business strategy – lecture 7 corporate-level strategy: portfolios and synergy john birchall
TRANSCRIPT
Business Strategy – Lecture 7Corporate-Level Strategy:
Portfolios and
Synergy
John Birchall
Linking Purpose to Action
Adapted from Harrison (2003: 37) and De Wit & Meyer (2005: 5)
Organisational PurposeVision, Mission, Ethics
Strategy Process
Strategy ContentBusiness Definition, Competitive Strategies
Strategy ContextBroad and Operating
Environments
Involves Stakeholders
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) MatrixGeneral 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
Stars Question marks
Cash Cows Dogs
10x 1x 0.1x Relative competitive position (market share)
BusinessGrowth rate (Harrison, de Wit & Meyer)
20%
0%
10%
The Boston Consulting Group (BCG) Matrix
(NB: Johnson, Scholes & Whittington (2005) pp. 315-7 use MARKET growth rate here)
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
Low
Market share
High
Note: high-growth MARKETS are attractive;
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 Green’s Arcadia, Conrad Black’s 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