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Strategic management
Lecture 7
Corporate strategy and strategic
portfolio
LEVELS OF STRATEGY
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Corporate level
• Determine overall scope of the organisation
• Add value to the different business units
• Meet expectations of stakeholders
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Business level (SBU)
• How to compete successfully in particular markets
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Operational
• How different parts of organisation deliver strategy
Three levels of the strategy
1. level: The corporate level
At this level the fundamental task is to develop
a balanced portfolio of businesses which will
achieve the goals of the corporation and satisfy
its stakeholders.
2. level: The strategic business unit level (SBU)
At this level the business, or set of activities is
given and the major task for strategic planner
at this level is for business to succeed against
competitors and also satisfy corporate success
criteria.
3. level: The functional level:
At this level the major task is to provide an
appropriate functional strategies ( finance and
accounting, marketing, R+D, production,
personnel) for SBU or corporate level strategy.
Strategic Business Unit (SBU)
A strategic business unit (SBU) is a
part of an organisation for which there
is a distinct external market for goods
or services that is different from
another SBU
Definition of strategic business units
The SBUs are the natural ‘grouping’ of part of a
corporation.
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The SBU has a range of related products/services
which has similar technologies and production
processes.
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The products/services are sold in similar or related
market segments.
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The production/services are sold against a welldefined set of competitors.
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An SBU is managed by an SBU manager, largely as
an independent unit.
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The SBU has its own set of goals and strategies.
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Each SBU in a particular organization should be
able to operate independently of any other SBU.
What is the portfolio stratregy?
From viewpoint of strategic management the
corporations are collections of different “productmarket-consumer-resource packages”. These are
the SBU’s. We can describe the sum of SBU’s, as
portfolio.
The portfolio analysis:
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Combines the assessment of business position with market
attractiveness evaluation, which emerges from external
analysis in general and market analysis, in particular.
Includes multiple SBU’s in the same analysis and addresses
the SBU investment decision - which organizational units
should receive resources, which should have resource
withheld , and which should be resource generators.
Offers baseline recommendations concerning the
investment strategies for each SBU based on an
assessment of business position and market attractiveness.
Corporate Portfolio Management

Portfolio balance
• Markets
• Organisation’s needs

Attractiveness of business units
• Profitability
• Growth rates

Portfolio ‘fit’
• Synergies between business units
• Synergies with corporate parent
The Growth Share (or BCG) Matrix
Strategic implication of the BCG matrix
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The strategies for the overall portfolio products are
concerned with the issue of balance, I.e. is the portfolio
of products balanced internally in terms of the following?
Are there a sufficient number of „cash cows” to support
those other products in the portfolio which are at stages
of their lifecycles when they are require cash?
Are there „questions-marks” which have resonable
prospects of becoming future stars and which do not , at
present, constitute a disproportionate drain on current
cash flow?
Are there an appropriate number of „stars” which will
provide sufficient cash generation when the current cash
cows are no longer able to fulfill this role?
Are there any „dogs” and if so why?
How to do a portfolio analysis?
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Construct a summary of the industry and competitive
environment of each business units.
Appraising the strength and competitive position of each
business unit. Understanding how each business unit
ranks against its rivals on the key factors for competitive
success.
Identifying the external opportunities, threats and
strategic issues peculiar to each business units.
Determining how much corporate financial support is
needed to fund each unit’s business strategy and what
corporate skills and resources could be deployed to boots
the competitive strength of various business units.
Comparing the relative attractiveness of the businesses in
the corporate portfolio. Compare the businesses on
various historical and projected performance measures sale growth, profit margin, return on investment, and the
like.
Checking the corporate portfolio to ascertain whether the
mix of businesses is adequately “balanced”
Industry Sales
The Industry Life Cycle
Introduction
Growth
Maturity
Decline
Time
Drivers of industry evolution :
 demand growth
 creation and diffusion of knowledge
Assumptions and limitations of BCG
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The use of highs and lows to make just four
categories is too simplistic.
The link between market share and profitability
isn’t necessarily strong. Low-share businesses
can be profitable, too (and vica versa.)
Growth rate only one aspect of industry
attractiveness. High-growth market may not
always be the best for every business unit or
product line.
It considers the product line or business unit
only relation to one competitor: the market
leader. It misses small competitors with fastgrowing market share.
Market share is only one aspect of overall
competitive position.
Indicators of SBU Strength
and Market Attractiveness
Market Attractiveness/SBU Strength Matrix
Strategy Guidelines Based on Directional Policy
Matrix
Corporate Level and International
Strategy
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Product and geographical diversity
Related and unrelated diversification
Attractions of international markets
Multidomestic and global strategies
Effect of product and geographical
diversity on performance
Corporate parenting
Portfolio management
Corporate Level Issues
The Multi-Business Organisation
Exhibit 6.2
Reasons for Diversification (1)

