Summary Strategy for the Corporate Level: by Campbell, Whitehead, Alexander and Goold. Contains chapter 1 t/m 6, 9 t/m 11, 13 t/m 15 and Appendix incl. lecture notes.
Summary book Strategy for the corporate level
Part I Introduction and history
Chapter 1 Strategy for the corporate level: summary of the main message
This book will help answer two important questions that can only be addressed at the corporate
level:
What businesses or markets should a company invest in, including decisions about diversifying
into adjacent activities, about selling businesses, about entering new geographies or markets and
about how much money to commit to each area of business? (-> business/portfolio strategy)
How should the group of businesses be managed, including how to structure the organization
into divisions or units or subsidiaries, how to guide each division, how to manage the links and
synergies between divisions, what activities to centralize or decentralize and how to select and
guide the managers of these divisions? (-> management/parenting strategy).
1.1 Portfolio strategy
There are three logics that guide the investment decisions:
1. Business logic: concerns the sector or market each business competes in and the strength of its
competitive position. If a business is in a high gowth market and is earning high margins.
2. Added value logic: concerns the ability of corporate-level managers to add value to a business.
You would buy a business if that business would perform much better under your ownership.
3. Capital markets logic: concerns the state of the capital markets. Business is likely to sell for more
than it is worth.
1.1.1 Business logic
Looks at the market the business is competing in and the position the business has in the market. The
core thought is that a company should aim to own businesses in attractive markets and that have
significant competitive advantage (highly profitable). Two dimensions to assess the market:
1. Attractiveness of the market(Porter’s 5 forces): summarizes the factors that drive average
profitability; rivalry, the power of buyers, the threat of substitutes, the power of suppliers and
the threat of new entrants. If average profitability is significantly above the cost of capital, the
market is attractive. Besides average profitability, the attractiveness of a market may also be
influenced by growth or size of the market.
2. Competitive advantage: can be assessed using relative profitability: the profitability of your
business vs. the average competitor in the market. Competitive advantage may be created by
many factors: technology, customer relationships, scale economies.
The 2 dimensions are combined in the ‘Business Attractiveness
Matrix’. Business units that plot in the top right corner of the matrix
are most attractive and those in the bottom left are least attractive.
Right of the central diagonal: companies should hold onto or acquire
businesses. Left of the central diagonal: exit or restructure
businesses. So, the business logic steers companies towards
investing in attractive business.
1.1.2 Added value logic
Added value logic looks at the additional value that is created or destroyed as a result of the
relationship between the business and the rest of the company. There are two kinds of added value:
1. Parenting: added value comes from the relationship between the business and its parent
company (vertical added value).
2. Relation between sister businesses: value that is created or destroyed as a result of the
relationship between sister businesses (horizontal added value).
1
,Added value can be measured by:
Looking at the impact on future cash flows (after an initiative of the HQ).
o Increase? value is added (Commercial companies)
A ratio such as cost per unit of benefit. (Public sector organizations/charities).
o HQ initiative can lower costs for same benefits? value is added.
o HQ initiative can increase benefits for the same costs? value is added
The potential for added value and the risk of subtracted value can be combined into the Heartland
matrix:
Heartland: there is a good fit between the business and the
company.
Alien territory: the fit is bad, so the company should sell or
close this business.
Ballast: the business will consume scarce time of HQ
managers without resulting in any extra value. Candidates
for selling, but can easily retained as well.
Value trap: the subtracted value may well outweigh the
added value. Exit these businesses, unless managers at the
group level can find ways to reduce the risks of subtracted
value and hence raise the business into “edge of Heartland”.
Added value logic steers companies towards investing in businesses that will benefit significantly
from being part of the company or that will contribute significantly to the success of other businesses
in the company.
1.1.3 Capital market logic
Capital market logic looks at the market for buying and selling businesses. Businesses are given
different values by the capital markets:
Low values: when there are few buyers and many sellers
High values: when there are many buyers and few sellers
As a result, businesses can have market values that differ from the discounted value of expected
future cash flows. This difference happens partly because some buyers or sellers are not
knowledgeable about likely cash flows or appropriate discount rates, and partly because cash flows
are not the only factor influencing decisions to buy or sell.
Managers can have “strategic” reasons for buying or selling and to accept a certain price that is
above or below the discounted cash flow value (net present value)
Market value is significantly above NPV: companies should avoid buying and consider selling.
Market value is significantly below NPV: companies should consider buying and avoid selling.
Capital markets logic steers companies
towards buying businesses that are cheap
and selling businesses that are expensive.
2
,Example: Mexican Foods (using all three logics):
Business logic: deciding to focus on brands.
Added value logic: managers recognized that branded businesses were a potential value trap,
because most of the senior managers had cut their teeth on private-label businesses. They
looked at how to reduce the risk of subtracted value. To increase the added value they decided
to strengthen and centralize brand marketing.
Capital markets logic: managers asked whether now would be a good time to buy branded
businesses or sell private-label businesses. They decided not to sell the private-label businesses,
since prices were too low, there were very few buyers.
