Corporate Strategy – Summary
PART I: INTRODUCTION AND HISTORY...................................................................................................................................... 1
1. Introduction to Strategy for the Corporate level – chapter 1 + 2...........................................................................................1
PART II: PORTFOLIO STRATEGY: WHERE TO INVEST AND WHAT TO AVOID......................................................................7
2. M&A Strategies: build, buy or ally?.......................................................................................................................................... 7
3 Diversification: where to invest and what to avoid?..............................................................................................................12
4 Downsizing and restructuring.................................................................................................................................................. 15
4.2.1 Guthrie & Deepak (2008): The impact of downsizing on firm performance as moderated by industry conditions.........17
4.2.2 Schulz & Wiersema (2018): The impact of earnings expectations on corporate downsizing.........................................18
5 Rivalry and multipoint competition......................................................................................................................................... 19
6 Ways of adding and subtracting value from corporate HQ – Case Study 2 Philips (just read, don’t learn).....................24
7 Corporate governance and legitimacy.................................................................................................................................... 25
PART III: MANAGEMENT STRATEGY: HOW TO STRUCTURE, HOW MUCH TO CENTRALISE AND HOW TO GROW THE
BUSINESS DIVISIONS.................................................................................................................................................................. 30
8 Corporate growth strategies.................................................................................................................................................... 30
9 Case study 2: Philips................................................................................................................................................................ 37
PART IV: Remaining subjects..................................................................................................................................................... 39
10 Global strategies..................................................................................................................................................................... 39
10 Text analysis: Mawdsley & Somaya (2018), Lieberman et al. (2018), Vermeulen (2018), MacDonald & Ryall (2018)....42
11. Example questions................................................................................................................................................................. 45
PART I: INTRODUCTION AND HISTORY
1. Introduction to Strategy for the Corporate level – chapter 1 + 2
Strategy = deliberate process of figuring out how to get from here to there. This is difficult, since the intended strategy leads to
deliberate strategy and unrealized strategy, which is reacted by the emergent strategy. This together makes the realized
strategy (planning vs. incrementalism). Strategy ‘pyramid’:
- Mission: the reason of the existence of the company;
- Vision: how do we see ourselves in the future;
- Strategic objectives: top priorities based on the mission statement; what do we want to achieve in long term?
- Strategy: how do we achieve our long-term strategic objectives?
- Critical success factors: in what do we have to excel compared to our competitors to achieve our strategic
objectives?
A diversified company has two levels of strategy:
- Business-level strategy (competitive strategy): how to create competitive advantage in each business in which the
company competes? Low cost, differentiation, integrated low cost/differentiation, focused low cost, focused
differentiation;
- Corporate level-strategy (company-wide strategy): how to create value for the corporation as a whole; make the
corporate whole add up to more than the sum of its business parts? Relevant for managers at the parent company
levels, management teams trying to integrate closely linked businesses and management teams running divisions that
themselves contain sub-businesses.
1. Business/portfolio strategy: in what businesses or markets should a company invest in? Guiding logics:
a. Business logic: attractiveness of the market and competitive advantage;
b. Added value logic (or parenting logic): adding value to the business via HQ (HQ must add or distract
value);
c. Capital markets logic: state of the capital markers/NPV of future cash flows.
2. Management/parenting strategy: how should the group of businesses be managed, incl. how to structure the
organization in divisions, units or subsidiaries?
CS = the way a company creates value through the configuration and coordination of its multimarket activities. Aspects:
- Value creation as the ultimate purpose of corporate strategy;
- Configuration: focus on the multimarket scope of the corporation, incl. its product, geographic and vertical boundaries;
- Coordination: emphasis on how the firm manages the activities and businesses that lie within the corporate hierarchy.
1
,1.1 Portfolio strategy: business-, added value (or parenting)- and capital markets logic
How should managers make decisions about which businesses, markets or geographies to invest in and which to avoid, harvest
or sell? Three logics which must use combined to guide these decisions. For example: if a business is in a high growth
market and is earning high margins (business logic), you are likely to want to invest in it, unless you believe that you are a bad
owner to the business (added value logic) or you could sell it for significantly more than it is worth to you (capital markets logic).
