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 namely: McLaren Racing; McLaren Automotive; McLaren Electronics Systems (MES); McLaren Applied Technologies (MAT); McLaren Marketing and Absolute Taste. Based near Woking, McLaren opened the new ?40 million McLaren Production Centre (MPC) in November 2011 and expect annual production of the MP4-12C sports car to reach 4000 by 2015. McLaren has successfully averted the market entry barriers in entering its mass car industry. Moreover, McLaren Group has undergone various levels of diversification including horizontal, vertical, cross sector and un-related diversification to accomplish such as varied portfolio of companies. Its corporate diversification strategies correspond to the contemporary management views from a historical perspective.
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In the past few decades, there has a lot of debate regarding strategic management and its critical role in determining the success of a business in an increasingly complex and competitive business environment. According to Johnson, et al. (2008) “strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations.” Michael Porter (2001) mentions that “strategy is likely to concern itself with the survival of the business as the minimum objective and the creation of value-added as a maximum objective.” This essay focuses upon the strategic management issues surrounding McLaren. The conception of strategic management encapsulates numerous management themes and therefore, it is logical to narrow the focus this essay to a specific strategic management issue. This essay emphasizes upon the diversification strategies adopted by Mc over the years of its establishment. Within the broader realm of diversification, the essay will also analyze its market entry strategy in mass car market.
Averting Market Entry Barrier in Mass Car Industry
This part of the essay will briefly analyze the market entry barriers averted by McLaren in its bid to enter the mass car market. The analysis is based on Porter’s (1979) five forces framework.
Suppliers Bargaining Power
Suppliers bargaining power refers to their ability to influence the price of a product. A limited number of suppliers for key components of a product results in high suppliers bargaining power. In case of high-end automobile industry, where there are a notable few suppliers for high-performance engines and other high-tech components, bargaining power is very high. Most of the new entrants in the sports cars and high-end road cars industry usually procure engines from other specialized suppliers. The success of market entry therefore, depends upon successful partnerships with such specialized suppliers. McLaren averted the challenges posed by high suppliers bargaining power through its prolonged partnership with Mercedes which provides it with engines for both its formula one as well as road cars.
Bargaining Power of Consumers
It refers to the ability of customers to influence the price of a product or their influence on a production industry. In case of Mc, the buyers bargaining power is very low as its customers are fragmented i.e. they are different and have no influence over product or its price. Moreover, Mc road cars are high performance non-standardized cars making them unique. Most of its customers buy them for its symbolic value and therefore have less influence over its price or production.
Threat of New Entrants
The possibility that new firms may enter an industry also affects competition. Automobile industry is widely seen as confined from the threat of new entrants because of the large capital and resources required for car production and marketing and distribution. Large initial capital requirement implies high suck costs, which increases the risks of market entry in this industry. However, in case of McLaren, the company entered the road car industry through its diversification strategy as it was already involved in producing formula one racing cars and tailored customer cars for years, rather than as an entirely new incumbent. Mc already had a strong brand image, experience and technical expertise along with relevant infrastructure and production facilities to support its entry in the mass car market.
Threat of Substitutes and Competitive Rivalry
McLaren has a niche product market for its consumer cars as its produces highly specialized cars. Its cars are unique and non-standardized and usually produced in small numbers. For these reasons, its products face relative low threat of substitutes. It faces competitive rivalry from other high-end car producers; however, since it produces cars in a small quantity, these are highly sought after and are not threatened by substitutes.
Defining the Level of Diversification Shown by the McLaren Group
Igor Ansoff (1957) quoted the Red Queen, a famous character of Lewis Carroll’s book ‘Through the Looking-Galss’ in his work ‘strategies of diversification’ wherein she says: “Now, here, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” (Carroll, 1941) This contention put forth by the Red Queen led to the development of the Red Queen hypothesis (also referred to as Red Queen’s Race or Red Queen’s Effect) which emphasizes upon the need of an organism to constantly adapt, evolve and propagate not just to gain a reproductive advantage over other organisms but also to survive in a constantly changing and opposing environment (Van Valen, 1973). Van Valen (1973) elaborates this principle and asserts that in an evolutionary system, an organization needs continuous developments to sustain its fitness “relative to the system in which it co-evolves”. The red queen principle is widely applied in evolutionary sciences in the field of biology. Some economists also apply this phenomenon to the evolutionary process of economies, wherein business entities operating in the market act in the same way as organisms in their environment. This implies that businesses need to grow continuously in order to survive in their respective markets and they need to grow twice as fast in order to get ahead of the competition (Ansoff, 1957).
According to Ansoff (1957), a firm can adopt one or more of the four basic strategies for growth. These are market penetration, market development, product development and diversification. Contrary to the former three strategies which represent change in product/market structure, diversification involves a change in the characteristics of a firm’s product line and/or market. Diversification “calls for a simultaneous departure from the present product line and the present market structure” (Ansoff, 1957, p.114).
