CH1 Strategy for the corporate level: Summary of the main messages
Portfolio strategy
How should managers make decisions about which businesses, markets or geographies to invest in
and which to avoid, harvest or sell? There are three logics that guide these decisions:
• Business logic, concerns the sector or market each business competes in and the strength of its
competitive position
• Added value (or parenting) logic, concerns the ability of corporate-level managers to add value
to a business
• Capital markets logic, concerns the state of the capital markets.
Business logic is the main area of overlap between business-level strategy and corporate-level
strategy. The average profitability of the competitors in the market and the relative profitability of
your business vs. the average are good surrogates for market attractiveness and competitive
position.
Added value can come from the relationship between the business and its parent company - hence
the term "parenting". But value is also created or destroyed as a result of the relationship between
the sister businesses. The first type we can think of as vertical added value and the second type as
horizontal added value.
The potential for added value and the risk of subtracted value can be combined to form a matrix -
the Heartland matrix. The issue at stake is the balance between the two types of value.
NPV = Net present value
,Capital markets logic is probably most influential in affecting the timing of portfolio decisions, rather
than in being a prime determinant of the composition of the portfolio.
The three logics - business logic, added value logic and capital markets logic - are best used in
combination.
Management (or parenting) strategy
Decisions or activities should be centralised at the corporate level, if centralisation will improve
overall performance. This is part of the logic of added value. There is also a governance and
compliance logic that determines the existence of some activities, like financial controls and tax
management. Corporate-level managers must develop some business plan and share it with the
board.
Typically, a corporate group will have three to seven major sources of corporate added value.
Management or parenting strategy is mainly about governance and major sources of added value.
The problem is that activities that distract attention from the major sources can easily generate
opportunity costs that are greater than the benefits. The more activities that are centralised, the
more initiatives that are led by headquarters managers and the more headquarters managers
"interfere", the higher the risk of subtracted value.
One way to keep a check on the build-up of bureaucracy at corporate levels is to challenge all new
corporate level initiatives against three hurdles:
• Is the initiative a necessary part of governance or compliance?
• If not, is the initiative a necessary part of some major source of corporate added value?
• If not, does the initiative clearly add some value and have low risk of negative side effects?
Companies should aim to have a parenting advantage. The management strategy should include an
analysis of rival parents.
CH2 Some history: From Boston Box to three logics that drive corporate
action
Corporate-level strategy seeks to answer to questions: How is a portfolio of business assembled, and
how are these businesses managed for maximum performance?
,The "professional management” school proposes that it makes sense to have multiple businesses in
one company when the leaders of the company have superior professional management skills.
Corporate-level strategy, according to this school, is about ensuring that the top team has the latest
management techniques. Using these techniques, the company can then expand into attractive
sectors or acquire businesses that are less well managed.
The "portfolio planning" school proposes that it makes sense to develop portfolios that deliver a
combination of growth, profitability and cash flow. Corporate strategy is therefore about buying and
selling businesses to maintain an optimal, attractive mix. It also involves directing resources towards
those businesses, which are, or are on their way to being, the most attractive.
The "synergy school" proposes that it makes sense to have multiple businesses in one company
when the businesses can be linked together to create extra performance through "synergies".
Corporate strategy is therefore about identifying businesses where there are opportunities for
synergy and developing skills at making the linkages between the businesses work.
The "capital markets" school proposes that it makes sense to buy businesses which are underpriced
and sell them when they are overpriced. Corporate strategy is therefore about buying and selling
businesses, or stakes in businesses, at the right time.
The professional management school
General management skills
During the 1950s and 1960s Peter Drucker argued that intuitive management was no longer
sufficient. He encouraged managers to study the principles of management and to acquire
knowledge and to analyse their performance systematically. These skills made it possible to create
conglomerates.
Diversification will because of know how develop in further diversification. In 1970, a lot of
conglomerates ran out of cash because of a financial crisis. Belief that professional managers could
make any business perform had been lost.
The concept of strategy
Strategic planning rose in the 1970s. Strategy was more than long-range planning or objective
setting; it was a way of deciding the basic direction of the company and preparing it to meet future
challenges. Because of the cash crisis allocating resources across a portfolio of business became a
critical activity. It became synonymous with corporate-level strategy: and a preoccupation of CEOs
and CFOs.
Financial theory saw the manager's task as choosing projects with the highest returns. Corporate
reality is where all proposed projects showed at least the return required by the corporate hurdle
rate for investment. There were no techniques to help.
The portfolio planning school
To help companies with the resource allocation challenge, academics and consulting companies
developed portfolio planning tools. The precursor of these portfolio planning tools was developed by
the Boston Consulting Group (BCG). The experience curve proposed that costs come down in a
predictable way as a company gains experience in producing a particular product. Their message was
that businesses needed to aim for market leadership, which would lead to greater volumes and
greater cumulative experience. The measure they used was relative market share (the market share
, of the business divided by either the market share of the leading company or, if the business was the
market leader, by the market share of the second largest player).
The growth share matrix
BCG then developed the famous BCG matrix.
The BCG matrix assumed that cumulative experience drove competitive advantage and thus business
attractiveness. Hence, market share was the key to success. One study suggested that the effect of
the experience curve was only 20-40% of that predicted by BCG.
A further refinement to portfolio thinking at BCG came from the insight that the ability to build
competitive advantage is not equally prevalent in all industries. The BCG Environments matrix (1981)
proposed that there are four different types of industry, based on the potential size of the
competitive advantage available to leaders, and how many ways there are to create advantage.
