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Module: Strategic management (marketing, enterprise and tourism)
Module no/no of students: UMSD37-20-3
ISBN/ISSN: 9780273651123
Extract Author: Gerry Johnson and Kevan Scholes.
Extract title: Corporate-level Strategy
Book or Journal Title: Exploring Corporate Strategy, Gerry Johnson and
Kevan Scholes
Edition or Volume no/issue: 6th edn
Publisher: Pearson Education Ltd, Harlow Essex, 2002
Page Numbers: 267 - 314

Corporate-Level Strategy
_1----------------------
After reading this chapter you should be able to explain:
What is meant by the corporate parent in a multi-business organisation.
The arguments for and against the value-adding capabilities of corporate
parents.
Different rationales of corporate parents, including the portfolio manager,
the restructurer, the synergy manager and the parental developer.
Different bases for explaining the portfolio logic of corporations; for
example, in terms of balance, business attractiveness and 'fit'; and different
frameworks for thinking about these.
The differences between related and unrelated diversification; and the
links between diversification and corporate performance.
The importance of the compatibility of the corporate parenting rationale,
the logic of the corporate portfolio, the nature and extent of diversification
and the nature of corporate control exercised by the parent.
6.1 INTRODUCTION
The central concern in this chapter is the strategic decisions at the corpor-
ate level of organisations; decisions which may affect many business units.
Managers at this level are acting on behalf of shareholders, or other stake-
holders, to provide services and, quite possibly, strategic guidance to business
units which, themselves, seek to generate value by interacting with customers
(the subject of Chapter 7). In these circumstances a key question is to what
extent and how might the corporate level add value to what the businesses do;
or at the least how it might avoid destroying value.
Exhibit 6.1 represents a simplified multi-business company structure. It
shows a number of business units grouped within divisions and a corporate
centre or head office providing, perhaps, legal services, financial services and
the staff of the chief executive. There are different views as to what is meant
by corporate strategy and what, indeed, represents corporate as distinct from
bUsiness-level strategy. Here the view is that anything above the business-unit
268 PART III .. STRATEGIC CHOICES
The multi-business company
---
Corporate parent
Centre
Divisions
Businesses
The levels of management
above that of the business
units and therefore without
direct interaction with buyers
and competitors are referred
to as the corporate parent
level represents corporate activity and is the subject of the discussion in
this chapter. In this chapter the levels of management above that of business
units and therefore without direct interaction with buyers and competitors
are often referred to as the corporate parent. So, for example, the divisions
within a corporation which look after several businesses act in a corporate
parenting role. Of course it could be that there are parts of the corporate cen
tre that do indeed interact with customers: a central call centre or a customer
service department in a commercial organisation; or a special crime squad
or specialist helicopter unit in a police force, for example. But where this is
the case the same'lessons apply as discussed in Chapter 7 relating to business
units.
The relevance of this discussion does not only relate to large conglomerate
businesses. Even small businesses may consist of a number of business units;
for example, a local builder may be undertaking contract work for local gOY-
ernment, work for industrial buyers and for local homeowners: not only are
these different market segments, but the mode of operation and competences
required for competitive success are also likely to be different. Moreover, the
owner of that business has to take decisions about the extent of investment
and activity in each segment. Public sector organisations such as local govern-
ment or health services also provide different services, which correspond to
business units in commercial organisations. So corporate level strategy is reley-
ant to them too.
The discussion on corporate level strategy begins in section 6.2 by con-
sidering the arguments which have been advanced as to why and hoW a
corporate parent might or might not be able to create value or add value to the
business units within it. The chapter then moves on to consider this in more
~ < ~ ~ ~ ~
Exhibit ~ ~ ~
CHAPTER 6 CORPORATE-LEVEL STRATEGY 269
Four key questions of corporate strategy
What is the strategic role of the corporate centre?
(How does it seek to add value to the businesses?)
What is the logic
of the portfolio?
What is the nature and
extent of diversification?
7
Is the corporate control
style appropriate?
detail by considering the four key questions shown in Exhibit 6.2 which form
the basis for the structure of the rest of the chapter.
What is the overall rationale of the corporate parent in terms of how it
envisages itself enhancing the value created by the business units for its
shareholders/stakeholders? This is the focus of section 6.3 which considers
four possible corporate roles, the portfolio manager, the restructurer, the
synergy manager and the parental developer.
What is the logic of the mix of business units in the corporate portfolio; and
how does this make sense in terms of the corporate rationale? This is the
focus of section 6.4 and is examined by reviewing a number of frameworks
for considering such portfolios.
Section 6.5 then asks whether the extent and type of diversity of the cor-
poration are sensible given the corporate rationale and logic of the portfolio.
Here, then, the focus is on the nature and extent of diversification.
Finally, section 6.6 introduces the important issue of how corporate parents
and business units interact; in particular, the way in which the centre seeks
to manage business units. Here the question is whether the nature of cor-
porate control of subsidiaries is appropriate in terms of the previous issues
discussed, namely the corporate rationale, the logic of the portfolio and the
extent of diversity. It is a question which is also taken up more fully in
Chapter 9.
The four questions posed in Exhibit 6.2 are, therefore, interrelated. There is no
absolute right or wrong answer to them: rather the key issue is the extent to
which there is a consistency between the answers to them.
270 PART III " STRATEGIC CHOICES
6.2 THE CORPORATE PARENT: VALUE ADDING OR
VALUE DESTROYiNG?
j,t
There is a story told in one major multinational corporation that, historicalJ'
there had never been a business within their portfolio which, having be:' f
divested, had not done better on its own or with someone else. The point ~ r
that the activities ~ f the o r p o r t ~ parent should not be. taken for granted. In t
the absence of clanty about how It adds value to the busmesses, it is in danger
of merely being a cost to those businesses and therefore reducing or destroy.
ing the value created by them.
There are those who argue that corporate parents should, indeed, be able
to add value and there are those who argue the evidence is that they do not.
Exhibit 6.3 summarises these views.
6.2.1 The value-adding corporate parent
1
Those who argue that corporate parents can create value point to the fact that
they should be able to exercise better control and be more efficient at resource
allocation than financial markets would if the businesses operated indepen.
dently. After all, the corporate parent should have ready access to internal
information within the businesses not available to external financial analysts:
so the corporate parent should be able to take decisions with regard to those
businesses, for example, in terms of allocation of resources, increasing or
decreasing investment or changing management in times of poor performance.
Moreover, they should have the co-operation of the managers in doing this
since the managers work for the corporation. The corporate parent should also
be able to enhance potential between the businesses. If one business is doing
particularly well, other businesses should be able to learn from it; if management
Exhibit 6.3
VALUE CREATING?
The multi-business corporation: value creation or destruction?
OR DESTROYING?
Beneficial control on businesses and
better resource allocation through:
- ready access to internal information
- co-operation of business executives
- real-time (not lagged) decision-making
Enhanced potential for exploitation
of slack, synergies, transferences and
learning between businesses
Intervention in managerial
appointments and development
Businesses would be better off on their
own subject to 'market' mechanisms
The Centre:
- adds cost
- creates 'bureaucratic fog'
- delays decisions and market responsiveness
- buffers businesses from investment realities
- provides a focus for managerial ambition
Managerial ambition and empire building is a better
explanation of corporate growth and development
CHAPTER 6 OJ CORPORATE-LEVEL STRATEGY 271
Potential added value roles of the corporate
parent
ADDING VALUE THROUGH:
Efficiency/leverage
Expertise
Investment and competence building
Fostering innovation - coaching/learning
Mitigating risk
Image/networks
Collaborationlco-ordination/brokerage
Standards/performance assessment
Intervention (e.g. acquisition, disposal, change agency)
Acting in a visionary capacity
in one business has particular skills, other businesses might be able to benefit
from this; there may also be synergies between businesses in terms of common
usage of resources; and so on.
