Business Strategy

1
Business Strategy Lecture 7Corporate-Level
StrategyPortfolios and Synergy

• John Birchall

2
Linking Purpose to Action
Strategy Context
Broad and Operating Environments
Strategy Content Business Definition, Competitive
Strategies
Organisational Purpose Vision, Mission, Ethics
Strategy Process
Involves Stakeholders

• Adapted from Harrison (2003 37) and De Wit
  Meyer (2005 5)

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Business Definition

• What is our business?
• Answer must be clear and firm yet open to
  change (Harrison 2003 124)
• Changing the business definition means looking
  for new answers
• Whose needs should be served?
• What is to be produced, or what services
  delivered - and how?
• What should be our scale and scope?
• How big relative to competitors?
• How heavily focused on specific industries?
• How much control of the industry supply chain?
• How should we relate to our key stakeholders?

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The Challenge of Growth (Harrison 2003 216-231)

• As it grows, should a business
• Concentrate Expand market share for existing
  product, selling to existing customer segment,
  possibly buying up competitors?
• Integrate vertically buying up suppliers
  and/or distributors?
• Expand Seek new markets for existing products
  and services, maybe overseas?
• Diversify horizontally
• Develop related products and services, using
  existing skills and relationships?
• Develop new unrelated product lines, possibly
  selling to new customers?

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Portfolio Management An Outside-In Approach

• Unrelated diversification
• Often by acquisition, rather than organic growth
• Analytical approach, focused on stock markets as
  well as on markets for goods and services
• Looking for opportunities to buy up existing
  brands and businesses
• Can develop an inside out dimension through
  corporate parenting buy up, turn around,
  add value

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Portfolio Management Examples

• Popular in the 1970s and 1980s
• Harrison (2003) ALFA Group, General Electric
• UK example Hanson Group
• Founded by two Yorkshire men James Hanson and
  Gordon White, 1964
• Delivered capital growth to shareholders an
  investment of 100 in 1964 was worth 70,000 by
  1986
• Unrelated businesses
• bought up 1960s-1980s
• split up 1996 Energy group, Millennium
  Chemicals, Imperial Tobacco and Hanson plc
  (building materials)
• Which UK business leader wants to make an
  unrelated acquisition now?

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Building Up a Strong Portfolio

• Key Principles
• Generate cash
• Look for opportunities to spend it see
  investment potential others have missed
• Take risks, and balance them with safer options
• Gain wide range of products and markets
• Manage unrelated businesses as separate business
  units
• Each strategic business unit (SBU) stays
  responsive to its environment

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Tools for Portfolio Analysis(Harrison, 2003
256-258)

• Boston Consulting Group (BCG) Matrix
• General Electric (GE) Business Screen
• Assume that each business unit already has a
  clear product/market position
• Helpful for decisions on whether to
• include a business unit in a corporate portfolio
• invest or take cash from it

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The Boston Consulting Group (BCG) Matrix
Question marks
20
Stars
Business Growth rate (Harrison, de Wit Meyer)
10
(NB Johnson, Scholes Whittington (2005) pp.
315-7 use MARKET growth rate here)
Cash Cows
Dogs
0
10x 1x
0.1x Relative competitive position
(market share)
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Question Marks and Problem Children

• Invest in the hope of creating a star
• but will you end up with a dog?

?
High
Growth rate
Low
Note high-growth MARKETS are attractive High-gro
wth BUSINESSES need large inflows of cash
Low
High
Market share
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The General Electric Experience

• General Electric (under Jeffrey Immelt) is still
  growing and generating high profit flows
• Jack Welch (CEO, 1981-2000) changed his image
• from Neutron Jack (1980s cost-cutter buildings
  remained, staff had gone)
• to strategy supremo (1990s visionary embracing
  globalisation and e-learning)
• Exceptional success most 1980s conglomerates
  spent the 1990s restructuring (Harrison 2003
  237-249)

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The Hanson Experience

• Hanson experience is typical of 1990s
• Criticised for asset-stripping (buying businesses
  to sell the parts, not to manage for growth)
• Asked to prove that Head Office functions added
  value to business-unit operations
• Broken up into smaller units, each containing
  more closely related businesses
• Mintzberg et al (2003 445) this fate threatens
  all conglomerates perched on the edge of a cliff
• What made General Electric different?
• Picked more winners, using its Screen?
• Generated more synergy?

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Relatedness and Synergy An Inside-Out Approach

• With synergy, the whole is more than the sum of
  the parts
• Examples Philip Greens Arcadia, Conrad Blacks
  Hollinger International
• Business units linked within the corporation are
  more profitable than they would be if they were
  outside it, standing alone
• Resources and costs may be shared
• Core competences may be leveraged or stretched
  skills, knowledge and understanding are
  transferred via the centre to all the business
  units
• Can develop an outside in dimension through
  increased bargaining power merged businesses
  stop being rivals and join forces

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Corporate-Level Strategy

• Should add value to business units
• All too often, destroys value instead
• Survey by Michael Porter of 33 large US firms
  over 37 years (Harrison 2003 234-235)
• Shareholders ask why not build our own
  portfolios, buying shares in numerous stand-alone
  businesses?
• Corporate executives answer this question by
  developing core competencies which can stretch
  across business-unit boundaries
• Top management skills
• Research and development
• Marketing, finance, public relations and labour
  relations