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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
A revised edition of the bestselling classic
This book covers strategy for organisations that operate more than one business, a situation commonly referred to as group-level or corporate-level strategy. Corporate-level strategy addresses four types of decisions that only corporate-level managers can make: which businesses or markets to enter, how much to invest in each business, how to select and guide the managers of these businesses, and which activities to centralise at the corporate level. This book gives managers and executive students all the tools they need to make and review effective corporate strategy across a range of organisations.
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Veröffentlichungsjahr: 2014
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Table of Contents
Endorsements
Title page
Copyright page
Preface
Acknowledgements
PART I: Introduction and History
Chapter One: Strategy for the Corporate Level: Summary of the Main Messages
Blacklock
Portfolio Strategy
Management (or Parenting) Strategy
Notes
Chapter Two: Some History: From Boston Box to Three Logics that Drive Corporate Action
The Professional Management School
The Portfolio Planning School
The Synergy School
The Capital Markets School
Towards a Synthesis
Conclusions
Notes
PART II: Portfolio Strategy: Where to Invest and What to Avoid
Chapter Three: How to Find Good Businesses and Avoid Bad Businesses
Market Profitability
Competitive Advantage
Growth
Size
What to Plot in the Matrix
Notes
Chapter Four: How to Make Businesses More Successful
What Is Value?
The Cost of Corporate Headquarters
The Heartland Matrix
Using the Heartland Matrix to Guide Strategy
Combining the Heartland and Business Attractiveness Matrices
Note
Chapter Five: How to Buy Low and Sell High
Are There Good Reasons Why Capital Markets Might Misprice This Business?
Do You Have the Superior Insight and Capabilities Required to Take Advantage of Any Mispricing?
A Common Pitfall in Looking For Mispricing Opportunities
Does the Financial Analysis Suggest That the Level of Mispricing Is Significant?
Fair Value Matrix
Using Capital Markets Logic Proactively
Notes
Chapter Six: Making Decisions about Where to Invest and What to Avoid
Decision Making When Logics Conflict
Running the Numbers
Notes
PART III: Ways of Adding and Subtracting Value from Corporate Headquarters
Chapter Seven: Ten Sources of Value from Direct Influence
People Decisions
Strategies
Targets
Performance Management
Policies and Standards
Relationships
Technology or Products
Expertise
Brand
Financial Engineering
Vertical Value Mirages
When Added Value Is Real
Chapter Eight: Nine Sources of Value from Coordinating across Business Divisions
One Face to the Customer
Cross-Selling
Economies of Scale
Shared Resources
Multipoint Competition
Vertical Integration
Sharing Knowledge and Good Practice
New Business Development
Risk Management
Horizontal Added Value Mirages
Notes
Chapter Nine: Eight Ways Headquarters can Destroy Value
How Much Value can be Subtracted?
First Do No Harm
Sources of Subtracted Value
Misleading Strategic Guidance
Inappropriate Performance Targets
Inappropriate Capital Constraints
Inappropriate Policies and Constraints
Poor Quality People Decisions
Misguided Synergy Projects
Inefficient Central Services
Delays and Time Wasting
Reducing the Risk of Subtracted Value
Notes
Chapter Ten: How to Identify Sources of Added Value for Your Company
Opportunity-to-Add-Value Analysis – Bottom Up
Opportunity-to-Add-Value Analysis – Top Down
Note
PART IV: Management Strategy: How to Structure, How Much to Centralise and How to Grow the Business Divisions
Chapter Eleven: Structuring the Organisation into Businesses and Divisions
What is a Business Unit or Business Division?
Strategic Business Units
Strategic Groups
Three Ways to Structure
Choosing the Right Structure
Customising the Divisional Structure
Matrix Structures
Distinguishing Headquarters from Divisions
Notes
Chapter Twelve: Corporate-level Strategy in Integrated Companies – The Apple Example
Integrated Organisations
Apple
Does Corporate-level Strategy Analysis Contribute any Insights that would be Unlikely to Surface from Business Strategy Analysis?
Notes
Chapter Thirteen: How Much to Centralise: Designing Corporate Headquarters
Step 1 – Governance and Compliance
Step 2 – Added Value
Small Headquarters or Large Headquarters
Step 3 – Clarifying Relationships
Step 4 – Document and Communicate the Design
Note
Chapter Fourteen: Developing New Capabilities at Corporate Headquarters
Why Headquarters Capabilities Can Be Misaligned
Why Is It so Difficult?
But Some Companies Do Develop New Headquarters Skills
How Should Companies Develop New Headquarters Skills?
When It Is Best to Sell Rather Than Develop New Skills
Notes
Chapter Fifteen: Encouraging Synergy and Cooperation across Business Divisions
Why Is Synergy so Difficult?