At the heart of this is the 'transaction cost' argument put forward by econ-
omists.
2
These potential ways of adding value are surely more efficiently and
effectively carried out within the boundaries of a corporation. The alternative
would, presumably, be to rely on contractual relationships of some sort to
achieve such benefits, with their associated costs; and the mechanisms of finan-
cial markets to deal with underperformance. Advocates of the benefits of the
corporate entity would say that financial markets could do little more than wait
for poor performance, reduce share value, wait for takeovers to occur and hope
that improvement would take place because of such changes. So, on the face of
it the costs of achieving such benefits should be less within a corporate structure.
Certainly corporate centres have claimed to add value in many ways (see
Exhibit 6.4); they include the following:
Improving efficiency - perhaps through scale advantages from resource
sharing, particularly in the use of infrastructure, support services and other
overhead items. The corporate parent may have more leverage in either
purchasing or market access.
Providing expertise and services not available within smaller units - for
example, personnel and financial services, estates management and IT infra-
structure. Some of the most successful corporate parents have competences
in market analysis, or cost analysis, which help fundamentally to reassess the
role and future of divisions or subsidiaries. Human resource and management
developments and succession planning may be important ways in which the
parent adds value.
Providing investment, particularly dUring the early days of new ventures.
This investment could be in resources and infrastructure, but could also
be concerned with developing or changing the core competences within
businesses.
PART III STRATEGIC CHOICES 272
,
t
G Fostering innovation through the management of the knowledge crear it'
processes. This could involve coaching of people and managers in di" ,Ion :
vlSIOns
and the important role of providing a larger peer group through which in '
viduals improve their own knowledge and skills, and where
learning occurs.
Mitigating risk which smaller units inevitably run, and easing the proble
created by the variety and variability of demands from customers.
bigger or more diverse organisations can smooth out these problems mar:
easily.
Providing a strong external image from which smaller units can benefit, and
accessing external networks better than any separate unit.
Encouraging collaboration and co-ordination of effort which could result
in products or services which a single unit could not deliver. The corporate
parent may also be able to broker external linkages or collaborations which
may be essential to the processes of innovation.
Setting standards, assessing performance of individuals and units, and
intervening to improve performance (for example, by replacing managers,
selling off businesses or ensuring turnaround of poorly performing diVisions
or businesses).
As Hamel and Prahalad
3
have highlighted, the importance of clear strategic
intent can help galvanise motivation and enthusiasm throughout the organ
isation by providing what they call a sense of destiny and discovery. The idea
is that by providing the businesses and those who work in them an attract
ive challenge of the future, managers will seek to 'stretch' their businesses
beyond the day-to-day operations and short-term requirements imposed on
them by their competitive environments and become more creative and
innovative in developing business-level strategy. Arguably this visional'j
role is one which, to a greater or lesser extent, all corporate parents should
play, not least because of the importance of providing clarity internally and
externally about the logic and purpose of the organisation.
6.2.2 The value-destroying corporate parent
4
There are, however, contrary arguments; that corporate centres actually tend
to destroy value and that businesses would be better off on their own subject
to market mechanisms, not least financial markets. Here the argument is that
not only is there a real and sometimes very large financial cost of the centre,
but that it may also create diseconomies in other ways.
Corporate parents can add cost with bureaucratic mechanisms and hier
archies that delay decisions, create a 'bureaucratic fog' and hinder market
responsiveness. Not least this is because there may be several levels of
corporate parent above the business unit, each with executives who have a
decision-making influence over the business units.
It is not clear that the cost of these levels of management above the business
unit are offset by the benefits they provide.
CHAPTER 6 CORPORATE-LEVEL STRATEGY 273
orate parents buffer the executives in businesses from the realities of
Corp d fin . I'" , h
financial markets by provi mg a anCla salety net t at mean that exec-
. are not truly answerable for the performance of their businesses.
utlves
Far from having a clear overall of what trying be achieved, the
diversity and size of some corporatiOns make It very difficult to see what
they are about.
Corporate hierarchies provide a focus for managerial ambition. Managers
aspire to be at the top of the. ladder, rather than performing the
value role of the busmess-ull1t level. The corporate centre is rather
more seen as a vehicle for empire building in which executives seek to grow
the number of businesses and the size of the corporation for motives of
personal ambition.
Increasingly, analysts and commentators are beginning to raise questions about
the extent to which corporate parents really do add value.
5
An example of the
questions raised about the value-adding capabilities of BT as a corporate parent
is given in Illustration 6.1. However it should not be thought that this is only a
private sector issue. In the public sector, too, similar questions about the value-
adding capabilities of parents also arise. In the UK there has been much ques-
tioning of the extent to which it makes sense for local government authorities
to control many services that, historically, they had within their portfolios. For
example, traditionally schools were managed through local education author-
ities (LEAs) who allocated government funds and provided certain services.
However, in the 1990s both central government and many head teachers
and governing bodies of schools began to question the value-adding role of
this level of management. Central government, wishing to improve education
standards, began to centralise education policy; and the schools themselves
wanted more flexibility in decision making. The result was that many schools
opted out of LEA control and for direct funding from central government.
The view taken in this chapter is that, indeed, there is a very great risk that
corporate parents will destroy value: but that this is not inevitable. If parents
do have the information about business units such that they can provide the
sorts of benefit shown in Exhibit 6.4, then a well-managed parent should be
able to add value. The real issue is, then, not whether a business unit should
have a parent or be independent, but which parent is most appropriate and
what the corporate strategy of the parent is such that it enhances the value
created at business-unit level. The components of that corporate strategy can
be informed by addressing the four questions raised in the introduction to this
chapter and set out in Exhibit 6.2.
6,3 THE CORPORATE RATIONALE
The first question posed in Exhibit 6.2 is: what is the strategic rationale of the
corporate parent? What is it there for? What role in value creation does it see
for itself and, informed by this, how will it answer the other three questions
posed in Exhibit 6.2? Being clear about this is important for at least three
reasons.
274 PART ill STRATEGIC CHOICES
8T in the bunker
1
A key issue of corporate-level strategy is
the value-adding role of the corporate
centre.
British Telecom (BT) was part of the nation-
alised UK Post Office until 1984, when it was
floated as a public limited company. Following
an initial period of cost cutting, it pursued a
strategy of development into mobile commun-
ications and international expansion. By 2000
its share price was over15; however, by March
2001 it was at 1.15, and BT's corporate man-
agement was being heavily criticised.
Its borrOWings of 30 billion were often
quoted as a main concern. This had arisen from
huge expenditure since 1999 on mobile phone
licences in Germany and Britain and in consolid-
ating BT's position in Japan, Germany, Ireland
and Norway. However, the FT
2
reported that:
'France Telecom and Deutsche Telecom have
bigger debts; Vodafone's fall has cost investors
more money; and the shares of Colt and Energis
have performed more poorly of late.' Yet the
concerns of institutional investors contributed
to the chairman's, Sir lain Vallance, standing
down; and there were questions as to whether
Sir Peter Bonfield should remain as chief execu-
tive. So why did BT and its executives take so
much flak?
Clarity of international strategy
Investors were concerned that BT's inter-
national strategy had lost its direction. BT had
been preparing to merge with MCI Commun-
ications, the US telecoms group, when, in 1997,
a bid from WorldCom meant that BT was forced
to sell its 20 per cent stake. Whilst this made a
huge profit for BT, it left its international strat-
egy unclear. BT had also lost out in acquisition
activity (e.g. Vodafone had acquired Japan
Telecom), and had been left in a weak position
in alliances in which it had taken an interest.
