MBA STRATMAN
Corporate Strategy
Dr. Vesselin Blagoev
Lecture outline
• Diversification types
• Corporate parenting styles
• Portfolio planning models
Corporate Strategy
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
Types of diversification
Related
Diversification
Unrelated
Diversification
Businesses within the same
industry.
Strategic fit between value
chains
Can be skills or
technology
Combine activities
Reduce costs
Strategic fit is absent or
secondary
Undervalued companies
Criteria such as:
Bottom line?
Stability, long term future?
Capital requirement?
Vulnerable to recession?
Motives: Growth
Spreading Risk
Profit
'Making the right moves' (Associated British Foods)
Types of diversification
Mintzberg believes all diversification are
unrelated because no matter what is common
between businesses, there are always more things
that aren’t common than are common.
Aim is reduce costs by combining some activities but
can be too expensive.
Combining is complex and may end up satisfying no
one.
Unrelated diversification - finance driven
approach. Known as conglomerates approach
Examples of
diversified companies
• Related
• Unrelated
Thorntons
General Electric
Retail shops
Café Thorntons
Wedding service
Gifts
Johnson and Johnson
Baby products
First-aid
Neutrogena
Prescription drugs
Prosthetics
Contact lenses
Aircraft engines
Hotpoint appliances
GE Equity
Lighting
X-ray equipment
NBC TV network
Virgin Group
Travel
Music,
Mobile phones
Methods of Diversification
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
Corporate Parenting Styles
PORTFOLIO
MANAGER
SYNERGY
MANAGER
PARENTAL
DEVELOPER
RESTRUCTURER
Conditions
for adding value
(Goold and Campbell, 1994)
• Room for improvement of SBU?
• Can parent add anything that
SBU can’t do better on its own?
• Does parent understand Critical
Success Factors?
Parenting Matrix assessing fit
High
Fit between:
SBU Critical
Success Factors,
and
Parent’s skills,
resources,
characteristics
Low
Goold, Campbell &
Alexander(1995)
Ballast
SBUs
Alien SBUs
Heartland
SBUs
Value trap
SBUs
Low
Fit between: High
SBU parenting opportunities, and
Parent’s skills, resources, characteristics
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
Portfolio planning models
Purpose
• Evaluate business unit performance
• Assess balance of the corporate portfolio
• Formulate business unit objectives
Models
• GE/McKinsey matrix
• BCG Growth-Share matrix (Boston Box)
Popular in 1970s but not now
GE/McKinsey matrix
Business unit position
Industry Attractiveness
Strong
Medium
High
Medium
Low
(Henry, 2008, p.243; Blagoev, 2003)
Weak
BCG Matrix (Boston Box)
Annual real rate of market growth (%)
HIGH
LOW
Earnings:
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
HIGH
Earnings:
low, unstable
Cash flow:
neutral or negative
Strategy:
divest
Relative market share
LOW
?
Portfolio planning models critique
• These models were popular in the
1970s/1980s but are now seen as oversimplifications
• Assume no linkages between businesses
Conclusion
• Corporate parenting decisions are made at
the highest level often involving 1000s of
employees and billions of Euro.
• 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
References
• Collis, D. and Montgomery C. (1998) .‘Creating
Corporate Advantage’, Harvard Business Review, MayJune 1998, pp71-83.
• Grant, R (2005). Contemporary Strategy Analysis,
Blackwell , 4th ed, or newer.
• Goold, Campbell & Alexander (1995) .‘The quest for
corporate parenting advantage’, Harvard Business
Review, March-April 1995, pp120-132.
• 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.