Business Strategy Corporate-Level Strategy 7

7/31/2019 Business Strategy Corporate-Level Strategy 7

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Business Strategy Lecture 7

Corporate-Level Strategy:

Portfoliosand

Synergy

John Birchall


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Linking Purpose to Action

Adapted from Harrison (2003: 37) and De Wit & Meyer (2005: 5)

Vision, Mission,Ethics

Business Definition,CompetitiveStrategies

Broad and Operating Environments

Involves Stakeholders


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Business Definition

What is our business?Answer must be clear and firm yet open to

change (Harrison 2003: 124)

Changing the business definition: meanslooking for new answers Whose needs should be served? What is to be produced, or what services delivered

- and how? What should be our scale and scope?

How big relative to competitors?How heavily focused on specific industries?How much control of the industry supply chain?

How should we relate to our key stakeholders?


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The Challenge of Growth (Harrison 2003:216-231)

As it grows, should a businessConcentrate: Expand market share for

existing product, selling to existing customer

segment, possibly buying up competitors? Integrate vertically: buying up suppliers

and/or distributors?Expand: Seek new markets for existing

products and services, maybe overseas?Diversify horizontally: Develop related products and services, using

existing skills and relationships? Develop new unrelated product lines, possibly

selling to new customers?


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Portfolio Management:

An Outside-In Approach

Unrelated diversificationOften by acquisition, rather than organic

growthAnalytical approach, focused on stock

markets as well as on markets for goodsand services

Looking for opportunities to buy up existing

brands and businessesCan develop an inside out dimension

through corporate parenting: buy up, turnaround, add value


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Portfolio Management:

Examples

Popular in the 1970s and 1980s Harrison (2003): ALFA Group, General Electric UK example: Hanson Group

Founded by two Yorkshire men: James Hanson andGordon White, 1964

Delivered capital growth to shareholders: aninvestment of 100 in 1964 was worth 70,000 by1986

Unrelated businesses bought up 1960s-1980s split up 1996: Energy group, Millennium Chemicals,

Imperial Tobacco and Hanson plc (building materials)

Which UK business leader wants to make an

unrelated acquisition now?


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Building Up a Strong PortfolioKey Principles:Generate cash

Look for opportunities to spend it: seeinvestment potential others have missedTake risks, and balance them with safer

optionsGain wide range of products and marketsManage unrelated businesses as separate

business unitsEach strategic business unit (SBU) stays

responsive to its environment


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Tools for Portfolio Analysis(Harrison, 2003: 256-258)

Boston Consulting Group (BCG) Matrix

General Electric (GE) Business Screen

Assume that each business unit already

has a clear product/market position

Helpful for decisions on whether to: include a business unit in a corporate portfolio

invest or take cash from it


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Stars Question marks

Cash CowsDogs

10x 1x 0.1x

Relative competitive position (market share)

(Harrison, deWit & Meyer)

20%

0%

10%(NB:Johnson,Scholes &

Whittington(2005) pp.315-7 useMARKETgrowth ratehere)


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Question Marks and Problem

Children

Invest in the

hope of creating

a star

but will you end

up with a dog??HighGrowth

rate

Low

Low

Market share

High


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The General Electric Experience

General Electric (under Jeffrey Immelt) is stillgrowing and generating high profit flows

Jack Welch (CEO, 1981-2000) changed hisimage from Neutron Jack (1980s cost-cutter: buildings

remained, staff had gone) to strategy supremo (1990s visionary: embracing

globalisation and e-learning)

Exceptional success: most 1980sconglomerates spent the 1990s restructuring(Harrison 2003: 237-249)


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The Hanson Experience

Hanson experience is typical of 1990s: Criticised for asset-stripping (buying businesses to

sell the parts, not to manage for growth)

Asked to prove that Head Office functions addedvalue to business-unit operations

Broken up into smaller units, each containing moreclosely related businesses

Mintzberg et al (2003: 445): this fate threatens all

conglomerates: perched on the edge of a cliff

What made General Electric different? Picked more winners, using its Screen? Generated more synergy?


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Relatedness and Synergy:

An Inside-Out Approach

With synergy, the whole is more than the sum of theparts

Examples: Philip Greens Arcadia, Conrad Blacks

Hollinger International Business units linked within the corporation are more

profitable than they would be if they were outside it,standing alone

Resources and costs may be shared Core competences may be leveragedorstretched:

skills, knowledge and understanding are transferredvia the centre to all the business units

Can develop an outside in dimension through

increased bargaining power: merged businesses stopbeing rivals and join forces


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Corporate-Level Strategy

Should add value to business unitsAll too often, destroys value instead

Survey by Michael Porter of 33 large US firms over 37 years

(Harrison 2003: 234-235) Shareholders ask: why not build our own portfolios,

buying shares in numerous stand-alone businesses? Corporate executives answer this question by

developing core competencies which can stretchacross business-unit boundaries: Top management skills Research and development Marketing, finance, public relations and labour relations

Documents

Business Strategy Corporate-Level Strategy 7