Strategic management

* CORPORATE LEVEL STRATEGY * By the end of this session the student should be able to: * Appraise different corporate parenting styles * Assess different ways of managing corporate portfolios * Examine the dynamics of portfolio management Dr Alan Tait 2 21/10/2015 * Dr Alan Tait 3 21/10/2015 * Scope How broad to make the portfolio? Corporate Parenting How should the parent company add value? Portfolio Management Which SBU’s to invest in? Managing the multibusiness firm Dr Alan Tait Where to compete What resources to allocate Johnson, Whittington, Scholes, Angwin & Regner (2014) 4 21/10/2015 * Portfolio Management * Portfolios * Pays attention to three things * Collections of business units * Balance * Attractiveness * Fit (BCG) * Collections of competences (Pralahad and Hamel, 1994) * Collections of projects (Bridges, 2003) * Collections of brands (Wise & Peirce, 2005) * Dr Alan Tait 5 21/10/2015 * Annual real rate of market growth (%) HIGH 20.0 Earnings: high stable, growing Earnings: low, unstable, growing Cash flow: neutral Cash flow: negative Strategy: invest for growth Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog Earnings: high stable Cash flow: high stable Strategy: milk 10.0 Earnings: low, unstable Cash flow: neutral or negative Strategy: divest 0.0 Dr Alan Tait3.0 LOW ? HIGH 2.0 6 1.0 Relative market share 0.5 LOW 21/10/2015 20.0 ? Industry Growth Rate 15.0 Disney Interactive 10.0 Walt Disney Studios Disney Cruises 5.0 Walt Disney Resorts 2010 2013 Dr Alan Tait ABC ESPN Disneyland Paris Disney Channels 0.0 3.5 3.0 2.5 2.0 1.5 1.0 0.75 7 Relative Market Share 0.5 0.25 21/10/2015 * SBU Strength strong Industry Attractiveness high Selective growth Selectivity Selective growth weak Selectivity Harvest/ Divest Medium Harvest/ Divest Selectivity low Dr Alan Tait Investment and growth medium Harvest/ Divest 8 21/10/2015 * SBU Strength strong Industry Attractiveness high weak Selective growth Selectivity Selectivity Harvest/ Divest Selective growth Medium Harvest/ Divest Selectivity low Dr Alan Tait Investment and growth medium Harvest/ Divest 9 21/10/2015 * Low Ballast Edge of Heartland Heartland Risk of subtracting value from a business due to misunderstanding of or failing to adjust to the situation in the business High Campbell, Whitehead, Alexander, & Goold (2014) Value trap Alien Low Potential to add value to a business from High Dr Alan Tait parent skills and resources 10 21/10/2015 * Low Ballast Edge of Heartland Heartland iPod iPhone iMac iPad Risk of subtracting value from a business due to misunderstanding of or failing to adjust to the situation in the business iTunes Campbell, Whitehead, Alexander, & Goold (2014) Beats headphones Apple Watch Beats Streaming High Value trap Alien Low Potential to add value to a business from High Dr Alan Tait parent skills and resources 11 21/10/2015 * * * * Criticism regarding validity of portfolio concepts * * Oversimplification Dogmatic Criticism regarding underlying assumptions and basic components * * * * * * Assumption of a balanced portfolio Assumption of market share as proxy for profitability Assumption of market growth Ambiguity of definitions Neglected elements Derogatory nature of definitions Criticism regarding misapplication * * Manipulating product-market boundaries Sub-optimal decisions arising from sticking to prescribed strategies Criticism regarding obsolescence * Tools have become obsolete as corporate diversification has not produced the expected performance outcomes * Untiedt, Nippa, & Pidun (2012) Dr Alan Tait 12 21/10/2015 * Criticism regarding validity of portfolio concepts * * * Simplification required for tools to aid decision making Oversimplification and prescriptive nature may be more of an issue of application rather than inherent to the tool itself Boston Consulting Group and McKinsey both incorporating dynamics * Criticism regarding underlying assumptions and basic components * * Underlying assumptions, ambiguities and neglected elements need to be explored but have not been over the past thirty years Market share as a proxy been adjusted by Boston Consulting Group * Criticism regarding misapplication * * No serious research conducted on the practical application of portfolio analysis tools since 1981 Misapplication may result from whether managers treat tools as prescriptive or diagnostic * Criticism regarding obsolescence * No evidence of negative diversification-performance