Clarity of ownership strategy
BT had also proposed to float 25 per cent of
its subsidiaries, Wireless (mobile communica_
tions), Yell (Yellow Pages and directories) and
Wholesale (land line capacity and call termina-
tions), all of Ignite (corporate and Wholesale
broadband network); and refocus its activities
on western Europe and Japan. But there was
confusion on this. The finance director, Philip
Hampton, who was said to favour a more far-
reaching break-up of the group, argued against
the plans to float a 25 per cent stake in Yell in
favour of a full de-merger: 'At the end of the day
we could not justify why it was important ...
to hold 75 per cent of Yell,.4 Commentators
wondered why it had been proposed in the first
place and went on to ask why the restructuring
proposals even contemplated turning BT into
a telecoms 'investment trust', with 75 per cent
stakes in separately quoted companies.
Corporate culture
In addition to all this, the view was that the
corporate centre of BT was slow to respond,
cumbersome and hamstrung by its past in terms
of its structures and its approach to understand-
ing markets. Newspapers used words such as
'BTs lingering civil service culture'.
Notes
1. This was the headline for the article on BT in The Sunday Times
of March 25,2001.
2. Financial Times, 25 March 2001.
3. Quoted in The Sunday Times, 11 March 2001.
Questions
1. Using the checklist in section 6.2.1, consider ~
BT corporate centre might add value to Its
subsidiaries.
2. Revisit this illustration when you have read the
chapter and consider if the concerns about BT as
a corporate parent were justified.
CHAPTER 6 0 CORPORATE-LEVEl STRATEGY 275
ecaus
e
in the absence of such clarity it is likely that the corporate parent
~ i l l undertake activities ~ bear costs that have .nothing to do with adding
lue to the business uruts, and are therefore Just costs which diminish
val a This is discussed more extensively in sections 6.3.1 to 6.3.4 below.
vue.
Because corporate managers need to be able to make clear to the stake-
holders what the corporation as a whole is about. In the absence of doing
so investors can become confused as to what a corporation is trying to
acweve or how it is going about doing it; and they might not understand
the argument for the presence of certain businesses within a portfolio, or
how a corporate parent might add value to them. Certainly this has been
the case for highly diversified firms. Financial institutions have begun to
question what value is added by the corporate centre and to take the view
that the different businesses might be better divested from existing corpor-
ate parents.
Internally, if business unit managers are not be able to make sense of
what their corporate parent is there for, they inevitably feel as though the
corporate centre is either little more than a cost burden on them, or that
corporate executives lack clarity of direction. In either case they are likely
to become demotivated. They will also wish to know whether their business
is seen as central to corporate aspirations or peripheral. If they are not clear,
it is unlikely that they will manage the business in ways to enhance the over-
all aspirations of the corporation. Indeed, strategic decisions at the business
level could run counter to corporate strategy. Of course, the reverse is the
case. Clarity at the corporate level can provide a basis on which strategic
choice is made at the business level.
The discussion which follows considers four corporate rationales,
6
summarised
in Exhibit 6.5.
6.3.1 The portfolio manager
The portfolio manager is, in effect, a corporate parent acting as an agent
on behalf of financial markets and shareholders with a view to enhancing the
value attained from the various businesses in a more efficient or effective way
than financial markets could. Their role is to identify and acquire under-valued
assets or businesses and improve them. They might do this, for example, by
acquiring another corporation, divesting low-performing businesses within it
and encouraging the improved performance of those with potential. They may
well seek to keep the cost of the centre low, for example by having a small
corporate staff with few central services, leaving the businesses alone so that
the chief executives of those businesses have a high degree of autonomy, but
setting clear financial targets for those chief executives with very high rewards
if they achieve them and the expectation of low rewards, or loss of position, if
they do not.
Such corporate parents could, of course, manage quite a large number of
such businesses because they are not directly intervening in the strategies
of those bUsinesses. Rather they are setting financial targets, making central
Aportfolio manager is a
corporate parent acting as an
agent on behalf of financial
markets and shareholders
276 PART III STRATEGIC CHOICES
Portfolio managers, restructurers, synergy managers and
parental developers
---
Portfolio managers Restructurers Synergy managers
Parental developers
Logic .. The achievement
-
$ 'Agent' for e Value creation at
_ Central
financial markets SBU level: limited of synergistic
competences can
role to create benefits
be used to create
SBU 'fitness' value in SBUs
Strategic
--
Identifying Identifying
-
Sharing activities/
- SBUs not fUlfilling
requirements
and acquiring restructuring resources or their potential
undervalued opportunities transferring skills/ (a parenting
assets
_ Intervention in competences opportunity)
Divesting low- SBU to transform to enhance
-
The Centre has
performing SBUs performance competitive
clear and relevant
quickly and good
Sale of SBU when
advantage of resources or
performers at a restructuring SBUs capabilities to
premium complete or
-
Identification of enhance SBU
unfeasible or appropriate bases potential
market for sharing or
-
The portfolio is
conditions transferring suited to Centre's
favourable
-
Identification of expertise
benefits which
outweigh costs
Organisational _ Autonomous
requirements SBUs
_ Small, low-cost
corporate staff
_ Incentives based
on SBU results
Autonomous
SBUs
_ Small, specialist
Centre
_ Turnround skills
of corporate staff
_ Incentives based
on acquired SBU
results
_ Collaborative
SBUs
_ Corporate staff
as integrators
_ Overcoming SBU
resistance to
sharing or
transferring
_ Incentives
affected by
corporate results
_ Centre manages
understand SBUs
('sufficient feel')
_ Effective structural
and control
linkages from
Centre to SBUs
_ SBUs may be
autonomous unless
collaboration is
required
_ Incentives based on
SBU performance
evaluations about the well-being and future prospects of such businesses and
investing or divesting accordingly.
A good example of such a corporation was GEe, the industrial conglomerate
so powerfullmder Lord Weinstock in the 1980s and 1990s. Weinstock did not
pretend to have a direct involvement in the businesses. He saw his role as
setting clear and challenging financial targets and letting the executives get
on with their jobs in their businesses. They were examined minutely about
the performance of those businesses in financial terms, but were left to get on
CHAPTER 6 CORPORATE-LEVEL STRATEGY 271
. trategically. A successful chief executive in GEe could look forward to
with 1t s .'
. his or her own busmess prov1ded the targets were met. The central
upon that chief executive were low but, if successful, he or she
costs 11Il .'
could draw on the substantIal financial resources of the group for purposes of
investment. .,
A aralle1 situation in the public sector 1S that the parent would be acting on
hJt of the government in the allocation of financial resources. For example,
b:
e
Higher Education Funding Council is responsible on behalf of government
the allocation of research funds to in and. It sets
criteria and establishes procedures by which to evaluate uruvers1t1es' research
activities, and funds are allocated according to the ratings which result. But it
does not intervene in the universities themselves with regard to the strategies
they choose to follow.
6.3.2 The restructurer
In some respects restructurers are similar to portfolio managers in so far as they Restructurers are adept at
are likely to have low central costs with relatively minimal involvement at busi- identifying restructuring
ness unit level. However, they are also adept at identifying restructuring oppor- opportunities in businesses
tunities in businesses and have the skills to intervene to transform performance
in those businesses. They may well hold a diverse range of businesses within
their portfolio. However, they do have a limited role at business-unit level,
which is to identify ways in which businesses can be turned round or fitness
improved and to manage the restructuring period. This might take effect in
some ways similar to the activities of the portfolio manager. They will acquire
another corporation and sell off businesses which do not have restructuring or
improvement opportunities through their skills opportunities; but they will
also move specialist managers from the centre into the businesses they keep
to set them on a profitable course. They will then leave the businesses alone.
So again the emphasis is on autonomous business units with a small corpor-
ate centre, but, in this case, with specialist turnround skills of corporate staff.
