Samenvatting
Summary Strategy for the Corporate Level
- Instelling
- Radboud Universiteit Nijmegen (RU)
This summary contains the following chapters: 1, 2, 3, 4, 5, 6, 9, 11, 13, 14, 15
[Meer zien]Voorbeeld 4 van de 34 pagina's
Voorbeeld 4 van de 34 pagina's
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Voorbeeld van de inhoud
Chapter 1 Strategy for the Corporate Level: Summary of the Main MessagesCorporate level strategy consists of:
- Business/portfolio strategy consists of what businesses or markets a company should invest
in.
- Management/parenting strategy is about how the group of businesses should be managed.
Portfolio Strategy
There are three logics that guide decisions on how managers make decisions about which businesses,
markets or geographies to invest in and which to avoid, harvest or sell:
- 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
The core thought is that a company should aim to own businesses in attractive markets and that have
significant competitive advantage. This analysis is part of the normal work done for business-level
strategy, which makes this the main area of overlap
between business-level strategy and corporate-level
strategy. The market attractiveness can be calculated by
looking at the profitability of the competitors in the
market. If profitability is significantly above the cost of
capital, the market is attractive. Competitive advantage can
be assessed using relative profitability. Business logic
steers companies towards investing in attractive
businesses: those in markets where most competitors make
good profits and where the business has higher profits than Figure 1: Business Attractiveness Matrix
the average.
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.
- Added value between the business and its parent company (vertical added value).
- Added value between the sister businesses (horizontal added value).
In commercial companies, added value is measured by looking at the impact on future cash flows.
Figure 2: The Heartland Matrix
,In the ‘Heartland’ area, there is a good fit between the business and the company (the potential for the
company to add value to the business unit is high and the risk that the company will subtract value
from the business is low).
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.
Capital Markets Logic
Capital markets logic looks at the market for buying and selling businesses. As a result of market
trends, businesses can have market values that differ from the discounted value of expected future
cash flows. A difference between market value and discounted value 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.
Figure 3: Fair Value Matrix
If the two values diverge outside of a corridor where market value and net present value (NPV) are
approximately equal, there are important consequences for portfolio decisions.
Capital market logic steers companies towards buying businesses that are cheap and selling businesses
that are expensive. It is probably most influential in affecting the timing of portfolio decisions rather
than in being a prime determinant of the composition of the portfolio.
The three logics are best used in combination.
Management (or Parenting) Strategy
Once portfolio decisions have been made, managers at the corporate level need to decide how to
manage the resulting portfolio. They need to decide how to structure the organization into business
divisions, what functions and decisions to centralise at the corporate level, who to appoint to the top
jobs in the divisions and what guidance to give these managers in the form of strategic targets and
controls.
The main logic that guides all of these decisions is the logic of added value. Decisions or activities
should be centralised at the corporate level, if centralisation will improve overall performance. 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 organisation. In most companies, however, these “required activities” are not the
main role of headquarters managers.
,Typically, a corporate group will have three to seven major sources of corporate added value.
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 centralisation or standardisation or other form of central influence.
These minor sources of added value should be included in the management strategy with reluctance.
The main focus of the management strategy should be the major source of added value. The problem
is that activities that distract attention from the major sources can easily generate opportunity costs
that are greater than the benefits. Moreover, subtracted value, the negative side of headquarters
activity, is an ever-present threat. 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, whether from
opportunity costs or other sources, is low.
Headquarters functions are normally looking for additional ways to improve overall corporate
performance and to expand the remit of their functions. Despite good intentions, their enthusiasm for
additional activity can run ahead of their ability to genuinely add value. Over time, headquarters
functions can gradually smother both initiative and efficiency at the business level.
One way to keep a check on the build-up of bureaucracy at corporate levels is to challenge all new
corporate-level initiatives against three hurdles:
- Is the initiative a necessary part of governance or compliance?
- If not, is the initiative a necessary part of some major source of corporate added value?
- 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.
Companies should aim to have a parenting advantage, which aims to add more value than other parent
companies can.
Chapter 2 Some History: From Boston Box to Three Logics that Drive Corporate Action
The “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. This
makes it possible for these managers to expand into new areas and acquire businesses where the
managers are less skilled at these management techniques. 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. To achieve this, a mix of businesses may be
required. Corporate strategy is therefore about buying and selling businesses to maintain an optimal,
attractive mix. It also involves directing resources towards those businesses, which are, or are on their
way to being, the most attractive.
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”. 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 therefore 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 it makes sense to buy businesses which are under-priced
and sell them when they are overpriced. Corporate strategy is about buying and selling businesses, or
stakes in businesses, at the right time.
The Professional Management School
General Management Skills
For more than 20 years, a belief that some managers had better general management skills than others
seemed to justify a kind of virtuous circle of corporate growth and diversification. Andrews argued
that “successful diversification develops know-how which further diversification will capitalise and
extend.”
The Concept of Strategy
The 1970s financial crisis and the struggles of conglomerates coincided with the rise of a new
management technique – strategic planning (wherein senior managers should focus on the strategies
of their company). 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. A focus on
strategy prevented senior executives from doing harm by meddling in operating details and day-to-day
issues that they did not understand. It allowed corporate executives to concentrate on the most
important issues facing their companies – and it simplified management by providing a framework for
decisions.
Problems with Resource Allocation
The 1970s cash crisis made the challenge of allocating resources across a portfolio of businesses a
critical activity in most diversified companies. 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, not to mention management teams with
differing levels of credibility. Joseph Bower’s research into resource allocation highlighted the gulf
between financial theory, which saw the manager’s task as choosing projects with the highest returns,
and corporate reality, where all proposed projects showed at least the return required by the corporate
hurdle rate for investment. In practice, divisional managers only proposed projects with acceptable
forecast returns, and corporate-level managers could not use financial analysis to choose among
projects.
The Portfolio Planning School
To help companies with this resource allocation challenge, academics and consulting companies
developed portfolio planning tools based on insights about which businesses offered the most
attractive opportunities for investment. They also gave insights into which businesses were
unattractive. The precursor of these portfolio planning tools was developed by the Boston Consulting
Group. They discovered the experience curve, which proposed that costs come down in a predictable
way as a company gains experience in producing a particular product. Attractive businesses were
those with more experience than competitors, and thus lower costs and higher margins.
The experience curve suggests that the primary driver of advantage and attractiveness is relative
cumulative experience.
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