How to Be Sensible about Synergy
Notes
PART V: Retrospective
Chapter Sixteen: Lessons from 20 Years of Consulting Experience
Thoughts that Get in the Way
Tricky Situations
Simple Tips
Appendix: The Links between International Strategy and Corporate-level Strategy
International Strategy and Corporate-Level Strategy
Six Issues in International Strategy
Drivers of International Business Activity
Drivers of Internationalisation in Specific Industries
Choice of Suitable International Locations: markets
Choice of Suitable International Locations: internal Activities
Choice of Suitable Ownership Structures
Overall Management of International Operations
Notes
Index
End User License Agreement
List of Tables
Table 4.1 Comparing critical success factors (example)
Table 13.1 Table showing headquarters role against added value
List of Illustrations
Figure 1.1: Blacklock organisation structure (simplified)
Figure 1.2: Business Attractiveness matrix
Figure 1.3: The Heartland matrix
Figure 1.4: Fair Value matrix
Figure 2.1: Experience curve: costs decline with cumulative experience (steam turbine production cost example, 1946–1963)Source: Adapted from The Experience Curve-Reviewed (Part III) © 1973, The Boston Consulting Group
Figure 2.2: The Growth Share matrixSource: Adapted from Strategy in the 1980s © 1981, The Boston Consulting Group
Figure 2.3: The Competitive Environments matrixSource: Adapted from The BCG Portfolio Matrix from the Product Portfolio Matrix © 1970, The Boston Consulting Group
Figure 2.4: The GE or McKinsey matrix
Figure 3.1: Differences in market or industry profitability
Figure 3.2: The Business Attractiveness matrix
Figure 3.3: Business Attractiveness matrix for Hamworthy
Figure 3.4: Why grow? $100 growing at 5%, 10% and 15% for 10 years
Figure 3.5: Where will your growth come from?
Figure 3.6: Business Attractiveness matrix for Hamworthy with growth added
Figure 3.7: Business Attractiveness matrix for Hamworthy with size added
Figure 4.1: Parent as value adding middleman
Figure 4.2: The Heartland matrix
Figure 4.3:
Figure 5.1: Fair Value matrix
Figure 6.1: Many different combinations of “green, red, amber” possible
Figure 6.2: You can add value to an unattractive business
Figure 6.3: Attractive business where you do not add value
Figure 6.4: An attractive business to which you add value, but which is overpriced in capital markets
Figure 6.5: An unattractive business from which you subtract value, but which is priced below NPV
Figure 6.6: Calculating the net present value of retaining a business
Figure 9.1: Statements on subtracted value in BCG research
Figure 10.1: Opportunities to add value – bottom-up analysis
Figure 10.2: Sources of horizontal added value
Figure 10.3: Common opportunities-to-add-value
Figure 10.4: The value staircase
Figure 10.5: Value added table
Figure 11.1: Map of strategic groups in car assembly
Figure 11.2: Three ways to structure operating activities
Figure 11.3: CIW's organisation changes (simplified)
Figure 11.4: The four parts of P&G's structure in 2009
Figure 11.5: The management layers in P&G's matrix in 2009
Figure 12.1: Business Attractiveness – Apple
Figure 13.1: Typical governance and compliance functions*
Figure 13.2: Ready reckoner for compliance and governance staff
Figure 13.3: A way of drawing organisation models
Figure 13.4: CIW organisation model
Figure 13.5: European retailer – group structure
Figure 13.6: HR function
Figure 14.1: Heartland matrix
Figure 15.1: Framework for choosing interventions
Figure A1.1: Michael Porter's National Diamond framework
Guide
Cover
Table of Contents
Start Reading
Preface
CHAPTER 1
Index
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“Effectively adapting to the dramatic pace of change brought by the internet is now a necessary condition for survival and future business success, but the best strategic judgment will need to draw also on experience. In an intensively competitive and challenging environment, business decision-takers cannot afford to disregard the lessons of the past, including mistakes that have been made before. This book Strategy for the Corporate Level, based on research into business experience over 25 years, gives authoritative guidance on how strategic decision-taking processes can be value-additive but also value-destructive. It is a rich quarry and ‘must read’ for those involved in the formation of strategy at both business unit and corporate level.”
Sir David Walker, Chairman, Barclays
“One of the most influential books I read as head of strategy for Clorox in 1994 was Corporate-Level Strategy: Creating Value in the Multibusiness Company. The entire concept of Parenting Advantage was a simple yet very compelling way to think about how the center adds value. With twenty more years of experience under my belt, I still have not found anything better – until this updated version.”
Dan Simpson, Chief Strategy Officer (retired), The Clorox Company
“As one who followed the authors' corporate strategy journey over the past 30 years I found in this book, which is sure to become a classic, the most comprehensive, practical and balanced approach to corporate-level strategy. By combining added value logic with business logic and capital markets logic, the authors offer concrete and tested guidance for those corporate and business managers willing to invest time in clarifying the main sources of added value and building them into their decisions and focus.”
Philippe Haspeslagh, Dean Vlerick Business School
“Too many companies still hang on to businesses they should sell to better owners. Too many companies still diversify unwisely in the name of growth, and make themselves unmanageable in the process. The authors have a deep understanding of these issues, and their book provides help and advice.”
Martin Taylor, Vice Chairman RTL Group, Member Bank of England Financial Policy Committee, previously Adviser to Goldman Sachs International and CEO, Barclays
“Campbell and Goold's Corporate Level Strategy introduced us to Parenting Advantage, one of the most useful business insights of recent years. Parenting Advantage is still one of the most important and least understood areas of strategy. In this excellent update they not only bring new examples and explanations on how corporate parents can add … and subtract … value but also they integrate Parenting Advantage with the better understood sources of value from business unit strategy and capital markets strategy. I highly recommend this book.”
Robin Buchanan, Chairman, Michael Page, previously Dean of London Business School and Senior Partner of Bain & Company
“Goold, Campbell and Alexander have been the thought leaders on Corporate-Level Strategy since they introduced the concept of ‘parenting advantage’ in 1994. We have used their recommendations and tools extensively and successfully over the years. The ideas helped us make important portfolio decisions and changed the way we manage the group. Now, with Whitehead, they have not only developed their work on parenting advantage, but have integrated this thinking with the more traditional concepts of business attractiveness and capital markets valuations. The new framework is a further step forward. I am sure it will impact our thinking and practice as much as their original ground breaking work.”
