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Strategic management Lecture 7 Corporate strategy and strategic portfolio.

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Presentation on theme: "Strategic management Lecture 7 Corporate strategy and strategic portfolio."— Presentation transcript:

1 Strategic management Lecture 7 Corporate strategy and strategic portfolio

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3 LEVELS OF STRATEGY Corporate level Corporate level Determine overall scope of the organisationDetermine overall scope of the organisation Add value to the different business unitsAdd value to the different business units Meet expectations of stakeholdersMeet expectations of stakeholders Business level (SBU) Business level (SBU) How to compete successfully in particular marketsHow to compete successfully in particular markets Operational Operational How different parts of organisation deliver strategyHow different parts of organisation deliver strategy

4 Three levels of the strategy 1. level: The corporate level At this level the fundamental task is to develop a balanced portfolio of businesses which will achieve the goals of the corporation and satisfy its stakeholders. 2. level: The strategic business unit level (SBU) At this level the business, or set of activities is given and the major task for strategic planner at this level is for business to succeed against competitors and also satisfy corporate success criteria. 3. level: The functional level: At this level the major task is to provide an appropriate functional strategies ( finance and accounting, marketing, R+D, production, personnel) for SBU or corporate level strategy.

5 Strategic Business Unit (SBU) A strategic business unit (SBU) is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU

6 Definition of strategic business units The SBUs are the natural ‘grouping’ of part of a corporation. The SBU has a range of related products/services which has similar technologies and production processes. The SBU has a range of related products/services which has similar technologies and production processes. The products/services are sold in similar or related market segments. The products/services are sold in similar or related market segments. The production/services are sold against a well- defined set of competitors. The production/services are sold against a well- defined set of competitors. An SBU is managed by an SBU manager, largely as an independent unit. An SBU is managed by an SBU manager, largely as an independent unit. The SBU has its own set of goals and strategies. The SBU has its own set of goals and strategies. Each SBU in a particular organization should be able to operate independently of any other SBU. Each SBU in a particular organization should be able to operate independently of any other SBU.

7 What is the portfolio stratregy? From viewpoint of strategic management the corporations are collections of different “product- market-consumer-resource packages”. These are the SBU’s. We can describe the sum of SBU’s, as portfolio. The portfolio analysis: Combines the assessment of business position with market attractiveness evaluation, which emerges from external analysis in general and market analysis, in particular. Combines the assessment of business position with market attractiveness evaluation, which emerges from external analysis in general and market analysis, in particular. Includes multiple SBU’s in the same analysis and addresses the SBU investment decision - which organizational units should receive resources, which should have resource withheld, and which should be resource generators. Includes multiple SBU’s in the same analysis and addresses the SBU investment decision - which organizational units should receive resources, which should have resource withheld, and which should be resource generators. Offers baseline recommendations concerning the investment strategies for each SBU based on an assessment of business position and market attractiveness. Offers baseline recommendations concerning the investment strategies for each SBU based on an assessment of business position and market attractiveness.

8 Corporate Portfolio Management Portfolio balance Portfolio balance MarketsMarkets Organisation’s needsOrganisation’s needs Attractiveness of business units Attractiveness of business units ProfitabilityProfitability Growth ratesGrowth rates Portfolio ‘fit’ Portfolio ‘fit’ Synergies between business unitsSynergies between business units Synergies with corporate parentSynergies with corporate parent

9 The Growth Share (or BCG) Matrix

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11 Strategic implication of the BCG matrix The strategies for the overall portfolio products are concerned with the issue of balance, I.e. is the portfolio of products balanced internally in terms of the following? The strategies for the overall portfolio products are concerned with the issue of balance, I.e. is the portfolio of products balanced internally in terms of the following? Are there a sufficient number of „cash cows” to support those other products in the portfolio which are at stages of their lifecycles when they are require cash? Are there a sufficient number of „cash cows” to support those other products in the portfolio which are at stages of their lifecycles when they are require cash? Are there „questions-marks” which have resonable prospects of becoming future stars and which do not, at present, constitute a disproportionate drain on current cash flow? Are there „questions-marks” which have resonable prospects of becoming future stars and which do not, at present, constitute a disproportionate drain on current cash flow? Are there an appropriate number of „stars” which will provide sufficient cash generation when the current cash cows are no longer able to fulfill this role? Are there an appropriate number of „stars” which will provide sufficient cash generation when the current cash cows are no longer able to fulfill this role? Are there any „dogs” and if so why? Are there any „dogs” and if so why?

