corporate strategy a primer
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Primer on Corporate Strategy – An Overview of External Thinking
2
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
3
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
4
WHAT IS CORPORATE STRATEGY? – QUOTES FROM ACADEMICS
"Corporate strategy is concerned with the overall purpose and scope of the organization to meet the expectations of owners or major shareholders and add value to the different parts of the enterprise"
J. Johnson/K. Scholes, 1999
"By the fashionable phrase, "corporate strategy" (…) I mean the pattern of company purposes and goals—and the major policies for achieving these goals—that defines the business or businesses the company is to be involved with and the kind of company it is to be"
Kenneth R. Andrews, 1980
"Corporate strategy concerns two different questions: What business the corporation should be in and how the corporate office should manage the array of business units. Corporate strategy is what makes the corporate whole add up more than the sum of its business unit parts"
Michael E. Porter, 1987
5
THE STRATEGY-MAKING PYRAMID
Source:Adapted from Thomson, Strickland and Thompson, 1999
Corporate strategy• In which businesses should the
corporation be in?• How can the corporate headquarter
add value to the individual businesses?
Business unit strategy• How to create competitive
advantage in each of the businesses?
Tactics• How to manage frontline
organisational units within a business (i.e. plants, sales districts)?
Two-way influence
Tactics
Businessunit
strategies
Corporatestrategy
6
TRADITIONAL CHARACTERISTICS OF CORPORATE STRATEGY
• Corporation is diversified• Decisions about scope and structure of the corporate portfolio
are necessary• Acquisitions and divestments are necessary
Multi-business
• The corporate whole must add up to more than the sum of its parts
• Corporate strategy defines functions and duties of the corporate center to create value
Value-creation
• The strategic creation, allocation and development of resources and competences are an essential task of corporate strategy
Resources andcompetences
• Corporate strategy has to give the corporation a mission • To raise shareholder value is a constraint, not a missionSense
• The development and definition of the corporate strategy is the responsibility of the senior management
Senior management
Source:XYZ analysis
7
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
8
EVOLUTION OF CORPORATE STRATEGY
Source:Goold, Campbell and Alexander, 1994; Goold and Luchs, 1993
Issue to be addressed
Principal theories
Impact on corporate strategy development
• Overload at the corporate center
• Decen-tralization
• Divisional-ization
• Growth
• Synergy
• Diversifi-cation
• Resource allocation
• Portfolio planning
• Balanced portfolios
• Value gaps• Poor per-
formance of diversifica-tion
• Value-based planning
• Restructuring/refocusing
• Defining the core business
• Dominant logic• Management styles• Core competencies• Shared resources• Parenting
advantage
• Manageable portfolios
• Maximizing value creation
1950s 1960s 1970s 1980s 1990s
Basis of corporate value added
• General management skills
• Strategy concepts
• Portfolio planning techniques
• Value-based planning concepts
• Core competencies
9
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
10
SCHOOLS OF THOUGHT AND RESEARCH APPROACHES
Aspiration-based management
• Purpose of the company as starting point and bench-mark of corporate strategy
Resources and capabilities
• Resources and capabilities are important instead of SBUs
• Identification and exploitation of resources and capabilities to achieving competitive advantage
Portfolio management
• Management of the corporate portfolio
• Identification/selection of businesses to invest in/divest
Value-oriented management
Research approaches
• Portfolio planning
• Portfolio concepts
• Diversification
• Core competen-cies
• Strategic capabilities
• Resource-based view
• Vision, mission and objectives
• Value-based management
• Parenting advantage
• Combination of strategic thinking and the modern theory of finance
• Increasing shareholder value
Schools ofthought
Source:XYZ analysis
Focus
11
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
12
RESOURCES AND CAPABILITIES: SYNOPSIS/SUMMARY
Focus
Contri-butions
Limi-tations
• Corporate strategy should focus on core competencies instead of on BUs
• Shift in logic of competition from "outside-in" (external product market positions) to "inside-out" (internal capabilities)
• Resources (assets, skills, capabilities) and the way they can be leveraged across BUs are the focus of corporate strategy
• Core competencies are the key organizational skills, mainly related to production and technologies
• Core competencies represent the roots of long-term competitive advantage
• They represent corporate resources and need to be leveraged across BUs
• Competitive success depends on transforming a company's key processes into strategic capabilities, linked by a support infrastructure
• Capabilities are collective and cross-functional/cross-SBU
• Diversification works by replicating strategic capabilities
• Diversification should be based on similarities in resources (not products)
• The nature of the resources determines the configuration of the corporation (in terms of scope, coordination and control)
• Definition of core competencies not very specific
• Practical implementation approach of core competencies missing
• High-level, conceptual approach with difficulties and open questions in implementation
• Difficult to determine critical resources
Resources and capabilities
Core competencies Strategic capabilities Resource-based view
Main authors
• Prahalad and Hamel, 1990 • Stalk, Evans and Shulman, 1992
• Wernerfelt, 1984; Collis and Montgomery, 1998
Source:XYZ analysis
13
CORE COMPETENCIES AND COMPETITIVENESS
• Derives from price/ performance attributes of current end products
• Derives from ability to build–at lower cost and more speedily than competitors–core competencies
Short-term
Long-term
Core competencies are• The collective learning in the
organization• About how to coordinate diverse
