Strategy: Choices and Impact MN6005

Session 14 (w/c 14/01/13 -3b) Corporate Level Strategic Choices

Lecturer: xxxxxxxx
Strategy Theme 3: Strategy Directions and Choices

Re-cap of session 13 : Business Unit Level Strategic Choice

What did we talk about last week?

Image source: http://www.accountingweb.co.uk/anyanswers/question/i-think-client-has-sacked-me

Today
Objectives
Understand the difference between business unit and corporate level strategies Identify alternative corporate strategy options and choices (Portfolio Analysis) Consider the different roles of the corporate parent

Levels of strategy
Corporate-Level Strategy is concerned with the overall purpose and scope of an organisation and how to add value to business units Business-Level Strategy is concerned with the way a business seeks to compete successfully in its particular market Operational Level Strategy is concerned with how different parts of the organisation deliver the strategy in terms of managing resources, processes and people

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 1

The Corporate Parent manages the portfolio of business units

Example Virgin highly diversified

source: http://www.virgin.com/ accessed 1/1/13

Strategic directions and corporate-level strategy

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Logic of the Portfolio

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Portfolio matrices

Growth/Share (BCG) Matrix

Directional Policy (GE-McKinsey) Matrix

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

The growth share (or BCG) matrix

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

The growth share (or BCG)

A star is a business unit which has a high market share in a growing market. A question mark (or problem child) is a business unit in a growing market, but it does not have a high market share. A cash cow is a business unit that has a high market share in a mature market. A dog is a business unit that has a low market share in a static or declining market.
source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

The growth share (or BCG)

A star is a business unit which has a high market share in a growing market. A question mark (or problem child) is a business unit in a growing market, but it does not have a high market share. A cash cow is a business unit that has a high market share in a mature market. A dog is a business unit that has a low market share in a static or declining market.

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

BCG matrix/Boston box: the pros

Simplicity PIMS (profit impact of market share) research provides some evidence to support BCG matrix Part of common business vocabulary Allows for purposive approach rather than following the vagaries of the market-place

BCG matrix/Boston box: limitations

Limited two-dimensional (2 factors) Its simplicity makes it prone to overuse Arguably, a self fulfilling strategy tool May be reasons for keeping a dog e.g. complementary product

The directional policy (GEMcKinsey) matrix

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Strategy guidelines based on the (GE McKinsey) directional policy matrix

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Indicators of Strategic Business Unit Strength and Market Attractiveness

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Role of the Corporate Parent

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Balancing Synergy and Responsiveness

Low parental control Collection of businesses Potentially unrelated businesses Focus on business unit responsiveness Centre allocates capital and monitors performance Low co-ordination between business units Simple to add new businesses High parental control Common core business Tightly related (focussed) businesses Focus on multi-business synergy Centre sets direction and manages synergies Highly integrated and interdependent business units New businesses require integration

De Wit, B and Meyer, R (editors) (2010). 4th Edition Strategy: Process, Content, Context, Thomson International Business Press: London. chapter 6

Corporate rationales role of Head Office

Original Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley, 1994

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Corporate rationales
The portfolio manager operates as an active investor in a way that shareholders in the stock market are either too dispersed or too inexpert to be able to do. The synergy manager is a corporate parent seeking to enhance value for business units by managing synergies across business units. The parental developer seeks to employ its own central capabilities to add value to its businesses.

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Value-Adding Corporate Parents

Envisioning Strategic Intent
Focus Clarity to external stakeholders Clarity to business units

Central Services and Resources

Investment Scale advantages Pool of management capabilities

Intervention at Business Level

Monitor performance Action to improve performance Challenge/develop strategic ambitions Coaching/training Achieve synergies

Expertise
Provide expertise/services Knowledge creation/sharing Brokering linkages/accessing external networks

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Value-Destroying Corporate Parents Bureaucracy

Adds cost Hinders responsiveness

Buffer from reality

Financial safety net

Diversity and size

Lack of clarity on overall vision

Managerial ambition
Empire building

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Read the Case Study: Virgin Group

What type of corporate parent is Virgin (portfolio manager, synergy manager or parental developer)? How does the Virgin Group, as a corporate parent, add value to its businesses? Whats the logic of the portfolio? Why do you think they are in mobile telephony, travel, financial services, leisure, music, holidays and health & wellness? What are the main risks facing the Virgin Group as a result of their strategy? How might they be reduced?

Summary
Many corporations comprise several, sometimes many business units. Decisions and activities above the level of business units are the concern of the corporate parent. There are several portfolio models to help corporate parents manage their businesses, of which the most common are: the BCG matrix and the directional policy matrix Corporate parents may seek to add value by adopting different parenting roles: the portfolio manager, the synergy manager or the parental developer.

source: Johnson, Whittington and Scholes (2011) Exploring Strategy, 9th Edition, Pearson Education, Chapter 7

Task for your Learning Journal

1. In your own words and using referenced quotes describe the difference between business unit level strategy and corporate level strategy 2. Discuss the corporate parenting style of Virgin group.
Note: this should take you about an hour. As an indicative guide, based on student submissions from semester 1, this can be completed to a high standard in 300 to 500 words but of course the quality of what is written matters greatly. Use referenced quotes to demonstrate academic reading. Demonstrate that you have a good understanding of the content of the module, the models and theories in particular, and can apply this to a real-world organisation like Virgin. This should be completed within 7 days i.e. before your next class.