1.2 Management (or parenting strategy)
Once portfolio decisions have been made, managers at the corporate level need to decide how to
manage the resulting portfolio. The main logic that guides all these decisions is the logic of added
value. In other words, decisions or activities should be centralized at the corporate level, if
centralization will improve overall performance. This means maximizing additional value created
from owning multiple divisions & minimizing the negative aspects of creating layers of management
above the level of the divisions.
Of course there is the governance and compliance logic: determines the existence of some activities,
like financial controls and tax management (must be carried out at the corporate level). A corporate
group will have three to seven major sources of corporate added value. This list will guide all of the
difficult decisions about what to centralize, how to organize, who to appoint and how to design
group-level processes. Management or parenting strategy is mainly about governance and major
sources of added value. However, there are often a large number of other activities where small
gains in performance can be achieved by some limited centralization or standardization or other
forms of central influence. These minor sources of added value should be included in the
management strategy with reluctance. The main focus of the management should be on the major
sources of added value. Disadvantages minor sources of added value:
It distract attention from the major sources and therefore can easily generate opportunity costs
that are greater than the benefits.
Subtracted value is a negative side of the HQ activity (threat). The more activities that are
centralized; the more initiatives that are led by HQ managers; the more HQ managers
“interfere”; the higher the risk of subtracted value.
It is important to challenge all minor sources of added value, and only include them in the
management strategy if the risk of value destruction is low.
To check on the build-up of bureaucracy at corporate levels one can challenge all new corporate level
initiatives against three hurdles:
1. Is the initiative a necessary part of governance or compliance?
2. If not, is the initiative a necessary part of some major source of corporate added value?
3. If not, does the initiative clearly add some value and have low risk of negative side effects?
If the initiative fails all three hurdles, it should be rejected. The answers to the above-mentioned
questions guide decisions about: 1) the overall organization structure; 2) the functions at the
corporate level or at the division level; 3) the central policies; 4) the skills, capabilities and focus of
senior corporate managers; 5) the degree of centralization or decentralization and 6) the ways in
which managers at the corporate level interact with managers lower down.
Companies should strive to have a parenting advantage: they should aim to add more value than
other parent companies can and to be the best owner of each of the businesses in their portfolio.
3
, Management strategy should include an analysis of rival parents. Without a good understanding of
the management strategies of other companies, it is hard to make judgments against the best owner
metric.
1.3 Summary
Corporate level strategy involves making decision about which business to own and invest in
(portfolio strategy) and how to manage them (management/parenting strategy). Added value logic is
common in guiding thought in both, however the business logic and capital market logic should not
be forgotten. As a result, good corporate level strategy work involves balancing the influence of
these three lgoics over time.
Chapter 2 Some History: from Boston box to three logics that drive corporate action
2.1 Introduction
Corporate-level strategy seeks to answer two questions:
1. How is a portfolio of businesses assembled?
2. How are these businesses managed for maximum performance?
There are four broad schools of thought that provide the foundations for the 3 logics in CH1:
1. Professional management school: proposes that it makes sense to have multiple businesses in
one company when the leaders of the company have superior professional management skills.
These managers know the latest techniques of good business management and therefore makes
it possible to expand into new areas and acquire businesses. Corporate-level strategy is about
ensuring that the top team has the latest management techniques. With these techniques the
company can expand into attractive sectors or acquire businesses that are less well managed.
2. Portfolio planning school: proposes that it makes sense to develop portfolios that deliver a
combination of growth, profitability and cash flow. To achieve this, a mix of businesses may be
required. Attractive businesses are not all identical, they can have different blends of different
qualities. Corporate strategy is here about buying and selling businesses to maintain an optimal,
attractive mix.
3. Synergy school: proposes that it makes sense to have multiple businesses in one company when
the businesses can be linked together to create extra performance through ‘synergies’. It is
about economies of scale. Synergies can come from combining activities where there are
economies of scale, or from transferring knowledge across businesses which share some similar
scope. Corporate strategy is about identifying businesses where there are opportunities for
synergy and developing skills at making the linkages between businesses work.
4. Capital markets school: proposes that it makes sense to buy businesses which are underpriced
and sell them when they are overpriced. Corporate strategy is about buying and selling
businesses, or stakes in businesses, at the right time.
2.1.1 Professional management school
Overview of the development of the professional management school:
1950s/1960s: intuitive management was no longer sufficient (Peter Drucker). Managers were
encouraged to study the principles of management and to acquire knowledge and analyse theire
performance systematically.
1960s: growth of conglomerates (managers perceived themselves as breaking new ground).
1970s: financial crisis, many conglomerates run out of cash. Belief that professional managers
could make any business perform had been lost, and faith in conglomerates never recovered.
Rise of new management technique: strategic planning. Strategy was more than long range
planning or objective setting; it was a way of deciding the basic direction of the company yand
preparing it to meet future challenges. CEOs accepted that strategy should be their main
responsibility.
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