production skills and integrate multiple streams of technologies
• About the cross-unit and cross-functional organization of work
• Corporate resources and may be reallocated by corporate management
• The engine for new business development (guidance for diversification and market entry)
• The focus of competitive strategy at the corporate level
• Built and developed deliberately through a process of continuous improvement and enhancement that may span a decade or longer
• The roots of competitive advantage
Competi-tiveness of a
company
Source:Prahalad and Hamel, 1990
14
THREE TESTS TO IDENTIFY CORE COMPETENCIES
Few corporations are likely to build world leadership in more than five or six fundamental
competencies
A core competence
Provides potential access to a wide variety of markets
Should make a significant contribution to the perceived customer benefits of the end product
Should be difficult for competitors to imitate
1
2
3
Source:Prahalad and Hamel, 1990
15
CORE COMPETENCIES AS THE ROOTS OF COMPETITIVE ADVANTAGE
End products
Competence 1 Competence 2 Competence 3 Competence 4
Core product 1
Core product 2
Business unit 1
Business unit 2
Business unit 3
Business unit 4
1 32 4 65 7 98 10 1211
Level and goal of competition
• Level of competition 1: End products
• Goal: Build leadership position in global brand share (with respect to product markets)
• Level 2: Core products• Goal: Maximize world manufacturing
share in core products (for wide variety of internal and external customers; leads to economies of scale and scope)
• Level 3: Core competencies• Goal: Build world leadership in design
and development of a particular class of product functionality
Analysis of underlying competitiveness has to look at core competencies not at end products
Core products are the physical embodiments of one or more core competencies; they are the components or subassemblies that actually contribute to the value of the end products
Source:Prahalad and Hamel, 1990
16
TWO CONCEPTS OF THE CORPORATION
SBU Core competence
Basis for competition
Corporate
structure
Status of the business unit
Resource allocation
Value added of top management
• Competitiveness of today's products
• Portfolio of businesses related in product-market terms
• Autonomy is sacrosanct; the SBU "owns" all resources other than cash
• Discrete businesses are the unit of analysis
• Capital is allocated business by business
• Optimizing corporate returns through capital allocation trade-offs among businesses
• Interfirm competition to build competencies
• Portfolio of competencies, core products and businesses
• SBU is potential reservoir
of core competencies
• Businesses and competencies are the unit of analysis
• Top management allocates capital and talent
• Enunciating strategic architecture and building competencies to secure the future
• SBU concept of the corporation leads to focus on only one level of the competitive battle
• It leads to– Underinvestment:
Underinvestment in developing core competencies and core products and thus in broader, cross-unit advantages
– Imprisoned resources: SBUs are unwilling to lend their best talent and carriers of competencies
– Bounded innovation: Individual SBUs will pursue only innovation opportunities that are close to hand–especially no hybrid opportunities that combine several skills and technologies
Source:Prahalad and Hamel, 1990
17
STRATEGIC ARCHITECTURE AND THE ROAD TO A COMPETENCE-BASED COMPANY
Definition
Fundamental questions to ask
• Strategic architecture is a road map of the future that identifies which core competencies to build and their constituent skills and technologies
• It broadly describes the evolving linkages between customer functionality requirements, potential technologies and core competencies
• It provides a logic for product and market diversification and makes resource allocation priorities transparent to the entire organization
• How long could the company preserve its competitiveness in this business if it did not control this particular core competence?
• How central is this core competence to perceived customer benefits?
• What future opportunities would be foreclosed if the company were to lose this particular competence?
Additional adjustments are necessary to become a competence-based company• Resource allocation: Core
competencies are corporate resources and SBUs should bid for them in the same way they bid for capital
• Reward systems: In addition to (SBU-centered) product-line results, investment in and development of competencies have be rewarded heavily
• Career paths: They have to cross SBU boundaries and critical carriers of core competencies have to be tracked and guided specifically
Source:Prahalad and Hamel, 1990
18
STRATEGIC CAPABILITIES: FUNDAMENTAL SHIFT IN LOGIC OF COMPETITION
Source: Stalk, Evans and Shulman, 1992
"Old" logic of competition "New" logic of competition
Nature of com-petition
• "War of position", chess-like • "War of movement", similar to an interactive video game
State of economy • Relatively static: World is characterized by durable products, stable customer needs, well-defined national and regional markets and clearly identified competitors
• More dynamics: Product life cycles accelerate, markets fragment and customer needs change frequently, globalization breaks down barriers between national and regional markets and competitors multiply
Key to competitive advantage
• Choose where to compete: The structure of a company's products and markets is key
• Choose how to compete: The dynamics of the organization's behavior, the development of hard-to-imitate organizational capabilities are key
Shift in economy necessitates shift in logic
of competition
19
FOUR BASIC PRINCIPLES OF CAPABILITIES-BASED COMPETITION
„ Champion of a capabilities-based strategy is the CEO, because capabilities need to cross functions and SBUs
‚ Competitive success depends on transforming a company's key processes into strategic capabilities that provide superior customer value
ƒ Companies create capabilities by making strategic investments in a support infrastructure that links together and transcends traditional SBUs and functions
Strategic capabilities
Business processes
Support infrastructure
… get transformed into ...
