Lecture 11,12

Corporate Strategy
Professor David Faulkner

PORTER DEFINES CORPORATE STRATEGY

AS DECIDING :* Which businesses to be in &
* How to run them

The Fundamental Questions in

Corporate Strategy
How is economic value created through

multi-market activity?
Why should these activities be undertaken

inside the corporation rather than through

contracts, joint ventures or other
institutional arrangements?
How must the corporation be structured and

coordinated to realise the benefits of its

multi-market activity

PORTER IDENTIFIES (1987) FOUR CONCEPTS

CENTRAL TO CORPORATE STRATEGY
1. Portfolio management
2. Restructuring
3. Transferring skills
4. Sharing activities

Proposition: the large, multi-business corporation

is (too often) a value destroyer

Why?
diversification often takes place for the wrong reasons
the real synergies are hard to define ex ante
companies are ineffective in organising to achieve
their stated strategic intent
the problem lies within the corporate centre

Porter stresses that in a successful corporate

strategy
THE CENTRE MUST ADD VALUE
Otherwise business units are better off left alone

THERE ARE FOUR BASIC FUNCTIONS OF

THE CENTRE IN CORPORATE STRATEGY

SELECTING
PROMOTING
RESOURCING

CONTROLLING

PROMOTING -Relations with the city

- Corporate advertising
- Public relations events
- Press relations
- Government relations
- Internal image building
- Mission statements

A BAD MISSION STATEMENT

We aim to be excellent in all we do, for our customers,
employees, shareholders and the community.
We aim to provide a first class service,
to improve profitability, to be an excellent employers,
and to play an active part in the community.

MISSION STATEMENT OF
AECI - CYANIDE DIVISION (A good one)
We are in the business of manufacturing and distributing cyanide.
We believe strongly that safety is paramount in production,
storage and handling of the product as well as in security and
protecting the environment We also believe in the strategic
importance of cyanide to the country.
Our primary market is supplying the Southern African gold industry
with an effective means of gold extraction. Secondary and potential
markets are in cyanide derived chemicals
These markets will be reached by direct selling backed by
technical expertise and service.
We seek to earn sufficient return on investment to encourage
the corporation to reinvest in the business.

SELECTING - Portfolio management

- Risk cube
- MBA matrix
- Vertical & horizontal integration
- Scoping:
- Transaction cost analysis
- International scope

THE BOSTON BOX

100%

10%

Star

Question Mark

Cash Cow

Dog

0%
10X
Present position
Position project in 5yrs time

1X

0.1x

Relative Market Share.

(relative to market leader or nearest competitor).

Market
growth
rate

The ideal sequence

Catastrophic
consequences

X
X

Relative market share

High
High

Industry attractiveness

Investment

Selective

and

Growth

Low
selectivity

Growth

Business
Strength

Low

Selective
Growth

selectivity

selectivitiy

McKinsey

Harvet/
Divest

Harvet/

Harvet/

Divest

Divest

Embryonic

Growth

Sales

Time

Mature

Ageing

Parenting-Fit Matrix
(Goold, Campbell & Alexander 1991)
Low

Ballast
Misfit between
critical success
factors and
parenting
characteristics

Heartland

Edge of
Heartland
Alien Territory
Value Trap

High
Low
High
Fit between parenting opportunities & parenting characteristics

RESOURCING:- Internal development

- Merger and acquisition
- Cooperation/Joint development

Targets and Bidders: Who win in M&A?

Winners (in most cases)
The CEO and TMT of the bidder (they get rich)
The shareholders of the target (they get rich)
Losers
The CEO and TMT of the target (they get fired)
the shareholders of the bidder (they face a decline in EPS)

Porters (1987) research

suggested that approximately
70% of acquisitions made in unfamiliar industry sectors fail
60% fail even in familiar sectors
50% of strategic alliances fail
40% of new internal developments fail
Doing anything new is risky!

Acquisition Success Rates

All Acquisitions
in new industries

% made by 1980
then divested

Acquisitions in
entirely new fields

% made by 1980
then divested

Average/Co.

