Formulating Corporate-Level
Strategy
HCAD 5390
Strategies
Distinguishing Corporations from Strategic
Business Units (SBUs)
Multi-SBU Corporations:
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Sole separate legal entity
Authorized to execute contracts
Able to borrow money and sell equity
Produces no goods or services
Quite small staff
Primary function is to assemble and manage a
portfolio of SBUs
Distinguishing Corporations from Strategic
Business Units (SBUs)
Strategic Business Units:
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No separate legal existence
No separate ability to contract or raise capital
Produce goods and services
Compete in one or more markets
Relative autonomy to manage operations and
strategy
Value-Adding Functions of
the Corporate Center
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Manage the Portfolio of SBUs
Raise Financial Capital for Allocation to SBUs
Allocate Resources and Services to SBUs
Facilitate Synergies Among SBUs
Choose Parenting Style for SBU Interactions
Participate in SBU Strategic Planning Process
Oversee and Monitor SBU Performance
Manage Corporate Relations With Stakeholders
Corporate Management of
an SBU Portfolio (I)
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In pursuit of a corporate vision
Acquires, merges with, or develops internally
new SBUs
Divests existing, unwanted SBUs
Set performance goals for SBU management
Provide input to SBU strategic decisions
Count upon SBUs to perform unique strategic
functions
Corporate Management of
an SBU Portfolio (II)
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Balance between central corporate direction and
individual SBU autonomy
Control vs spontaneity
Hire good SBU managers, give them general
guidelines, and let them loose … or …
Give detailed directions, watch closely, and
intervene frequently
Model Portfolio Management Process
Choose strategic thrust of the corporation
1.
–
–
–
2.
3.
Growth
Stability
Retrenchment
Choose geographic areas, markets, and
products or services to offer in them
Decide how many SBUs in the portfolio and
which businesses they will be
Texas Health Resources

Texas Health Resources (THR) is one of the largest faith-based,
nonprofit health care delivery systems in the United States and the
largest in North Texas in terms of patients served. The system's
primary service area consists of 16 counties in north central Texas,
home to more than 6.2 million people.
THR was formed in 1997 with the assets of Fort Worth-based Harris
Methodist Health System and Dallas-based Presbyterian Healthcare
Resources. Later that year, Arlington Memorial Hospital joined the
THR system.
THR has 12 acute-care hospitals and one long-term care hospital that
total 3,100 licensed hospital beds, employs more than 18,000 people,
and counts more than 3,600 physicians with active staff privileges at
its hospitals. THR is also a corporate member or partner in six
additional hospitals and surgery centers.
Adaptive Strategies
10
Corporate-Level Strategic Options:
Growth – Expand the Portfolio
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Most common corporate-level strategy direction
Critical to maintaining share in a growing market
In pursuit of economies of scale and scope
Increase in experience and learning
Top executive egos to be satisfied
Adaptive Strategies
Expansion Adaptive Strategy:
–
Orientation toward growth
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12
Expand, cut back, status quo?
Concentrate within current industry, diversify into
other industries?
Growth and expansion through internal development
or acquisitions, mergers, or strategic alliances?
Growth By Concentration
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All businesses start here
Dedicate all resources and competencies to
one or a few products or services
Achieved in one of three ways:
–
–
–

Sell more of current products in current markets
Sell current products in new markets
Sell new products in current markets
To sell new products in new markets is
diversification
Adaptive Strategies
Basic Growth Strategies:
Concentration
–
Current product line in one industry
–
Market Development
– Product Development
– Penetration
Diversification
–
14
Into other product lines in other industries
Concentration on a Single Business
Southwest Airlines
Concentration on a Single Business
Advantages
–
–
–
Operational focus on a
single familiar industry or
market.
Current resources and
capabilities add value.
Growing with the market
brings competitive
advantage.
Disadvantages
–
–
–
No diversification of market
risks.
Vertical integration may be
required to create value
and establish competitive
advantage.
Opportunities to create
value and make a profit
may be missed.
Concentration No Longer Sufficient to
Maintain Growth
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Unlikely to capture a greater share of current
market
Current market is stagnating, maturing,
shrinking, or otherwise lacking growth potential
Excess cash on hand needs to be invested
productively
Management has greater ambitions for further
strategic achievement
Diversification
Related
–
diversification
Entry into new business activity based on shared
commonalities in the components of the value
chains of the firms.
Unrelated
–
diversification
Entry into a new business area that has no
obvious relationship with any area of the existing
business.
Growth By Related Diversification
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Move beyond existing markets and products
Employ existing resources and competencies
New businesses are closely connected
(“related”) to existing businesses
Directions of related diversification
–
–
–
Vertical forward integration (toward customers)
Vertical backward integration (toward suppliers)
Horizontal expansion
Forms of Relatedness
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Products or services
Markets
Processes, systems, or other operating
features
Manufacturing facilities, distribution
channels, marketing media, or support
services
Brand image, corporate reputation, creativity
or innovation skills, or general managerial
Vertical Integration