The incentives for the businesses will, again, be based on SBU performance and
little attention will be paid to integrating the businesses or achieving syner-
gies across those businesses. In its heyday of acquisitions, Hanson
7
was often
thought of as a portfolio manager, but would more accurately be described
as a restructurer. It did more than buy and sell businesses: it targeted busi-
nesses in which it could see opportunities for restructuring and therefore value
creation.
Of course, in this case it is likely that the business restructuring opportun-
ities that will be sought will be those that match the skills of the corporate
centre. In this sense there are some similarities with the parental developers
discussed in section 6.3.4. below.
Some would argue that the days of the portfolio manager and restructurer
are gone. They are certainly not popular corporate rationales with financial
analysts and there are many fewer such corporations than there used to be. For
example, the corporate strategies of both GEC and Hanson have changed since
278 PART III STRATEGIC CHOICES
the departures of Lord Weinstock and Lord Hanson, with extensive d'
. IVest
ment and a search for greater focus, and, as IllustratIOn 6.2 shows, the
powerful and hugely diverse Lonhro has gone through similar changes. I
Tomkins, which built a business with a portfolio described as 'from b n ).'
Uns' (
(Hovis bread) 'to guns' (Smith and Wesson) sold its bakery business in 2000 l
. b . to ,
focus more on its engineenng usmesses. \
The decline of the portfolio managers and restructurers could be because f
financial analysts and investors have become more adept at analYSing for t
themselves the opportunities that businesses present and identifying under I
performing businesses. There are also increasing signs that financial institu. '
tions such as pension funds are becoming more interventionist in the affairs
of corporations: if the pension fund Hermes sees opportunities for im.
proving returns to shareholders through the reconfiguration of bUSinesses
within a portfolio, it will approach corporate executives direct. The role of COr.
porate parents acting as 'agents' on behalf of investors is therefore being
reduced.
6.3.3 The synergy manager
Synergy can occur in
situations where two or
more activities or processes
complement each other, to
the extent that their combined
effect is greater than the sum
of the parts
Synergy is often seen as the raison d'etre of the corporate parent. Potentially,
synergy can occur in situations where two or more activities or processes
complement each other, to the extent that their combined effect is greater
than the sum of the parts.
8
In terms of corporate strategy, the logic is that value
can be enhanced across business units. This might be done in a number of
ways:9
Activities might be shared: for example, common distribution systems might.
be used for different businesses; overseas offices may be shared by smaller
business units acting in different geographical areas; common brand names
may provide value to different products within different businesses.
There may exist common skills or competences across businesses. For
example, on the face of it there may be diverse products or technologies
within an industrial products business; but the value-adding capabilities of
service offered to industrial customers may be a common thread through
such businesses. If this is so, then the skills and competences learned in one
business may be shared by another, thus improving performance. Or there
may exist expertise built up, for example, in marketing or research, which
is transferable to other businesses within a portfolio less capable in such
ways, again enhancing their performance.
However, there are problems in achieving such synergies:
The skills or competences on which argued synergy is supposed to be based
may not really exist or, if they do, may not add value. It is not unusual for
managers to claim, either at the business level or the corporate level, that
particular competences exist, are important and are useful to share, when
they are little more than the inherited myths in the business, or are not really
valued by customers.
From Lonrho to Lonmin
The highly diversified, decentralised
conglomerate form of corporation is
becoming less common.
At its peak, Lonrho controlled 900 subsidiary
companies in Africa, Europe, Asia and North
America with a turnover in excess of $7bn and
a workforce of over a quarter of a million. For
much of this time it was dominated by its chair-
man, Roland 'Tiny' Rowland.
Lonhro's 1993 annual report listed its prin-
cipal activities as embracing:
Mining of gold, platinum, rhodium and coal;
it was the third-largest producer of platinum
in the world through its ownersWp of mines
in South Africa and a major gold producer
from mines in Ghana and Zimbabwe.
Agriculture, including ranching and produc-
tion of cotton, sugar and tea; Lonrho ranked
as the largest single producer of food in
Mrica, owner of 1.5 million acres of land and
125,000 cattle spread across ten countries.
Agricultural equipment and motor vehicle
distribution and assembly; the company was
one of the world's largest automobile dis-
tributors, selling Rolls-Royces, Volkswagens,
Audis, Mercedes and French, Japanese and
American veWcles in Britain, Europe and
Mrica.
Other interests included engineering and
manufacturing; printing; insurance; export-
ing; property management; hotels; finance
and general trading; production and retailing
of textiles. It also owned the Observer news-
paper and 23 provincial newspapers in the
UK.
As the 1993 annual report explained, at that
time the company was 'divisionalised into 30
CHAPTER 6 CORPORATE-lEVEl STRATEGY 279
management regions... principally organised
on a territorial basis in Africa and on an activity
basis outside Africa'. Lonhro insisted that de-
centralisation was the key to its management
philosophy. Each region was highly autonom-
ous, with a chief executive and finance director
being responsible for the efficient day-to-day
operations of its business, and its own specialist
personnel. It was the group's policy 'to grant
each region sufficient capital and revenue
autonomy to operate a successful business',
though capital expenditure was monitored and
controlled by the centre. The performance of
each region was then monitored centrally
through the medium of budgetary control based
on an annual budget, updated through revised
forecasts.
However, after investor confidence began to
decline in the early 1990s, there was a pro-
tracted battle between a major shareholder,
Dieter Boch, a German financier, and Tiny
Rowland. The output of tWs was that Boch
eventually took control of the business in 1994,
Rowland resigned in 1995 and Boch began to
unravel the complex corporation. By 2000, the
corporation was renamed Lonmin; much of its
diversified portfolio had been divested such
that it had come to be focused on the mining of
platinum, coal and gold mainly in Southern and
Central Africa.
Questions
1. What parenting rationale and portfolio logic
might apply to a group as diversified as
Lonhro?
2. How might this differ for the more focused
Lonmin?
280 PART III STRATEGIC CHOiCES
~ There also needs to be a benefit in such sharing or transference of skins
which outweighs the costs involved in doing so. There will be a c
h h fi
. I f . . h host.
w et er nanCla or III terms 0 opportull1ty cost - III SUC s aring, not Ie
because it will require central resources to undertake the integration. ast
In terms of practical realities:
Managers in the businesses have to be prepared to co-operate in such trans-
ference and sharing: and there are reasons they may not wish to do so n
least of which is that such sharing detracts from focusing on the pn:n o ~
concerns they have for their own businesses. Also, for managers in the b:.
nesses to be collaborative in achieving such synergistic benefits, reWards
may have to be tailored to encourage such sharing. The problem is that
rewards to business managers are typically on business unit performance
whereas under this strategy they are being asked to co-operate in s r i n ~
activities between businesses. It is quite possible that the business unit man.
ager will respond by asking 'what's in it for me?' and conclude that there is
very little.
There also needs to be compatibility between the systems and culture of
the business units that are to do the sharing. A business may have been
acqUired with the logic of gaining synergistically from an existing business
in a firm's portfolio, only to find that the two businesses are quite different
in cultural terms such that sharing between the two is problematic.
Finally, the corporate parent needs to be determined to achieve such syn
ergies. The need here, at a minimum, is for central staff to act as integrators,
and therefore to understand the businesses well enough to do so. The centre
may also need to be prepared to intervene at the business level in terms
of strategic direction and control to ensure that such potential synergies
bear fruit. However, in turn this raises questions as to whether such detailed
understanding of businesses and hands-on directive influence from the
corporate centre makes sense for other reasons. This relates to the sorts of
issues discussed in section 6.6 below and in section 9.3 of Chapter 9.