CEO
Business processes, not products and markets are the building blocks of corporate strategy
Source: Stalk, Evans and Shulman, 1992
20
STRATEGIC CAPABILITIES
• The key to transform individual business processes into a strategic capability is to connect them to real customer needs
• A capability is strategic only when it begins and ends with the customer
• Capabilities-driven companies conceive of their organization as a giant feedback loop that begins with identifying the needs of the customer and ends with satisfying them
Development of strategic capabilities
• Capabilities-based companies identify their key business processes, manage them centrally and invest in them heavily, looking for long-term pay back
• Leveraging capabilities requires many strategic investments across SBUs and functions far beyond what traditional cost-benefit metrics can justify
Management of capabilities
• Capabilities-based companies are integrating vertically to ensure that they, not a supplier or distributor, control the performance of key business processes
• Even when a company doesn't actually own every link of the capability chain, it works very hard to tie these parts very closely into its own business system
Point of view on vertical integration
• A capability is a set of business processes strategically understood, i.e., they represent the primary object of strategy
• Capabilities are collective and cross-functional/cross-SBU: They are a small part of many people's job, not a large part of a few
Definition
Source: Stalk, Evans and Shulman, 1992
21
BECOMING A CAPABILITIES-BASED COMPETITOR
• Abandon traditional focus on strategic positioning in core markets/products
• Conceive business in terms of strategic capabilities
• Identify capabilities linking customer needs to customer satisfaction
• Set aggressive goals
• Build up/strengthen chosen strategic capabilities by– Adapting the organization,
roles and responsibilities– Providing training to
employees– Providing supporting
systems
• Develop measurement system linked to strategic capabilities
• Compensate according to new measures
Top management needs to be involved because capabilities are cross-functional and cross-SBU and becoming a capabilities-based competitor requires a high amount of change
Shift strategic frameworkOrganize around strategic capabilities
Adapt measurement and reward system
Let CEO/top management lead the transformation
Source: Stalk, Evans and Shulman, 1992
22
NEW CAPABILITIES-BASED GROWTH LOGIC
Strategic advantages built on capabilities are easier to transfer geographically than more traditional competitive advantages
No growth/ diversification in businesses with new strategic business processes/ capabilities
Previous choice of capabilities determines path and ability to grow; the right
choice of them is thus the essence of strategy
Bus
ines
ses
Geographicarea
New growth 1
New
gro
wth
2
Strategiccapabilities
Biggest payoff for capabilities-led growth through entry in new businesses by
• "Cloning"/duplicating key business processes
• Creating processes so flexible and robust that the same set can serve many different businesses
Source: Stalk, Evans and Shulman, 1992
Current
23
HOW CAPABILITIES DIFFER FROM CORE COMPETENCIES
Definition ExampleDiversification rationale
• Complementary dimensions of a new corporate strategy paradigm
• Both concepts emphasize behavioral aspects of strategy in contrast to the traditional structural model
Diversification successful if built on existing core competencies
Combination of individual tech-nologies and production skills that underly a company's many product lines at specific points in the value chain
• Sony's competence in miniaturization
• Canon's competence in optics, imaging and microprocessor controls
• Honda's competence in engines/power trains
Co
re c
om
pe
ten
cy
Diversification successful by replicating strategic capabilities
Business pro-cesses that encompass the value chain more broadly and are more visible to the customer
• Honda's dealer management: Training and support of dealer network with operating procedures, policies for mer-chandising, selling, floor planning, service management
• Honda's product realization:Continuous and parallel product planning and testing separated from execution; product launchin existing factories
Cap
ab
ilit
y
Source: Stalk, Evans and Shulman, 1992
24
RESOURCE-BASED VIEW: INTRODUCTION AND OVERVIEW
Definition of corporate strategy/corporate advantage
View on diversifi-cation/expansion of businesses
Corporate valueadded
Process of corporatestrategy development
• The way a company creates value through the configuration and coordination of its multi-business activities
• New businesses should be entered based on similarities in resources that contribute to competitive advantage in each business, not based on similarities in products
• The firm's corporate capabilities/resources have to enhance the competitiveness of every business it owns
• The benefits of corporate membership must be greater than its costs• Corporate acid test: The company's businesses must not be worth
more to another owner
• The development of corporate strategy starts with a vision of how a company's resources will differentiate it from competitors across multiple businesses
• The vision guides corporate strategy in that it shows how a firm, as a whole, will create value
• The vision has to be followed up by deliberate investments in those resources over many years
• The organization has to be tailored to make the strategy a reality• Benchmarking (looking at companies with successful strategies build
around types of resources that are similar to the company's and contrasting them with companies that are further away on the resource continuum) can be very helpful
Source:Collis and Montgomery, 1998
25
THE TRIANGLE OF CORPORATE STRATEGY (1/2)
Coordination Control
Competitive advantage
BusinessesR
esou
rces
Organization
Vision
• Provides direction• Discussion of
corporate strategy begins with vision
• Segments/industries in which the company operates
• Assets• Skills• Capabilities
• Structure: The way the corporation is divided into units• Systems: Set of formal policies and routines that
govern organizational behavior (especially measurement and reward systems)
• Processes: Informal elements of the organization's activities (e.g., personal relationships)
Source:Collis and Montgomery, 1998
26
THE TRIANGLE OF CORPORATE STRATEGY (2/2)
Great corporate strategiesresult from• Strength in each element
of corporate strategy– High-quality resources– Strong market positions of the
businesses in attractive industries
– Efficient administrativeorganization
• Tight fit and integration of the elements– Resources that are critical to
the success of the businesses result in competitive advantage
– An organization configured to leverage those resources into the businesses leads to synergies and coordination
– Fit between measurement and reward systems and the businesses produces strategic control
Coordination Control
Competitive advantage
BusinessesR
esou
rces
Organization
Vision
Source:Collis and Montgomery, 1998
27
RESOURCES AND THE CONFIGURATION OF THE CORPORATION: THE RESOURCE CONTINUUM (1/2)
General SpecializedNature of resources
Wide NarrowScope of businesses
OperatingFinancial Control systems
Small LargeCorporate office size
Transferring SharingCoordination mechanisms
As resources become more specialized, the value of moving from financial to operating controls increases
The more general the resources and the less the need for sharing, the smaller the corporate office should be
Companies with specialized resources will compete in a narrower range of businesses
The more general the resource, the more likely the company can effectively deploy it through transfer
Source:Collis and Montgomery, 1998
28
RESOURCES AND THE CONFIGURATION OF THE CORPORATION: THE RESOURCE CONTINUUM (2/2)
General SpecializedNature of resources
Wide NarrowScope of businesses
OperatingFinancial Control systems
Small LargeCorporate office size
Transferring SharingCoordination mechanisms
As resources become more specialized, the value of moving from financial to operating controls increases
