Transcript Corporate Strategy

Corporate Strategy
• What is it?
• What are its main concerns?
• How is it different from business-level
strategy?
History of Corporate Strategy:
1950s & 1960s
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Conglomerates
Undervalued companies & general mgmt skills
The reality of this period
Contributions to C.S.:
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Concept of corporate strategy
SWOT
Structure follows strategy
Strategic fit
Examples of Strategic Fit
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Resource strengths are well matched to the
KSFs of industries the firm competes in
Adequate managerial expertise exists to cope
with problems of current businesses
Ability exists to transfer resources and
capabilities from one business to another
Good financial fit is when a business:
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Contributes to achievement of corporate objectives
– Enhances shareholder value
History of Corporate Strategy: 1970s
• Unrelated diversification still in vogue
• Search for portfolio planning tools
• Contributions to C.S.:
– BCG Matrix & GE Matrix
– Rumelt’s diversification typology
– Valuable internal capital allocation (Williamson ‘75)
The BCG Growth-Share Business Portfolio Matrix
Circle Size = proportion of total revenue business contributes to corp.
Weaknesses of the BCG Matrix
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No average position
Oversimplification
Position in matrix  investment success
Cash cows defending shrinking market share
2 dimensions -- inadequate
Cash flow emphasis
Constructing a GE
Attractiveness/Strength Matrix
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Use quantitative measures of industry
attractiveness and business strength to plot
location of each business in matrix
Each business unit appears as a circle
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Area of circle is proportional to size of
business as a percent of company revenues
(Or area of circle can represent relative size of
industry with pie slice showing the company’s
market share)
Procedure: Rating the Relative
Attractiveness of Each Industry
Step 1: Select industry attractiveness factors
Step 2: Assign weights to each factor
(sum of weights = 1.0)
Step 3: Rate each industry on each
factor (use scale of 1 to 10)
Step 4: Calculate weighted ratings; sum to get an
overall industry attractiveness rating for
each industry
Example: Rating Industry Attractiveness
Weight
Attractiveness
Rating
Weighted
Industry Rating
Market size and projected growth
0.15
5
0.75
Intensity of competition
0.30
8
2.40
Emerging industry opportunities and
threats
0.05
2
0.10
Social, political, regulatory, and
environmental factors
0.05
6
0.30
Seasonality and cyclical influences
0.05
4
0.20
Resource requirements
0.15
7
1.05
Industry profitability
0.15
4
0.60
Degree of risk and uncertainty
0.10
5
0.50
Industry Attractiveness Factor
Sum of weights
1.00
Industry attractiveness rating
Rating Scale: 1 = Unattractive; 10 = Very attractive
5.90
Rating the Competitive Strength of
Each Business
Step 1: Select competitive strength factors
Step 2: Assign weights to each factor
(sum of weights = 1.0)
Step 3: Rate each business on each
factor (use scale of 1 to 10)
Step 4: Calculate weighted ratings; sum to get an
overall attractiveness rating for each
business
Example: Rating a Business Unit’s
Competitive Strength
Weight
Strength
Rating
Weighted
Strength Rating
Relative market share
0.20
5
1.00
Ability to compete on cost
0.25
8
2.00
Ability to match rivals on quality or
service
0.05
2
0.10
Bargaining leverage
0.10
6
0.60
Technology/innovation capabilities
0.05
4
0.20
How well resources match KSFs
0.15
7
1.05
Brand name reputation/image
0.10
4
0.40
Degree of profit relative to rivals
0.10
5
0.50
Competitive Strength Measure
Sum of weights
1.00
Competitive strength rating
Rating Scale: 1 = Weak ; 10 = Strong
5.85
General Electric’s Industry AttractivenessBusiness Strength Matrix
Business Strength
Industry
Attractiveness
• Relative Market Share
• Relative Costs
• Reputation/ Image
• Profit Margins
• Bargaining Leverage
• Fit with KSFs
• Ability to Match Quality/Service
10.0
• Market Size
• Growth Rate
High
• Profit Margin
• Intensity of Competition
6.7
• Seasonality
• Cyclicality
Medium
• Resource Requirements
• Social Impact
3.3
• Regulation
• Environment
Low
• Opportunities & Threats
Strong
6.7
1.0
Rating Scale: 1 = Weak ; 10 = Strong
Average
3.3
Weak
1.0
Strategy Implications of
Attractiveness/Strength Matrix
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Businesses in upper left corner
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Accorded top investment priority
– Strategic prescription is grow and build
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Businesses in three diagonal cells
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Given medium investment priority
– Invest to maintain position
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Businesses in lower right corner
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Candidates for harvesting or divestiture
– May be candidates for an overhaul and reposition
strategy
The Attractiveness/Strength Matrix
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Allows for intermediate rankings between
high and low and between strong and weak
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Incorporates a wide variety of strategically
relevant variables
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Stresses allocating corporate resources to
businesses with greatest potential for
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Competitive advantage and
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Superior performance
Rumelt’s Diversification Typology
Levels of Diversification
Source of Revenues
Linkages Between Business
Low Level: Single Business
> 95% from a single
business
N/A
Low Level: Dominant
Business
70% to 95% from a single
business
Linkages between two
businesses
Moderate-High Level:
Related-Constrained
< 70% from dominant
business
All businesses share linkages
Moderate-High Level:
Related Linked
< 70% from dominant
business
Only some businesses share
linkages
Very High Level:
Unrelated
< 70% from dominant
business
No linkages
History of Corporate Strategy: 1980s
• Sticking to the Knitting
• Restructuring: Downsizing, Downscoping, &
LBOs
• Corporate Raiders
• Contributions to C.S.:
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Value-Based Strategy
New Concepts: Market for Control & Free Cash Flows
Porter’s Generic Corporate Strategies
Resource-Based View of the Firm
Value-Based Strategy
• Computed Value:
– Discount forecasted cash flows using WACC
– Compute share value
• Imputed Value:
– Apply industry average P:E ratio to company
earnings to get imputed share value.
• Computed < Imputed … improve or sell
Porter’s Generic Corporate Strategies
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Portfolio Management
Restructuring
Transferring Skills
Sharing Activities
Corporate Strategy in the ‘90s & Beyond
• Restructuring & Refocusing Continues, yet ...
• Record Number of Mergers & Acquisitions
• Issues Confronted in this Course:
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Are there generic corporate strategies?
What are the key elements of C.S.?
How do you achieve a corporate advantage?
Is any corporate advantage sustainable?
How far should one diversify?