Paulo Azevedo, CEO, Sonae
“Corporate strategy is a subject often misunderstood by Boards around the world. While there is a plethora of books on business level strategy there are in my opinion very few that address the fundamentals of corporate-level strategy. Campbell and his co-authors are leading thinkers in this field and explain the concepts in a clear and practical way in this book – how the centre can really add value and also (importantly) how to avoid it destroying value! We derived immense benefit from applying these principles to our businesses in Africa.”
Dr Graham Edwards, Chief Executive, AECI (retired 2013)
“The authors have been pioneers in the field of corporate level strategy. With this book they share with us their rich experience gained in countless projects over more than two decades, and they give us new tools, which can help to conceptualize corporate-level work. This book is important reading not only for the top management team, but also for strategy officers and leaders of corporate functions.”
Prof. Dr Guenter Mueller-Stewens, IFB Institute of Management, University of St. Gallen
“Strategy for the Corporate Level is a particularly useful book for the many Asian companies that are now moving from an incoherent portfolio of unrelated businesses to creating an effective corporate strategy.”
George S. Yip, Professor of Strategy and Co-Director, Centre on China Innovation, China Europe International Business School
“Strategy for the Corporate Level highlights the challenge managers face when responsible for multiple activities. Strategy is as relevant for those in government as for those in business. In both areas, strategy can make things worse – subtract value, or make things better – add value. If you aspire to add value, please buy and read this book.”
William Dartmouth (The Earl of Dartmouth), Member of the European Parliament
“This book is concerned with a key issue in most developed economies; how best to manage large multi business businesses. It is based, not only on the authors' scholarly understanding of the field, but also the experience they have gained in working over three decades with executives in large corporations. The authors pose questions and challenges fundamental to corporate-level strategy and provide invaluable guidance to those who have to deal with such challenges. As such it is a book that all managers charged with managing multiple businesses, or those who aspire to do so, should read. The ground they cover is, however, significant not just to the executives who run such businesses but to all who work in them, invest in them or analyze and study them.”
Gerry Johnson, Emeritus Professor of Strategic Management, Lancaster University Management School and co-author of Exploring Strategy
“This work, the latest contribution to business strategy from the Ashridge Strategic Management Centre, distils the knowledge and insights from more than 20 years of research. It addresses two key questions – what businesses should a company invest in and how should they be managed. It is particularly relevant to managers of multi-divisional businesses, but it has much to offer for students of management and, indeed, all those who have to deal with questions of organisation design – in the public as well as the private sector. Reading this could save many thousands of pounds in consultants' fees.”
Philip Sadler CBE, Tomorrow's Company
This edition first published 2014
© 2014 by John Wiley & Sons, Ltd
First edition published 1994 under the title Corporate-Level Strategy.
Under the Jossey-Bass imprint, Jossey-Bass, 989 Market Street, San Francisco CA 94103-1741, USA
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Library of Congress Cataloging-in-Publication Data
Campbell, Andrew,
Strategy for the corporate level : where to invest, what to cut back and how to grow organisations with multiple divisions / Andrew Campbell, with Jo Whitehead, Marcus Alexander, and Michael Goold.
pages cm
Includes index.
ISBN 978-1-118-81837-4 (cloth)
1. Multiproduct firms—Management. 2. Diversification in industry. 3. Strategic planning. I. Title.
HD2756.C347 2014
658.4'012—dc23
2013050104
A catalogue record for this book is available from the British Library.
ISBN 978-1-118-81837-4 (hardback) ISBN 978-1-118-81836-7 (ebk)
ISBN 978-1-118-81835-0 (ebk)
Cover design: Dan Jubb
Preface
This book is the end of a long journey – one that started in 1983, when Michael Goold joined London Business School (LBS) from the Boston Consulting Group. As a member of the LBS faculty, Michael started research work on decision making in hierarchies. In 1984, Andrew Campbell joined Michael from McKinsey. At the time, the Centre for Business Strategy was led by Professor John Stopford and contained such modern-day luminaries as Gary Hamel and Rob Grant. It was a stimulating place to work.
Michael was trying to understand “strategic management” in multi-business companies: how do strategically managed companies make decisions and how different are companies that are not strategically managed? The work resulted in a book, Strategies and Styles, published in 1987, that categorised companies into strategically driven (Strategic Planning Style), financially driven (Financial Control Style) and somewhere in between (Strategic Control Style).
More important, looking back, was the discovery that the involvement of top managers can be positive, leading to better decisions, or negative, leading to worse decisions. Their influence, the research exposed, was significant and rarely neutral. Of course, in academic circles, it can take some years to discover something that every manager knows well: “your boss is influential, and his or her influence is not always positive”!
The research also resulted in a new contingency theory. The influence of top managers was more likely to be beneficial if the style matched the challenge facing the business. If the business was long term, like oil or pharmaceuticals, a Strategic Planning Style seemed to be more successful. If the business was short term, like bricks or rubber belting, a Financial Control Style seemed to be more successful.
However, it was the observation that top management's influence could be and frequently was negative that spurred further work. At the time, in the late 1980s, a new phenomenon was occurring. Conglomerates were failing, and some large companies, like ICI and Courtaulds in the UK, were voluntarily getting smaller and breaking themselves up. What is more, this was creating value. The negative impact of some corporate groups was being fully exposed for the first time.
