Transcript Portfolios and Synergy

Business Strategy – Lecture 7
Corporate-Level Strategy:
Portfolios
and
Synergy
John Birchall
Linking Purpose to Action
Strategy Context
Broad and Operating Environments
Organisational
Purpose
Vision, Mission,
Ethics
Strategy Process
Involves Stakeholders
Strategy Content
Business Definition,
Competitive
Strategies
Adapted from Harrison (2003: 37) and De Wit & Meyer (2005: 5)
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)
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?
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
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
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)
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
The Boston Consulting
Group (BCG) Matrix
20%
Business
Growth rate
Stars
Question marks
(Harrison, de
Wit & Meyer)
10%
(NB:
Johnson,
Scholes &
Whittington
(2005) pp.
315-7 use
MARKET
growth rate 0%
here)
Cash Cows
Dogs
10x
1x
0.1x
Relative competitive position (market share)
Question Marks and Problem
Children
High
?
Invest in the
hope of creating
a star
– but will you end
up with a dog?
Growth
rate
Low
Note: high-growth
MARKETS are attractive;
High
Low
Market share
High-growth BUSINESSES
need large inflows of cash
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
 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






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
 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