Strategy for the corporate level
Where to invest, what to cut back and how to grow organizations with multiple divisions
Table of content
PART I: INTRODUCTION AND HISTORY..............................................................................................................2
1 STRATEGY FOR THE CORPORATE LEVEL - SUMMARY OF THE MAIN MESSAGES ..................................................................2
2 SOME HISTORY – FROM BOSTON BOX TO THREE LOGICS THAT DRIVE CORPORATE ACTION ..................................................4
PART II: PORTFOLIO STRATEGY: WHERE TO INVEST AND WHAT TO AVOID.......................................................9
3 HOW TO FIND GOOD BUSINESSES AND AVOID BAD BUSINESSES – THE BUSINESS ATTRACTIVENESS MATRIX .............................9
4 HOW TO MAKE BUSINESSES MORE SUCCESSFUL – THE HEARTLAND MATRIX ................................................................. 12
5 HOW TO BUY LOW AND SELL HIGH – FAIR VALUE MATRIX ........................................................................................ 14
6 MAKING DECISIONS ABOUT WHERE TO INVEST AND WHAT TO AVOID .......................................................................... 16
PART III: WAYS OF ADDING AND SUBTRACTING VALUE FROM CORPORATE HEADQUARTERS ........................17
8 NINE SOURCES OF VALUE FROM COORDINATING ACROSS BUSINESS DIVISIONS ............................................................... 17
9 EIGHT WAYS HEADQUARTERS CAN DESTROY VALUE ................................................................................................ 19
10 HOW TO IDENTIFY SOURCES OF ADDED VALUE FOR YOUR COMPANY ......................................................................... 21
PART IV: MANAGEMENT STRATEGY: HOW TO STRUCTURE, HOW MUCH TO CENTRALIZE AND HOW TO GROW
THE BUSINESS DIVISIONS................................................................................................................................23
11 STRUCTURING THE ORGANIZATION INTO BUSINESSES AND DIVISIONS ........................................................................ 23
13 HOW MUCH TO CENTRALIZE: DESIGNING CORPORATE HEADQUARTERS ...................................................................... 25
14 DEVELOPING NEW CAPABILITIES AT CORPORATE HEADQUARTERS ............................................................................. 27
15 ENCOURAGING SYNERGY AND COOPERATION ACROSS BUSINESS DIVISIONS ................................................................. 29
APPENDIX – LINKS BETWEEN INTERNATIONAL AND CORPORATE-LEVEL STRATEGY........................................30
Campbell, A., Whitehead, W., Alexander, M. & Goold, M. (2014). Strategy for the corporate
level: where to invest, what to cut back and how to grow organisations with multiple
divisions. John Wiley & Sons.
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,Part I: Introduction and history
1 Strategy for the corporate level - Summary of the main messages
Business or portfolio strategy: 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 or business?
Management or parenting 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?
The combination of these two types of strategy makes up corporate level strategy.
Business or portfolio strategy
How should managers make decisions about which businesses, markets or geographies to invest in and which
to avoid, harvest or sell? There are three logics that guide these decisions, best used in combination:
- Business logic: concerns the sector or market each business competes in and the strength of its
competitive position.
- Added value logic: concerns the ability of corporate-level managers to add value to a business.
- Capital market logic: concerns the state of the capital markets.
Business logic
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 advantages. (Overlap business-level and
corporate-level strategy.) These two measures can be combine in the
Business Attractiveness Matrix (McKinsey/GE matrix).
The attractiveness of a market can be assessed by calculating the average
profitability of competitors. If it is sign. above the cost of capital, it is
attractive. Porters 5-forces framework summarizes the factors that drive
average profitability: competitive rivalry, customer power, substitutes
threats, suppliers power and new entrants threat. Attractiveness may
also be influenced by other factors like growth and market size.
Competitive advantage can be assessed using relative profitability. Competitive advantage may be created by
many factors, such as technology or customer relationships or scale economies.
Added value logic
Added value (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. Two kinds: business-parent company or
between sister businesses.
In commercial companies, added value is measured by looking at the impact on future cash flows. In public
sector organizations or charities, added value is measures by a ratio such as cost per unit of benefit.
Added value can come from a wise guidance from HQ or other sources like a parent company brand, technical
know-how of a central technology unit, relationships with important stakeholders, financial strength, etc.
Subtracted value happens when HQ’s provide less wise guidance like setting inappropriate targets/strategies or
other sources like time wasting, inefficient central services, delayed decision making, etc.
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,Heartland: good fit between the businesses and the company.
Alien territory: fit is bad, and the company should almost certainly
sell or close this business.
Ballast: consumes scarce time of HQ, unless ways to add value are
found, these businesses are candidates for selling; but can easily be
retained until an opportune moment arrives.
Value trap: normally best to exit these businesses unless group-
level managers find ways to reduces the risk of subtracted value,
and hence raise the business into edge of heartland.