Michael and Andrew, by then joined by Marcus Alexander, and installed at Ashridge Business School, dug deeper into the conditions that caused added value and the conditions that caused subtracted value. We looked globally for the best managed corporate groups and uncovered a much finer grained contingency theory: corporate groups add value when the activities and influences from headquarters address the specific needs of each business division. They subtract value in pretty much all other circumstances.
This research made another significant contribution: the idea of “parenting advantage”. Corporate groups are competing with each other for the right to own businesses. They, therefore, need to add more value (or subtract less value) than rival parent companies to be sure of winning the competition. In other words, a parent company needs to have advantage over its rivals in just the same way that a business division needs to have advantage over its competitors.
The parenting advantage concept, published in Corporate Level Strategy in 1994, felt like the end of the journey. Michael, Andrew and Marcus began to turn their attention to related topics – how to create synergies between business divisions, the size of corporate centres, organisation design, growth into new businesses, international strategy, the role of headquarters functions, collaborating with business partners, and why capable people sometimes make stupid decisions.
At the same time, however, we continued to teach corporate-level strategy and to do consulting projects with companies all over the world. Nearly 20 years on, we now realise that 1994 was not the end of the journey. Our own thinking had moved forward without us fully realising it.
In 1994, we were reacting against Boston Consulting Group's matrix. We wanted to replace it with our “Ashridge Portfolio Display”. But over the years, we have realised that the two ideas are not in conflict. Corporate groups need good businesses and an ability to add value. Both are important. Both should be part of corporate-level strategy.
Jo Whitehead joined Ashridge more recently, bringing a different perspective partly from his 20 years in management consulting and partly from research he led on why companies appear to give less attention to “parenting advantage” thinking than seems appropriate. He noted that there are other legitimate drivers of corporate-level decisions. In addition to a desire to own “good businesses”, managers are also affected by the state of the capital markets. Seemingly sound strategies can become impossible to execute because capital markets are overvaluing or undervaluing some businesses. New strategies open up because certain types of businesses are available at good prices. Of course, capital market influences were always evident in our consulting work, but we had not previously tried to formalise this element into the way we developed corporate-level strategies.
This book, therefore, contains the current state of our collective thinking. It feels less like a call to arms and more like a description of the sensible path all companies need to follow. For sure, it will not be the end of the journey, but it feels like the journey will be smoother in the future than it has been in the past.
One part of the journey still to be completed is the synthesis of corporate-level strategy and international strategy. Many of the issues are the same, but the tools and language used are different. In the appendix, we (mainly Marcus) have made a stab at linking the two, with a particular desire to show where one discipline may be able to help the other. We have made a start but more work is needed.
We have enjoyed our journey and believe that we are now much closer to understanding how to help companies with multiple business divisions be more successful. We hope you will find our conclusions helpful.
Andrew, Jo, Marcus, Michael
Acknowledgements
This book is derived from 30 years of research, teaching and discussion. Along the way many, many people have contributed their stories and comments – far too many to list or even to remember!
We have, however, had particular support with case studies for this book, which we would like to acknowledge. Unfortunately, a few of the people who have helped us have chosen to be anonymous or their companies preferred not to be named, making it hard for us to thank them publicly. However, we can mention Henry Elkington, Chris Floyd, Paul Marsh, Phil Renshaw, Ian Weston and Sven Kunisch.
We would also like to acknowledge the support of our fellow directors at the Ashridge Strategic Management Centre – Felix Barber, Stephen Bungay, Anthony Freeling and Neil Monnery – and the contributions made over the years by the heads of strategy of the Centre's member companies. We also recognise the broader support provided by Ashridge Business School, led by Kai Peters.
But this book has more unacknowledged contributors than acknowledged. So we dedicate it to all those who have, over the years, provided their insights and anecdotes, in the belief that their contributions would help future generations. We might particularly mention Sir Christopher Hogg, Sir David Walker and Philip Sadler, who were instrumental in helping launch the Ashridge Strategic Management Centre in 1987. We hope this book justifies the faith they showed in us.
PART IIntroduction and History
Chapter OneStrategy for the Corporate Level: Summary of the Main Messages
Almost all companies need a strategy at the corporate level that is in addition to the strategies for products or markets or business divisions. So this book is for any manager with responsibilities for multiple business divisions. It is also for any student, adviser or more junior manager who wants to understand the challenges that corporate managers face and how they make decisions. The book will help answer two important questions that can only be addressed at the corporate level:
What businesses or markets should a company invest in, including decisions about diversifying into adjacent activities, about selling businesses, about entering new geographies or markets and about how much money to commit to each area of business?
How should the group of businesses be managed, including how to structure the organisation into divisions or units or subsidiaries, how to guide each division, how to manage the links and synergies between divisions, what activities to centralise or decentralise and how to select and guide the managers of these divisions?
We will refer to the first as “business” or “portfolio” strategy and the second as “management” or “parenting” strategy. The combination of these two types of strategy makes up corporate-level strategy.
Terms like business division, corporate headquarters or corporate-level strategy may suggest that this book is only relevant to managers running old-fashioned conglomerates. Far from it. This book is just as relevant for focused companies like Apple or Google. It is also relevant for public sector organisations, although much of the language used is commercial.
Blacklock1
In 2010, Blacklock Inc., a US engineering company, was being threatened with hostile takeover approaches from two companies: Vantex, another US engineering company, and Molsand, a Scandanavian company skilled at turnarounds and business improvement. Blacklock had two business divisions: Carlsen, a company manufacturing pumps, water equipment and air conditioners, and CIW, a company supplying wire, wire equipment and related consumables (see Figure 1.1).