The more general the resources and the less the need for sharing, the smaller the corporate office should be
Companies with specialized resources will compete in a narrower range of businesses
The more general the resource, the more likely the company can effectively deploy it through transfer
• A corporation's location on the continuum constrains the set of businesses it should compete in and limits its choices about the design of its organization along the other dimensions below
• Transfer of resources to capture synergies leaves independence and accountability of BUs intact
• Sharing of resources usually entails intense coordination and cross-unit committees in order to effectively leverage the resources and manage the included conflicts and trade-offs
• Activities that are especially scale sensitive should be shared
• Activities that are "public goods" (that can be used in several businesses simultaneously without conflict) should be transferred
• Financial control looks at a few objective output variables (most appropriate in mature, stable businesses and discrete BUs)
• Operating control is concerned with evaluating manager's decisions and actions
• Resources provide the basis for corporate advantage (they are the unifying thread) and range along a continuum
Source:Collis and Montgomery, 1998
29
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
30
PORTFOLIO MANAGEMENT: SYNOPSIS/SUMMARY
Focus
Contri-butions
Limi-tations
• Identification/selection of businesses to invest in/ divest
• Activities where corporate can add value
• Questions and criteria to consider when thinking about diversification
• Helpful tools for cash flow allocation
• Helpful in determining the positions of the business units
• Usage of interrelationships among core businesses
• Four different concepts of corporate strategy to add value to the corporate portfolio– Portfolio management– Restructuring– Transferring skills– Sharing activities
• Forms of diversification• Structured approach for
diversification decision-making
• Tendency towards over- simplification and trivialization of corporate strategy formulation
• Implicit assumption of self-sustainability (in terms of capital) of businesses
• Based on the assumption of efficient capital markets
• Assumes that transferring skills/sharing activities is easily executable
• Beliefs in significant horizontal synergies
• Criteria for appropriate relatedness/scope of corporation is missing
• Although synergy is conceptually defined, its realization is often unclear
Portfolio management
Portfolio planning Portfolio concepts Diversification
Main authors
• Henderson, 1979; XYZ • Porter, 1987 • Andrews, 1951; Markides, 1997
Source:XYZ analysis
31
PORTFOLIO PLANNING: GROWTH-SHARE-MATRIX
Key sources:
• Balanced portfolio in terms of cash-flow allocation/ generation
• Predescribed strategy for each role/segmentStar Question mark
Cash cow Poor dog
Market share
?
High Low
High
Low
Market growth
Source:Haspeslagh, 1982
Goal:
• Henderson, 1979
Limitations: • Market share as dimen-sion is only of limited value (requires a appropriate market definition)
• Results depend on high market growth, validity of the experience curve and the fact that no interdependencies between the SBUs exist
• Ignores resources and capabilities and inter-dependencies except for cash-flow
32
High Medium Low
Industry attractiveness
Low
Med
ium
Hig
h
Bu
sin
ess
po
siti
on
PORTFOLIO PLANNING: INDUSTRY ATTRACTIVENESS-BUSINESS POSITION-MATRIX
Invest
Selective growth
Up or out Harvest
Harvest Divest
Up or out
Selective growth
Up or out
Key sources: • XYZ• General Electric
Goal: • Scoring model for portfolio planning
Limitations: • Results are highly sensitive to percep-tional change and modification in weighting
• Not easy to execute
Source:Miller, 1998
33
PORTFOLIO PLANNING: LIFE CYCLE – COMPETITIVE STRENGTH MATRIX
Key sources: • Arthur D. LittlePush:
Inve
st ag
g-
ress
ively
Cautio
n:
Inve
st se
lecti-
vely
Danger
:
Harve
st
Introduc-tion
Growth Maturing Decline
Stage of market life cycle
High
Moderate
Low
Co
mp
etit
ive
stre
ng
th
• Hybrid of BCG and XYZ portfolio planning models
Goal:
Limitations: • Results are highly sensitive to percep-tional change and modification in weighting
• Not easy to execute
Source:Miller, 1998
34
PORTFOLIO CONCEPTS: PORTER'S BASIC BELIEFS
Premises of corporate strategy
Essential tests to ensure that diversification creates shareholder value
• Competition occurs only at the business unit levelDiversified companies do not compete; only their businesses do
• Diversification inevitably adds costs and constraints to business unitsCorporate overhead creates visible costs and hidden costs by introducing and monitoring constraints
• Shareholders can readily diversify themselvesShareholders can easily diversify by selecting those stocks that best match their preferences; shareholders can diversify cheaply by avoiding acquisition premiums
• The attractiveness test: Chosen industry structurally attractive or capable of being made attractive
• The cost-of-entry test: Cost of entry must not capitalize all future profits
• The better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa
Source:Porter, 1987
35
FOUR DIFFERENT CONCEPTS OF CORPORATE STRATEGY
Description
Forms of shareholder value creation
Problems
Portfolio management Restructuring Transferring skills
• Diversification through acquisitions of attractive companies with competent managers
• Acquired units stay autonomous and continue to be run by the "old" management team; purely passive financial investment
Sharing activities
• Expertise and analytical resources to identify attractive acquisition candidates
• Impossible to buy undervalued companies in efficient capital markets
• Large companies no longer have a competitive advantage in terms of management skills
• Diversification through acquisition of "undeveloped, sick or threatened" organizations
• Corporate Center as active restructurer
• Sell-off after successful turnaround
• Expertise in finding the "right" candidates
• Expertise in restructuring
• Strategy is identical with portfolio management if the units don't get sold after restructuring
• Corporate center transfers skills or expertise among similar parts of value chains of the businesses
• Requirements– The activities involved in
the businesses are similar enough that sharing expertise is meaningful
– The transfer of skills involves activities important to competitive advantage
– The skills transferred represent a significant source of competitive advantage for the receiving unit
• Competitive advantage of businesses because of transferred skills/expertise
• Transfer of skills is a difficult process. It does not happen by accident or osmosis, but by change of strategy/operations
• Acquisition of companies that allow the realization of horizontal synergies on the basis of value chains
• Shared activities must involve activities that are significant to competitive advantage
-
• Lowering costs or raising differentiation
• Benefits of sharing activities must outweigh the costs involved
• Diversification based solely on sharing corporate overhead is rarely appropriate
• Sharing activities enhances competitive advantage by lowering costs (economies of scale, efficiency or utilization) or increasing differentiation
• Sharing must involve activities that are signifi-cant to competitive advantage
• Sharing activities inevitably involves costs that the benefits must outweigh
Source:Porter, 1987
36
ACTION PLAN FOR DEFINITION OF THE CORPORATE STRATEGY
Choosing a corporate strategy (action plan)
A company chooses a corporate strategy by
Identifying the interrelationships between existing business units
Selecting core businesses that will be the foundation of the corporate strategy
Creating organisational mechanisms to facilitate interrelationships among core businesses that will also lay the groundwork for future diversification
Pursuing diversification that allows shared activities
Pursuing diversification through the transfer of skills (if opportunities for sharing activities are limited)
Pursuing a strategy of restructuring if this action is in line with management skills
Paying dividends allowing shareholders to be portfolio managers
1.
