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05/11/2019

Hull University Business School

Connected Thinking!

Business Strategies 2019

Dr. Giles A. Hindle

600552

Corporate Strategy 2 – Week 7 Session B

Dr. Giles A. Hindle E: [email protected] T: +44 1482 463 457

05/11/2019

The Corporate Parent,

Portfolio Matrices &

Corporate Strategies

Some reflections on Woodlands recommendations

» All businesses have issues. These can be internal or external. They may be people, processes, profits, etc. Anything.

» Woodlands has lots of issues, which you will have identified. Your analysis (steps 1-4) will help you see these more clearly.

» So, your analysis enables you to think about what Harry might do next. It will help you create ideas for strategy.

» Try to look for a range of ideas for strategy. From improving the current business model to thinking about more radical ideas.

– For example: improving coordination between units

– For example: selling boards which are environmentally friendly

» The maximum word count is 2500 words.

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• Late 1960’s: GE encounters problems of direction, co-ordination, control, and profitability

• Corporate planning innovations include:

• Portfolio Planning Models —matrix frameworks for evaluating business unit performance, formulating business strategies, and allocating resources

• Strategic Business Units —GE organizes its strategic planning system around SBUs. An SBU is a business that comprises a strategically-distinct

group of closely-related products

• Profit Impact of Marketing Strategy (PIMS) —a database which quantifies the impact of strategy on performance. Used to appraise SBU performance

and guide business strategy formulation

General Electric’s Development of Techniques of Corporate Strategy during the 1970’s

Managing the Corporate Portfolio

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

Corporate Rationales

Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, W iley, 1994.

The parental developer seeks to employ its own

central capabilities to add value to its businesses:

Corporate office – large

Main emphasis – downward, providing parental

capabilities

The portfolio manager operates as an active investor

in a way that shareholders in the stock market are

either too dispersed or too inexpert to be able to do:

Corporate office – small

Main emphasis – downward, investing and intervening

The synergy manager is a corporate parent seeking

to enhance value for business units by managing

synergies across business units:

Corporate office – large

Main emphasis – across, facilitating cooperation

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Portfolio Matrices

Models which can determine financial investment and divestment within portfolios of business. Each model uses three criteria:

• the ‘balance’ of the portfolio;

• the ‘attractiveness’ of the business units;

• the ‘fit’ of the business units.

BCG (or growth/share) matrix – uses market share and

market growth criteria for determining the

attractiveness and balance of a business portfolio

The GE–McKinsey directional policy matrix which

categorises business units into those with good

prospects and those with less good prospects

Parenting matrix – introduces parental fit as an important

criterion for including a business in a portfolio

The BCG Growth-Share Matrix

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

HIGHLOW

A n

n u

a l ra

te o

f m

a rk

e t

g ro

w th

( %

)

Relative market share

Earnings: high stable

Cash flow: high stable

Strategy: milk

Earnings: low, unstable

Cash flow: neutral or negative

Strategy: divest

Earnings: high stable, growing

Cash flow: neutral

Strategy: invest for growth

Earnings: low, unstable, growing

Cash flow: negative

Strategy: analyze to determine

likelihood of the

business becoming

a “star” or a “dog”

H IG

L O

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» Allocating resources—indicating both the investment requirements of different businesses and their likely returns

» Setting performance targets—indicating likely performance outcomes in terms of cash flow and ROI

» Formulating business-unit strategy—offering generic strategy recommendations (e.g.: “invest”, “hold”, or “harvest”)

The Directional Policy (GE–McKinsey) Matrix

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

Low

Medium

High

Low Medium High

In d

u s

tr y

A tt

ra c

ti v

e n

e s

Business Unit Position

The GE/ McKinsey

Matrix

• Portfolio balance—guiding business portfolio changes in order to achieve corporate goals such as a balanced cash flow by combining mature and growing businesses.

