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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 l What is our business? ¡ l 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? l l l ¡ 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 l Concentrate: Expand market share for existing product, selling to existing customer segment, possibly buying up competitors? l Integrate vertically: buying up suppliers and/or distributors? l Expand: Seek new markets for existing products and services, maybe overseas? l 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 l Analytical approach, focused on stock markets as well as on markets for goods and services l Looking for opportunities to buy up existing brands and businesses l Can develop an ‘inside out’ dimension through corporate parenting: buy up, turn around, add value l l
Portfolio Management: Examples Popular in the 1970 s and 1980 s l l 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 l l l bought up 1960 s-1980 s 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: l Generate cash l Look for opportunities to spend it: see investment potential others have missed l Take risks, and balance them with safer options l Gain wide range of products and markets l Manage unrelated businesses as separate business units l Each strategic business unit (SBU) stays responsive to its environment
Tools for Portfolio Analysis (Harrison, 2003: 256 -258) l Boston Consulting Group (BCG) Matrix l General Electric (GE) Business Screen Assume that each business unit already has a clear product/market position l Helpful for decisions on whether to: include a business unit in a corporate portfolio Ø invest or take cash from it Ø
The Boston Consulting Group (BCG) Matrix 20% Business Growth rate 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 10 x 1 x 0. 1 x Relative competitive position (market share)
Question Marks and Problem Children High ? Invest in the hope of creating a star – but will you end up with a dog? 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 l Jack Welch (CEO, 1981 -2000) changed his image l ¡ ¡ l from ’Neutron Jack’ (1980 s cost-cutter: buildings remained, staff had gone) to strategy supremo (1990 s visionary: embracing globalisation and e-learning) Exceptional success: most 1980 s conglomerates spent the 1990 s restructuring (Harrison 2003: 237 -249)
The Hanson Experience l Hanson experience is typical of 1990 s: ¡ ¡ l 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 l l l 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 l All too often, destroys value instead l ¡ 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? l Corporate executives answer this question by developing core competencies which can stretch across business-unit boundaries: l ¡ ¡ ¡ Top management skills Research and development Marketing, finance, public relations and labour relations