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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

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business strategy lecture 7 corporate level strategy portfolios and synergy

Business Strategy – Lecture 7Corporate-Level Strategy:Portfolios and Synergy

John Birchall

linking purpose to action
Linking Purpose to Action

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

Strategy Context

Broad and Operating Environments

Strategy Content

Business Definition, Competitive Strategies

Organisational Purpose

Vision, Mission, Ethics

Strategy Process

Involves Stakeholders

business definition
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?

the challenge of growth harrison 2003 216 231
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 unrelatedproduct lines, possibly selling to new customers?

portfolio management an outside in approach
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

portfolio management examples
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?

building up a strong portfolio
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

tools for portfolio analysis harrison 2003 256 258
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

slide9

The Boston Consulting Group (BCG) Matrix

20%

Question marks

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)

question marks and problem children
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-growth BUSINESSES need large inflows of cash

High

Low

Market share

the general electric experience
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)

the hanson experience
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?

relatedness and synergy an inside out approach
Relatedness and Synergy: An Inside-Out Approach

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

corporate level strategy
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