Corporate Strategy
Corporate strategy:
Strategic Management
Corporate Strategy
Where should we compete and what value do we add to the
individual businesses?
“The overall plan for a diversified company” (Porter)
e.g. Ford Motors, General Electric, PepsiCo, Gillette, Unilever,
Proctor and Gamble.
Business (or competitive) strategy:
How should individual businesses compete?
Relates to strategic business units (SBUs) within one industry or
market
Lecture outline
• Diversification types
• Corporate parenting styles
• Portfolio planning models
Types of diversification
Related Diversification
Unrelated Diversification
Strategic fit between value chains
Strategic fit is absent or secondary
Undervalued companies
Criteria such as:
Can be skills or technology
Combine activities
Reduce costs
Motives:
Bottom line?
Stability, long term future?
Capital requirement?
Vulnerable to recession?
Growth
Spreading Risk
Profit
'Making the right moves' (ABF)
Examples of
diversified companies
• Related
Thorntons
Retail shops
Café Thorntons
Wedding service
Gifts
Johnson and Johnson
Baby products
First‐aid
Neutrogena
Prescription drugs
Prosthetics
Contact lenses
Methods of Diversification
• Unrelated
General Electric
Aircraft engines
Hotpoint appliances
GE Equity
Lighting
X‐ray equipment
NBC TV network
Virgin Group?
Vertical Integration
(Backward / Forward)
Control of Supplies or Markets
Access to Information
Cost saving
ISSUES:
Problems in the management of diverse
business activities
Increase of dependency on one
‘industry’
Thorntons: manufacturer
and retailer of chocolate
Horizontal Integration
Under utilized resources
Escape present business
Spreading risk
Synergy in resources & capabilities
Building on expertise or technology
ISSUES:
Close and distant relatedness
What exactly are the synergies?
e.g. Cadbury buy
Green&Blacks
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Conditions for adding value
Corporate Parenting Styles
(Goold and Campbell 1994)
SYNERGY
MANAGER
PORTFOLIO
MANAGER
PARENTAL
DEVELOPER
RESTRUCTURER
Parenting Matrix ‐ assessing fit
High
Ballast
SBUs
Heartland
SBUs
Fit between:
SBU Critical Success
Factors,
and
Parent’s skills, resources,
characteristics
Low
• Room for improvement of SBU?
• Can parent add anything that SBU can’t do
better on its own?
• Does parent understand Critical Success
Factors?
Adapted from
Goold, Campbell
& Alexander,
Corporate Level
Strategy, Wiley
1994
Alien SBUs
Low
Value trap
SBUs
How do corporate parents destroy value?
• Add an extra layer of bureaucracy that delays
decision‐making
• Encourage ‘careerism’ in managers
• Increase mistrust managers
• Advise incorrect methods because don’t understand
the industry
• Force all businesses to follow the same strategic
planning methods
• Force synergy between businesses that doesn’t add
any benefit
High
Fit between:
SBU parenting opportunities, and
Parent’s skills, resources, characteristics
GE/McKinsey matrix
Portfolio planning models
- Evaluate business unit performance
- Assess balance of the corporate portfolio
- Formulate business unit objectives
Models
- GE/McKinsey matrix
- BCG Growth-Share matrix (Boston Box)
strong
Industry Attractiveness
Purpose
Business unit position
Medium
weak
high
Medium
low
Popular in 1970s but not now
(see Henry 2008, p243)
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BCG Matrix (Boston Box)
Portfolio planning models ‐ critique
(See Henry 2008 p239)
Annual real rate of market growth (%)
HIGH
LOW
high stable, growing
Earnings:
low, unstable, growing
Cash flow:
neutral
Cash flow:
negative
Strategy:
invest for growth
Strategy:
analyze to determine
whether business can be grown into
a star, or will degenerate into a dog
Earnings:
high stable
Cash flow:
high stable
Strategy:
milk
Earnings:
HIGH
Earnings:
low, unstable
Cash flow:
neutral or negative
Strategy:
divest
Relative market share
?
• These models were popular in the
1970s/1980s but are now seen as over‐
simplifications
• Assumes no linkages between businesses
• Selling a ‘dog’ business could have negative
consequences for remaining businesses
LOW
Conclusion
References
• Corporate parenting decisions are made at the
highest level often involving 1000s of employees and
$billions.
• Perhaps there is no ‘formula’ for making the right
decision because there are so many variables and a
great deal of uncertainty.
• Businesses that are up for sale tend to be overvalued
– therefore difficult to recover the cost of purchase
• Collis, D and Montgomery C (1998) ‘Creating Corporate Advantage’,
Harvard Business Review, May‐June 1998, pp71‐83.
• Goold et al (1995) ‘The quest for corporate parenting advantage’, Harvard
Business Review, March‐April 1995, pp120‐132.
• Grant, R (2005) Contemporary Strategy Analysis, Blackwell (fourth edition
onwards)
• Henry, A (2008) Understanding Strategic Management, OUP.
• Johnson, Scholes and Whittington (2008) Exploring Corporate Strategy
(8th edition) – (note 6th and 7th edition also useful) FTPH.
• (note – the main authors in this area are Michael Goold, Andrew Campbell
and Marcus Alexander)
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