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4.

The corporate parent & value creation

JS&W propose 3 main value-creating roles of the corporate parent: (i) Envisioning: the process of creating a clear vision of the corporate intent (ii) Intervention: to improve business performance or develop business strategy that takes a number of forms: Monitoring and control of performance against plan

Coaching and training - Facilitating co-operation and collaboration between SBUs (iii) Provision of services, resources & expertise to its SBUs: - Financial assistance - Resource sharing - Managerial assistance - Providing access to central services such IT & HR
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- Providing access to markets, suppliers & sourced of finance

The existence of corporate parent imposes costs related to its size, therefore it must create value at least equal to these costs The ways of destroying values are as follows: a) The added bureaucracy resulting from organisational structure may; (i) Slow decision making process (ii) Limit organisations flexibility; (iii) Slow speed of response to customers & environmental changes

b) The size and complexity of very large organisation may hinder and obscure the development of clear & useful corporate vision c) The high administrative costs of corporate parent may exceed the benefits provided to SBUs

JS&W identify 3 main approaches to value creation that the corporate parent might adopt. They call these approaches strategic rationales: Portfolio managers Synergy managers Parental developers

Provide service to investor by applying financial disciplines It seek undervalued companies as purchase targets, acquire them, and improves their value and performance They keep their own costs low and provide few central services Their SBUs are largely autonomous and their managers are judged by financial results

Pursues economies of scope Synergy managers aim to achieve high efficiency in the shared use of resources and competences. To do this they must be able to overcome some difficulties: (i) The cost involved in sharing (ii) Incompatibility of system and culture among SBUs (iii) Variation in local condition

Parental developer add value to its SBUs by developing its own specific competences to aid SBUs in their operations and development Need to have a clear view of their valueadding capabilities and needs of SBUs

Portfolio analysis

Many companies have a portfolio of products or services with different characteristics such as: (i) market growth, (ii) investment requirements, (iii) projected profitability, and (iv) volumes of product sales

Build: A build strategy forgoes short-term earnings & profits in order to increase the market share Hold: a hold strategy seek to maintain current position Harvest: a harvest strategy seeks short-term earnings & profits at the expense of longterm development Divest: divestment reduces negative cash flows

Is designed to reveal whether the organisation has: Should be applied to SBUs as they are the one dealing with particular market segment Too many declining products or services Too few products or services with growth potential Insufficient product or service profit generators to maintain organisation performance or to provide investment funds

Classifies businesses, division or products according to the present market share and future growth of that market

Relative market share High Low High

Market growth

stars

Problem child

Low

Cash cow

dogs

A cash cow has high market share and low growth rate and this should generate substantial cash inflows Product life-cycle is in the maturity or declining stage Market is less attractive to existing competitors and new entrants Products generate cash in excess of what is needed to sustain their current market position Profits support the growth of other products

A star product has high relative market share and high growth rate May be cash neutral despite its strong position Competitors are attracted to such market due to the high growth rate Needs sufficient funds to sustain its current market share Represents the best future prospects of an organisation

A problem is characterised by low market share in a high growth market Substantial cash input is needed to maintain or increase the market share The question is whether the product can compete successfully with adequate support and what will the cost of that support be

The dog product has a low relative market share in a low growth market Products tends to have negative cash flows

The matrix uses only two measures (market growth & market share) and these may be too limited as a basis for policy decisions The matrix encourages companies to adopt holding strategies The matrix implies only those products with large market share should remain The matrix implies that most profitable markets are those with high growth Not all dogs should be condemned

Public sector portfolio matrix Directional policy matrix Market attractiveness matrix

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