Corporate strategy a primer

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



• 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



• 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



• 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



• 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


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


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


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


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


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


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


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


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


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)


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


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


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


29

CONTENTS



• 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 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


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


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


42

CONTENTS



• 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


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.)


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


Organization design

Value driver definition


48

Individual performance management

Metrics

Value thinking

Mindset

Business performance management

Shareholder value

Aspirations and targets


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)


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


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


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


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


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


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


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


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?


3 4

58

TOOL : PARENTING-FIT MATRIX

Ballast

Edge of heartland

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


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


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



• 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


• 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.

Corporate strategy a primer

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