Business Strategy Lecture 7 Corporate-Level Strategy: Portfolios and Synergy

John Birchall

Linking Purpose to Action

Strategy Context
Broad and Operating Environments Organisational Purpose Vision, Mission, Ethics Strategy Process Involves Stakeholders Strategy Content Business Definition, Competitive Strategies

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

Business Definition
What is our business? Answer must be clear and firm yet open to change (Harrison 2003: 124) Changing the business definition: means

looking 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?

The Challenge of Growth (Harrison 2003:

216-231)

As it grows, should a business Concentrate: 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?

Portfolio Management: An Outside-In Approach

Unrelated

diversification Often by acquisition, rather than organic growth Analytical approach, focused on stock markets as well as on markets for goods and services Looking for opportunities to buy up existing brands and businesses Can develop an inside out dimension through corporate parenting: buy up, turn around, add value

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 and Gordon White, 1964 Delivered capital growth to shareholders: an investment of 100 in 1964 was worth 70,000 by 1986 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?

Building Up a Strong Portfolio

Key Principles: Generate cash Look for opportunities to spend it: see investment potential others have missed Take risks, and balance them with safer options Gain wide range of products and markets Manage unrelated businesses as separate business units Each strategic business unit (SBU) stays responsive to its environment

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

The Boston Consulting Group (BCG) Matrix

Business Growth rate

20%

Stars

Question marks

(Harrison, de Wit & Meyer) 10% (NB: Johnson, Scholes & Whittington (2005) pp. 315-7 use MARKET growth rate 0% here)

Cash Cows

Dogs

10x 1x 0.1x Relative competitive position (market share)

Question Marks and Problem Children

Invest in the hope of creating a star but will you end up with a dog?

High Growth rate Low

Note: high-growth MARKETS are attractive;

High Low Market share

High-growth BUSINESSES need large inflows of cash

The General Electric Experience

General

Electric (under Jeffrey Immelt) is still growing and generating high profit flows Jack Welch (CEO, 1981-2000) changed his image

from Neutron Jack (1980s cost-cutter: buildings remained, staff had gone) to strategy supremo (1990s visionary: embracing globalisation and e-learning)

Exceptional

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

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 added value to business-unit operations Broken up into smaller units, each containing more closely 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?

Relatedness and Synergy: An Inside-Out Approach

With synergy, the whole is more than the sum of the parts 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 leveraged or stretched: skills, knowledge and understanding are transferred via the centre to all the business units Can develop an outside in dimension through increased bargaining power: merged businesses stop being rivals and join forces

Corporate-Level Strategy

Should add value to business units All 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 stretch across business-unit boundaries:

Top management skills Research and development Marketing, finance, public relations and labour relations