car. In addition to its consumer car business, McLaren Group has also created a company called McLaren Electronic Systems, which produces high-end electronics control unit (ECU) for formula one racing teams, as part of its horizontal diversification strategy. McLaren Electronic Systems creates some of the most advanced race telemetry and sensor equipments that provide innovative solutions to racing teams (McLaren, 2013). These horizontal diversifications are in line with Ron Dennis’s vision in which he observes that in the “21st Century to survive in F1 you need to have more than just a team” (Phillips, 2012). These diversifications provide the company with economies of scale in its core business and enable it to expand its avenue by capturing the high-end road car market.

As part of its vertical diversification, McLaren has ventured into applied technologies. This business is involved in developing groundbreaking technological solutions in the field of sport, medicine, biomechanics and entertainment. McLaren has employed its overall technical know-how and channeled it extensively into a range of improved technological systems and solutions through its Applied Technologies business. The company’s solutions are aimed at improving performance, cutting costs or increasing efficiency, as well as introducing new approaches in a number of specialist fields (McLaren, 2013). Moreover, McLaren has established a marketing and advertising business which foresees its marketing activities in maintaining its global brand image whilst retaining its exclusivity. Moreover, McLaren has also established a food and hospitality business which attends to not only its customers at the formula one racing tracks but also other high-end customers around the world. This diversification strategy can be attributed to the maturity of McLaren’s primary racing business in which the company has been operating for almost 5 decades. McLaren is the second oldest active team after Ferrari, having won 182 races, 12 drivers’ championships and 8 constructors’ championships (McLaren, 2013). With so much experience, technological and managerial expertise at its disposal, it is viable that the company utilized them in other areas of business which are indirectly related to McLaren’s core business.

McLaren’s Diversification as a Reflection of the Historical Perspective on Corporate Diversification

During 1950s and 1960s

Most of the large corporation justified and adopted diversification corporate strategies during 1950s and 1960s mainly due to the competency of their managers in general management skills. During this period, there was much attention being given to basic principles of management which were useful for all managers and applicable in all kinds of enterprises. There was emphasis upon common problems and issues across different types of enterprises and how professional managers could manage any business with their general skills. For almost two decades, the faith in general management skills provided a justification for growth and diversification (Goold and Luchs, 1993). During the late 1960s, McLaren was relatively a small and new business and its top management was focused merely on winning races rather than deciding for a corporate diversification and growth strategy. The company had neither the resources nor general managerial expertise to embark upon any sort of diversification.

Late1960s and 1970s

During this period, there was a realization among management practitioners and academicians that different types of businesses had to be managed differently. The validity of general management skills as a rationale for diversification began to lose popularity. Many companies realized that by applying the same management practices in different businesses, they were minimizing the overall value acquired from those businesses. Many conglomerates were facing problems during this period in that they were making profitless growth. Resultantly, there was an increasing force upon managers to focus their attention on formulating ‘strategies’ for their companies. Numerous strategic management frameworks were developed by consultancy organizations and business corporations for business unit strategy. Portfolio management practices were adopted for defining an overall corporate strategy (Goold and Luchs, 1993). During this time, McLaren had established itself as a successful formula one team and was determined to continue its success as its core business strategy. It was still not focused on diversifying its product and services portfolio.

1980s and 1990s

Following the focus upon corporate and business strategy, management practitioners were now under pressure to increase stakeholders’ value through their businesses. This led to the emphasis upon value-based planning. Realizing that un-related diversification often decreased the overall stakeholders’ value; organizations began to retreat back to their core businesses. Numerous management academicians such as Henry Mintzberg emphasized upon the need of having in-depth technological expertise, knowledge and experience in a particular business for ensuring the highest shareholders value rather than “thin and lifeless strategies that result from treating businesses as mere positions on a portfolio matrix” (Mintzberg, in Goold and Luchs, 1993). Confirming with this logic, McLaren, which had by now acquired in-depth expertise, knowledge and experience in formula one racing, and race and sports cars, was now embarking upon its high performance road car venture. Its road cars were very much similar to its formula one car and therefore McLaren was rightly justified in its diversification move.

Post 1990s

Following this period, there was a widespread focus upon how organizations could best exploit their corporate expertise. This led to the emergence of themes such as core competencies and dominant logic view. Both these themes are somewhat similar in that they underscore the importance of growth and diversification of companies in only those fields which require relatively same core expertise as those of their primary businesses and which fit within the managerial dominant logic of their corporate cultures (Goold and Luchs, 1993). Coinciding with this dominant business view, McLaren diversified its offerings in related and un-related areas within which it already had adequate competencies and which could be easily fitted within its existing management structure. McLaren had great know-how of the technical and information requirements of a formula one team which was utilized to create its innovative electrical control units business. The company’s vast mechanical and electrical engineering expertise were further exploited to create its applied technology business. As a global brand, McLaren was already engaged in marketing activities and likewise in catering its global clientele and fans attending formula one race. Both these capabilities were further explored to establish McLaren’s marketing and hospitality businesses.

References

Ansoff, I. (1957) Strategies for Diversification. Harvard Business Review. Vol. 35 Issue 5.

Brad, S. (2000). TAG McLaren Group Revs Up Off Track. International Herald Tribune: 2000-06-24. p. 9.

Charles E. Bamford, G. (2010). Strategic Management. Cengage Learning.

Cole, G.A. (2003). Strategic Management. Cengage Learning.

Goold, M. and Luchs, K. (1993) Why Diversify: Four Decades of Management Thinking. Academic of Management Executive. Vol. 7 No. 3

McLaren (2013) Vodafone McLaren Mercedes. Available from http://www.mclaren.com/formula1/page/mclaren-group (cited on 5th, March, 2013)

Michael E. Porter. (2008). The Five Competitive Forces that Shape Strategy. Harvard Business Review, January 2008, p.86-104.

Mintzberg, H in Goold, M. and Luchs, K. (1993) Why Diversify: Four Decades of Management Thinking. Academic of Management Executive. Vol. 7 No. 3

Nye, D. (1988) McLaren: The Grand Prix, Can-Am and Indy Cars. Guild Publishing.

Phillips, A. (2012). Business Leaders: The master behind McLaren the super brand. Business Review Europe. Available from http://www.businessrevieweurope.eu/business_leaders/the-master-behind-mclaren-the-super-brand (cited on 5th, March, 2013)

William, T. (2009). McLaren – The Cars 1964–2008. Coterie Press.

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