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Corporate vs. Business Level Strategy
Corporate Increase parenting advantage
Beat competitors by: • Add more value to its businesses
Build competitive advantage
Beat competitors to: • Grow revenue and profit • Grow market share
Competitor • Other businesses in industry • Substitutes
• Other parent companies which own similar business • Investment institutions
1. The Concept of Diversification 2. Diversification and Performance
3. Corporate Parenting
diversification have several motives and purposes.Introduction Diversification is the act to form portfolio that comprises of some assets. the purpose of diversification is risk reduction. In investment field. In business field. .
or multiple market segments (by geographic location or customer type) . or multiple product lines.Diversified Company A Company can be considered diversified if it has: multiple divisions and/or SBUs.
Apple Diversification • Develop new product to new market segment Existing Product Igor Ansoff Market Penetration • Increase sales per customer • Find new customer in existing segment Market Development • Offer product to new market segment (geographic or customer type) – Delta Airline Existing Market New Market .Ansoff Matrix (1957) New Product Product Development • Develop new product with different characteristics to existing market segments .
Business Development .
Motive for Diversification Operational economies of scope and scale (Strategic Competitiveness) • shared and transferred activities Cross utilization • leveraging core competencies Financial economies of scope (Internal Capital Market) • internal capital allocation • risk reduction • tax advantages Anticompetitive economies of scope (Market Power) • Multimarket competition • exploiting market power Maintain and Increase Growth (Growth Motive) • avoid declining industries (portfolio renewal) • grasp new growth opportunities .
Assets Improvement: strategic assets in one SBU are used to improve strategic assets’ quality in other SBUs. . Assets Fission: Knowledge and experience in creating new strategic assets for new SBU provide insight (feedback) to improve strategic assets’ quality in existing SBU.Cross Utilization Assets Amortization: SBUs share same strategic assets. Assets Creation: strategic assets in one SBU are used to create new strategic assets for other SBUs.
Assets Improvement: Honda build distribution channel for motorbike based on knowledge and experience in car (both have much similar characteristics).Example: Honda Motor Co. lawnmower. i. Honda got insight and inspiration to build “parallel network” (achieve more rural areas) for its other SBU. Assets Creation: When creating distribution channel for motorbike. Assets Fission: Knowledge and experience from building parallel network can be used to expand car and motorbike distribution channel (deep penetration). . Ltd Assets Amortization: All SBU use at least three corporate strategic asset (brand.e. machine technology. distribution knowledge).
Direction of Diversification Industry A sub Upstream Midstream sub Industry B Downstream Horizontal Diversification Lateral Diversification (Conglomeration) Vertical Diversification .
Level of Diversification Type Low Single Business Vertically integrated Dominant Business Related SR SR > 95% SR > 70% 95% <= SR <= 70% SR < 70% Note 95% of revenues come from single business unit (focus diversification) More 70% of revenues come from series of SBUs in a value chain 70% .95% of revenues come from single business unit • Majority of businesses share linkage. or • Majority of businesses linked to at least one other businesses Most of SBUs are not linked each others High Unrelated SR < 70% • SR = specialization ratio = share of main SBU in total corporate revenue .
Ltd Net Sales 2010: Automobile business Motorcycle business Financial service business Other business engine. aircraft • What is the diversification level of Honda? • What if automobile business net sales drops to 60%? . lawnmower. etc.1% : 3. ski vehicle. solar cell.Example: Honda Motor Co.4% : 13.2% (power generator.3% : 7.) : 76.
Way to Diversify Corporate Venture Creating division or SBU internally. Strategic Alliance Creating SBU by joint venturing with other parties Acquisition Acquire other business and integrate it into corporate management .
1980s: Corporations tended to refocus their portfolio around the core business. Overdiversified refocusing Underdiversified more diversification . Nokia). 1990s – now: Some researches indicate that moderate diversification tend to be better than focus. Some corporations almost become single business (e.g. 1970s – now: Related diversifications tend to outperform the unrelated one.Diversification Development 1960s – 1970s: Broad (related and/or unrelated) diversification was a fashion.
3 20.4 31.1 12.4 10.4 25.7 4.Diversification Trend Fortune 500 Companies: 1949 .3 12.8 15.7 12.5 18.8 44.0 18.7 12.1 1959 (%) 22.4 37.1974 1949 (%) Single Business 42.4 18.8 1964 (%) 21.6 7.0 1954 (%) 34.2 42.4 38.3 14.2 17.7 12.4 Vertically Integrated Dominant Business Related Unrelated Source: Rumlet (1982) 12.3 8.5 1969 (%) 14.8 1974 (%) 14.6 4.7 .