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Forward or backward in the industry value
chain
Moving “upstream” toward suppliers
–
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Moving “downstream” toward customers
–
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Hospital acquiring a physician group practice
Hospital acquiring a long-term care facility
Examples: physician-hospital organizations
(failed), integrated delivery systems
(succeeded)
Stages in the Raw-Material-toConsumer Value Chain
Upstream
Downstream
Stages in the Raw-Material-to-Consumer
Value Chain in the Personal Computer
Industry
Raw materials
Examples:
Dow Chemical
Union Carbide
Kyocera
Intermediate
manufacturer
Examples:
Intel
Seagate
Micron
Assembly
Examples:
Apple
Hp
Dell
Distribution
Examples:
Best Buy
Office Max
End user
Vertical Integration
Decision Steps in Vertical Integration
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Adequate resources and competencies to
bring the new business operations in-house
Choose form of integration – full ownership,
partial ownership, joint venture, or long-term
contract
Consider impact on other stakeholders
Pay attention to share of industry value chain
being brought in-house
Good Reasons for Vertical Integration
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Reduce costs by eliminating redundancy throughout
the value chain
Better coordination at interface between value chain
components
Profit-taking at several levels in the chain is
eliminated
Greater overall control of inputs (resources) and
outputs (distribution channels)
Wider network of sources of competitive intelligence
Opportunity to reengineer the value chain
Vertical Integration Problems (I)
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Does the value chain function as well after
integration as it did before?
Excessive costs may be incurred in
managing the new businesses and their
interactions
Inability to use full capacity of acquired
businesses so must … sell to competitors?
Must the business deal exclusively with its
new integration partners?
Vertical Integration Problems (II)
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Commitment to entire chain reduces
strategic flexibility
Commitment may tie business to inefficient
processes, poorly managed units, and
obsolete technologies
Inability to coordinate added units may
increase costs and limit opportunities to
create value for customers
Horizontal Expansion
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Moving sideways in the value chain,
acquiring similar businesses in different
geographic areas
Acquisition target may be a competitor
May create antitrust enforcement concerns
Examples: multistate hospital networks,
nursing home chains, national health plan
systems
Best Circumstances for
Horizontal Expansion
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Current market is growing, requiring additional
capacity to meet demand
Target acquisition doing poorly – lacks
resources or competencies possessed by the
acquirer
Expanded size enables economies of scale
leading to competitive advantage
Opportunity to create dominant market position
by acquiring a competitor
Diversification
Basic Diversification Strategies:
31
–
Concentric (Related) Diversification
–
Conglomerate (Unrelated) Diversification
Incentives to Diversify
Internal Incentives:
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Poor performance may lead some firms to diversify an
attempt to achieve better returns
Firms may diversify to balance uncertain future cash flows
Firms may diversify into different businesses in order to
reduce risk
Resources and Diversification
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Besides strong incentives, firms are more likely to
diversify if they have the resources to do so
Value creation is determined more by appropriate
use of resources than incentives to diversify
Managerial Motives to Diversify
Managers have motives to diversify
–
–
–
diversification increases size; size is associated with
executive compensation
diversification reduces employment risk
effective governance mechanisms may restrict such
motives
Related Diversification
Concentric Diversification
–
–
35
Growth into related industry
Search for synergies
Related Diversification
Marriott
Related Diversification
Advantages of Related Diversification
(I)
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Synergies among existing and acquired
businesses
Lower overall corporate risk – balancing high
and low-risk SBUs
Greater bargaining power vis-à-vis
competitors, suppliers and customers
Advantages of Related Diversification
(II)
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Cross-subsidization among businesses at
different life cycle stages
General increase in revenues and profits
from acquired businesses
Opportunity to acquire new knowledge,
competencies, and technologies
Enhance status, power, and compensation of
top executives
Forms of Inter-SBU Synergy (I)
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Share solutions to problems and ideas for