2.
3.
4.
5.
6.
7.
Source:Porter, 1987
37
DIVERSIFICATION: DIFFERENT FORMS OF DIVERSIFICATION
Horizontal unrelated
• Governance economies
• Competitive– Divisions are
independent– Divisions compete
for capital– Managers compete
for promotion
Related
• Scope economies
• Cooperative– Divisions are
interdependent– Competition is
dysfunctional
Vertical integrated
• Coordination economies
• Constraining– Divisions are
inter-supportive– Competition is
dysfunctional
Source:Reynor, 1999
Administra-tive structure
Corporate value added
Forms
38
TWO-STEP APPROACH IN DIVERSIFICATION DECISION-MAKING
Financial analysis• Evaluate financial consequences of
diversification move
Strategic risk and opportunities analysis• Identify strategic risks and opportunities
connected with diversification move
Diversification decision-making Focus of
followingdiscussion
Source:Markides, 1997
39
SIX CRITICAL QUESTIONS FOR DIVERSIFICATION SUCCESS (1/3)
What can the company do better than any of its competitors in its current market?
What strategic assets does the company need in order to succeed in the new market?
Can the company catch up or leapfrog competitors at their own game?
Will diversification break up strategic assets that need to be kept together?
Will the company be simply a player in the new market or will it emerge as a winner?
What can the company learn by diversifying and is it sufficiently organized to learn it??
1
2
3
4
5
6
1
2
3
4
5
6
DIVERSIFICATION
Source:Markides, 1997
40
?SIX CRITICAL QUESTIONS FOR DIVERSIFICATION SUCCESS (2/3)
What can the company do better than any of its competitors in its current market?
• The company needs to determine its strategic assets (its unique and unassailable competitive strengths) before attempting to apply them elsewhere
• Strategic assets (what does the company do better?) are different from the current business of the company (what does it do?)
• By using its strategic assets, the company might add value to an acquired company or a new market
What strategic assets does the company need in order to succeed in the new market?
• The company needs to determine whether it has all the strategic assets necessary to establish a competitive advantage in the new market
Can the company catch up or leapfrog competitors at their own game?
• In case necessary strategic assets are missing, the company might be able to purchase them, develop them in-house or make them unnecessary by changing the competitive rules of the game
• The costs of doing so have to be reasonable
1
2
3
1
2
3
4
5
6
DIVERSIFICATION
Source:Markides, 1997
41
?SIX CRITICAL QUESTIONS FOR DIVERSIFICATION SUCCESS (3/3)
Will diversification break up strategic assets that need to be kept together?
• Individual strategic assets might not be transferable to the new environment because they are part of an interrelated cluster of competencies or skills that work only because they support and reinforce one another in a particular competitive context
Will the company be simply a player in the new market or will it emerge as a winner?
• To achieve a sustainable advantage, diversifying companies need to create something unique
• Therefore, and in order for the diversification to be successful, the strategic assets to be deployed in the new market need to be rare (not available on the open market), hard to imitate and not easily substituteable
What can the company learn by diversifying and is it sufficiently organized to learn it?
• A diversification move might have the additional advantage of allowing the company to learn competencies that can be reapplied in its exiting businesses or of serving as a strategic stepping stone to help enter yet another business
• Processes that facilitate and promote learning and transfer competencies across functions and divisions need to be installed to reap those advantages of diversification
4
5
6
1
2
3
4
5
6
DIVERSIFICATION
Source:Markides, 1997
42
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
43
VALUE-ORIENTED MANAGEMENT: SYNOPSIS/SUMMARY
Focus
Contri-butions
Limi-tations
• Goal of corporate strategy is to increase shareholder value
• Focus on businesses where the corporate parent can add value
• Focus is on relationship between parent organization and the individual businesses
• Corporate strategy has several levers to pull in order to increase shareholder value
• Shareholder value is defined by free cash flow and the cost of capital (WACC)
• Parent organization should own only those businesses where it can add more value than other parents
• Provides good analytical framework and valuation approach, but needs to be complemented with content (strategies, ideas, vision, actions)
• Value-based management and DCF valuations usually miss important option considerations
• Focus on parenting advantage ignores important linkages between business units
Value-oriented management
Value-based management Parenting advantage
Main authors
• Rappaport, 1981, 1986; Copeland, Koller and Murrin, 2000
• Gould, Campbell and Alexander, 1994; Campbell, Gould and Alexander, 1995
Source:XYZ analysis
44
THE ROAD TO VALUE-BASED MANAGEMENT
Source:Copeland, Koller and Murrin, 2000
• Big, one-time effort to restructure the corporation in order to unleash value
Restructure the corporationBuild value-based management approach
• Continuous/annual process to instill and develop a value-based management approach within the corporation
• Restructuring hexagon • Value activities
Description
Framework
45
RESTRUCTURING HEXAGON
Perceptions gap
Maximum opportunity
Operating improvement
Financial engineering
Disposal/new owners
New growth opportunities
Current market value
Value as is
1
2
3
4
6
5
Total potential
value
Value with growth, internal
improvements and disposals
Value with internal
improvements and disposals
Value with internal
improvements
Source:Copeland, Koller and Murrin, 2000
46
THE RESTRUCTURING PROCESS
Current market value
Value as is
Value with internal improvements
Value with internal improvements and disposals
Value with growth, internal improvements and disposals
Total potential value
• Analyze performance in stock market, underlying financial performance (returns, earnings), generation and investment of cash flow, the market's assumption about future performance
• Calculate value as is based on extrapolation of recent historical performance and based on current business plans
• Identify key value drivers (with sensitivities) of each business and generate measures to improve operating performance
• Investigate external value of businesses under four scenarios: sale to strategic buyer (company able to realize operational or strategic synergies), flotation/spin-off, leveraged buy-out by management of a third-party, liquidation
• Generate ideas for internal and external growth options
• Optimize the company's financial structure with financial engineering (rating, debt levels with tax advantages, etc.)