According to Charles et. al, (2010), there is two basic types of diversification namely related and unrelated diversification. These authors further divide related diversification into three categories as horizontal, vertical and cross-sector diversification. The distinctions between these strategies can be described in terms of the combination of industry similarity and value chain similarity (see fig 1.). Horizontal diversification occurs when a company enters in a new business which falls within the same industry and employs the exact same value chain as of its core business. McLaren has so far not diversified horizontally as it has neither acquired nor merged with any other formula one racing team, which is its core business.
Vertical diversification occurs when a firm enters into a business which shares a common industry; however, the value chain differs (Charles et, al. 2010). McLaren underwent vertical diversification through the establishment of its automotive business. In its formative years, McLaren built several cars including formula two, hillclimbing, formula 5000 and sports cars that were sold to customers. McLaren contracted Trojan to built customer versions of several McLaren’s race cars. Finally in 1992, McLaren ventured into the mass car market by offering a slightly varied version of its formula one racing car called McLaren F1 supercar to the consumer market. Later it produced the iconic Mercedes-Benz SLR McLaren in collaboration with Mercedes (William, 2009). The company has developed a high tech automotive production plant for manufacturing high end consumer cars. McLaren Automotive has established itself as a global brand and is currently pursuing the production of new MP4-12C car. Similarly, McLaren’s establishment of its electronic systems business, which produces high-end electronics control unit (ECU) for teams racing on the formula one circuit, also qualifies for vertical diversification. Through this business, McLaren creates advanced race telemetry and sensory devices for formula one racing team. This business operates within the same industry as McLaren core business, but it engages an entirely different production, distribution and customer network (McLaren, 2013).
Cross Sector Diversification
Cross sector diversification occurs when a firm enters into business within a different industry which has a similar value chain as of its core business (Charles et, al. 2010). McLaren also ventured into cross sector diversification by entering into a marketing and advertising business. Similarly, its venturing into the event management and hospitality industry also qualifies for cross sector diversification. Both these businesses share the same value chain as of McLaren’s core racing business to some extent in that they both cater the internal demands of McLaren Group and serve its own customers. McLaren marketing overlooks the group’s marketing activities apart from operating as a separate entity while Absolute Taste (McLaren’s hospitality and event management business) caters the Group’s customer at formula one event along with serving other high-end customers globally.
Unrelated diversification occurs when a firm enters into a new business in a different industry than that of its primary business through which it does not aim to achieve any value chain synergies (Charles et, al. 2010). McLaren, diversification into applied technologies can be categorized as unrelated diversification in that this business engages an entirely different value chain in terms of suppliers, production, and customers. This business involves developing groundbreaking technologies for the field of sport, medicine, biomechanics and entertainment (McLaren, 2013). It is worthy to note that this business does benefit from McLaren’s overall technical know-how in providing improved technological systems and solutions and therefore it cannot be definitely termed as unrelated diversification.
Historical Perspective on Corporate Diversification
From 1950s to 1970s
There was an era when there were only a few companies selling similar products within a particular market, while the demands of the customers were relatively simple and less sophisticated. At that time, the phenomenon of strategic management was neither popular nor deemed a critical element for business success. This was the case throughout the first half of the 20th century (Orcullo, 2007). In the following two decades, there was an emphasis upon several principles of management, which were deemed equally applicable across various industries and businesses. Throughout 1960s and 1970s, the simple faith in general management skills justified virtuous circle of corporate growth and diversification. Robert Katz noted in that regard that: “We are all familiar with those ‘professional managers’ who are becoming the prototypes of our modern executive world. These men shift with great ease and with no apparent loss in effectiveness, from one industry to another. Their human and conceptual skills seem to make up for their unfamiliarity with the new job’s technical aspects.” (Goold and Luchs, 1993) Hence, during 1950s and 1960s, it was widely opined that any business with a relatively effective management could venture into any other related or un-related business solely based upon its managerial resources. Throughout this period, McLaren was simply focused upon its primary business of formula one racing.
From 1970s to 1980s
According to Orcullo (2007), the notion of strategic management only became popular and well known after the 1970s. Strategic positioning and market competition implied that firms were now under increasing pressure to grow and diversify in order to sustain and thrive in the changing business environment. Concurrently, there was a realization during 1970s and 1980s that different businesses had to be managed differently (Goold and Luchs, 1993). This view encouraged businesses to undergo main related-horizontal diversification so that a firm’s new undertakings may share the exact sources of synergies such as market, operational and management fit. At this time, McLaren strategized to expand into mass car market which closely shared the sources of synergies with McLaren’s racing team.
1990s and Onwards
During the late 1980s and 1990s, management literature introduced new themes such as core competencies and management dominant logic view and business synergies. These themes further emphasized on achieving synergy through diversification and venturing into businesses which were directly or indirectly related to the core competencies and fell within the dominant management logic of the company (Goold and Luchs, 1993). Coinciding to these corresponding business views, McLaren was expanding in some of its current businesses during this time which are all either directly or indirectly related to its core competencies and create synergy for the McLaren Group.
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