67 (Grant.Diversification In History Broad diversification Refocus (related diversification) Moderate diversification 1950 1960 1970 1980 1990 2000 Now • Only 1% Fortune 500 did refocusing • 1960s: diversification was a fashion. • It signaled a strong company.0 to 0. 1993) • Diversification index dropped from 1. 2002). • It is more related diversification . • 47% North America Companies refocused their business (Wall Street Journal.50% Fortune 500 did refocusing (Markides. 1998) • Moderate diversified companies outperformed focused and broad diversified companies (Harper & Viguerie. 1985) • 20% .
Focused. Moderate. and Diversified .
but some researches did not indicated consistent results.Which Diversification Performs Better? Last four decades researches seem to support curvilinear relationship between level of diversification and performance. Performance Single Business Related Diversification Unrelated Diversification .
Information-processing capability (bounded rationality).: o Cost of coordination: greater complexity.e.Why Related Diversification Fails? Increasing the costs of sharing. o Cost of inflexibility: difficulty to respond or exit due to greater firm size and bureaucracy. Acquisition premium paid. o Cost of compromise: suboptimal of SBU performance due to the necessity of sharing it with other SBU. i. . Political maneuver and agency problem.
Which Diversification Performs Better? Some corporations tend to continue diversifying their portfolio (become conglomerates). especially in Europe Source: Whittington (1999) .
Why Unrelated Diversifications Occur? Cognitive relatedness Managers believe that they have management logic or process knowledge to run seem-similar business (e. chemical vs. where each cluster consists of related businesses. and/or have capability to attract or to develop talent.g. drug store). Efficient internal capital market (governance structure) o Slack resources vs. attractive opportunities (excess resources) o Risk-return balancing o Principal-agent consideration Superior talent Corporations have superior talent. . Corporation might control each cluster financially. Conglomerates as cluster managers Conglomeration can be viewed as group of unrelated clusters of related businesses.
Which Diversification Performs Better? There are bad and good conglomerates as well as bad and good single businesses. Source: BCG (1996) .
It is too simple to relate performance only with level of diversification. corporate style. etc. Investigation should accommodate other factors.Which Diversification Performs Better? Academic researches can not indicate consistently which diversification level perform better yet. management competence. such as form of organization. .
VALUE ENHANCING What organizational structure.Corporate Strategy Perspective Two major tasks of corporate strategy: BUSINESS SELECTION What business should we own or divest. The best corporations create more value than any of their rivals if they owned the same business . management process. and philosophy should we develop to foster superior performance. how portfolio mix should we balance.
cash cow. profit. . Core Competence Concept (Hamel & Prahalad. 1990) The businesses are related if they shared technical or operating competencies.Existing Value Enchancing Concept Corporations will create more value if they are able to build related business portfolio. BCG Matrix The businesses are related if their cash. and question mark). and growth performance create a balance within portfolio (star.
BCG Matrix .
Deficiencies Those concepts does not account for the success of broad diversified corporations (e. Goold. . and Alexander (1995) proposed The Parenting Model to fill those deficiencies. GE). Campell. Those concepts has not provided practical guidelines for developing corporate-level strategy. This model was built based on the fitness between parent (corporation) and its businesses (SBUs).g.
Parenting Concept Investors Investment Company Fitness Corporate A Corporate B SBU-A1 SBU-A2 SBU-B1 SBU-B2 Firm 2 Firm Value = 100 Firm Value = 70 Firm Value = 75 Parenting Advantage .
Corporate Strategy Framework Parent Characteristics FIT Business (SBU) Characteristics Parent’s Rivals Parenting Advantage Environmental Changes Decision about the parent FIT Decision about the portfolio .
Assessing Fitness Understanding the business Identify CSF for each businesses FIT = add value = parent knows the business. and influence operational positively Identify Improvement Areas Identify Parenting Opportunity (PO) FIT = add value = Parent knows where the improvement opportunities is • Portfolio decisions • Characteristics decisions Understanding the business Evaluate Parent Characteristics (PC) .
Identify Critical Success Factors Critical Success Factors Product branding Selling Product mix mgt Capacity utilization Biz development skill Formula branding Positioning to match locality Site selection Property development cost Value engineering Detailed operating control Mgt selection & training Supply chain logistic Low overhead Property Food Production Resto Retail Hotel V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V .
