CorporateStrategy

StrategicManagement Corporate Strategy

Corporatestrategy:
Where should we compete and what value do we add to the individual businesses? Theoverallplanforadiversifiedcompany (Porter) e.g.FordMotors,GeneralElectric,PepsiCo,Gillette, Unilever,ProctorandGamble.

Business (orcompetitive)strategy: How should individual businesses compete?

Relatestostrategicbusinessunits(SBUs)withinone industryormarket

Lectureoutline
Diversificationtypes Corporateparentingstyles Portfolioplanningmodels

Typesofdiversification
Related Diversification
Unrelated Diversification Businesses within the same industry.
Strategic fit is absent or secondary Undervalued companies Criteria such as:

Strategic fit between value chains Can be skills or technology Combine activities Reduce costs

Bottom line? Stability, long term future? Capital requirement? Vulnerable to recession?

Motives:

Growth Spreading Risk Profit

'Making the right moves' (ABF)

Typesofdiversification
Mintzberg believes all diversification are unrelated because no matter what is common between businesses, there are always more things that arent common than are common. Aim is reduce costs by combining some activities but can be too expensive. Combining is complex and may end up satisfying no one. Unrelateddiversification financedrivenapproach. Knownasconglomerates

Examples of diversified companies

Related
Thorntons
Retailshops Caf Thorntons Weddingservice Gifts

Unrelated
GeneralElectric
Aircraftengines Hotpointappliances GEEquity Lighting Xrayequipment NBCTVnetwork VirginGroup?

JohnsonandJohnson
Babyproducts Firstaid Neutrogena Prescriptiondrugs Prosthetics Contactlenses

1
1

Methods of Diversification
Vertical Integration (Backward / Forward)
Control of Supplies or Markets Access to Information Cost saving ISSUES: Problems in the management of diverse business activities Increase of dependency on one industry Thorntons: manufacturer and retailer of chocolate

Corporate Parenting Styles

Horizontal Integration
Under utilized resources Escape present business Spreading risk Synergy in resources & capabilities Building on expertise or technology ISSUES: Close and distant relatedness What exactly are the synergies?
PARENTAL DEVELOPER RESTRUCTURER PORTFOLIO MANAGER SYNERGY MANAGER

e.g. Cadbury buy Green&Blacks

Conditionsforaddingvalue
(Goold andCampbell,1994)

ParentingMatrix assessingfit
High
Ballast SBUs
Heartland SBUs

RoomforimprovementofSBU? CanparentaddanythingthatSBUcant dobetteronitsown? DoesparentunderstandCriticalSuccess Factors?

Fit between: SBU Critical Success Factors, and Parents skills, resources, characteristics

Adapted from Goold, Campbell & Alexander, Corporate Level Strategy, Wiley 1994

Low

Alien SBUs

Value trap SBUs

Low

Fit between: SBU parenting opportunities, and Parents skills, resources, characteristics

High

Howdocorporateparents destroyvalue?
Addanextralayerofbureaucracythatdelays decisionmaking Encouragecareerism inmanagers Increasemistrustmanagers Adviseincorrectmethodsbecausedont understandtheindustry Forceallbusinessestofollowthesamestrategic planningmethods Forcesynergybetweenbusinessesthatdoesnt addanybenefit

Portfolio planning models

Purpose - Evaluate business unit performance
- Assess balance of the corporate portfolio - Formulate business unit objectives

Models

- GE/McKinsey matrix - BCG Growth-Share matrix (Boston Box)

Popular in 1970s but not now

2
2

GE/McKinsey matrix
Business unit position strong Medium weak
HIGH

BCG Matrix (Boston Box)

(SeeHenry2008p239)
Earnings: Cash flow: low, unstable, growing negative

Earnings: Cash flow: Strategy:

high stable, growing neutral invest for growth

high

Annual real rate of market growth (%)

Industry Attractiveness

Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog

Medium

Earnings: Cash flow: Strategy:

high stable high stable milk

Earnings: Cash flow: Strategy:

low, unstable neutral or negative divest

low

(see Henry 2008, p.243)

LOW

HIGH

Relative market share

LOW

Portfolio planning models critique

These models were popular in the 1970s/1980s but are now seen as oversimplifications Assume no linkages between businesses

Conclusion
Corporate parenting decisions are made at the highest level often involving 1000s of employees and $billions. Perhaps there is no formula for making the right decision because there are so many variables and a great deal of uncertainty. Businesses that are up for sale tend to be overvalued therefore difficult to recover the cost of purchase

References
Collis,DandMontgomeryC(1998)CreatingCorporateAdvantage, HarvardBusinessReview,MayJune1998,pp7183. Gooldetal(1995)Thequestforcorporateparentingadvantage,Harvard BusinessReview,MarchApril1995,pp120132. Grant,R(2005)ContemporaryStrategyAnalysis,Blackwell(fourthedition onwards) Henry,A(2008)UnderstandingStrategicManagement,OUP. Johnson,ScholesandWhittington(2008)ExploringCorporateStrategy (8thedition) (note6th and7th editionalsouseful)FTPH. (note themainauthorsinthisareaareMichaelGoold,AndrewCampbell andMarcusAlexander)

3
3