improving operational efficiency
Use slack capacity to achieve economies of
scale
Earn volume discounts and greater
bargaining power with suppliers
Integration of computer systems and
capabilities
Forms of Inter-SBU Synergy (II)
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By sharing R&D facilities, reduce innovation
costs and spread research risks
Share distribution channels
Leverage the use of influential brand names
and images
Wide opportunities for knowledge transfer
Adaptive Strategies
Unrelated (Conglomerate) Diversification
–
–
42
Growth into unrelated industry
Concern with financial considerations
Growth By Unrelated Diversification
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Few similarities or commonalities among
businesses in the portfolio
Operate in different industries/markets, serve
different customers, face different
competitors
Corporation composed of unrelated
businesses may be called a “conglomerate”
What value is added by bringing unrelated
businesses together into one corporation?
Unrelated Diversification
Adaptive Strategies
Performance
Relationship Between
Diversification and Performance
Dominant
Business
Related
Constrained
Level of Diversification
Unrelated
Business
Bureaucratic Costs and the Limits of
Diversification
Number
–
of businesses
Information overload can lead to poor resource allocation
decisions and create inefficiencies.
Coordination
–
–
As the scope of diversification widens, control and
bureaucratic costs increase.
Resource sharing and pooling arrangements that create
value also cause coordination problems.
Limits
–
among businesses
of diversification
The extent of diversification must be balanced with its
bureaucratic costs.
Tools for Implementing
Growth Strategies
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Internal development
Internal new venture creation
Investments in new ventures
Acquisition
Merger
Joint venture, strategic alliance or partnership
Reasons for Making Acquisitions
Learn and develop
new capabilities
Increase
market power
Overcome
entry barriers
Cost of new
product development
Acquisitions
Increase speed
to market
Reshape firm’s
competitive scope
Increase
diversification
Lower risk compared
to developing new
products
Diversification and Corporate Performance: A
Disappointing History
 A study conducted by Business Week and Mercer Management
Sources: Lipin, S. & Deogun,
N. 2000. Big merges of the
90’s prove disappointing to
shareholders. Wall Street
Journal, October 30: C1; A
study by Dr. G. William
Schwert, University of
Rochester, cited in Pare, T. P.
1994. The new merger boom.
Fortune, November 28:96; and
Porter, M.E. 1987. From
competitive advantage to
corporate strategy. Harvard
Business Review, 65(3):43.
Consulting, Inc., analyzed 150 acquisitions that took place
between July 2000 and July 2005. Based on total stock returns
from three months before, and up to three years after, the
announcement:
 30 percent substantially eroded shareholder returns.
 20 percent eroded some returns.
 33 percent created only marginal returns.
 17 percent created substantial returns.
 A study by Salomon Smith Barney of U.S. companies acquired
since 1997 in deals for $15 billion or more, the stocks of the
acquiring firms have, on average, under-performed the S&P
stock index by 14 percentage points and under-performed their
peer group by four percentage points after the deals were
announced.
Problems With Acquisitions
Integration
difficulties
Inadequate
evaluation of target
Resulting firm
is too large
Acquisitions
Large or
extraordinary debt
Managers overly
focused on acquisitions
Too much
diversification
Inability to
achieve synergy
Corporate-Level Strategic Options:
Stability – Maintain the Portfolio
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Rapid growth outstripped financial and
managerial resources
Difficulties in assimilating recent portfolio
additions
Some current SBUs may have serious financial
or operational problems
No attractive acquisition opportunities available
Waiting for environmental changes to develop
Restructuring:
Contraction of Scope
Why
–
–
–
restructure?
Pull-back from overdiversification.
Attacks by competitors on core
businesses.
Diminished strategic advantages of
vertical integration and diversification.
Contraction
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(Exit) strategies
Retrenchment
Divestment– spinoffs of profitable SBUs to investors;
management buy outs (MBOs).
Harvest– halting investment, maximizing cash flow.
Liquidation– Cease operations, write off assets.
Why Contraction of Scope?
The causes of corporate decline
– Poor management– incompetence, neglect
– Overexpansion– empire-building CEO’s
– Inadequate financial controls– no profit responsibility
– High costs– low labor productivity
– New competition– powerful emerging competitors
– Unforeseen demand shifts– major market changes
– Organizational inertia– slow to respond to new competitive
conditions
Corporate-Level Strategic Options:
Retrenchment – Cut Back the Portfolio