Identify Parenting Opportunities By analyzing this areas: • Major challenges facing a business • Influence of parent on a business • Influence of parent rivals on same business PO might be identified on: • Size and age • Management • Business definition • Predictable errors • Linkages • Common capabilities • Special expertise • External relations • Major decisions • Major changes .
. restaurant. Influence of rivals on same business It can be obtained by public documents. consultant. and hotel business need training facilities to improve their leaders’ management skill.Identify Parenting Opportunities Identifying improvement areas in business. Influence of parent on business Retail. individuals in rival companies. or benchmarking. through analyzing: Major challenges facing a business Example: restaurant business face two challenges: (1) expand capacity. and (2) lower cost by increasing purchasing.
.g. Managers’ capabilities: people with unique skill and experience. HR system. System. brand. budgeting.Parent Characteristics Mental map: value.g. etc. Decentralization: delegation of responsibilities and authority from parent to its business. Central functions and Resources: function and resources that are managed by parent. success formula that guide parent managers as they deal with the business Structure. e. Process: mechanism through with the parent creates value. patent. information flow. rule of thumb. aspiration. capital approval system. government relation. or key individuals in parent organization. e. decision making structure.
Fitness Judgement Judge the fitness by answering these questions honestly: Does the parent have PC that fit the PO? Can the parent exploit the upside potential of those relationship? Is there a misfit between PC with business’s CSF? What is the potential downside of the relationship? .
Parenting-Fix Matrix Low Ballast Heartland CSF – PC Misfit Edge of Heartland Alien High Territory Low Value Trap PO – PC Fit High .
Example Low Ballast Heartland Property Resto CSF – PC Misfit Edge of Heartland Food Product Retail Hotel High Alien Territory Value Trap Low PO – PC Fit High .
Priority to improve.Heartland Business None of PCs conflict with business’s CSF. Parent is able to identify which area can be improved to add more value to its business. Heartland business = core business. PCs that fit its heartland business = core competence. .
but others do not. Some PCs fit. making clear judgment is difficult. Parent should learn more enough about CSF to avoid destroying business’s value. Net value added almost zero. Case: Unilever acquired Calvin Klein (CK) o o o Unilever did not impose its famous talent on CK Unilever did not use market research to launch CK’ upmarket perfumes Unilever treated CK as a global business (not regional) .Edge of Heartland Business For some business.
Ballast Business Most portfolios contain a number of ballast business Majority of PCs fit CSF comfortably. When environment change. Parent should find POs. but parent can not find potential for further improvement (POs). Ballast business is a source of stability. it can turn into alien territory. Most managers instinctively choose to hold on. or divest them to other parent as they can get good price (even that business contribute big revenue) Parent with too many ballast business can easily become target for a takeover .
.: business is currently profitable. These business is more likely to destroy than to create value normally. there is commitment from business manager. parent managers often have many reason to hold on. Nevertheless. has growth potential. there are few ready buyer. Food product industry has become international. parent is learning how to improve fitness.Alien-Territory Business Most PCs misfit both either CSF or POs. thus national business is less competitive.g. parent should divest them. e. POWER bias. Parent has little international experience. in the process of a turnaround. so forth.
The POs often blinds parent to the misfit. and performance benchmarking. Example: Hotel business in food company The parent believe its restaurant and retail skill would bring success in the hotel business Parent initially saw it as edge of heartland experiment. and specialized site selection. but misfit in CSF. But value was destroyed in other vital areas: selling skill. with POs in food purchasing. . referral from other business. property development cost.Value-Trap Business They are business with a fit in POs. where parent has not enough skill on them.
even parent parents constantly modify and fine-tune their PCs. than to change PC to fit the businesses. so they are hard to change fundamentally. resources. mental map. This realization accounts for the rise in demerges and corporate-level breakup. etc) Researches suggest that PC are built on deeply held values and beliefs. . Parents are coming to understand that it is often easier to change the portfolio to fit the PC. parent might: o Acquire or divest business o Change PC (skill.Make Decision From Parenting-Fit Matrix.
or • Divest to other parent • Evaluate objectively the judgment for these business • Divest quickly Alien Territory Value Trap • Evaluate objectively vital CSFs that do not fit PC • Improve some parent’s skill (if possible). or • Divest to other parent .Summary Business Recommended Action for Parent Heartland Hold on and Improve Edge of • Learn more about business’s CSF Heartland • Improve some parent’s skill (if possible) • Move business into Heartland Ballast • Evaluate the business environment changes • Find POs as soon as possible.
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