Source:Copeland, Koller and Murrin, 2000
47
AREAS OF ACTIVITY FOR MAKING VALUE HAPPEN
• Combine inspiring aspiration with tough quantitative targets linked to value creation
• Manage the portfolio through three perspectives on portfolio management: Exploit the strategic advantages of the corporation (corporate themes), look for performance improvement opportunities (restructuring hexagon) and manage a growth pipeline (three horizons)
• Orient hard (structure, decision rights, people) and soft elements (beliefs, values, leadership style) of organization towards value
• Develop superior insights into the key value drivers of each business
• Manage the performance of the businesses through sophisticated target setting and performance reviews
• Motivate employees through financial rewards and other incentives
Individual performance management
Metrics
Value thinking
Mindset
Business performance management
Shareholder value
Aspirations and targets
Portfolio management
Organization design
Value driver definition
Source:Copeland, Koller and Murrin, 2000
48
Individual performance management
Metrics
Value thinking
Mindset
Business performance management
Shareholder value
Aspirations and targets
Portfolio management
Organization design
Value driver definition
OVERVIEW OF PORTFOLIO MANAGEMENT: THREE PERSPECTIVES
• There are seven corporate themes or ways in which the corporate center can add value
• Successful centers create value by being distinctive in one or two of these themes
• The hexagon should be used periodically to look for performance improvement opportunities
• It helps to quantify and prioritize the opportunities
• Companies should ensure that their portfolio includes businesses in all three stages of development (core businesses, new businesses, options to build future businesses)
• Incorporates the important issue of value creation through profitable growth (vs. restructuring)
Source:Copeland, Koller and Murrin, 2000
Corporate theme analysis
1
Restructuring hexagon2
Three growth horizons analysis
3
49
CORPORATE THEME ANALYSIS: SEVEN RECURRINGCORPORATE THEMES
• The Industry Shaper repeatedly spots discontinuities in industries and acts pre-emptively to shape the emerging new industry to its own advantage
• The Deal Maker systematically beats the market through its superior skill at spotting and executing deals. This could either be through superior insight into the inherent value of companies or through superior insight into specific industries
• The Scarce Asset Allocator efficiently allocates capital, cash, time and talent across multiple business units
• The Skill Replicator repeatedly transfers particular skills across business units. The skill of lateral transfer is a distinct skill from the functional skill itself
• The Performance Manager has proven skills at instilling a high performance ethic with matching incentives and MIS processes across multiple business units
• The Talent Agency institutionalizes a model for attracting, retaining and developing talent that is truly distinctive relative to all others in the industry
• The Growth Asset Attractor possesses a proven and sustained record of consistently leading in innovation in multiple businesses
Source:Copeland, Koller and Murrin, 2000
1
50
THREE GROWTH HORIZONS ANALYSIS
• Core businesses • New businesses and extensions of existing businesses fuelling future growth
• Options to build future businesses
Creating strategic degrees of freedom
Horizon 1
Horizon 2
Horizon 3
Destiny shaping decisions
Creating options for future businesses
Types of businesses
• Unlock incremental growth, then manage for value as the business declines
• Exercise options, assemble required capabilities and drive business-building capabilities
• Source options for future growth and test viability of business concepts
Management imperative
• Bottom-line performance and profitability
• Top-line growth and capital efficiency
• Future potential and robustness against multiple scenarios
Primary focus
Source:Copeland, Koller and Murrin, 2000
3
51
PARENTING ADVANTAGE: DEFINITIONS AND ASSUMPTIONS
Source: Campbell, Goold and Alexander, 1995
Two questions of corporate strategy
• What businesses should the company – rather than rival companies – own and why?
• What organizational structure, management processes and philosophy will foster superior performance from the businesses?
Parenting advantage• The ability to create more value by influencing
(= parenting) the businesses of a multi-business company than any other rival parent
Role of parent organization
• Intermediary between investors and businesses• Competes with other parent organizations and other
intermediaries, e.g., investment trusts or mutual funds
Changeability of parenting characteristics
• Parenting characteristics are built on deeply held values and beliefs and, therefore, are hard to change
• Fundamental changes in parenting do rarely occur, e.g., when the CEO and the senior-management team are replaced
52
PARENTING ADVANTAGE vs. OTHER CORPORATE STRATEGY FRAMEWORKS
Growth/share matrix
Core compe-tence concept cc
• Balance business portfolio with a mix of stars, cash cows and question marks
Main lesson • Focus on core businesses around technical or operational core competencies and develop structures and systems to enhance them
• Focus on businesses where the parent organization can add value (ideally: more value than any other parent)
Parenting advantage
• Businesses and their relationship between each other
Unit of analysis
• Businesses and their relationship between each other
• Relationship between parent organization and the individual businesses
• Cash flow (and profit, growth)
Nature of relationship/focus of analysis
• Common technical or operational know-how of businesses
• Competencies of the parent organization and the value it creates with its businesses
Source: Campbell, Goold and Alexander, 1995
53
PROCESS OF PARENTING ADVANTAGE FRAMEWORK
Explanation
Tool
• Analyze critical success factors of the individual businesses
• High probability of value destruction if parent does not understand the businesses (dowside potential)
• Gives impression of similarity of businesses
• Examine potential for parent to add value to businesses
• Parenting opportunity = potential for parent to improve businesses in order to add value (upside potential)
Understand critical success factors of businesses
Identify parenting opportunities
Examine characteristics of parent and assess fit with businesses
Validate fit assessments by analyzing the company's track record
Develop portfolio and parenting characteristics
• Document characteristics of parent organi-zation
• Compare characteristics with critical success factors and parenting opportunities in each business
• Compare results of the previous three steps with the company's track record with different sorts of businesses
• Summarize assessments in parenting-fit matrix
• Develop portfolio of businesses
• Adapt parenting characteristics if realistic
Parenting opportunities checklistParenting opportunities analyses
Success and failure analysis Performance analysis
Parenting-fit matrix
Source: Campbell, Goold and Alexander, 1995
1
2
3
4
5
54
TOOL : PARENTING OPPORTUNITIES CHECKLIST
Parenting opportunity Explanation
– Cut costs and streamline old, large businesses– Provide skills, management and financial resources for young, small businesses
• Size and age
• Management
• Business definition
• Predictable errors
• Linkages
• Special expertise
• External relations
• Major decisions
• Major changes
– Provide, attract and retain top-quality management and important specialists
– Correct repetition of predictable errors, e.g., attachment to previous decisions, excessively long product cycles, overinvestment in cyclical markets, etc.