12 How to do a portfolio analysis? Construct a summary of the industry and competitive environment of each business units. Construct a summary of the industry and competitive environment of each business units. Appraising the strength and competitive position of each business unit. Understanding how each business unit ranks against its rivals on the key factors for competitive success. Appraising the strength and competitive position of each business unit. Understanding how each business unit ranks against its rivals on the key factors for competitive success. Identifying the external opportunities, threats and strategic issues peculiar to each business units. Identifying the external opportunities, threats and strategic issues peculiar to each business units. Determining how much corporate financial support is needed to fund each unit’s business strategy and what corporate skills and resources could be deployed to boots the competitive strength of various business units. Determining how much corporate financial support is needed to fund each unit’s business strategy and what corporate skills and resources could be deployed to boots the competitive strength of various business units. Comparing the relative attractiveness of the businesses in the corporate portfolio. Compare the businesses on various historical and projected performance measures - sale growth, profit margin, return on investment, and the like. Comparing the relative attractiveness of the businesses in the corporate portfolio. Compare the businesses on various historical and projected performance measures - sale growth, profit margin, return on investment, and the like. Checking the corporate portfolio to ascertain whether the mix of businesses is adequately “balanced” Checking the corporate portfolio to ascertain whether the mix of businesses is adequately “balanced”

13 The Industry Life Cycle Drivers of industry evolution : demand growth demand growth creation and diffusion of knowledge creation and diffusion of knowledge Introduction Growth Maturity Decline Industry Sales Time

14 Assumptions and limitations of BCG The use of highs and lows to make just four categories is too simplistic. The use of highs and lows to make just four categories is too simplistic. The link between market share and profitability isn’t necessarily strong. Low-share businesses can be profitable, too (and vica versa.) The link between market share and profitability isn’t necessarily strong. Low-share businesses can be profitable, too (and vica versa.) Growth rate only one aspect of industry attractiveness. High-growth market may not always be the best for every business unit or product line. Growth rate only one aspect of industry attractiveness. High-growth market may not always be the best for every business unit or product line. It considers the product line or business unit only relation to one competitor: the market leader. It misses small competitors with fast- growing market share. It considers the product line or business unit only relation to one competitor: the market leader. It misses small competitors with fast- growing market share. Market share is only one aspect of overall competitive position. Market share is only one aspect of overall competitive position.

15 Indicators of SBU Strength and Market Attractiveness

16 Market Attractiveness/SBU Strength Matrix

17 Strategy Guidelines Based on Directional Policy Matrix

18 Corporate Level and International Strategy Product and geographical diversity Product and geographical diversity Related and unrelated diversification Related and unrelated diversification Attractions of international markets Attractions of international markets Multidomestic and global strategies Multidomestic and global strategies Effect of product and geographical diversity on performance Effect of product and geographical diversity on performance Corporate parenting Corporate parenting Portfolio management Portfolio management

19 Corporate Level Issues

20 The Multi-Business Organisation Exhibit 6.2

21 Reasons for Diversification (1) Value creation Value creation Efficiency gains from applying existing resources/capabilities to new markets/productsEfficiency gains from applying existing resources/capabilities to new markets/products Economies of scope Economies of scope Benefits of synergy Benefits of synergy Applying corporate managerial capabilities to new markets/products/servicesApplying corporate managerial capabilities to new markets/products/services Dominant logic Dominant logic Increased market power from diverse product/service rangeIncreased market power from diverse product/service range Cross subsidy Cross subsidy Possible monopoly in long-run Possible monopoly in long-run

22 Reasons for Diversification (2) Less obvious value creation Less obvious value creation In response to environmental changeIn response to environmental change To defend existing value To defend existing value Or straying too far from dominant logic? Or straying too far from dominant logic? To spread risk across range of businessesTo spread risk across range of businesses Investors can diversify more effectively? Investors can diversify more effectively? Important for private businesses Important for private businesses In response to expectations of powerful stakeholdersIn response to expectations of powerful stakeholders Pressure from financial analysts to produce constant growth Pressure from financial analysts to produce constant growth