Figure 1.1:
Blacklock organisation structure (simplified)
The Carlsen division was itself organised into business divisions. Some of the business divisions were focused on products, such as a type of equipment or conditioner. Some were focused on market segments, such as the utilities sector. Some were focused on regions, such as AsiaPac or Europe. All business divisions contained both manufacturing and sales. Linking the business divisions together were processes for sharing technology, manufacturing and purchasing as well as typical group functions, such as finance, HR and IT.
Some of Carlsen's business divisions also contained business units. For example, Danlogan, a division focused on conditioners and acquired in 2005, was divided into seven geographic regions. Also, the AsiaPac division included business units in Australia, China and South Asia.
CIW (originally Commercial & Industrial Wire) was also organised into business divisions. CIW's business divisions were geographic: Europe, North America, South America, China, India, etc. Each division had its own manufacturing and sales, but technology and product development were centralised at the CIW level, along with group marketing. Also at the CIW level were typical group functions covering finance, HR, IT, Safety and Lean.
At the Blacklock level, there were a handful of managers covering legal and financial issues.
For a company like Blacklock, this book is about the following questions. Should Blacklock own both Carlsen and CIW? What other business divisions should Blacklock seek to develop or acquire, if any? Should Blacklock resist the acquisition approaches by Molsand and Vantex? If not, which company should they seek to align with? What should be the main focus of the management team at the Blacklock level? Which activities should be centralised at the Blacklock level? How should Blacklock appoint, interact with and guide the management teams running Carlsen and CIW? How much collaboration should Blacklock encourage between Carlsen and CIW?
Blacklock is a parent company and this book is helpful to managers at this level in the organisation. But this book is just as relevant for managers at the Carlsen and CIW levels. The management teams of Carlsen and CIW are both running organisations with multiple business divisions. For Carlsen, this book will help with the following questions. Why does it make sense for Carlsen to own businesses involved in both pumps and conditioners? What other products should Carlsen seek to develop or acquire, if any? Does it make sense for Carlsen to be involved in bespoke equipment for the water industry as well as off-the-shelf equipment for general industrial uses? Is it necessary for Carlsen to have a global footprint? How should Carlsen group its business units into business divisions: by geography, by market sector, by product or by a combination of all of these? How should Carlsen manage the links and overlaps among divisions? Which activities should be centralised at the Carlsen level? How should Carlsen's top managers appoint, interact with and guide the managers running its business divisions?
Even within Carlsen, this book will help the management team running the Danlogan division or the Asia division. Why does it make sense for Danlogan to be a global company rather than focused in just one region? What other countries should Danlogan enter? How should Danlogan control or guide the links among its country-based business units? Which activities should be centralised at the Danlogan level? How should Danlogan appoint, interact with and guide the managers running its business units?
For CIW, this book helps answer similar questions. Should CIW own businesses in India and South America? What other geographies should CIW seek to expand into? Should CIW produce both wire products and wire equipment? What other products, if any, should CIW produce? Which activities should be centralised at the CIW level? Should CIW be organised into regional business units or should it be a global functional structure? How should CIW's top managers select, interact with and guide the management teams running its regional units?
Hence, it is important that readers do not presume that this book is only relevant for management teams at the parent company level of diversified companies. It is equally relevant for, and potentially has more to offer to, management teams trying to integrate closely linked businesses and for management teams running divisions that themselves contain sub-businesses.
Molsand was the winning bidder and acquired Blacklock. A similar set of questions then needed to be asked at the Molsand level. Why will Molsand benefit from paying a significant premium over the quoted market price for the Blacklock businesses? Why did it make sense for Molsand to outbid Vantex? Having acquired Blacklock, should Molsand retain the Blacklock level of management? Should Molsand keep both business divisions or should it sell either Carlsen or CIW or parts of these companies? Should Molsand retain Carlsen and CIW in their current shape or should Carlsen be divided, for example, into two companies each reporting directly to Molsand: conditioners and water equipment? What other companies should Molsand seek to acquire? What should be centralised at the Molsand level? (At the time of writing, Molsand had fewer than 20 people in its corporate centre.) How should Molsand appoint, interact with and guide the managers of Blacklock, Carlsen and CIW once they are under full ownership?
So, this book is for a wide range of managers and covers a wide range of decisions. Even a single hotel can be considered to have multiple businesses or profit centres – accommodation, business conferences, restaurant and spa – and hence needs a corporate-level strategy. Ashridge Business School, a charity, with revenues in 2012 of about £40 million, needs a corporate-level strategy. Ashridge has profit centres for open programmes, tailored programmes, conferences, hotel and facilities, qualification programmes, consulting and research centres. It needs a strategy that explains why these different activities are part of one organisation and how the leadership team is going to manage the organisation. So, this book is about more than diversified conglomerates, it is about the strategic thinking that is required to run any complex organisation.
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. Is the market attractive or unattractive and does the business have a competitive advantage or competitive disadvantage?
Added value logic
concerns the ability of corporate-level managers to add value to a business. Is this business one that corporate-level managers feel able to improve or create synergy with other businesses, or is it one that corporate-level managers may misjudge and damage?
Capital markets logic
concerns the state of the capital markets. Are prices for businesses of this kind inflated and hence likely to be higher than the net present value of future cash flows, or depressed and hence likely to sell at less than net present value?