The notion of synergy has long been a justification used by corporate bodies
for their value-adding capabilities. However, this has become less so. It has
been realised that synergistic benefits are not as easy to achieve as would
appear, can be costly to the extent that the benefits do not outweigh the costs,
and in any case the basis of synergies may be mythical. However, it remains a
dominant theme in corporate-level strategy, as Illustration 6.3 shows.
6.3.4 The parental developer
10
The parental developer
seeks to employ its own
competences as a parent to
add value to its businesses
The parental developer seeks to employ its own competences as a parent to
add value to its businesses. Here, then, the issue is not so much about how it
can help create or develop benefits across business units or transference
between business units, as in the case of managing synergy: rather parental
developers. have to be clear about the relevant resources or capabilities they
have to enhance the potential of business units. Suppose, for example, it has a
CHAPTER 6 ,. CORPORATE-LEVEl STRATEGY 281
Espoused synergies in acquisitions
Many companies cite synergy as one ofthe
jUstificationsfor mergers and acquisitions.
Primedia and About
In December 2000, About.com, a US Internet
portal, was acquired by Primedia, a magazine
publisher based in the USA. About.com covered
over 50,000 subjects and was the seventh most
frequently visited Internet site, with 60 million
users each month. Primedia published 22.0 maga-
zines, including periodicals and trade publica-
tions, and owned a television network as well as
200 websites and other Internet properties.
The CEO of Primedia, Thomas Rogers, said,
'The Primedia and About merger creates the
leading model for the integration of traditional
and new media niche content and the result-
ing delivery of targeted marketing vehicles . . .
Primedia is the leading traditional media com-
pany in the delivery of highly targeted niche
print and video products to consumers. About
is the leading online company in the delivery of
niche content. This is the most synergistic com-
bination either of these two companies could
enter into and creates a one-of-a-kind company
that no two other companies could create.'
Primedia planned to take advantage of cross-
marketing and shared content with the new
merger. Rogers argued that, as well as the bene-
fits from sheer scale in market niches, there
would be major cost-saving synergies. Revenue
would be generated by applying 'Primedia's
1,600-person sales force and 60,000 advertisers
.. : to ~ b o u t s niche-based sites [and] driVing
Pnmedla magazine subscriptions on these sites'.
Cost synergies would result from cutting back
b o ~ t s marketing expenses whilst significantly
cuttmg back Primedia's own spending on Inter-
net businesses.
Tata Tetley
In March 2000, Tata Tea, India's largest pro-
ducer of tea, acquired the Tetley Group, the
second-biggest tea brand in the world. Ac-
cording to the vice-chairman of Tata Tea
Mr Kumar, 'the synergies will produce a global
leader'. Tata would supply produce to Tetley
for the manufacture of teabags and it would
?ain .from Tetley's skills in blending, packag-
mg, mventory management, cost control and
distribution.
Kumar argued that in an industry in which
brand strength is a critical business success
factor, Tetley'S flair for product development
and marketing would allow Tata to gain a larger
share of the tea market and opportunities
to achieve synergies and higher added value.
Tata's activities would also benefit from stan-
dardised management practices, including the
quality performance norms and consumer
focus of Tetley. The two organisations would
work under a unified global strategy, and their
combined strength would help to create oppor-
tunities to expand sales in existing and new
markets.
The breadth of experience and vertical integra-
tion would equip Tata to compete anywhere in
the world. With the globally recognised Tetley
brand and other regional brands, Tata would
have a product portfolio of over 100 varieties of
teas (margins for which were higher than for
traditional tea) and this would make it possible
to tap into markets effectively and increase
market share.
Prepared by Urmilla Lawson, University of Strathclyde
Graduate School of Business
Sources: B. Quint, 'About.com acquired by Primedia: sin or
synergy?', Information Today, Dec. 2000, vol. 17, i. 11, p. 22;
K. Merchant, 'Tata may have swallowed Tetley but "tea folk"
will remain', The Financial Times, 28 Feb. 2000, p. 26.
Questions
1. What would the corporate parent need to do
to ensure the realisation of the sorts of synergy
described above?
2. What might prevent the realisation of these
synergies?
282 PART III STRATEGIC CHOICES
great deal of experience in globalising domestically based businesses' or
. , avalu
able brand that may enhance the performance of image of a business' 0 .
haps specialist skills in financial management, brand marketing or per
development. If such parenting competences exist, corporate managers
need to identify a 'parenting opportunity': a business or businesses which a
en
not fulfilling their potential but where improvement could be made by
application of the competences of the parent - for example, a business
could benefit by being more global, by brand development or by central R&D
support.
The competences that parents have will vary. Shell would argue that it is nOt
just their huge financial muscle that matters but also that they are particularl'
adept at negotiating with governments as well as developing high-calibre inte;.
nationally mobile executives who can work almost anywhere in the World
within a Shell corporate framework, and that this allows them to deVelop busi.
nesses globally. 3M are single-mindedly concerned with inculcating a focus on
innovation in their businesses. They try to ensure a corporate culture based on
this, set clear innovation targets for their businesses and elevate the standing
of technical personnel concerned with innovation. Unilever have
sought to focus on developing their core expertise in global branding and
marketing in the fast-moving consumer goods company, with supporting state.
of-the-art research and development facilities to back it up. They would argue
that this is where they can add greatest value to their businesses, and that it
has significantly affected the shape of their corporation over the years (see Illus-
tration 6.4 on page 294). Of course, it could be that some corporate parents
become adept at developing networking for learning across their businesses-
Canon would claim they do this - and in this sense they may be encouraging
synergy benefits; but this horizontal benefit is not necessarily the core rationale
of the parental developer.
Running an organisation on this basis does, however, pose some challenges.
For example:
If the corporate parent identifies that it has value-adding capabilities in par
ticular and limited ways, the implication is that it should not be providing
services in other ways, or if it does they should be at minimal cost. For
example, some corporate centres have decided to outsource a great many
services that were once seen as a traditional role of the centre: legal services,
payroll services, training and development and so on. One chief executive,
follOWing such a course of action, claimed that his head office workforce
would be reduced by over 50 per cent with a saving of over 60 per cent of
the costs of that centre. Moreover, he claimed, by so doing it focused the
attention of corporate executives on management time in areas that really
could add value as distinct from merely administrative functions.
Following the same logic in the public sector can create a dilemma. On the
one hand, keeping such central services in the public sector ensures polito
ical control over social purposes - for example, ensuring service coverage
to all sections of the community. On the other hand, a private sector com-
pany might be a better parent, in the sense that they might be more skilleu
at providing the service or doing it more efficiently.
CHAPTER 6 CORPORATE-LEVEL STRATEGY 283
other and very challenging responsibility of the corporate parent is being
about just how it can add value to. units. If the value-adding
abilities of the parent are wrongly Identified then, far from the busi-
benefiting, they will be to interference from the centre in
ways which are There needs to be some hard evidence
of such value-adding capabIhtles.
The corporate parent may realise that there are some business units within
its portfolio where it can add little value. This may help identify businesses
that should not be part of the corporate portfolio. More uncomfortably,
however, such business units could be high-performing businesses, suc-
cessful in their own right and not requiring the competences of the parent.
The parent may argue that other businesses in the portfolio can learn from
them; but this is the logic of synergy management rather than parental
development. The question the parental developer has to ask is how it is
adding value to that business. The logic of the parental development
approach is that since the centre cannot add value, it is a cost and is there-
fore destroying value; that the parent should therefore consider divesting
such a business, realising a premium for it and reinvesting it in businesses
where it can add value. Logical as this may seem, it is unlikely to find favour,
not least because the executives at the centre might be indicted by their
own shareholders for selling the 'crown jewels'.
This, in turn, raises the question as to whether the parent could adopt
multiple rationales in its parenting. For example, could it simultaneously
act as a parental developer for some of its businesses with a hands-off,
almost portfolio approach, for those in which it cannot add further value?