You want to invest in or acquire a business which will add value to your existing business (added value logic), even if it is likely
to sell at a price that is higher than the value of the cash flows it generates (capital market logic).
A) Business logic: looks at the sector or market where each business competes in and the strength of its competitive
position. Is the market (un)attractive and does the business have a competitive (dis)advantage? The goal of companies
which are driven mainly by the business logics is to own attractive businesses (= holding or investment company).
How to find good businesses and avoid bad businesses – tools (chapter 3):
- 5-Forces framework (Porter): factors that influence the average profitability in a market (appeal of the market):
1. Competitive rivalry;
2. The power of customers to bargain down prices;
3. The constraint that substitute products place on price levels;
4. The power of suppliers to bargain down margins by pushing up costs;
5. The threat that new entrants pose to the price structure
of the market.
- Business Attractiveness matrix (or GE/McKinsey matrix)
combining: market profitability – competitive advantage.
Best to plot one level lower and higher than you decision
making-level, to see if there are parts of the business that
are more attractive than others (more detail).
o Market profitability:
o Competitive advantage: differences in profitability
between competitors in a market are more
significant than differences between markets.
Differences in performance are due to competitive
advantages (technology, market share, management team, or any other source). Measure relative
competitive advantage by measuring relative returns on capital employed. Judge whether the business
has significantly higher returns, about the same level or significantly lower returns compared to the
average in its market.
o Outcomes:
Businesses right up are clearly attractive (high market profitability = higher profitability than
average, and high competitive advantage) to hold or acquire these businesses;
Businesses left down are clearly unattractive restructure, close or sell.
Businesses in the middle boxes (on the borderline) Only invest in potential attractive
businesses. Rule of thumb: mostly on the left: unattractive (owners are likely to get below
average returns) and right attractive. But always analyse before judgement.
Top left = weak business in attractive markets invest in fast growing markets;
divest in slow growing markets: Offer the highest levels of return and risk. Investing
is risky, but if it is possible to shift a business to top right, returns can be very attractive
Therefore, business must can improve its competitive position. Risk is lower in a
market in fast growing markets, since competitors can grow in market share as well
and are therefore less aggressive in their competitive response
Bottom right = strong business in unattractive markets: Lower risks, few options
for generating high returns. Companies owning such a business should ensure that it
receives enough investment to maintain its strong position, but that it delivers any
excess cash back for reinvestment in higher returning opportunities to make it possible
to shift more up.
- Business Attractiveness matrix with growth and size added: besides market profitability and competitive
advantage, are growth and size important factors to determine the attractiveness of a business.
o Growth: you want to show it in the business attractiveness matrix by colours (for example A is red, B
green, etc.) to include the growth of the business. You can add arrows to represent changes in position
that are expected in the future.
Two-edged aspect of growth:
Positive: growth is attractive,
because: is a major drives of
2
, shareholder value, provides career opportunities and opportunities for pay increases as
responsibilities widens.
Negative: high growth in a market that offers returns below the cost of capital is worse
than no growth at all: with every extra percentage of growth the business is destroying
the wealth of its owners faster and fasters.
B = best position;
A = worst position: high growth in a market that gives
returns below the cost of capital (airline industry).
Necessary to invest, because returns are expected to
improve in the future.
o Size of the business in the market representing on the business
attractiveness matrix by making the circles different sizes.
Two-edged of size: a big market is only more attractive
than a small market if it is possible to earn returns
above the cost of capital. When returns are below the
cost of capital, size is a disadvantage.
B) Added value logic (or parenting 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. 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.
- Vertical added value = added value from the relationship between: business – parenting company
o Subtracted value = when headquarters provides less wise guidance (inappropriate targets or strategies,
etc.).
- Horizontal added value = added value from the relationship between sister businesses.
- Value added is measured by looking at the impact of future cash flows (in non-profit it is measured by cost per unit
of benefit). Added value if a headquarters initiative can lower costs for the same benefits or increase benefits
for the same costs.