These three logics are each important for making good portfolio decisions. If a business is likely to sell for more than it is worth (capital markets logic), there is little reason to buy and good reason to sell. You would only buy if you felt that the business would perform much better under your ownership (added value logic). If you are already in the business, you might consider selling now or doubling your investment with a view to selling soon (capital markets logic).
If a business is in a low margin industry and has a significant competitive disadvantage (business logic), you are likely to want to sell it or close it, unless you can help the business overcome its disadvantage or improve the margins in its industry (added value logic) or unless you believe that owning the business adds value to your other businesses (added value logic), or unless the price you can sell it for is less than the value of continuing to own it (capital markets logic).
If a business is in a high growth market and is earning high margins (business logic), you are likely to want to invest in it, unless you believe that you are a bad owner of the business (added value logic) or you could sell it for significantly more than it is worth to you (capital markets logic).
If a business is one you are able to significantly improve or one that will add value to your existing businesses (added value logic), you are likely to want to invest in it or acquire it. Even if it is likely to sell at a price that is higher than the value of cash flows it generates (capital markets logic), you are still likely to want to retain the business.
Business Logic
Business logic looks at the market the business is competing in and the position the business has in that market. The core thought is that a company should aim to own businesses in attractive markets and that have significant competitive advantage. These businesses are highly profitable. This analysis – market attractiveness and competitive advantage – is part of the normal work done for business-level strategy. Hence, business logic is the main area of overlap between business-level strategy and corporate-level strategy: it is a tool used by both disciplines.
The attractiveness of a market can be assessed by calculating the average profitability of the competitors in the market. If average profitability is significantly above the cost of capital, the market is attractive. If average profitability is significantly below the cost of capital, the market is unattractive. Michael Porter, the Harvard Business School strategy guru, developed a framework – the 5-Forces framework – that summarises the factors that drive average profitability. He identified competitive rivalry, the power of customers, the threat of substitutes, the power of suppliers and the threat of new entrants as the five forces that influence the average profitability of a sector.
Of course, the attractiveness of a market to a particular company may be influenced by factors other than average profitability. Growth is typically an important factor to most management teams. Size of the market is typically another factor. Individual companies may want to develop their own measures of market attractiveness.
The other dimension, competitive advantage, can be assessed using relative profitability: the profitability of your business versus the average competitor in the market. If your business is more profitable than the average, it is likely to have a competitive advantage. If your business is less profitable than the average, it is likely to have a competitive disadvantage. Competitive advantage may be created by many factors, such as technology or customer relationships or scale economies. Relative profitability captures the result of all these factors.
These two measures – the average profitability of the competitors in the market and the relative profitability of your business versus the average – are good surrogates for market attractiveness and competitive position. They can be combined into a matrix – the Business Attractiveness matrix (see Figure 1.2). This matrix is similar to the McKinsey/GE matrix described in most textbooks. Business units that plot in the top right corner of the matrix are most attractive and those in the bottom left are least attractive. In broad terms, companies should look to hold onto or acquire businesses that are to the right of the central diagonal, and exit or restructure businesses that are to the left of the central diagonal.
Figure 1.2:
Business Attractiveness matrix
Business logic steers companies towards investing in attractive businesses: those in markets where most competitors make good profits and where the business has higher profits than the average. Mexican Foods2 owned a portfolio of foods businesses with a bias towards private-label products. These are products that sell under a retailer's brand rather than a manufacturer's brand. The management team predicted that margins on private-label businesses were likely to be squeezed in the future. The problem was the power of the major retailers, as well as the large number of small low cost competitors. Profitability for the average competitor was already low and would be likely to fall.
Branded products, in contrast, would be likely to provide good margins. There were fewer competitors in the branded sector, and, because the brand communicated directly with consumers, branded companies could resist the power of retailers. Mexican Foods owned one or two strong brands, which were well positioned in their product categories.
As a result of this assessment of the relative attractiveness of the two markets, senior managers decided to focus their investment on their strongest brands and look for bolt-on brands to acquire. Over time they decided to shift their portfolio towards brands and away from private label products.
Added Value Logic
Added value (or parenting) logic looks at the additional value that is created or destroyed as a result of the relationship between the business and the rest of the company. There are two kinds of added value. 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. Together they make up added value.
In commercial companies, added value is measured by looking at the impact on future cash flows. If the discounted value of future cash flows increases as a result of some headquarters initiative, value has been added. In public sector organisations or charities, added value is measured by a ratio such as cost per unit of benefit. If a headquarters initiative can lower costs for the same benefits or increase benefits for the same cost, the ability of the organisation to serve its beneficiaries has been increased: value has been added.
Value can be added or subtracted. Added value can come from wise guidance from headquarters managers or from a broad range of other sources, such as a parent company brand, the technical know-how of a central technology unit, relationships with important stakeholders, financial strength, etc. Subtracted value happens when headquarters provides less wise guidance, such as the setting of inappropriate targets or inappropriate strategies, or from a broad range of other sources, such as time wasting, inefficient central services, delayed decision making, inappropriate standardisation and poor people decisions.
The potential for added value and the risk of subtracted value can be combined to form a matrix – the Heartland matrix (see Figure 1.3). The issue at stake is the balance between the two types of value.
Figure 1.3:
The Heartland matrix
Each business unit is plotted on the matrix. Where the potential for the company to add value to the business unit is high and the risk that the company will subtract value from the business is low, it is plotted in the “heartland”. In other words there is a good fit between the business and the company.
If the risk of subtracted value is high and the potential for added value is low, the business is in “alien territory”. The fit is bad, and the company should almost certainly sell or close this business.
