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Business Strategy – Lecture 7 Corporate-Level Strategy: Portfolios and Synergy. John Birchall. Linking Purpose to Action. Adapted from Harrison (2003: 37) and De Wit & Meyer (2005: 5). Strategy Context. Broad and Operating Environments. Strategy Content
Adapted from Harrison (2003: 37) and De Wit & Meyer (2005: 5)
Broad and Operating Environments
Business Definition, Competitive Strategies
Vision, Mission, Ethics
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?
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?
Develop related products and services, using existing skills and relationships?
Develop new unrelatedproduct lines, possibly selling to new customers?
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
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
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?
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
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
Growth rate(Harrison, de Wit & Meyer)
(NB: Johnson, Scholes & Whittington (2005) pp. 315-7 use MARKET growth rate here)
10x 1x 0.1x
Relative competitive position (market share)
Invest in the hope of creating a star
– but will you end up with a dog?
Note: high-growth MARKETS are attractive;
High-growth BUSINESSES need large inflows of cash
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)
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?
With synergy, the whole is more than the sum of the parts
Examples: Philip Green’s Arcadia, Conrad Black’s 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
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