Need to do more than pause and rethink
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–
–
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Regain control of inefficient operations
Rebuild resources and competencies
Reconsider strategic direction
Result may be a radical restructure and
redirection of the organization
Retrenchment Options
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Getting back down to fighting weight
Returning to core businesses and
competencies
Seeking a “white knight” to take over
Selling the entire organization
Divesting pieces of the corporate portfolio
Voluntary filing for bankruptcy/reorganization
Voluntary/involuntary filing for
bankruptcy/liquidation
The Main Steps of Turnaround
Changing
–
the leadership
Replace entrenched management with new managers.
Redefining
–
Evaluate and reconstitute the organization’s strategy.
Asset
–
sales and closures
Divest unwanted assets for investment resources.
Improving
–
strategic focus
profitability
Reduce costs, tighten finance and performance controls.
Acquisitions
–
Make acquisitions of skills and competencies to strengthen
core businesses.
Tools for Portfolio Analysis
and Management
Graphical matrix diagrams showing variable
factors key to strategic portfolios decisions
1.
2.
Boston Consulting Group Growth-Share Matrix
General Electric Business Screen
Reviewing the Corporate Portfolio

Portfolio Planning under the Boston
Consulting Group (BCG) matrix:
–
–
–
Identifying the Strategic Business Units (SBUs) by
business area or product market
Assessing each SBU’s prospects (using relative
market share and industry growth rate) relative to
other SBUs in the portfolio.
Developing strategic objectives for each SBU.
The BCG Matrix
Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by
permission from The Boston Consulting Group, Inc., 1970.
The BCG Matrix

Stars
–
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Question marks
–
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Low relative market shares in fast growing industries.
Cash cows
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High relative market shares in fast growing industries.
High relative market shares in low-growth industries.
Dogs
–
Low relative market shares in low-growth industries.
The Strategic Implications of the BCG
Matrix
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Stars
–
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Question marks
–
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Selective investments; divestiture for weak firms or those with
uncertain prospects and lack of strategic fit.
Cash cows
–
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Aggressive investments to support continued growth and
consolidate competitive position of firms.
Investments sufficient to maintain competitive position. Cash
surpluses used in developing and nurturing stars and selected
question mark firms.
Dogs
–
Divestiture, harvesting, or liquidation and industry exit.
Limitations on Portfolio Planning

Flaws in portfolio planning:
–
–
–
–
The BCG model is simplistic; considers only two
competitive environment factors– relative market
share and industry growth rate.
High relative market share is no guarantee of a
cost savings or competitive advantage.
Low relative market share is not always an
indicator of competitive failure or lack of
profitability.
Multifactor models (e.g., the McKinsey matrix) are
better though imperfect.
The McKinsey Matrix
Raise Financial Capital
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SBUs may lack the separate legal existence
to do this on their own
Corporate center performs this function by
issuing stock and borrowing
Then, allocates the capital to SBUs in some
rational, objective manner that maximizes
total return to the corporation
This is the practice of corporate strategic
financial management
Allocate Resources and Services

