Strategy and Responsibility 1:

Corporate Strategy
 What is Corporate Strategy

Shareholders

Corporate
Strategy:
relationship
Group HQ between Centre
and SBUs

Addresses key questions:

= 3 !
1. Value: Is a business worth more under our ownership? +1
1
2. Composition: What businesses should we be in?
3. Co-ordination: How should the businesses be managed?
 Essential Tests of Diversification

Porter: Diversification will only truly create shareholder value

under certain conditions captured in 3 tests:
O bv
1. Market Attractiveness ious
??
The industries chosen for diversification must be structurally
attractive

2. The Cost of Entry Test

The cost of entry must not capitalise all future profits

3. The Better Off Test

Either the new unit must gain competitive advantage from its link
So o
with the corporation or vice versa
f
cost fset the
of o o
wne ngoing
rshi
p
Source: Porter (1987)
How can a parent add value?
 Adding Parenting Value

Which generates more value for shareholders....

Shareholders Shareholders Shareholders

Parent A Parent A Parent B

Business Units Business Units Business Units

From a shareholder perspective:

The key question is what value does the parent add to each
business unit NOT what value the business units provide the
parent.
 Developing a Parental Strategy

Light to
uc Core to
minimis h to fu
e of busin ture
of pare cost ess
nting “Ballast” “Heartland”
Typical core SBU – SBUs with high
good fit but few potential to for parent
opportunities to add to add more value
Level of “feel” more value

for
businesses in
portfolio
Divest a
s O
destroy
i ng
“Alien Territory” “Value Trap” m nly keep if can
shareho Exit – no potential for Potential for adding ore to
lder value creation value seldom realised heartlan
value – due to poor fit d
bu
inputs i y in
fn
for othe eeded
r SBUs Potential for “parent” to
add value
Source: Campbell et al (1995) 5