relationship * Untiedt, Nippa, & Pidun (2012) Dr Alan Tait 13 21/10/2015 * • Withdrawal Market: Increasing new customers • Demerger • Privatisation Product or service: increasing technical innovation Existing MARKET PENETRATION • Retain existing customers Existing • Attract competing customers New PRODUCT DEVELOPMENT • New product development (utilise capacity/ counter new entrants/ exploit new technology/ maintain image/ protect market share) MARKET DEVELOPMENT New Dr Alan Tait DIVERSIFICATION • Related diversification • Unrelated diversification • New customer segments • New geographic areas • New uses Ansoff (1989) Related markets 14 Unrelated markets 21/10/2015 * * Simplistically defined as ‘related’ and ‘unrelated’ diversification * Related (concentric strategy) * Acquiring or developing a business where there is some linkage with the existing value chain e.g.. BBC started off as just Radio, now TV, online, DVD sales, magazines. * Unrelated (conglomerate strategy) * An attempt to spread risk to different industries - has little or no linkage with existing value chain and goes beyond existing products/markets. * Typically a portfolio of separate businesses (e.g.. Berkshire Hathaway) Dr Alan Tait 15 21/10/2015 * Value-Destroying Drivers * Value-Creating Drivers * Market Decline * Economies of Scope * E.g. Xbox * E.g. Halls of residence * Spreading Risk * Corporate Management * Spreading investment Resources * Hubris * E.g. LVMH * Increasing Market Power * E.g. RBS * Retaliate and Subsidise * Dr Alan Tait 16 Value in diversifications is often described in terms of synergies 21/10/2015 * Performance High Low Undiversified Dr Alan Tait Related 17 limited diversification Unrelated extensive 21/10/2015 diversification * Vertical Integration (Backward / Forward) Capture more of the profits in a value network Increased market power Access to assets Ability to adapt to uncertainty ISSUES: Involves heavy investment Difficulties of integrating different capabilities Increased costs of coordination Potential for excess capacity/ resource underutilization Tight coupling to poor performing businesses Dr Alan Tait 18 21/10/2015 Portfolio manager Corporate Group Corporate Functions SBU 1 Synergy Manager Parental Developer SBU 2 Corporate Group SBU 3 Corporate Functions Corporate Group SBU 1 Corporate Functions SBU 1 SBU 2 SBU 2 SBU 3 SBU 3 * Dr Alan Tait 19 21/10/2015 * Value Creating Activities * Keep costs of the centre low * Intervening * Provision of investment * Value Destroying Activities Corporate HQ * Harder to find and invest cheaply in underperforming businesses * Lack of relatedness * Dr Alan Tait 20 21/10/2015 * Value Creating Activities * Provision of central services and resources * Value Destroying Activities * Lack of focus * Crown Jewel Problem Corporate HQ Dr Alan Tait * 21 21/10/2015 * Value Creating Activities * Envisioning * Facilitating cooperation * Providing central services/resources * Value Destroying Activities Corporate HQ * Excessive Costs (Capacity and Contagion) * Self Interest * Mirages Dr Alan Tait * 22 21/10/2015 * By the end of this session the student should be able to: * Appraise different corporate parenting styles * Portfolio Manager-Parental Developer-Synergy Manager * Assess different ways of managing corporate portfolios * BCG Matrix-McKinsey Matrix-Value Chain InterrelationshipsSynergy Audit * Examine the dynamics of portfolio management * Continual examination of value add * Continual reallocation of resources * Dr Alan Tait 23 21/10/2015 * * Campbell, A., Whitehead, J., Alexander, M., & Goold, M. (2014). Strategy for the Corporate Level, 2nd Edition. Wiley: Chichester. * Collis, D and Montgomery C (1998) ‘Creating Corporate Advantage’, Harvard Business Review, May-June 1998, pp71-83. * Goold et al (1995) ‘The quest for corporate parenting advantage’, Harvard Business Review, March-April 1995, pp120-132. * Johnson,G., Whittington, R., Scholes, K., Angwin, D., & Regner, P. (2014). Exploring Strategy, 10th edition. FT Prentice Hall: Edinburgh. * Shaver, J. M. (2006) ‘A paradox of synergy: contagion and capacity effects in mergers and acquisitions’, Academy of Management Review, Vol.31, No.4, pp.962-976. * Untiedt, R., Nippa, M., & Pidun, U. (2012), Corporate Portfolio Analysis Tools Revisited: Assessing the Causes That May Explain Their Scholarly Disdain, International Journal of Management Reviews, 14 (3): 263-279. Dr Alan Tait 24 21/10/2015