In addition to financial capital, corporate
center may possess other resources useful
to SBUs
–
–
–
–
–
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Human resource management services
Research and development capability
Technology assessment competence
Information technology support
Corporate legal department
These too must be allocated to the SBUs
Facilitate Synergies Among SBUs
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Inter-SBU synergies are one of the main reasons for
assembling corporate portfolios
Synergies do not often occur naturally; the corporate
center must foster them
–
–
–
–
–
Watch each SBU’s operations and strategies
Notice lacks of resources and competencies
Inventory resources or competencies owned by the SBUs
Match lacking and owning SBUs
Facilitate actual sharing among them
Forms of Synergy Facilitation (I)
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Disseminate knowledge and best practices
Facilitate transfer of knowledge assets and
services
Encourage collaboration and coordination
Arrange transfer of skills and capabilities
Build central database of resources and
competencies available to all SBUs
Forms of Synergy Facilitation (II)
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Temporarily assign a specialist from one
SBU to another
Sponsor all-SBU meetings to share
information and problem solutions
Coordinate activities of common SBU
functions to gain economies of scale
Provide synergy-supporting education,
training, and coaching to SBU personnel
Choose a Corporate Parenting Style
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Conscious choice on how the corporate
center will interact with SBUs in its portfolio
Range along a continuum from complete
detachment to intrusive micromanagement
Choice will affect behavior and performance
of SBU top management
Too loose parenting can lead to rogue SBUs
Too tight parenting can stifle creative
spontaneity
Participate in SBU Strategy-Making
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Corporate degree of involvement in SBU
strategic management is a parenting choice
Difference between a true SBU and a
division or department of a business:
–
–

SBU – great autonomy and freedom of action
Division – close central direction and control
Essence of SBU success is in
entrepreneurial impulses of their top
executives
Oversee and Monitor SBU
Performance

Every corporate center must monitor the
performance of SBUs in its portfolio:
–
–
–
–
Are they meeting the strategic objectives of the SBU
and the overall corporation?
Are they financially healthy?
Are there any looming problems?
Are top executives meeting personal performance
standards?
Managing Relationships With External
Stakeholders
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
Every organization has numerous stakeholders who
must be tended to
Meaning of term “stakeholder”
Examples of health care stakeholders:
–
–
–
–
–
–
Suppliers (employees, unions, contractors)
Customers (patients, payers)
Competitors
Regulators
Capital sources (donors, grantors, shareholders, lenders)
Media
Corporate Value Negation
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

Systems and approvals that add costs, delay
decisions, and slow market responsiveness
Insulate SBU executives from realities and
pressures of financial markets
Portfolio so large and diverse that no
common theme is apparent
Overly large corporate HQ that incur
expense without providing added value to
SBUs
Strategic Alliance

A strategic alliance is a cooperative strategy in which
–
–
firms combine some of their resources and capabilities
to create a competitive advantage
 A strategic alliance involves
– exchange and sharing of resources and capabilities
– co-development or distribution of goods or services
Strategic Alliance
Firm A
Resources
Capabilities
Core Competencies
Firm B
Resources
Capabilities
Core Competencies
Combined
Resources
Capabilities
Core Competencies
Mutual interests in designing, manufacturing,
or distributing goods or services
Types of Cooperative Strategies



Joint venture: two or more firms create an
independent company by combining parts of their
assets
Equity strategic alliance: partners who own different
percentages of equity in a new venture
Nonequity strategic alliances: contractual
agreements given to a company to supply, produce,
or distribute a firm’s goods or services without equity
sharing
Marketing & Sales
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Support Activities
Service
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
Service
Marketing & Sales
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Supplier
Support Activities
Vertical Alliance
Strategic Alliances
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
• vertical complementary strategic
alliance is formed between firms
that agree to use their skills and
capabilities in different stages of
the value chain to create value
for both firms
• outsourcing is one example of
this type of alliance
Strategic Alliances
Buyer
Buyer
Primary Activities
Service
Marketing & Sales
Procurement
Inbound Logistics
Technological Development
Operations
Human Resource Mgmt.
Outbound Logistics
Firm Infrastructure
Marketing & Sales
Support Activities
Service
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Support Activities
Potential Competitors
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
• horizontal complementary strategic alliance is formed
between partners who agree to combine their resources and
skills to create value in the same stage of the value chain
• focus on long-term product development and distribution
opportunities
• the partners may become competitors
• requires a great deal of trust between the partners