61.2

53.4%

20

60.0%

P&G

14

17

11

17

UTC

28

25

10

20

Exxon

19

62

80

GE

51

65

14

100

Xerox

33

71

100

Source:33 Large US companies 1950-86: Porter, HBR, 1987

Coop Strategies fall into Two Distinct Types

COOPERATIVE STRATEGY

LEARNING
ALLIANCES

SKILL SUBSTITUTION
COOPERATIONS

* Joint ventures
* Collaborations
* Consortia

* Virtual corporations
* Distributor agreements
* Networks
* Keiretsu

STRATEGIC IMPORTANCE OF ACTIVITY

High

Med

Low

ALLIANCE

INVEST
&
MAKE

ALLIANCE

ALLIANCE

MAKE

BUY

BUY

BUY

Low

Med

MAKE

High

COMPETENCE COMPARED WITH THE BEST IN THE INDUSTRY

CONTROLLING : - Organisation structure

- Style
- Synergy achievement
- Systems

Lecture 12

Organisation Structures

A MINTZBERG
ORGANOGRAM
STRATEGIC
APEX

TECH
SUPPORT

ADMIN
SUPPORT

MIDDLE LEVEL

OPERATING CORE

FIVE BASIC TYPES OF ORGANISATION:1. The Entrepreneurial Form

2. The Machine Bureaucracy
3. The Multi-divisional Form
4. The Professional Organisation
5. The Adhocracy

STYLE AND STRUCTURE

Goold and Campbell (1987) tried to find the best way to run
a diversified Corporation. They researched 16 large
UK companies.

They concluded that they fell into three groups:1. BOC, BP, CADBURY, LEX, STC AND UB (SP)
2. COURTAULDS, ICI, IMPS, PLESSEY, VICKERS (SC)
3. BTR, FERRANTI, GEC, HANSON & TARMAC (FC)

Corporate
SP
SC
Planning
influence
FC
Largely SBU
Flexible strategy tight strategy tight financial
Control influence

NATURE OF BUSINESS
-shape of portfolio
- size & payback of
investments
- stability of competitive
environment

RESOURCES IN ORG
- financial situation
- personality of CEO
- senior management
skills

STYLE
- Strategic planning
- Strategic control
- Financial control

Opportunities for Synergy

High
% of total
costs
or assets

potentially
important

Strategic
relationship

Potentially
important
Low

Unimportant

Low
High
sensitivity to scale, learning or utilisation in value activity

IN ADDITION SOME CORPORATE

CENTRES ADD VALUE THROUGH THEIR
OWN ACTIONS EG
* Unique corporate values
* External actions
* Astute m&a identification and negotiation
* Charisma eg unusual CEO

Campbell identifies four ways in which a corporate centre

or parent can create (or destroy) value
1.Stand alone influence
eg strategy development, resource allocation

2. Linkage influence
eg developing synergies between business units

3. Central services provision eg IT

4. Corporate development activities
eg alliances, acquisitions

He warns that his research indicates that

the probability of value destruction by a parent
is greater than that of value creation
To create value therefore a parent must :1. Build

on insights on how to create value

2.Understand what is the companys heartland

3. Identify parenting opportunities
4. Assess accurately how to grasp those opportunities
Only then will the parent avoid destroying value

Assessing Corporate
Strategy

What kind of
diversification
(related, unrelated,
or mixture)?
How much diversification?

Actions to divest
weak or unattractive
business units
Use of acquisition
to build the
corporate portfolio
Any corporate-level
or corporate-wide
distinctive competence

Corporate
Strategy

Evidence of efforts to
build diversification
around some strategic
theme, with unifying
well-defined mission

Efforts to create
corporate-level
competitive advantag

Criteria and priorities

for allocating
investment capital to
business units

Corporate-level
strategic objectives
Key
corporate-level
Use of any distinctive
functional area support and financial
approaches to
performance targets
strategies
(esp.
finance,
managing key business
R&D, & HR)
units