Strategic Choices :

Strategic Decisions and Corporate-Level Strategy

 Learning Outcomes.

1. Organisational scope is often considered in terms of related

and unrelated diversification.
2. Corporate parents may seek to add value by adopting different
parenting roles: the portfolio manager, the synergy manager
or the parental developer.
3. Portfolio Models : Tools to analyse portfolio of business
 Corporate Strategy

Corporate strategy is about the overall scope of the organisation

and how value is added to the constituent businesses of the
organisation as a whole.
Choices about business areas, industries and geographies to be
active in
 Corporate Level Decisions

Diversified Company choices include

which business unit(s) to buy,
the direction(s) an organization might pursue
how resources may be allocated efficiently across multiple business
activities
The Functions of Corporate Management

Managing the —Decisions over diversification, acquisition,

Corporate divestment
Portfolio —Resource allocation between businesses.

Managing the — Business strategy formulation

individual —Monitoring and controlling business
businesses performance

Managing
linkages —Sharing and transferring resources and
between capabilities
businesses
TATA GROUP
 Tata- Corporate Strategy

Questions are :
 whether it should enter any more industries?
 Whether it should exit some ?
How far it should integrate the businesses it retains
Strategic directions and
corporate-level strategy
 Scope

Scope is concerned with how far an organisation should be

diversified in terms of
• Products
• Markets.
Another way of increasing the scope of an organisation is
vertical integration-internal supplier or a customer to itself
 Diversification

Diversification involves increasing the range of

products or markets served by an organisation.
Related diversification involves expanding into
products or services with relationships to the existing
business.
Conglomerate (unrelated) diversification involves
diversifying into products or services with no
relationships to existing businesses.
Vertical integration

Vertical integration describes entering activities

where the organisation is its own supplier or
customer.
Backward integration refers to development into
activities concerned with the inputs into the
company’s current business.
Forward integration refers to development into
activities concerned with the outputs of a
company’s current business.
Diversification and integration
options
Diversity and performance
The Parenting Opportunities Framework

The perspective that the role of corporate

headquarters (the “parent”) in multibusiness (the
“children”) companies is that of a parent sharing
wisdom, insight, and guidance to help develop its
various businesses to excel.

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 Corporate Parenting

assess whether the portfolio of businesses is worth more under its

management than the individual businesses would be worth standing
alone.
Parenting advantage i.e , the ways in which a corporate parent can
add or destroy value for its portfolio of business units
Analyze portfolio matrices of business units
Judge which to invest in and which to divest.
Synergy

Synergy refers to the benefits gained where activities or

assets complement each other so that their combined effect
is greater than the sum of the parts. (e.g. A film company
and a music company can add value by working together).

N.B. Synergy is often referred to as the

‘2 + 2 = 5’ effect.
VALUE CREATION AND THE CORPORATE
PARENT

 Corporate parents need to demonstrate that they create more value than they
cost.
 Also create more value than any other rival corporate parent can create.
 Rivals can bid for the company’s shares, on the expectation of either running the
businesses better or selling assets.
 Corporate parents must show that they have parenting advantage like business
units must demonstrate competitive advantage.
The Parenting Strategy Approach

According to BCG, corporate parents add value through five types of levers:
1. Corporate functions and resources

2. Strategy development

3. Financing advantages

4. Business synergies

5. Operational engagement

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Value-adding activities

Facilitating
Envisioning Coaching
synergies

Providing
central services Intervening
and resources
Value-adding activities

1. Envisioning -provide a clear overall vision or strategic intent for its

business units.
2. Facilitating synergies-facilitate cooperation and sharing across the
business units.
3. Coaching-help business unit managers develop strategic capabilities
3.Providing central services and resources-central services such as
treasury, tax and human resource advice. Sufficient scale to be efficient
and to build up relevant expertise .
4. Intervening-monitor and to ensure appropriate performance
Value-destroying activities

Adding Adding
management bureaucratic
costs complexity

Obscuring
financial
performance
Value-destroying activities

1.Adding management costs- Corp. parents are expensive. Costs

are greater than the value they create. Cost allocation /
control ?
2.Adding bureaucratic complexity- Slows down decision making.
3.Obscuring financial performance-under-performance of weak
businesses can be obscured in diversified company.
Corporate Parenting Roles.

Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley, 1994.
Corporate Parenting Roles.

The portfolio manager operates as an active investor.