Or could it be both a synergy manager and a parental developer? The
dangers are, of course, that the rationale becomes confused, the centre
unclear as to what it is trying to achieve, the business unit managers con-
fused as to their role in the corporation and the cost of the centre escalates.
Amultiple approach also raises the issue of multiple control styles in cor-
porate bodies (see section 6.6 below), and in particular whether this is
feasible.
If the logic of the parental developer is to be followed then the executives
of the corporate parent must also have 'sufficient feel' or understanding
of the businesses within the portfolio to know where they can add value
and where they cannot: this is an issue taken up in section 6.4.3 below in
relation to the logic of portfolios. It is also necessary that there has to be
effective structural and control linkages from the centre to the businesses;
an issue taken up in section 6.6 below and in section 9.3.
6.4 THE CORPORATE PORTFOLIO
So far the discussion has been about the rationales that corporate parents
might have in relation to the management of a multi-business organisation. It
should be seen that each of these rationales has implications in terms of the
number and nature of the businesses within such a group; or vice versa, the
284 PART III STRATEG IC CHOICES
The growth share matrix (or BeG box)
---
MARKET
GROWTH
High
Low
MARKET SHARE
High
Stars
Cash
cows
Low
Question
marks
Dogs
number and nature of businesses will have implications for the rationale the
parent might adopt. To take two examples: a parent acting as a portfolio man.
ager might be able to manage a very diverse set of businesses with no particu.
lar similarities between them, largely by setting financial targets, whereas a
synergy manager needs to understand the businesses well and can therefore
probably only cope with a limited number of related-type businesses. The rest
of the issues which now follow are to do with the nature and diversity of the
businesses within the group, given the different rationales described above,
The first concern is with the basis upon which the portfolio of the business is
considered.
A number of tools have been developed for helping managers choose what
businesses to have in a portfolio. Each tool gives more or less focus on one of
three criteria:
the balance of the portfolio;
the attractiveness of the businesses in the portfolio in terms of how profit-
able they are or are likely to be and how fast they are growing; and
the degree of 'fit' that the businesses have with each other in terms of poten
tial synergies or the extent to which the corporate parent will be good at
looking after them.
6.4.1 The growth share matrix (or BeG bOx)'ll
One of the most common and long-standing ways of conceiving of the bal-
ance of a portfolio of businesses is in terms of the relationship between market
share and market growth identified by the Boston Consulting Group (BeG).
Exhibit 6.6 represents this approach and shows the terms typically used to
refer to the types of businesses in such a portfolio.
CHAPTER 6 CORPORATE-LEVEL STRATEGY 285
Astar is a business unit which ~ s a h i ~ marke.t share in a growing market.
The business unit may be spendmg heavl1y to gam that share, but experience
curve benefits (see section 4.3.3) should mean that costs are reducing over
time and, it is to be hoped, at a rate faster than that of competitors.
Aquestion mark (or problem child) is a business unit in a growing market,
but without a high market share. It may be necessary to spend heavily to
increase market share, but if so, it is unlikely that the business unit is achiev-
ing sufficient cost reduction benefits to offset such investments.
Acash cow is a business unit with a high market share in a mature market.
Because growth is low and market conditions are more stable, the need for
heavy marketing investment is less. But high relative market share means
that the business unit should be able to maintain unit cost levels below those
of competitors. The cash cow should then be a cash provider (e.g. to finance
question marks).
Dogs are business units with a low share in static or declining markets and
are thus the worst of all combinations. They may be a cash drain and use up
a disproportionate amount of company time and resources.
The growth share matrix permits business units to be examined in relation
to (a) market (segment) share and (b) the growth rate of that market and in this
respect the life cycle development of that market. It is therefore a way of con-
sidering the balance and development of a portfolio.
It is argued that market growth rate is important for a business unit seeking
to dominate a market because it may be easier to gain dominance when a mar-
ket is in its growth state. In a state of maturity, a market is likely to be stable,
with customer loyalties fairly fixed, so it is more difficult to gain share. But if
all competitors in the growth stage are trying to gain market share, competi-
tion will be very fierce: so it will be necessary to invest in that business unit in
order to gain share and market dominance. Moreover, it is likely that such a
business unit will need to price low or spend high amounts on advertising and
selling, or both. This strategy is one of high risk unless this low-margin activity
is financed by products earning higher profit levels. This leads to the idea of a
balanced mix of business units.
Of course, other firms might take a different view. For example, if the cor-
porate aspiration is one of high growth in income and the business is prepared
to invest to gain that growth, then it may be prepared to support more stars
and question marks than a parent who is concerned with stable cash genera-
tion and who may concentrate on preserving or building its cash cows.
There could be links between the businesses in such a portfolio in terms of
perceived synergies; but this is not necessary for the logic to hold. The idea is
that the corporate parent will be good at spotting investment opportunities in
line with this matrix. They could be less concerned about managing the busi-
nesses themselves; so in this sense it would correspond to the logic of the port-
folio manager or restructurer. It is not always the case that the matrix is used
with this in mind: but if the corporate parent envisages itself as having some
more proactive logic associated with it, then it might wish to ask whether a
portfolio logic more appropriate to its purpose may be helpful; some of which
are discussed below.
A star is a business unit
which has a high market
share in a growing market
A question mark (or problem
child) is a business unit in a
growing market, but without
a high market share
A cash cow is a business unit
with a high market share in a
mature market
Dogs are business units
with a low share in static
or declining markets
286 PART III .. STRATEGIC CHOICES
It is worth noting that some caution needs to be exercised in the use of th
BCG matrix: e
o There can be practical difficulties in deciding what exactly 'high' and 'loW'
(growth and share) can mean in a particular situation.
The analysis should be applied to strategic business units, not to products
or to broad markets (which might include many segments).
In many organisations the critical resource to be planned and balanced
will not be cash, but the innovative capacity, which consists of the time and
creative energy of the organisation's managers, designers, engineers, etc.
Question marks and stars are very demanding on these types of resource.
The position of dogs is often misunderstood. Certainly, there may be Some
business units which need immediate deletion - but even then there may be
political difficulties if they are the brainchild of people with power within
the organisation. However, other dogs may have a useful place in the pOrt.
folio. They may be necessary to complete the product range and provide a
credible presence in the market. They may be held for defensive reasons _
to keep competitors out. They may also be capable of revitalisation.
Little is said about the behavioural implications of such a strategy. Howdoes
central management motivate the managers of cash cows, who see all their
hard-earned surpluses being invested in other businesses? Indeed, perhaps
the single factor which makes the creation and management of a balanced
portfolio difficult in practice is the jealousy that can arise between the vari
ous strategic business units.
6.4.2 Balance in a public sector portfolio
The different services offered by public sector organisations can also be can
sidered in terms of the balance of a portfolio, as seen in Exhibit 6.7. Here the
key judgements are concerned with (a) the organisation's 'ability to serve effec-
tively' by providing perceived value for money with the resources which are
available to it, and (b) the political attractiveness of its services in terms of
the extent to which they can gain stakeholder and public support for fund-
ing. Not all services will be public sector 'stars' in this respect. Some may be
services required politically or because of public need, but for which there are
limited resources - the 'political hot box'. In many respects this is where the
National Health Service in the UK finds itself. Similarly - and a point often for-
gotten by public sector managers when reviewing their portfolio of activities -
a provider of public services may be mandated to proVide some statutory ser-
vices and find resources 'locked up' in so doing. There are still other services
that a public sector provider may have undertaken effectively for many years
but for which there is little popular public support or funding attractiveness.
Somewhat strangely these are referred to as the 'golden fleece' in the matrix.
