Readings week 2
Readings week 2
Paper 1: Strategy and the “business portfolio” - Hedley, B. (1977)
Paper 2: From competitive advantage to corporate strategy - Porter, M. (1987)
Paper 3: The core competence of the corporation - Prahalad, C.K. and G. Hamel (1990)
Notes seminar week 2
1
,Readings week 2
Paper 1 - Strategy and the “business portfolio”
Hedley, B. (1977)
Corporate strategy = portfolio management. SBU’s operate independently and often in
unrelated businesses. Companies should assess these different SBU’s and formulate
tailored strategies for each business unit based on their position in the growth-share matrix.
Most companies (with the exception of the smallest and simplest companies) comprise
multiple businesses. In determining the strategy, one should consider the different
businesses or product-market segments as distinct economically and should look at:
1. Relative competitive position
2. Growth
The key factor determining strategy success for each individual business segment = relative
competitive position (see Porter’s five forces article)
Focusing on the relative competitive position as a strategic goal -> the basis for effective
long-range planning even when there is considerable environmental uncertainty.
Business portfolio = A business portfolio is a group of products, services, and business units
that conform to a given company and allows it to pursue its strategic goals
The effect and value of growth
● Growth considerations affect the rate at which businesses will use cash.
● Growth in a business is a major factor influencing the likely ease (and cost) of gaining
market share:
○ Low growth business:
■ Market share gained = volume reduction in competitor’s sales
■ Competitors will fight to prevent the throughput in their plans from
dropping
○ High growth business:
■ Market share gained steadily - securing the largest share of the growth
in the market: expanding capacity earlier than the competitors,
ensuring product availability, effective selling support
■ Competitors might not be aware or concerned because their volume
throughput is well maintained and they do not understand the strategic
importance of market share for long term profitability resulting from the
experience curve effect.
● The growth provides an opportunity for investment - invest in the business in order to
see it compound and return even larger amounts of cash at a later point in time.
○ The more it grows, the more investment it needs to maintain market share.
2
, Readings week 2
Importance of relative competitive position for cash generation
● Relative competitive position determines the rate at which the business will
generate cash.
● A measure of relative competitive position is relative market share:
○ market share in the business divided by that of the largest other competitor
The growth-share matrix
● Different financial characteristics -> different strategic options based on growth and
competitive position
● Stars: high growth and high share
○ Uses large amounts of cash to maintain position
○ Leaders in the business and should generate large amounts of cash
○ In balance on net cash flow
○ Can be self-sustaining in growth terms
○ Best profit growth and investment opportunities available to the company
○ When growth slows: if the share has been maintained, the star becomes a
cash cow and generate large cash returns
● Cash cows: low growth, high share
○ Superior market positions and low costs
○ Profits and cash generation high, reinvestment needs low (because of the low
growth)
○ Pay the dividends and interest, provide debt capacity, pay for the company
overhead and provide cash for investment elsewhere in the business
○ Can be seen as the foundation
● Dogs: low growth, low share
○ Poor competitive position means poor profits
○ Low growth means little potential for gaining sufficient share to achieve a
viable cost position
3
Readings week 2
Paper 1: Strategy and the “business portfolio” - Hedley, B. (1977)
Paper 2: From competitive advantage to corporate strategy - Porter, M. (1987)
Paper 3: The core competence of the corporation - Prahalad, C.K. and G. Hamel (1990)
Notes seminar week 2
1
,Readings week 2
Paper 1 - Strategy and the “business portfolio”
Hedley, B. (1977)
Corporate strategy = portfolio management. SBU’s operate independently and often in
unrelated businesses. Companies should assess these different SBU’s and formulate
tailored strategies for each business unit based on their position in the growth-share matrix.
Most companies (with the exception of the smallest and simplest companies) comprise
multiple businesses. In determining the strategy, one should consider the different
businesses or product-market segments as distinct economically and should look at:
1. Relative competitive position
2. Growth
The key factor determining strategy success for each individual business segment = relative
competitive position (see Porter’s five forces article)
Focusing on the relative competitive position as a strategic goal -> the basis for effective
long-range planning even when there is considerable environmental uncertainty.
Business portfolio = A business portfolio is a group of products, services, and business units
that conform to a given company and allows it to pursue its strategic goals
The effect and value of growth
● Growth considerations affect the rate at which businesses will use cash.
● Growth in a business is a major factor influencing the likely ease (and cost) of gaining
market share:
○ Low growth business:
■ Market share gained = volume reduction in competitor’s sales
■ Competitors will fight to prevent the throughput in their plans from
dropping
○ High growth business:
■ Market share gained steadily - securing the largest share of the growth
in the market: expanding capacity earlier than the competitors,
ensuring product availability, effective selling support
■ Competitors might not be aware or concerned because their volume
throughput is well maintained and they do not understand the strategic
importance of market share for long term profitability resulting from the
experience curve effect.
● The growth provides an opportunity for investment - invest in the business in order to
see it compound and return even larger amounts of cash at a later point in time.
○ The more it grows, the more investment it needs to maintain market share.
2
, Readings week 2
Importance of relative competitive position for cash generation
● Relative competitive position determines the rate at which the business will
generate cash.
● A measure of relative competitive position is relative market share:
○ market share in the business divided by that of the largest other competitor
The growth-share matrix
● Different financial characteristics -> different strategic options based on growth and
competitive position
● Stars: high growth and high share
○ Uses large amounts of cash to maintain position
○ Leaders in the business and should generate large amounts of cash
○ In balance on net cash flow
○ Can be self-sustaining in growth terms
○ Best profit growth and investment opportunities available to the company
○ When growth slows: if the share has been maintained, the star becomes a
cash cow and generate large cash returns
● Cash cows: low growth, high share
○ Superior market positions and low costs
○ Profits and cash generation high, reinvestment needs low (because of the low
growth)
○ Pay the dividends and interest, provide debt capacity, pay for the company
overhead and provide cash for investment elsewhere in the business
○ Can be seen as the foundation
● Dogs: low growth, low share
○ Poor competitive position means poor profits
○ Low growth means little potential for gaining sufficient share to achieve a
viable cost position
3
