Corporate Strategy

1. Corporate Strategy • What is it? • What are its main concerns? • How is it different from business-level strategy?

2. History of Corporate Strategy: 1950s & 1960s • Conglomerates • Undervalued companies & general mgmt skills • The reality of this period • Contributions to C.S.: • Concept of corporate strategy • SWOT • Structure follows strategy • Strategic fit

3. Examples of Strategic Fit • Resource strengths are well matched to the KSFs of industries the firm competes in • Adequate managerial expertise exists to cope with problems of current businesses • Ability exists to transfer resources and capabilities from one business to another • Good financial fit is when a business: • Contributes to achievement of corporate objectives • Enhances shareholder value

4. History of Corporate Strategy: 1970s • Unrelated diversification still in vogue • Search for portfolio planning tools • Contributions to C.S.: • BCG Matrix & GE Matrix • Rumelt’s diversification typology • Valuable internal capital allocation (Williamson ‘75)

5. The BCG Growth-Share Business Portfolio Matrix Circle Size = proportion of total revenue business contributes to corp.

6. Weaknesses of the BCG Matrix • No average position • Oversimplification • Position in matrix  investment success • Cash cows defending shrinking market share • 2 dimensions -- inadequate • Cash flow emphasis

7. Constructing a GEAttractiveness/Strength Matrix • Use quantitative measures of industry attractiveness and business strength to plot location of each business in matrix • Each business unit appears as a circle • Area of circle is proportional to size of business as a percent of company revenues (Or area of circle can represent relative size of industry with pie slice showing the company’s market share)

8. Procedure: Rating the Relative Attractiveness of Each Industry Step 1:Select industry attractiveness factors Step 2:Assign weights to each factor (sum of weights = 1.0) Step 3:Rate each industry on each factor (use scale of 1 to 10) Step 4:Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry

9. Industry Attractiveness Factor Weight Attractiveness Rating Weighted Industry Rating Market size and projected growth 0.15 5 0.75 Intensity of competition 0.30 8 2.40 Emerging industry opportunities and threats 0.05 2 0.10 Social, political, regulatory, and environmental factors 0.05 6 0.30 Seasonality and cyclical influences 0.05 4 0.20 Resource requirements 0.15 7 1.05 Industry profitability 0.15 4 0.60 Degree of risk and uncertainty 0.10 5 0.50 Sum of weights 1.00 Industry attractiveness rating 5.90 Example: Rating Industry Attractiveness Rating Scale: 1 = Unattractive; 10 = Very attractive

10. Rating the Competitive Strength of Each Business Step 1:Select competitive strength factors Step 2:Assign weights to each factor (sum of weights = 1.0) Step 3:Rate each business on eachfactor (use scale of 1 to 10) Step 4:Calculate weighted ratings; sum to get an overall attractiveness rating for each business

11. Competitive Strength Measure Weight Strength Rating Weighted Strength Rating Relative market share 0.20 5 1.00 Ability to compete on cost 0.25 8 2.00 Ability to match rivals on quality or service 0.05 2 0.10 0.10 6 0.60 Technology/innovation capabilities 0.05 4 0.20 How well resources match KSFs 0.15 7 1.05 Brand name reputation/image 0.10 4 0.40 Degree of profit relative to rivals 0.10 5 0.50 Sum of weights 1.00 Competitive strength rating 5.85 Example: Rating a Business Unit’s Competitive Strength Bargaining leverage Rating Scale: 1 = Weak ; 10 = Strong

12. General Electric’s Industry Attractiveness-Business Strength Matrix Business Strength • Relative Market Share • Reputation/ Image • Bargaining Leverage • Ability to Match Quality/Service • Relative Costs • Profit Margins • Fit with KSFs Industry Attractiveness 10.0 6.7 3.3 1.0 Strong Average Weak • Market Size • Growth Rate • Profit Margin • Intensity of Competition • Seasonality • Cyclicality • Resource Requirements • Social Impact • Regulation • Environment • Opportunities & Threats High 6.7 Medium 3.3 Low 1.0 Rating Scale: 1 = Weak ; 10 = Strong

13. Strategy Implications of Attractiveness/Strength Matrix • Businesses in upper left corner • Accorded top investment priority • Strategic prescription is grow and build • Businesses in three diagonal cells • Given medium investment priority • Invest to maintain position • Businesses in lower right corner • Candidates for harvesting or divestiture • May be candidates for an overhaul and reposition strategy

14. The Attractiveness/Strength Matrix • Allows for intermediate rankings between high and low and between strong and weak • Incorporates a wide variety of strategically relevant variables • Stresses allocating corporate resources to businesses with greatest potential for • Competitive advantage and • Superior performance

15. Rumelt’s Diversification Typology

16. History of Corporate Strategy: 1980s • Sticking to the Knitting • Restructuring: Downsizing, Downscoping, & LBOs • Corporate Raiders • Contributions to C.S.: • Value-Based Strategy • New Concepts: Market for Control & Free Cash Flows • Porter’s Generic Corporate Strategies • Resource-Based View of the Firm

17. Value-Based Strategy • Computed Value: • Discount forecasted cash flows using WACC • Compute share value • Imputed Value: • Apply industry average P:E ratio to company earnings to get imputed share value. • Computed < Imputed … improve or sell

18. Porter’s Generic Corporate Strategies • Portfolio Management • Restructuring • Transferring Skills • Sharing Activities

19. Corporate Strategy in the ‘90s & Beyond • Restructuring & Refocusing Continues, yet ... • Record Number of Mergers & Acquisitions • Issues Confronted in this Course: • Are there generic corporate strategies? • What are the key elements of C.S.? • How do you achieve a corporate advantage? • Is any corporate advantage sustainable? • How far should one diversify?