Corporate strategy and strategic portfolio Strategic management Lecture 7 Corporate strategy and strategic portfolio

LEVELS OF STRATEGY Corporate level Determine overall scope of the organisation Add value to the different business units Meet expectations of stakeholders Business level (SBU) How to compete successfully in particular markets Operational How different parts of organisation deliver strategy

Three levels of the strategy 1. level: The corporate level At this level the fundamental task is to develop a balanced portfolio of businesses which will achieve the goals of the corporation and satisfy its stakeholders. 2. level: The strategic business unit level (SBU) At this level the business, or set of activities is given and the major task for strategic planner at this level is for business to succeed against competitors and also satisfy corporate success criteria. 3. level: The functional level: At this level the major task is to provide an appropriate functional strategies ( finance and accounting, marketing, R+D, production, personnel) for SBU or corporate level strategy.

Strategic Business Unit (SBU) A strategic business unit (SBU) is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU

Definition of strategic business units The SBUs are the natural ‘grouping’ of part of a corporation. The SBU has a range of related products/services which has similar technologies and production processes. The products/services are sold in similar or related market segments. The production/services are sold against a well-defined set of competitors. An SBU is managed by an SBU manager, largely as an independent unit. The SBU has its own set of goals and strategies. Each SBU in a particular organization should be able to operate independently of any other SBU.

What is the portfolio stratregy? From viewpoint of strategic management the corporations are collections of different “product-market-consumer-resource packages”. These are the SBU’s. We can describe the sum of SBU’s, as portfolio. The portfolio analysis: Combines the assessment of business position with market attractiveness evaluation, which emerges from external analysis in general and market analysis, in particular. Includes multiple SBU’s in the same analysis and addresses the SBU investment decision - which organizational units should receive resources, which should have resource withheld , and which should be resource generators. Offers baseline recommendations concerning the investment strategies for each SBU based on an assessment of business position and market attractiveness.

Corporate Portfolio Management Portfolio balance Markets Organisation’s needs Attractiveness of business units Profitability Growth rates Portfolio ‘fit’ Synergies between business units Synergies with corporate parent

The Growth Share (or BCG) Matrix

Strategic implication of the BCG matrix The strategies for the overall portfolio products are concerned with the issue of balance, I.e. is the portfolio of products balanced internally in terms of the following? Are there a sufficient number of „cash cows” to support those other products in the portfolio which are at stages of their lifecycles when they are require cash? Are there „questions-marks” which have resonable prospects of becoming future stars and which do not , at present, constitute a disproportionate drain on current cash flow? Are there an appropriate number of „stars” which will provide sufficient cash generation when the current cash cows are no longer able to fulfill this role? Are there any „dogs” and if so why?

How to do a portfolio analysis? Construct a summary of the industry and competitive environment of each business units. Appraising the strength and competitive position of each business unit. Understanding how each business unit ranks against its rivals on the key factors for competitive success. Identifying the external opportunities, threats and strategic issues peculiar to each business units. Determining how much corporate financial support is needed to fund each unit’s business strategy and what corporate skills and resources could be deployed to boots the competitive strength of various business units. Comparing the relative attractiveness of the businesses in the corporate portfolio. Compare the businesses on various historical and projected performance measures - sale growth, profit margin, return on investment, and the like. Checking the corporate portfolio to ascertain whether the mix of businesses is adequately “balanced”

The Industry Life Cycle Industry Sales Introduction Growth Maturity Decline Time Drivers of industry evolution : demand growth creation and diffusion of knowledge

Assumptions and limitations of BCG The use of highs and lows to make just four categories is too simplistic. The link between market share and profitability isn’t necessarily strong. Low-share businesses can be profitable, too (and vica versa.) Growth rate only one aspect of industry attractiveness. High-growth market may not always be the best for every business unit or product line. It considers the product line or business unit only relation to one competitor: the market leader. It misses small competitors with fast-growing market share. Market share is only one aspect of overall competitive position.

