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