If the risk of subtracted value is low and the potential for added value is low, the business is “ballast”. The danger here is that the business will consume the scarce time of headquarters managers without resulting in any extra value. Unless headquarters managers can find ways to add value, these businesses are candidates for selling; but can easily be retained until an opportune moment arrives.
If the risk of subtracted value is high and the potential for added value is high, the business is a “value trap”: the subtracted value may well outweigh the added value. It is normally best to exit these businesses unless managers at the group level can find ways to reduce the risks of subtracted value, and hence raise the business into “edge of heartland”.
Added value logic steers companies towards investing in businesses that will benefit significantly from being part of the company or that will contribute significantly to the success of other businesses in the company.
Danaher, a diversified US company with a portfolio of businesses that mainly manufacture equipment, is an example of a company driven by added value logic. Danaher delivered over 25% annual share price growth from its founding in 1985 up to the economic crisis in 2008. The largest divisions focused on electronic test equipment, environmental test equipment and medical technologies.
Danaher acquired companies and improved them: more than 50 in the five years before 2008. The driving force was the Danaher Business System, an approach to continuous improvement based on the principles of lean manufacturing. As Larry Culp, CEO from 2001, explained, “The bedrock of our company is the Danaher Business System (DBS). DBS tools give all of our operating executives the means with which to strive for world-class quality, delivery and cost benchmarks, and deliver superior customer satisfaction and profitable growth.”3
Following acquisition, the new business would feel the influence of Danaher immediately. Within one month, the management team would have an Executive Champion Orientation. This involved getting the top 50 managers in the business to map out the processes in the business and come up with targets for improvement. The improvement targets typically ranged from 20 to 100%.
The next influence came from redoing the business's strategic plan. Particular attention would be given to gains in market share and to understanding why some customers buy from competitors. Typically, the new plan involved doubling the business's organic growth ambitions.
At the same time Danaher would demand a review of people. Most businesses tolerate some managers who are capable at their jobs but not drivers of change and improvement. Danaher would provide replacements from other businesses in the group.
The final influence would come from the Danaher system for ensuring that plans are executed – Policy Deployment. Each manager would be given a set of metrics that linked directly to the plan. The metrics would be pinned to his or her door (or displayed in the work area) and updated monthly. This accelerated the pace of change.
One further source of added value came from bolt-on acquisitions. Danaher liked to acquire businesses that could create a platform for bolt-on acquisitions. A large portion of the back office costs in these bolt-on acquisitions could be saved. There were also often savings in sales and distribution costs as well as opportunities to consolidate manufacturing sites.
Apple is a more integrated company than Danaher. The added value of corporate headquarters, while Steve Jobs was leading Apple, was considerable. Headquarters led the product development process, controlling the heart of Apple's success. Headquarters looked after the brand. Headquarters also ensured that different products shared sales channels and supporting services, such as the retail stores, and online applications and services, such as the Apps Store.
With this degree of centralisation, Apple needed to have a set of product lines, each of which could benefit from its added value. At the time of writing, Apple was expected to enter a new business – television. Added value logic would require Tim Cook, the new CEO, to ask whether television products would be likely to gain as much advantage as phones and tablets from Apple's product development skills, brand, distribution channels and online services. He would also need to ask whether the business model in television is significantly different from that of phones or computers, and, hence, whether there is a significant risk of subtracted value. Is television heartland, edge of heartland or value trap for Apple?
Apple is a particularly interesting example, which we will come back to in Chapter 12. The involvement of headquarters at Apple was so great that it would be reasonable to think of Apple as a single business rather than as a corporate group. However, we will show how corporate-level strategy analysis is as helpful in a company like Apple as it is in a more divisionalised company like Danaher.
Capital Markets Logic
Capital markets logic looks at the market for buying and selling businesses. At certain times, businesses are given low values by the capital markets: there are few buyers and many sellers. This was true for oil refineries during the 1990s, due to excess capacity, and for regional food brands from the late 1980s, because the major food companies were focusing on international brands. At other times, businesses have high values: there are many buyers and few sellers. This was true for dot.com businesses and for mobile telephone licences in the 1990s.
As a result of these market trends, businesses can have market values that differ from the discounted value of expected future cash flows. A difference between market value and discounted value happens partly because some buyers or sellers are not knowledgeable about likely cash flows or appropriate discount rates, and partly because cash flows are not the only factor influencing decisions to buy or sell. Managers can have “strategic” reasons for buying or selling that cause them to pay a price or accept a price that is above or below the discounted cash flow value (net present value).
Figure 1.4 plots the market value against the net present value (NPV) of owning the business. If the two values diverge outside of a corridor where market value and NPV are approximately equal, there are important consequences for portfolio decisions. When the market value is significantly above the NPV, companies should avoid buying and consider selling. When the market value is significantly below NPV, companies should consider buying and avoid selling.
Figure 1.4:
Fair Value matrix
Capital markets logic steers companies towards buying businesses that are cheap and selling businesses that are expensive. It is probably most influential in affecting the timing of portfolio decisions, rather than in being a prime determinant of the composition of the portfolio. However, Associated British Foods (ABF), a UK-based conglomerate, is an example of a company that made a number of significant decisions primarily driven by capital markets logic.
ABF started as a bakery in Canada in the 1890s.4 It grew first as a worldwide bakery group and then, in the 1960s, diversified more widely. In the financial crisis of the 1970s, the company split into two and the UK arm became ABF. Gary Weston, the CEO and a member of the founding Weston family, then built ABF through a series of well-timed acquisitions and disposals.
