MAKING SENSE OF STRATEGY B301-B tutorial week 3 Arab Open University-K.S.A.

MAKING SENSE OF STRATEGY B301-B tutorial week 3 Arab Open University-K.S.A.

Corporate strategy and parenting theory Reading 14 Corporate strategy and parenting theory

9.01 Introduction Corporate strategy can be defined as “the scope of the firm in terms of the industries and markets in which it competes” Corporate parent is the head office and the senior managers of an organization. Corporate strategy has no external customer Corporate strategy aims to raise firms performance What parenting can do for businesses?

Firm that owns or controls other firms (called subsidiaries) which are legal entities in their own right. Holding company . A company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors

Many of the business units in multibusiness companies could be viable as stand-alone entities: To justify its existence, the corporate parent must influence the business collectively to perform better than they would as stand-alone entities

Parenting Advantage Parent companies compete with each other for the ownership of businesses: The objective of corporate strategy should be to add more value to the businesses in the portfolio than other rival parent organisations would.

Value Destruction All multibusiness organisations have inherent and pervasive tendencies to destroy value: Corporate strategies should recognize these tendencies and be designed to minimize value destruction as much as to maximize value creation.

Lateral Synergies The importance of lateral synergies in creating value in multibusiness companies has been systematically overrated: Corporate parents should pay relatively more attention to other sources of value creation, in particular their ability to improve performance in each individual business as a standalone entity.

Value Creation Value creation seldom occurs unless the corporate parent perceives a few large opportunities for business performance enhancement, and develops distinctive skills, resources and influencing processes that address these opportunities: Corporate parents should focus their efforts on building special competences that fit the particular opportunities they are targeting.

Corporate Centres and Management Processes Corporate centres, functions, and processes designed to achieve general best practice lack sufficient focus to achieve outstanding results: They should be designed more idiosyncratically (characteristically) to fit with the specific opportunities targeted by the corporate- level strategy.

Diversity Past measures of diversity based on conventional concepts of relatedness have proved unsatisfactory: To avoid excessive diversity, corporate parents should build their portfolios around businesses with similarities in terms of parenting needs and opportunities.

Stretch and Fit Many corporate parents are overambitious about the speed with which they can build new skills and understand new types of businesses: Good corporate strategies should maintain a balance between "stretch" for new opportunities and "fit"with the parent's existing skills.

Business Unit Definition and Corporate Structure Business unit boundaries and corporate reporting structures have a profound impact on both the value creation opportunities and the value destruction risks for the corporate parent: Decisions on unit definitions and corporate structures should be determined by careful analysis of their likely impact on net value creation, not by history, ambition and politics.

ansoff's growth vectors

Economics of scope and synergy Competitive strategy

Testing and evaluating strategic choices Suitability (will it work?) raises the question whether the strategy would work? The key issues are – Does the strategy make economic sense? Is it possible to reach the economies of scale, economies of scope or obtain economy? Would strategy be environmentally suitable? Would be strategy help achieve the organization’s capability?

`Feasibility` is related to the fact that if resources required to implement the strategy are available, can they be developed or obtained? These resources are - funding people time information

Acceptability (will they work it Acceptability (will they work it?): Acceptability is one of the criteria for assessing the success of strategic options. 'Acceptance' is primarily concerned with the expectations of the stakeholders, employees, and customers with the company.  The company’s performance is based on its returns, risk, and shareholders reactions.

Parenting advantage: result better value than competitors Why it matters: better growth rate

Value destruction: parenting managers give little time to the business issues, business hierarchy motivate units to compete strongly in order to get better funds Why it matters: more discipline, less portfolio extensions, eliminate business don’t add value, downsize business functions.

Lateral synergies Why it matters Value creation: the parent find opportunities, the parent has the skills and resources, the parent has sufficient understanding of business and disciplines Why it matters: the parent should think about the major opportunities, fill the competencies with the required opportunities.

Corporate centers and management processes: the desire of following best practices in corporate processes Why it matters: functions if not developed towards adding value of the corporate, the businesses will end up with not adding any value or performance improvement.

Diversity: needed to be managed as per the parent needs and opportunities between businesses in the portfolio Stretch and fit: close fit between parenting capabilities and business needs is a sake. Why it matters: businesses need to balance between new opportunities (stretch) and “fit” of the parent skills

Business unit definition and corporate structure: one management with a performance concern, management of identity building and performance measurement establish the scope for lateral synergizing.

Thanks for listening Contact me: sattar.moj@arabou.edu.sa Your questions The next class: Date Time Do’s and don’ts Prepare Read Homework