– Ensure appropriate breadth of target markets, appropriate degree of vertical integration (especially with outsourcing, alliances, e-commerce trends)
– Establish and/or improve linkages between businesses
• Common capabilities
– Encourage sharing of capabilities between businesses
– Provide specialized/rare expertise to businesses
– Manage external stakeholders (shareholders, custpmers, government, unions, suppliers) better than businesses
– Provide help in difficult decisions in areas where the business lacks expertise
– Provide help in change situations where the business management has little experience
Source: Campbell, Goold and Alexander, 1995
1
55
TOOL : PARENTING OPPORTUNITIES ANALYSES
Major challenges of business
Do major challenges of a business contain a parenting opportunity?
Influences of different parents on similar business
Have rival parent companies discovered additional parenting opportunities with their businesses?
Influences of parent on business
What are the most important influences of the parent on a business and do they address parenting opportunities?
Parenting opportunities
analyses
Source: Campbell, Goold and Alexander, 1995
2
56
EXAMINATION OF CHARACTERISTICS OF PARENT AND ASSESSMENT OF FIT WITH BUSINESSES
• Do the characteristics fit the parenting opportunities (exploit upside potential)?
• Is there a misfit between parenting characteristics and the businesses critical success factors (downside potential)?
• Is there a better rival parent with much larger parenting opportunities?
• Mental maps of parent managers Values, aspirations, rules of thumb, biases and success formulas that guide parent managers in dealing with the businesses
• Corporate structure, management systems and processesCoordination and linkage mechanisms (e.g., appointment process, HR systems, budgeting and planning processes) through which the parent creates value and the managers' interaction within them
• Central functions, services and resourcesThey support line managers' efforts to create value (e.g., R&D, purchasing, patents, corporate brand); value creation potential and thus size of central resources strongly depend on the circumstances in each business
• Nature, experience and skills of parent managersE.g., influential and charismatic CEO, very knowledgeable technical director
• Decentralization contract between parent and business Defines extent of decentralized responsibilities and authority (e.g., in authorization limits, job descriptions, formal statements of due process, corporate culture)
Parenting characteristics
Assessment of fit
Source: Campbell, Goold and Alexander, 1995
57
TOOLS AND TO VALIDATE THE ASSESSMENT OF FIT
• Analyze the company's track record with different sorts of businesses
• Step 1: List important decisions• Step 2: Classify each decision
as success, failure or neutral • Step 3: Group decisions by
type (e.g., key appointments, new product launches, acquisitions) and time period
• Step 4: Draw conclusions about strengths and weaknesses in parenting influences
Success and failure analysis
• Review performance of each business in comparison with competitors
• Profitability much higher or lower than the competitive level is strong indication of a parent's influence (other important influences might exist, though)
Performance analysis
Judgement of fit
correct?
Source: Campbell, Goold and Alexander, 1995
3 4
58
TOOL : PARENTING-FIT MATRIX
Ballast
Edge of heart- land
Heartland
Alien territory
Low High
Fit between parenting opportunities and parenting characteristics
High
LowM
isfi
t b
etw
een
cri
tica
l su
cces
s fa
cto
rs
and
par
en
tin
g c
har
act
eris
tic
s
Value trap
Source: Campbell, Goold and Alexander, 1995
5
59
RECOMMENDATIONS FOR PORTFOLIO BUSINESSES ON PARENTING-FIT MATRIX
• Heartland businesses should be at the heart of the company's future and have priority in portfolio development
• Parenting characteristics that fit its heartland businesses should form the core of the parent organization
Heartland
• Parent both creates and destroys value, the net contribution might not be clear-cut
• Edge-of-heartland businesses might move into heartland if the parent learns enough about the critical success factors to avoid destroying value (either by changing its behavior or by changing the business' strategy)
Edge of heartland
• Mostly old businesses that have been owned by the parent for a long time • Those businesses can represent important sources of stability• Alternatively, businesses can be a drag, slowing growth and distracting parents• Should be sold to competitor if he is the better parent and price larger than
DCF
Ballast
• Large potential for value destruction• Should be quickly divested to better parent
Alien territory
Value trap• Fit in parenting opportunities but misfit in critical success factors: Both
some upside as well as large downside potential exists• Sometimes a result of a diversification path following a core competence
logic
Source: Campbell, Goold and Alexander, 1995
60
ROLE OF THE PARENT
Parenting styles Successful parents
Three main styles of parenting emerge when examining fit between the parent and business
Keys to being a successful parent include
• Focusing on parenting opportunities that are significant and therefore create major value
• Focusing on opportunities that others have not noticed
• Having deep understanding of why specific improvements exist and how to exploit the improvements
1.