Exhibit 6.7
CHAPTER 6 CORPORATE-LEVEl STRATEGY 281
Public sector portfolio matrix
ABILITY TO SERVE EFFECTIVELY
High
low
Public
Political
High sector
hot box
star
PUBLIC NEED
AND SUPPORT
+ FUNDING
ATIRACTIVENESS
Golden
Back
low
fleece
drawer
issue
Scwrc,,: l.R. Montanari and J.S, Bracker, Srraregic Management Journal. vol. 7, no. 3 (1986), reprinted by permission of John Wiley Ili
SOns Ltd.
'!lack drawer issues' arc the equiV"dlent of dogs in the BeG matrix; they have
neither political (or public) support, nor sufficient resources. In a review of the
public sector ponfolio, thcy arc the sons of service which, if possible, should
Ix dropped.
Another problem may arise for managers in public sector org.lni.s:uions. They
nuy find it difficult to develop services with real growth potcntial or geller.uc
surpluses to be reinvcstcd, bcemse this may not be their brief from gm"cnl-
ment. They may be cxpected to man:lge services which cannot make mOlley.
but which arc public necessities. Further, if thcy seck 10 develop services
which can grow and makc moncy, these may be privatised or put out 10 privatc
tender. It may be seen as legitimate for a local govt:nlment leisure departmcnt
to manage public parks and recreation grounds, but the dc\"c1opmellt of indoor
tennis and SWimming poolS with profit potential may be St..-cn as an inappro-
priate actiVity. The definition of the appropriatc portfoliO of :lctivities therefore
requires a clarity of corporatc purposes and aspir:ltions.
288 PART III STRATEGIC CHOICES
Indicators of SBU strength and market attractiveness
-- INDICATORS OF SBU STRENGTH
COMPARED WITH COMPETlTlON
Market share
tiP) Salesforce
Marketing
R&D
Manufacturing
CD Distribution
Financial resources
Managerial competence
Competitive position in terms of,
e.g. image, breadth of product line,
quality/reliability, customer service
INDICATORS OF MARKET
ATTRACTIVENESS
Market size
Market growth rate
Cyclicality
Competitive structure
Barriers to entry
., Industry profitability
Technology
Inflation
Regulation
Workforce availability
Social issues
Environmental issues
Political issues
Legal issues
---
6.4.3 The directional policy matrix
The directional policy
matrix positions SBUs
according to (a) how
attractive the relevant market
is in which they are operating,
and (b) the competitive
strength of the SBU in that
market
Another way to consider a portfolio of businesses is by means of the direc-
tional policy matrix,12 which categorises business units into those with good
prospects and those with less good prospects. Sometimes known as the attrac-
tiveness matrix, it provides a way of considering a portfolio of business units
in terms of their attractiveness by directing attention to the attractiveness of
both the environment for SBUs and their competitive position. Specifically, the
directional policy matrix positions business units according to (a) how attrac-
tive the relevant market is in which they are operating, and (b) the competitive
strength of the SBU in that market. Each business unit is positioned within the
matrix according to a series of indicators of attractiveness and strength. The
factors typically considered are set out in Exhibit 6.8. However, these should
not be thought of as pre-ordained. The factors should be those most relevant
to the organisation and its market: for example, as identified by PESTEL or five
forces analysis for attractiveness and through competitor analysis to identify
business unit strength. Some analysts also choose to show graphically how
large the market is for a given business unit's activity, and even the market
share of that business unit, as shown in Exhibit 6.9. For example, managers in
a firm with the portfolio shown in Exhibit 6.9 will be concerned that they have
relatively low shares in the largest and most attractive market, whereas their
greatest strength is in a market with only medium attractiveness and smaller
markets with little long-term attractiveness.
The matrix also provides a way of considering appropriate corporate-level
strategies given the positioning of the business units as shown in Exhibit 6.10.
It suggests that the businesses with the highest growth potential and the great-
est strength are those in which to invest for growth; and those which are the
exhibit 6.9
CHAPTER 6 CORPORATE-LEVEL STRATEGY 289
Market attractiveness/SBU strength matrix
SBU STRENGTH
High
LONGTERM
MARKET Medium
ATTRAGIVENESS
Low
Average

represents
size of
market

represents market
share of SBU
1IIIIIIII Strategy guidelines based on the directional policy matrix
INDUSTRY ATTRACTIVENESS

High Medium Low

Investment Selective
.'" and growth growth
Selectivity
:I:
:J:
>-
'" z
w
E
>-
.2 Selective Harvestl

"
Selectivity

growth
divest

:;
w
Z

:>
m

Harvestl Harvestl
0
Selectivity
divest divest
290 PART III .. STRATEGIC CHOICES
weakest and in the least attractive markets should be divested or harvested ('
used to yield as much cash as possible before divesting or closure). The difficl.
e
,
decisions relate to those businesses in the middle ground; and in the exam~ t
in Exhibit 6.9 there are a number of these. Where the matrix helps in this r e s p ~ e
is in getting managers to identify the reasons for the positions in the mat ~
such that they can ask questions about whether it is possible to grow such ~
SI
nesses; and, if choices of investment have to be made between the bUSinesses
which look most likely to show a pay-off on the basis of such eVidence. I
This portfolio logic is essentially about understanding the relative strengthof
a business in the context of its markets so as to make decisions about invest.
ment, acquisition and divestment. It therefore assumes that the corporate centre
needs to have an understanding of the businesses, their strategies and bases of
success. Whilst there is little inherently within this matrix to do with related.
ness, the implication is that the businesses should have some degree of related.
ness, otherwise the managers at the corporate centre would be expected to
understand too wide an array of different businesses for investment purposes.
So far the discussion has been about the logic of portfolios in terms of
balance and attractiveness. The third logic is to do with 'fit'. Thinking about fit
has developed around two concepts - parenting and core competences.
6.4.4 The parenting matrix
In deciding on the appropriateness of the role of the parent and the mix of
business units best suited to the parent, the parenting matrix (or Ashridge
Portfolio Display13) can be useful. This builds on the ideas set out in section
6.3.4 above which discussed the parental developer corporate rationale. It
suggests that corporations should seek to build portfolios that fit well with
their corporate centre parenting skills and that the corporate centre should in
turn build parenting skills that are appropriate for their portfolio. By juggling
these two principles, corporations should be able to move towards greater fit
in terms of two dimensions (see Exhibit 6.11):
The extent to which the corporate parent has sufficient 'feel' for the busi
nesses in the portfolio. In effect this is the fit between the critical success
factors of the business units (see section 4.2 ) and the skills, resources and
characteristics of the corporate parent.
Fit between the parenting opportunities of business units (see below) and
the skills, resources and characteristics of the parent. So this is about how
the businesses might benefit from the parent.
The logic for using these two dimensions of fit is as follows. If the critical suc
cess factors of the business fit badly with the skills and characteristics of the
parent organisation, then parent managers are likely to misunderstand the
business and inadvertently do it harm. So the first measure of fit is about avoid
ing problems. For example, when BAT, a tobacco company, acquired Eagle
Star, a financial services company, in the 1990s there was low critical success
factor fit: the critical success factors of insurance did not fit well with the skills
and characteristics of BAT managers. The result was problematic. BAT encour-
aged Eagle Star to gain market share (a normal strategy in tobacco) with the
Exhibit 6.11
CHAPTER 6 CORPORATE-LEVEl STRATEGY 291
The parenting matrix: the Ashridge Portfolio Display
Alien businesses
Fit between
business unit
critical success
factors and the
parent's skills,
resources and
characteristics
('feel')
High
Ballast
businesses
Heartland
businesses
Value trap
businesses
low High
Fit between business unit parenting opportunities and
the parent's skills. resources and characteristics
('benefit')
Sour(f' Adilpted from M. Goold, A. Campbell and M, Alexander, Corporate Level Wiley 1994.
consequente thai Eagle Star took on inappropriate insurance risks, incurring
some big losses a few years latcr. The lack of [II W:IS partly the calise of these
subsequent losses. Fit berween critic:!1 Sllccess f,lClOrs of the business :lnd the
characteristics of the parent is therefore about downside risk. High Iii means
low risk of problems. Low fit means high risk of problems.