Value creation
• Efficiency gains from applying existing
resources/capabilities to new
markets/products
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Economies of scope
Benefits of synergy
• Applying corporate managerial capabilities
to new markets/products/services
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Dominant logic
• Increased market power from diverse
product/service range
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Cross subsidy
Possible monopoly in long-run
Reasons for Diversification (2)
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Less obvious value creation
• In response to environmental change
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To defend existing value
Or straying too far from dominant logic?
• To spread risk across range of businesses
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Investors can diversify more effectively?
Important for private businesses
• In response to expectations of powerful
stakeholders
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Pressure from financial analysts to produce
constant growth
Reasons for International Diversity
Market-based
Exploit cultural/
geographic differences
Globalisation of markets &
competition
Cash in on differences in
culture
Following customers
Administrative differences
Bypass limitations in home
market
Specific geographical/
economic differences
Utilise strategic capabilities
Economic benefits
Broaden market size
Economies of scale
Internationalise value-adding
activities
Stabilisation of earnings across
markets
Enhance knowledge
Related Diversification
Entry Modes (1)
Exporting Advantages
JV/Alliance Advantages
No operations in host country
Shared investment risk
Economies of scale
Complementary resources
Internet access for small firms
Possible government condition
Exporting Disadvantages
JV/Alliance Disadvantages
No benefit from location
advantages of host
Difficult to select and agree with
partner
Limited local knowledge
Managing relationship
Dependence on intermediaries
Loss of competitive advantage
through imitation
Exposure to trade barriers
Limits integration/coordination
of activities across countries
Transportation costs
Slow response to customers
Entry Modes (2)
Licensing Advantages
FDI Advantages
Contractually agreed income
Control of resources/capabilities
Limit financial/economic risk
Integration/coordination of
activities across countries
Acquisitions – rapid entry
Greenfield – state of art and
government finance
Licensing Disadvantages
FDI Disadvantages
Difficult to select and agree
with partner
Substantial investment –
financial exposure
Loss of competitive advantage
through imitation
Problems of integration/
coordination of acquisitions
Limits benefit from location
advantages of host
Greenfield – time consuming
and unpredictable cost
International Strategies
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Issues
• Global-local
• Centralised/decentralised
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Generic Strategies
• Multi-domestic
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Value adding activities located in national
markets
Products/services adapted to local requirements
• Global
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Standardised products
Produced in centralised location
Value-Adding Corporate Parents
Envisioning Strategic Intent
Central Services and
Resources
Focus
Clarity to external stakeholders
Clarity to business units
Investment
Scale advantages
Transferable management
capabilities
Intervention at Business
Level
Expertise
Monitor performance
Action to improve performance
Challenge/develop strategic
ambitions
Coaching/training
Develop strategic capabilities
Achieve synergies
Provide expertise/services
Knowledge creation/sharing
Leverage
Brokering linkages/accessing
external networks
Value-Destroying Corporate Parents
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Bureaucracy
• Adds cost
• Hinders responsiveness
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Buffer from reality
• Financial safety net
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Diversity and size
• Lack of clarity on overall vision
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Managerial ambition
• Empire building
Corporate Rationales
Portfolio
managers
Logic
Strategic
requirements
Organisational
requirements
Agent for
financial markets
Limited SBU
value creation
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Acquire assets
Divest assets
Low strategic
role in SBU
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Autonomous
SBUs
Small, low cost
corporate staff
SBU
performancebased incentives
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Synergy
managers
Synergy
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Share
resources/skills
Identify bases for
sharing
Identify benefits
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Collaborative SBUs
Corporate staff as
integrators
Overcome
resistance to
sharing
Corporate-based
incentives
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Parental
developers
Competences used
to create value in
SBUs
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SBUs below potential
(‘parenting
opportunity’)
Relevant central
resources
Suitable portfolio
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Understand SBUs
(‘feel’)
Effective linkages
SBUs autonomous
SBU performancebased incentives
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Bases of strategic choice
Corporate purpose and aspirations
Ownership
Mission and strategic intent
Scope and diversity
The global dimension
Bases of SBU strategy
Achieving competitive advantage
Price-based strategies
Differentiation strategies
Focus strategies
Enhancing SBU strategy: corporate parenting
Portfolio management
Financial strategy
The role of the corporate parent
The parenting matrix