23 Reasons for International Diversity Market-based Exploit cultural/ geographic differences Globalisation of markets & competition Cash in on differences in culture Following customers Administrative differences Bypass limitations in home market Specific geographical/ economic differences Utilise strategic capabilities Economic benefits Broaden market size Economies of scale Internationalise value-adding activities Stabilisation of earnings across markets Enhance knowledge

24 Related Diversification

25 Entry Modes (1) Exporting Advantages JV/Alliance Advantages No operations in host country Shared investment risk Economies of scale Complementary resources Internet access for small firms Possible government condition Exporting Disadvantages JV/Alliance Disadvantages No benefit from location advantages of host Difficult to select and agree with partner Limited local knowledge Managing relationship Dependence on intermediaries Loss of competitive advantage through imitation Exposure to trade barriers Limits integration/coordination of activities across countries Transportation costs Slow response to customers

26 Entry Modes (2) Licensing Advantages FDI Advantages Contractually agreed income Control of resources/capabilities Limit financial/economic risk Integration/coordination of activities across countries Acquisitions – rapid entry Greenfield – state of art and government finance Licensing Disadvantages FDI Disadvantages Difficult to select and agree with partner Substantial investment – financial exposure Loss of competitive advantage through imitation Problems of integration/ coordination of acquisitions Limits benefit from location advantages of host Greenfield – time consuming and unpredictable cost

27 International Strategies Issues Issues Global-localGlobal-local Centralised/decentralisedCentralised/decentralised Generic Strategies Generic Strategies Multi-domesticMulti-domestic Value adding activities located in national markets Value adding activities located in national markets Products/services adapted to local requirements Products/services adapted to local requirements GlobalGlobal Standardised products Standardised products Produced in centralised location Produced in centralised location

28 Value-Adding Corporate Parents Envisioning Strategic Intent Central Services and Resources Focus Clarity to external stakeholders Clarity to business units Investment Scale advantages Transferable management capabilities Intervention at Business Level Expertise Monitor performance Action to improve performance Challenge/develop strategic ambitions Coaching/training Develop strategic capabilities Achieve synergies Provide expertise/services Knowledge creation/sharing Leverage Brokering linkages/accessing external networks

29 Value-Destroying Corporate Parents Bureaucracy Bureaucracy Adds costAdds cost Hinders responsivenessHinders responsiveness Buffer from reality Buffer from reality Financial safety netFinancial safety net Diversity and size Diversity and size Lack of clarity on overall visionLack of clarity on overall vision Managerial ambition Managerial ambition Empire buildingEmpire building

30 Corporate Rationales SBUs below potential (‘parenting opportunity’) SBUs below potential (‘parenting opportunity’) Relevant central resources Relevant central resources Suitable portfolio Suitable portfolio Share resources/skills Share resources/skills Identify bases for sharing Identify bases for sharing Identify benefits Identify benefits Acquire assets Acquire assets Divest assets Divest assets Low strategic role in SBU Low strategic role in SBU Strategic requirements Competences used to create value in SBUs Competences used to create value in SBUs Synergy Synergy Agent for financial markets Agent for financial markets Limited SBU value creation Limited SBU value creationLogic Parental developers Synergy managers Portfolio managers Understand SBUs (‘feel’) Understand SBUs (‘feel’) Effective linkages Effective linkages SBUs autonomous SBUs autonomous SBU performance- based incentives SBU performance- based incentives Collaborative SBUs Collaborative SBUs Corporate staff as integrators Corporate staff as integrators Overcome resistance to sharing Overcome resistance to sharing Corporate-based incentives Corporate-based incentives Autonomous SBUs Autonomous SBUs Small, low cost corporate staff Small, low cost corporate staff SBU performance- based incentives SBU performance- based incentives Organisational requirements

31 Ownership Mission and strategic intent Scope and diversity The global dimension Corporate purpose and aspirations Bases of SBU strategy Enhancing SBU strategy: corporate parenting Portfolio management Financial strategy The role of the corporate parent The parenting matrix Achieving competitive advantage Price-based strategies Differentiation strategies Focus strategies Bases of strategic choice


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