The GE or McKinsey matrix
Portfolio strategy
How should managers make decisions about which businesses, markets or geographies to invest in
and which to avoid, harvest or sell? There are three logics that guide these decisions:
• Business logic, concerns the sector or market each business competes in and the strength of its
competitive position
• Added value (or parenting) logic, concerns the ability of corporate-level managers to add value
to a business
• Capital markets logic, concerns the state of the capital markets.
Business logic is the main area of overlap between business-level strategy and corporate-level
strategy. The average profitability of the competitors in the market and the relative profitability of
your business vs. the average are good surrogates for market attractiveness and competitive
position.
Added value can come from the relationship between the business and its parent company - hence
the term "parenting". But value is also created or destroyed as a result of the relationship between
the sister businesses. The first type we can think of as vertical added value and the second type as
horizontal added value.
The potential for added value and the risk of subtracted value can be combined to form a matrix -
the Heartland matrix. The issue at stake is the balance between the two types of value.
NPV = Net present value
,Capital markets logic is probably most influential in affecting the timing of portfolio decisions, rather
than in being a prime determinant of the composition of the portfolio.
The three logics - business logic, added value logic and capital markets logic - are best used in
combination.
Management (or parenting) strategy
Decisions or activities should be centralised at the corporate level, if centralisation will improve
overall performance. This is part of the logic of added value. There is also a governance and
compliance logic that determines the existence of some activities, like financial controls and tax
management. Corporate-level managers must develop some business plan and share it with the
board.
Typically, a corporate group will have three to seven major sources of corporate added value.
Management or parenting strategy is mainly about governance and major sources of added value.
The problem is that activities that distract attention from the major sources can easily generate
opportunity costs that are greater than the benefits. The more activities that are centralised, the
more initiatives that are led by headquarters managers and the more headquarters managers
"interfere", the higher the risk of subtracted value.
One way to keep a check on the build-up of bureaucracy at corporate levels is to challenge all new
corporate level initiatives against three hurdles:
• Is the initiative a necessary part of governance or compliance?
• If not, is the initiative a necessary part of some major source of corporate added value?
• If not, does the initiative clearly add some value and have low risk of negative side effects?
Companies should aim to have a parenting advantage. The management strategy should include an
analysis of rival parents.
CH2 Some history: From Boston Box to three logics that drive corporate
action
Corporate-level strategy seeks to answer to questions: How is a portfolio of business assembled, and
how are these businesses managed for maximum performance?
,The "professional management” school proposes that it makes sense to have multiple businesses in
one company when the leaders of the company have superior professional management skills.
Corporate-level strategy, according to this school, is about ensuring that the top team has the latest
management techniques. Using these techniques, the company can then expand into attractive
sectors or acquire businesses that are less well managed.
The "portfolio planning" school proposes that it makes sense to develop portfolios that deliver a
combination of growth, profitability and cash flow. Corporate strategy is therefore about buying and
selling businesses to maintain an optimal, attractive mix. It also involves directing resources towards
those businesses, which are, or are on their way to being, the most attractive.
The "synergy school" proposes that it makes sense to have multiple businesses in one company
when the businesses can be linked together to create extra performance through "synergies".
Corporate strategy is therefore about identifying businesses where there are opportunities for
synergy and developing skills at making the linkages between the businesses work.
The "capital markets" school proposes that it makes sense to buy businesses which are underpriced
and sell them when they are overpriced. Corporate strategy is therefore about buying and selling
businesses, or stakes in businesses, at the right time.
The professional management school
General management skills
During the 1950s and 1960s Peter Drucker argued that intuitive management was no longer
sufficient. He encouraged managers to study the principles of management and to acquire
knowledge and to analyse their performance systematically. These skills made it possible to create
conglomerates.
Diversification will because of know how develop in further diversification. In 1970, a lot of
conglomerates ran out of cash because of a financial crisis. Belief that professional managers could
make any business perform had been lost.
The concept of strategy
Strategic planning rose in the 1970s. Strategy was more than long-range planning or objective
setting; it was a way of deciding the basic direction of the company and preparing it to meet future
challenges. Because of the cash crisis allocating resources across a portfolio of business became a
critical activity. It became synonymous with corporate-level strategy: and a preoccupation of CEOs
and CFOs.
Financial theory saw the manager's task as choosing projects with the highest returns. Corporate
reality is where all proposed projects showed at least the return required by the corporate hurdle
rate for investment. There were no techniques to help.
The portfolio planning school
To help companies with the resource allocation challenge, academics and consulting companies
developed portfolio planning tools. The precursor of these portfolio planning tools was developed by
the Boston Consulting Group (BCG). The experience curve proposed that costs come down in a
predictable way as a company gains experience in producing a particular product. Their message was
that businesses needed to aim for market leadership, which would lead to greater volumes and
greater cumulative experience. The measure they used was relative market share (the market share
, of the business divided by either the market share of the leading company or, if the business was the
market leader, by the market share of the second largest player).
The growth share matrix
BCG then developed the famous BCG matrix.
The BCG matrix assumed that cumulative experience drove competitive advantage and thus business
attractiveness. Hence, market share was the key to success. One study suggested that the effect of
the experience curve was only 20-40% of that predicted by BCG.
A further refinement to portfolio thinking at BCG came from the insight that the ability to build
competitive advantage is not equally prevalent in all industries. The BCG Environments matrix (1981)
proposed that there are four different types of industry, based on the potential size of the
competitive advantage available to leaders, and how many ways there are to create advantage.
The GE or McKinsey matrix