Capital market logic
Capital markets logic looks at the market for buying and selling
businesses which can have low or high values. As a result of the
market trends, businesses can have market values that differ
from the discounted value of expected future cash flows (NPV). A
difference between market value and discounted value happens
partly because some buyers or sellers are not knowledgeable
about likely cash flow or appropriate discount rates, and partly
because cash flows are not the only factor influencing decisions to
buy or sell.
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 decisions is the logic of added value. Decisions or activities
(like targets or corporate-level managerial influencing) should be centralized at the corporate level if
centralization will improve overall performance.
Of course there is also a governance and compliance logic that determines the existence of some activities,
like financial controls and tax management. These activities must be carried out at the corporate level in any
responsible company. HQ managers must ineract with the owners and with certain stakeholders, such as
governments.
Typically, a corporate group will have three to seven major sources of corporate added value. This list will then
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 pareting strategy is mainly about governance and major sources of added value. However,
there are often a large number of other actitivites where small gains in performance can be achieved by some
limited centralization or standardization or other form of central influence: e.g. proposals to centralize payroll,
to improve working capital or to help an individual business with its market entry in the USA. These minor
sources of added value should be included in the management strategy with reluctance.
The problem is that activities that distract attention from the major sources can easilty generate opportunity
costs that are greater than the benefits. Moreover, substracted value, is an ever-present threat. The more
activities that are centralized, the higher the risk of substracted value. As a result, it is important to only include
minor sources of added value if the risk of destruction is low.
Having a management strategy that adds a sign. amount of value is a central aim of any company ambitious to
own multiple business units. However, being a positive parent is not enough. Companies should aim to have a
parenting advantage: they should aim to add more value than other parent companies in their portfolio can.
Corporations also compete with governments, private equity firms, family holding companies, national wealth
funds, investments firms, and others.
Of course, companies are rarely the best owners of all of their business units all of the time. Therefore, it is
important that the management strategy is guided by the medium-term aim of being the ‘best owner’. This
means that management strategy should include an analysis of rival parents.
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, 2 Some history – From Boston Box to three logics that drive corporate action
Corporate-level strategy seeks to answer two questions: How is a portfolio of businesses assembled, and how
are these businesses managed for a maximum performance? Four broad schools of thought show how they
provide the foundations for the three logics (chapter 1).
The professional management school proposes that it makes sense to have multiple businesses in one
company when the leaders have superior professional management skills. This makes it possible to expand into
new areas and acquire businesses where the managers are less skilled. Corporate-level strategy is about
ensuring that the top team has the latest management techniques.
The portfolio planning school proposes that it makes sense to develop portfolios that deliver a combination of
growth, profitability and cash flow. Corporate strategy is about buying and selling businesses to maintain an
optimal, attractive mix and involves directing resources towards those businesses.
The 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. Corporate strategy is about
identifying businesses where there are opportunities for synergy and developing skills at making the linkages
between the businesses work.
The capital markets school proposes that is makes sense to buy businesses which are underpriced and sell
them when they are overpriced. Corporate strategy is about buying/selling businesses/stakes at the right time.
The professional management school
General management skills
During the 1950s and 1960s, much attention focused on identifying basic principles of management, useful to
all managers and applicable to all kinds of enterprises. Peter Drucker, management guru, argued that intuitive
management was no longer sufficient. If all managers face similar problems, professional managers might be
able to use their skills across a range of different businesses. During the 1960s, the growth of conglomerates,
with their numerous acquisitions of unrelated businesses across industries, provided almost laboratory
conditions in which to test out this idea. The high stock prices of conglomerates in the 1960s reflected the
growing belief that this new way of managing was the future. But economic worries at the end of the 1960s
brought the dream to an end. The stock market in 1969 fell by 10% and the prices of conglomerates by 50%.
The financial crisis of the mid-1970s followed, causing many conglomerates to run out of cash. All of them had
to slim down their portfolio to raise cash, some failed completely and others just survived. Belief that
professional managers could make any business perform had been lost, and faith in conglomerates as the way
forward never recovered.
The concept of strategy
The 1970s financial crisis and the struggles of conglomerates coincided with the rise of a 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 and preparing it to meet future challenges. Roland Christensen
argued that the concept of strategy made it possible to simplify the complex tasks of managers. It simplified
management by providing a framework for decisions. During the late 1960s and 1970s many companies
established formal planning systems.
Problems with resource allocation
The 1970s cash crisis made the challenge of allocating resources across a portfolio of businesses a critical
activity. It became synonymous with corporate-level strategy. Corporate CEOs needed to understand the
relative merits of investment proposals coming from a range of businesses in different sectors, with different
time horizons, competitive positions, and risk profiles. Joseph Bower explored how large, diversified firm
allocated resources. He highlighted the gulf between financial theory and corporate reality. What corporate
managers needed was a management technique to help them.
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