Extract more value from the various businesses than they
could achieve themselves. Unrelated / Conglomerate
strategy.
The synergy manager is a corporate parent seeking to
enhance value for business units by managing synergies
across business units. Cost / resources optimization.
The parental developer seeks to employ its own central
capabilities to add value to its businesses. Downward.
transfers of knowledge , skills and resources.
The Portfolio Approach

 The portfolio approach is a historical starting

point for strategic analysis and choice in
multibusiness firms.
 The portfolio approach helps allocate resources
in multibusiness companies.
Portfolio Techniques

 An approach pioneered by the Boston Consulting Group

( BCG) that attempted to help managers “balance” the flow of
cash resources among their various businesses while also
identifying their basic strategic purpose within the overall
portfolio.
Portfolio matrices

Models which can determine financial investment and

divestment within portfolios of business. Each model uses
three criteria:
• the ‘balance’ of the portfolio ( relation to market / corp.
needs).
• the ‘attractiveness’ of the business units. ( individual /
industry)
• the ‘fit’ that the business units ( potential synergies/
parental capability)
Portfolio matrices

BCG (or growth/share) matrix – uses market share and

market growth criteria for determining the
attractiveness and balance of a business portfolio.

The GE–McKinsey directional policy matrix which

categorises business units into those with good
prospects and those with less good prospects.

Parenting matrix – introduces parental fit as an important

criterion for including a business in a portfolio.
 The Growth Share (BCG) Matrix

To balance flow of cash

resources
Identify strategic
purpose within overall
portfolio
Sales Growth Vs Market
Share
7-33
The BCG (or growth/share)

A star is a business unit which has a high market

share in a growing market.
A question mark (or problem child) is a business
unit in a growing market, but it does not yet have a
high market share.
A cash cow is a business unit that has a high
market share in a mature market.
A dog is a business unit that has a low market
share in a static or declining market.
 BCG – Application Advantages

 Visualizing the different needs and potential of all the diverse businesses
within the corporate portfolio.
 Highlights the financial demands of what - a desirable portfolio of high-growth
businesses.
 Reminds corporate parents that stars are likely eventually become dim.
 Underlining fact- corporate parent ultimately owns the surplus resources they
generate and can allocate them for overall corporate needs.
 Cash cows should not hoard their profits.
 Reallocate business unit managers who are not fully utilised by low-growth cash
cows or dogs.
 Problems with the BCG matrix:

Should be applied to SBUs/ not products

Definitional vagueness- high / low growth share means.
defining their market in a particularly narrow way
Capital market- assumptions- finance portfolio from internal
sources (cash cows) /capital cannot be raised in external markets
 No linkages assumption – with group businesses.
Motivation problems- managers see little point in working hard
for the sake of other businesses
The directional policy
(GE–McKinsey) matrix

(i) how attractive the

relevant market is in
which they are
operating.

(ii) the competitive

strength of the SBU
in that market.
 Composite of weighted average
quantitative measures.

Industry Attractiveness Factors Business Strength Factors

1. Market size and growth rate 1. Market share growth, size and
2. Intensity of competition profitability

3. Technological requirements 2. Economies of scale

4. Capital requirements 3. Knowledge of customers and

factors
5. Entry and exit barriers
4. Caliber of Management
6. Emerging threats and opportunities
7. Historical and projected industry
profitability
8. Social, environmental and regulatory
influences
The Directional Policy (GE-McKinsey)
Matrix

 Attractiveness of the relevant market - identified by PESTEL and five forces

analyses.
 Competitive strength of the SBU in that market-defined by competitor analysis-
strategic groups analysis.
 Deciding appropriate corporate-level strategies given the positioning of the
business units.
 Businesses with the highest growth potential / greatest strength are those in
which to invest for growth
 Weakest and in the least attractive markets should be divested or ‘harvested
 Acknowledges – difficult middle ground
Steps for directional policy
(GE–McKinsey) matrix

1) Rate the industry for each business unit

2)Key success factors for each business unit( scale 1-5)
3)Current position of each business unit plotted on matrix.
4)Future portfolio is plotted
The directional policy
(GE–McKinsey)
The parenting matrix

Introduces parental fit

as an important
criterion for including a
business in a portfolio.
 The parenting matrix

1. Heartland – the parent understands these well and can add value.
The core of future strategy.
2. Ballast– the parent understands these well but can do little for
them. They could be just as successful as independent companies. If
not divested need to avoid corporate bureaucracy.
3. Value trap business units are dangerous. There are attractive
opportunities to add value but the parent’s lack of feel will result in
more harm than good.
4. Alien business units are misfits. They offer little or no opportunity to
add value and the parent does not understand them. Exit is the best
strategy.
Limitations of Portfolio Approaches

Convey large amounts of info about diverse business units in simplified

format- BUT:

1. Does not show how value is being created across business units- only
cash relationship.
2. Accurate measurement for matrix calculation not easy-assumptions
made
3. Flow of resources converted to Strategic options
4. Companies assumed to be self sufficient in capital.
5. Corporate capabilities and skills not captured