Tool Heartland matrix (low – high are %):
- Heartland (core business) = good fit between the
business and the company. Ideal place to be for
HQ. When you are not at heartland, there is still
value to add. Unilever is an example of heartland-
HQ.
- Edge of heartland = not sure how much added
and subtracted value. Temporarily place, can go to
heartland (becoming core business) or to ballast,
value trap or even alien territory.
- Alien territory = bad fit and the company should
sell or close this business.
- Ballast = businesses are candidates for selling, but
can easily be retained until an opportune moment
arrives.
- Value trap = tempted by the potential for added value, managers can underestimate the risk of subtracted value.
Subtracted value may outweigh the added value of the business. Best to exit these businesses, unless managers
at the HQ can find ways to reduce the risk of subtracted value, and hence raise the business into edge of
heartland. Causes: mismanagement, not understanding the business at corporate level, overreporting,
underreporting, lack of oversight.
C) Capital markets logic: looks at the market for buying and
selling businesses. Steers companies towards buying
businesses that are cheap and selling businesses that are
expensive. Due to market trends, businesses can have
market values that differ from the discounted value of
expected cash flows. Also due to strategic reasons for
buying or selling that cause managers to pay a price above
or accept a price that is below the discounted cash flow
value (net present value). How much costs it to invest in a
market, is this less or more in the future? How much costs it
to buy a business and how much earns it to sell one?
Tool Fair Value matrix: market price (or market value) –
net present value (NPV) ow owning the business.
3
, D) Combining the three logics: making decisions about where to invest and what to avoid (chapter 6)
Portfolio strategy requires all three logics combined, so as well to the decision where to invest, where to cut back and what to
avoid. The specific approach used does not matter, necessary is that all three logics are used.
- When deciding to invest: most managers start by assessing the attractiveness of the business (business logic), then
consider what they have to do to add value (value added logic) and may consider the price they could get for the business
(capital markets logic).
- When deciding to sell: most managers start by identifying businesses that are not performed well (business logic) or that
they do not understand well (value added logic) and then evaluate what price they might to be able to get (capital markets
logic).
Decision making
when logics
conflict:
- You can add
value, but
the business
is
unattractive
focus on
what you are
good at. If
you can add
value which
results in a
competitive
advantage,
the business
becomes attractive again. You can invest.
- Attractive business where you do not add value learn fast how to add value: 1) develop adequate parenting skills, 2)
business is so attractive that you generate high returns for a while and then sell it to a better owner. In both situations, you
need to be confident that rival parents do not have a significant advantage over you.
- Attractive, heartland businesses which are overpriced depending on whether you are looking to acquire or whether you
already own the business, and whether the reason for the overvaluation in the capital markets is likely to be temporary or
permanent.
o Don’t acquire: change the strategy so that you do not need to buy the business or wait until the capital market
correct themselves. Another option is to acquire with equity rather than with cash (= paying for an overpriced
asset with overpriced equity).
o If you have, hold: overvaluation is likely to be temporary. If the overvaluation is likely to be permanent and you
want to retain the business
- Unattractive businesses you own, where you are subtracting value, but which can only be sold below NPV construct a
way of selling. As seller you can use tactics that can be used to increase the price offered by buyers, like: restructuring the
deal into three (more wanted) separate parts, redesign the deal process (50% buying now, 50% later where the price
depends on the future value).
Financial analysis: combine all logics in one financial calculation (strategy should be first, financial analysis as
support) if the top of the fourth column is higher than the top of the first column, you should keep the business. If it is lower,
you should consider selling (premium that the capital markets are giving the business is likely to be greater than the value you
can generate by holding onto it.
- First column = price you would be likely
to get for the business today;
- Second column = values the cash flows
that you expect the business to
generate over the plan period, based on
the attractiveness of the business and
your ability to add value to it;
- Third column = value of any cash flows
that come from other businesses in your
company as a result of retaining this
business (often zero);
- Fourth column = discounted value of the
business at the end of the plan period,
based on some estimate if its terminal
value.
4