2.
3.
Strategic planning – parent closely involved with businesses in developing plans and strategies; focuses on long-term profit goals
Strategic control – parent seeks balance between strategic planning and financial control
Financial control – parent decentralizes responsibility for development of plans and strategies to businesses; focuses on short-term profit goals
Source:Goold, Campbell and Alexander, 1994
61
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Resources and capabilities– Portfolio management– Value-oriented management– Aspiration-based management
• Bibliography
62
ASPIRATION-BASED MANAGEMENT: SYNOPSIS/SUMMARY
Focus
Contri-butions
Limi-tations
• The goals of a company extend beyond the performance objective of shareholder value maximization to a sense of overall purpose that shapes strategy and unifies the efforts of the organization
• In order to provide motivation and direction to their employees, companies should create an inspiring vision and mission
• Vision and mission represent the overarching starting point and ultimate benchmark for corporate strategy development
• Success of aspiration-based management is highly dependent on the credibility and behavior of top management ("walk your talk")
• Having a formal mission statement is not enough in itself; a "sense of mission" is necessary
Aspiration-based management
Vision, mission and objectives
Main authors
• Campbell and Devine, 1990; Bleicher, 1994
Source:XYZ analysis
63
THE HIERARCHY OF STRATEGIC INTENT
Source:Johnson and Scholes, 1999; Lynch, 2000; Miller, 1998
Most integrative,fewest in number
Most specific,greatest in number
Vision
Mission
Goals and objectives
Desired future state, the aspiration of the organization
Outline of the broad directions that the orga-nization should follow together with a brief summary of the reasons and values behind it
More precise statements of what is to be achieved and when results are to be accomplished (often quantified)
64
THREE FUNCTIONS OF A VISION
IdentityThe vision descibes a unique future state of the organization
IdentificationThe vision provides purpose to the employees and enables identification
MobilizationThe vision should inspire employees to try to achieve the desired future state
Source:Bleicher, 1994
Vision
65
THE CONTEXT OF A STRATEGY
PurposeWhy the com-
pany exists
StrategyThe competitive
position and distinctive
competences
Behavior standardsThe policies and behavior patterns that underpin the
distinctive competence and the value system
Source:Adapted from Campbell and Devine, 1990
ValuesWhat the company
believes in
Development and implementation of a strategy is heavily influenced by its
context
66
CONTENTS
• What is corporate strategy?– Definition– History and development
• Schools of thought– Aspiration-based management– Resources and capabilities– Portfolio management– Value-oriented management
• Bibliography
67
BIBLIOGRAPHY (1/3)
Works cited
• Andrews, K. R. 1951. Product Diversification and the Public Interest. Harvard Business Review (July-August): 91-107.
• Andrews, K. R. 1980. Directors' Responsibility for Corporate Strategy. Harvard Business Review (November-December): 30-42.
• Bleicher, K. 1994. Normatives Management. Frankfurt: Campus.• Campbell, A. and M. Devine. 1990. A Sense of Mission. London: Random House.• Campbell, A., M. Goold and M. Alexander. 1995. Corporate Strategy: The Quest for
Parenting Advantage. Harvard Business Review (March-April): 120-132.• Collis, D. J. and C. A. Montgomery. 1998. Creating Corporate Advantage. Harvard Business
Review (May-June): 71-83.• Copeland, T., T. Koller and J. Murrin, 2000. Valuation: Measuring and Managing the Value
of Companies. 3rd ed. New York: John Wiley.• Goold, M., A. Campbell and M. Alexander. 1994. Corporate-Level Strategy: Creating Value
in the Multibusiness Company. New York: John Wiley. • Goold, M. and K. Luchs. 1993. Why diversify? Four decades of management thinking.
Academy of Management Executive 7 (no. 3): 7-25.• Haspeslagh, P. 1982. Portfolio Planning: Uses and Limits. Harvard Business Review
(January-February): 58-73.
68
BIBLIOGRAPHY (2/3)
Works cited
• Henderson, B. D. 1979. Henderson on Corporate Strategy. Cambridge: Abt Books/The Boston Consulting Group.
• Johnson, J. and K. Scholes. 1999. Exploring Corporate Strategy: Text and Cases. 5th ed. London: Prentice Hall.
• Lynch, R. 2000. Corporate Strategy. 2nd ed. London: Prentice Hall.• Markides, C. 1997. To Diversify or Not to Diversify. Harvard Business Review (November-
December): 93-99.• Miller, A. 1998. Strategic Management. 3rd ed. Boston: Irwin McGraw-Hill.• Porter, M. E. 1987. From Competitive Advantage to Corporate Strategy. Harvard Business
Review (May–June): 43-59.• Prahalad, C. K. and G. Hamel. 1990. The Core Competence of the Corporation. Harvard
Business Review (May-June): 79-91.• Rappaport, A. 1981. Selecting Strategies That Create Shareholder Value. In Strategy:
Seeking and Securing Competitive Advantage, 3rd ed., ed. C. A. Montgomery and M. E. Porter, 379-399. Boston: Harvard Business School Press.
• Rappaport, A. 1986. Creating Shareholder Value: The New Standard for Business Performance. New York: Free Press.
69
BIBLIOGRAPHY (3/3)
Works cited
• Reynor, M. E. 1999. Hidden in Plain Sight: Hybrid Diversification, Economic Performance and 'Real Options' in Corporate Strategy. Harvard Business School Paper, presented at the Strategic Management Society Conference in Berlin.
• Stalk, G., P. Evans and L. E. Shulman. 1992. Competing on Capabilities: The New Rules for Corporate Strategy. Harvard Business Review (March-April): 57-69.
• Thomson, A. A., A. J. Strickland and J. Thomson. 1999. Strategic Management. Boston: McGraw-Hill.
• Wernerfelt, B. 1984. The Resource-based View of the Firm. Strategic Management Journal 5 (no. 2): 171-180.
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