Indicators of SBU Strength and Market Attractiveness

Market Attractiveness/SBU Strength Matrix

Strategy Guidelines Based on Directional Policy Matrix

Corporate Level and International Strategy Product and geographical diversity Related and unrelated diversification Attractions of international markets Multidomestic and global strategies Effect of product and geographical diversity on performance Corporate parenting Portfolio management

Corporate Level Issues

The Multi-Business Organisation Exhibit 6.2

Reasons for Diversification (1) Value creation Efficiency gains from applying existing resources/capabilities to new markets/products Economies of scope Benefits of synergy Applying corporate managerial capabilities to new markets/products/services Dominant logic Increased market power from diverse product/service range Cross subsidy Possible monopoly in long-run

Reasons for Diversification (2) Less obvious value creation In response to environmental change To defend existing value Or straying too far from dominant logic? To spread risk across range of businesses Investors can diversify more effectively? Important for private businesses In response to expectations of powerful stakeholders Pressure from financial analysts to produce constant growth

Reasons for International Diversity Market-based Exploit cultural/ geographic differences Globalisation of markets & competition Cash in on differences in culture Following customers Administrative differences Bypass limitations in home market Specific geographical/ economic differences Utilise strategic capabilities Economic benefits Broaden market size Economies of scale Internationalise value-adding activities Stabilisation of earnings across markets Enhance knowledge

Related Diversification

Entry Modes (1) Exporting Advantages JV/Alliance Advantages No operations in host country Shared investment risk Economies of scale Complementary resources Internet access for small firms Possible government condition Exporting Disadvantages JV/Alliance Disadvantages No benefit from location advantages of host Difficult to select and agree with partner Limited local knowledge Managing relationship Dependence on intermediaries Loss of competitive advantage through imitation Exposure to trade barriers Limits integration/coordination of activities across countries Transportation costs Slow response to customers

Entry Modes (2) Licensing Advantages FDI Advantages Contractually agreed income Control of resources/capabilities Limit financial/economic risk Integration/coordination of activities across countries Acquisitions – rapid entry Greenfield – state of art and government finance Licensing Disadvantages FDI Disadvantages Difficult to select and agree with partner Substantial investment – financial exposure Loss of competitive advantage through imitation Problems of integration/ coordination of acquisitions Limits benefit from location advantages of host Greenfield – time consuming and unpredictable cost

International Strategies Issues Global-local Centralised/decentralised Generic Strategies Multi-domestic Value adding activities located in national markets Products/services adapted to local requirements Global Standardised products Produced in centralised location

Value-Adding Corporate Parents Envisioning Strategic Intent Central Services and Resources Focus Clarity to external stakeholders Clarity to business units Investment Scale advantages Transferable management capabilities Intervention at Business Level Expertise Monitor performance Action to improve performance Challenge/develop strategic ambitions Coaching/training Develop strategic capabilities Achieve synergies Provide expertise/services Knowledge creation/sharing Leverage Brokering linkages/accessing external networks

Value-Destroying Corporate Parents Bureaucracy Adds cost Hinders responsiveness Buffer from reality Financial safety net Diversity and size Lack of clarity on overall vision Managerial ambition Empire building

Corporate Rationales Parental developers Synergy managers SBUs below potential (‘parenting opportunity’) Relevant central resources Suitable portfolio Share resources/skills Identify bases for sharing Identify benefits Acquire assets Divest assets Low strategic role in SBU Strategic requirements Competences used to create value in SBUs Synergy Agent for financial markets Limited SBU value creation Logic Parental developers Synergy managers Portfolio managers Understand SBUs (‘feel’) Effective linkages SBUs autonomous SBU performance-based incentives Collaborative SBUs Corporate staff as integrators Overcome resistance to sharing Corporate-based incentives Autonomous SBUs Small, low cost corporate staff Organisational requirements

Bases of strategic choice Corporate purpose and aspirations Ownership Mission and strategic intent Scope and diversity The global dimension Bases of SBU strategy Achieving competitive advantage Price-based strategies Differentiation strategies Focus strategies Enhancing SBU strategy: corporate parenting Portfolio management Financial strategy The role of the corporate parent The parenting matrix