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

3. 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

4. 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.

5. 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

6. 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.

7. 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.

8. 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

9. The Growth Share (or BCG) Matrix

11. 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?

12. 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”

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

14. 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.

15. Indicators of SBU Strength and Market Attractiveness

16. Market Attractiveness/SBU Strength Matrix

17. Strategy Guidelines Based on Directional Policy Matrix

18. 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

19. Corporate Level Issues

20. The Multi-Business Organisation
Exhibit 6.2

21. 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

22. 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

23. 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

24. Related Diversification

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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