He sold Premier Milling in South Africa before the apartheid regime resulted in negative sentiment for South African businesses. He sold Fine Fare, a grocery retailer, before the race between Sainsbury's and Tesco to build out-of-town stores reduced the prices of high street retailers. He bought Beresford, the owner of British Sugar, at a point when its stock price was low. Conglomerates such as Beresford were out of favour and the profits from sugar were temporarily depressed. A few years later, the annual profit from British Sugar, a division of Beresford, was nearly the same as the price he had paid for the whole company. As one manager explained, “The basic logic of this portfolio is that they were businesses that were cheap.”
In the last 10 years, ABF has expanded its branded grocery business acquiring brands from companies like Unilever. ABF spotted that major companies, like Unilever and P&G, were increasingly focusing on their large international brands. This caused them to sell regional brands and smaller international brands. But, there were not many buyers for these brands, enabling ABF to acquire them at attractive prices.
The three logics – business logic, added value logic and capital markets logic – are best used in combination. Mexican Foods, for example, was driven by business logic, when deciding to focus on brands. But managers needed to consider the other logics as well. Using added value logic, managers recognised that branded businesses were a potential value trap because most of the senior managers had cut their teeth on private-label businesses. So they considered what they would need to do at the group level in order to reduce the risk of subtracted value. They also wanted to increase the amount of value they could add to branded businesses, so they decided to strengthen and centralise brand marketing.
Using capital markets logic, managers asked whether now would be a good time to buy branded businesses or sell private-label businesses. They decided not to sell the private-label businesses. Prices were too low: there were very few buyers. For the reverse reason, it proved hard to buy branded businesses at reasonable prices. Other food companies had done similar analyses about the prospects for branded businesses. As a result, the strategy to focus on brands became an organic growth strategy based on existing brands, and on creating new brands using competences from the private-label businesses.
Danaher also used the three logics to guide its acquisition decisions. While managers were interested in acquiring businesses that would respond to the DBS, business logic caused them to look particularly in markets that would allow high margins and for businesses that had strong competitive positions. As Larry Culp explained, Danaher looked to acquire the number one or two in large markets, or to acquire companies with significant market shares and high margins in fragmented markets. In these situations, their “lean” medicine proved to be particularly effective: they were good at tuning up sound businesses.
Danaher managers also used capital markets logic to guide their decisions. They avoided sectors such as communications equipment, because they were considered hot opportunities by other acquirers. They also made more acquisitions when stock markets were low, such as 2001–2005, than in the boom markets of 2006 and 2007.
ABF was also influenced by all three logics. While the main strategy was about buying cheap, ABF also focused on business logic. In the early 1980s, Gary Weston sold “any part of the business that was not generating cash”, and kept businesses, like Primark, that appeared to have a significant competitive advantage.
ABF also exploited added value logic. By bringing in new managers to British Sugar and raising performance targets, ABF more than doubled profits. By adding bolt-on brands to its Grocery Division, ABF exploited its international presence and back office platform. The bolt-on brands could be integrated without adding significant overheads.
Management (or Parenting) Strategy
Once portfolio decisions have been made (which businesses to invest in and how much to invest in each), managers at the corporate level need to decide how to manage the resulting portfolio. They need to decide how to structure the organisation into business divisions, what functions and decisions to centralise at the corporate level, who to appoint to the top jobs in the divisions and what guidance to give these managers in the form of strategic targets and controls.
The main logic that guides all of these decisions is the logic of added value. All these decisions should be guided by the objective of maximising the additional value created from owning multiple business divisions and minimising the negative aspects of creating layers of management above the level of the divisions.
In other words, decisions or activities should be centralised at the corporate level, if centralisation will improve overall performance. Targets should be set for divisions by corporate-level managers, if the targets will help division managers achieve more than they would have achieved without the targets. Decisions delegated to divisions should be influenced by corporate-level managers, if the influence can help improve the decisions or the motivation of the managers in the divisions.
Of course there is also a governance and compliance logic that determines the existence of some activities, like financial controls and tax management. These activities must be carried out at the corporate level in any responsible company. Headquarters managers must interact with the owners and with certain stakeholders, such as governments. The corporate level must ensure that financial controls are in place, that there is sufficient money available, that taxes are paid and that employees are acting within the law. Corporate-level managers must develop some business plan and share it with the board. Finally, the CEO and the board must appoint the heads of the businesses under their control.
In some industries, such as financial services, that are highly regulated, these governance and compliance activities can be significant, involving hundreds of central staff. However, in most companies these “required activities” are not the main role of headquarters managers. They are part of the management strategy at the corporate level, but they typically occupy only a small percentage of the managers at headquarters. The remainder of the people have jobs at the corporate level that are about adding value.
Typically, a corporate group will have three to seven major sources of corporate added value. This list will then guide all of the difficult decisions about what to centralise, how to organise, who to appoint and how to design group-level processes.
For example, if the main sources of added value are
investing in a company-wide brand,
creating a company-wide commitment to lean manufacturing and
helping business divisions grow in China,
there are implications for centralisation, organisation and processes.
First, the corporate level is likely to appoint some marketing people to look after the brand. These people will set policies for how the brand can be used and may require that decisions relating to the brand pass through their department. Their department is likely to be a central function so that it can gain authority from proximity to the CEO. But, this is not the only arrangement possible. Virgin's brand is managed by a separate company that licenses it to Virgin's businesses. In some companies, product brands that are used in more than one division are controlled by the lead division.