HEARTLAND

--businesses with

high potential

for adding value

EDGE OF

HEARTLAND

-- businesses where for

value adding potential is

lower or of negative risks higher

BALLAST

--typical core

business position:

fit high, but limited

potential to add

more value

VALUE TRAP

--potential for adding value is

seldom realized because of

problems of management fit

ALIEN TERRITORY

--exit: no potential for

value creation

LOW

HIGH

LOW HIGH

Potential for value

destruction from

misfit between

needs of the

business and

parent’s corporate

management style

Potential for parent to add value to the business

Ashridge Display: Parenting Advantage

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

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EDGE OF

HEARTLAND

BALLAST

VALUE TRAPALIEN TERRITORY

LOW

HIGH

LOW HIGH

Restaurant

chain C

Restaurant

chain D Restaurant

chain B

Restaurant

chain APubs and

bars

Hotels

Coffee

chain

Tennis

clubs

Spas

Liquor

chain

Size of circle represents sales

Potential for value

destruction from

misfit between

needs of the

business and

patent’s corporate

management style

Potential for parent to value added to the business

A Diversified Leisure Company

HEARTLAND

Contemporary Strategy Analysis, 9th Ed. © Robert M. Grant , John W iley & Sons Ltd., 2016

Corporate Strategies

» Consolidation/divestment – operation scope

» Integration/outsourcing - activity scope

» Diversification/focusing – industry/market scope

» Globalisation/localisation - geography scope

» Partnering - relationship/resources scope

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Consolidation

Fragmented

industry

Consolidated

industry

Consolidation

» Also called ‘horizontal integration’

» Reducing the number of firms in an industry

» By means of merger, acquisition, franchise, government mandate …

» For the benefit of economy of scale, cost reduction, efficiency in scarce resources allocation, market share, bargain power …

» Big is beautiful!

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Consolidation

For the economy and government officials,

the very size of these banks means they should

be better insulated from big shocks. But it also

means these banks are now ‘too big to fail’.

Wall Street Journal, Sept. 30 2008

Divestment

» Selling a business with which a firm had been operating – reducing firm size or scope or both

» Also called disposal, spin-off, demerger

» For simplifying operation, promoting entrepreneurship, raising capital, withdrawing from declining industry

» Small is beautiful!

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Outsourcing

» Turning an activity to outside suppliers – buy, not make

» Dispersing activities to take advantages of best partners/locations

» Balancing efficiency and control

» Ideally: leveraging competence than cost-cutting

M & A »Merger: two similar-size firms

are combined to establish a new legal entity

»Acquisition: a firm (acquirer) purchases another firm (target)

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Relationship management between firms

» Franchising

» Long-term contracting

» Alliances

» Joint ventures

» Network organisations

» Virtual organisations …

Ways of collaborating

»Strategic alliance

»Joint venture

»Subcontracting

»Networking

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SA vs JV » Strategic alliance: two or more independent

firms cooperate in the development, manufacture, or sale of products or services

» Joint venture: cooperating firms create a legally independent firm, in which they invest and from which they share profits and loses that are created

SA between Airlines

» Star Alliance: United, Lufthansa, Air Canada, SAS, etc.

» Sky Team: Delta, Air France, KLM, Korean Air, etc.

» One World: American Airline, British Airlines, Cathay Pacific, Qantas, etc.

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What do they want from JV? The foreign investment view Connection with relevant local

administrations

2.952

Experience in local

management

2.714

Local information channel 2.595

Local market channel 2.548

Currently available facilities 2.524

What do they want from JV? The host view

Channel to international market 3.262

Flexibility 3.024

Management skills 3.857

Capital 2.786

Technology and know-how 2.548

Economies of scale 2.500

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Networks

» Persistent and structured sets of players

» Cooperate on the basis of implicit and open-ended contracts

» Contracts are socially rather than legally binding

» Networks provide specialisation, low cost, flexibility and stability

» Need to be maintained and enhanced – not cost-free

Subcontracting (dominated networks)

» Downsized, delayered, core-competence-based, lean and mean

form of inter-firm organising

» Benefit for the dominant firm: regular quality supplies, pre-agreed

price, low capital investment

» Benefit for satellite firms: reliable orders, low sales and marketing

costs

» Efficiency at the cost of autonomy

» Long-term commitment and trust