Fit between the parenting opportunities of the business and the characteris-
tics of tile parent is about benefit and opportunity. High fit means high poten-
ti21 for added \'alue. low fit means 1m"\' potcntial. A 'parenting opportunity' is
an opportunity for thc business to impro\'e that which can be better exploitc.'d
v.ilh help from a parent organisation. For example, the business may need to
COSts and could be helped by a parent organisation with experience of
doing this; the business may need to expand in Asia and would be hclpcd
b1' a parent with good Asian contacts; the business may need to impro\'e its
292 PART III STRATEGIC CHOICES
t
marketing skills and could be helped by a parent with strong marketing skills' r
and so on. '
Exhibit 6.11 shows what a resulting portfolio might look like.
Heartland businesses are ones to which the parent can add value Without
danger of doing harm. They should be at the core of future strategy.
Ballast businesses are ones the parent understands well but can do little fa
r.
They would probably be just as successful as independent companies. U
they are part of a future corporate strategy, they need to be managed With a
light touch and bear as little cost of the corporate bureaucracy as Possible.
e Value trap businesses are dangerous. They appear attractive because there
are opportunities for the parent to add value. But they are deceptivelyattrac.
tive, because there is a high danger that the parent's attentions will result in
more harm than good. Value trap businesses should only be included in the
future strategy if they can be moved into the heartland. Moreover, some
adjustments to the skills, resources or characteristics of the parent will prob-
ably be necessary.
Alien businesses are clear misfits. They offer little opportunity to add value
and they rub awkwardly with the normal behaviour of the parent. Exit is the
best strategy.
This approach to considering corporate portfolios therefore places the
emphasis firmly on asking how the parent benefits the business units, and this
results in a number of challenging questions.
If the parent is not enhancing the performance of the business units, what
is its role? A corporate body has a role to play with regard to purely corpor-
ate affairs, such as dealing with financial institutions and negotiating with.
governments. But if its role is limited to this, the cost of delivering these func-
tions should be low to the business unit. A large and costly corporate head
quarters which does little to enhance the strategies of its business units can
be a great cost burden to them, thus undermining potential market-based
competitive advantage, and so reducing the overall returns for shareholders.
Where, then, is greatest value to be added? An overall pattern has emerged
in the past decade or so which suggests that organisations throughout the
world are attempting to drive responsibility for strategic decisions nearer
and nearer to markets. There is an attempt to ensure that business-specific
competences are directed at developing successful competitive strategies.
The trend towards deregulation and privatisation of public utilities and gov-
ernment authorities, increasing throughout the world, has a similar rationale
underlying it. The aim is to give the responsibility for developing strategic
capability and achieving competitive advantage in markets to the business
unit level - to managers who are most closely in touch with their markets.
The role of the parent has therefore been increasingly seen as one of facilita-
tion, or of taking a hands-off approach as far as possible.
If the corporate parent seeks to enhance the strategies of the businesses it
must, then, be very clear that there is a match between its skills in so doing
and the help which the businesses require to achieve competitive advan-
tage. It must also avoid undertaking roles which do not enhance strategies
CHAPTER 6 CORPORATE-LEVel STRATEGY 293
h
bu
sine.,s unit leye!. For example. the corpor.lIe pJ.rent rna) impose
:11 I e
umberso
me
planning more 10 do wilh pro\'iding i.nfomlalion 10
cenlre Ihan with aiding the slr.l!egic of the unil"; it may
retain a large head office staff which duplicate the roles of execllIi\'cs in
business units; or it may make demands on businl'ss unit strategy thai arc not
sensible in lemlS of compctilive str.lIegy at Ih.1t level.
The concepl offil has equal relevance in Ihe public sector. 11u' implication is
Ihat public sector managers should control dirt.'Ctly only Ihose services and
aCIi\'ilies Ihat fit services and activities for which Ihey ha,c special
agerial expertise. Other services should be outsourced or:let up as independ-
ent agencies. Whilsl outsourcing, privalising and selling up independent
agencieS is driven as much by politic;ll dogma as by corpor:llc-le\'e1 SIr.t1r.:gy
analysis, the trcnd has been in this direction.
The corporate parent should also assess which businesses should most sens-
ibl)' be wilhin ils portfolio given these considerations. Illustration 6.4 shows
how Unile"er re\iewed ils role as :t corporate parenl and, in consequence.
ib portfolio.
If the corpor.lte parenl does, indeed. seek 10 enhance business sirategies, it
needs 10 considr.:r the number of business units for which il can sensibl)' do
so, For this Ihe parelll has to have sufflcielll feci for the businesses, so the
number cannot be greal unless they arc similar businesses in terms of tech-
nolog)'. products or compc((:nces; or in similar markels.
6.4.5 Arelatedness matrix"
The idea of syncrgy, disCllSSt:d in st'crion 6.3.3 above, presupposes that there
art capabililit's, resources or competcnces across a portfolio of businesses
which. when pUI together, yield benefits greater Ihan Ihe sum of their parts.
If this is applied 10 portfolio management, it Sllggt'SIS the importance of the
twO dimensions shown in E:\:hibit 6.12. First, the extenl 10 which Ihe portfolio
IIIDB. The relatedness matrix
DEGREE OF RELATEDNESS OF BUSINESS UNITS
MANAGEABILITY
High
Low
Low
Distractions
Aliens
High
Heartland
businesses
Value
traps
294 PART III .. STRATEGIC CHOICES
Unilever's parenting
If the role of the parent is to add value to
business units, it needs to be clear about
how it can do this for which businesses.
Unilever, the consumer products company,
involved in food, detergents and personal prod-
ucts, has built particular skills, resources and
characteristics which make it an effective parent
of certain kinds of business, but a less effective
parent of others.
Unilever had developed as a decentralised
organisation, traditionally setting great store in
the country or regional manager. It had a strong
technology base and centralised corporate re-
search laboratories; a strong marketing focus,
built around skills in product development and
branding for mass market consumers; and an
unusual human resource management process,
monitoring the progress of 20,000 managers, a
large portion of whom were expatriates.
The skills, resources and characteristics of
Unilever's corporate centre fitted well with the
parenting opportunities and critical success
factors of its businesses. Regionally focused
consumer products businesses needed help to
access product and market knowledge from
across the globe. Consumer products businesses
also benefited from the type of support Uni-
lever provided in product marketing, basic tech-
nical research and new product development.
Unilever found from long experience that con-
tinuous new product development was the
right policy. The company therefore pressed
its subsidiaries to push harder in this area
than they would probably choose to .do on their
own.
For the past 20 years, Unilever has been focus.
ing its portfolio. It has disposed of bUSinesses
such as animal feed, tea plantations and speciality
chemicals that were not in its heartland (see
figure). A speciality chemical business is often
global, operating from one site in serving a global
market, whereas consumer goods businesses are
multi-local, having many sites serving the slightly
different needs of different regions. Unilever is
more knowledgeable about multi-local businesses
than global businesses. The needs of a speCiality
chemicals business and tea plantations were also
different from Unilever's consumer products
businesses. Unilever's skills in marketing, fat
technology and new product development were
of little relevance here.
In the figure, Unilever's food businesses are
identified as having the best fit because the
combination of centralised skill management and
decentralised decision making that Unilever was
most comfortable with suits food businesses .
best. The detergents businesses were becoming
increasingly global, particularly in developed
economies, and Unilever has been losing market
share to companies more comfortable with acen
tralised management philosophy. The detergents
businesses were therefore moving to the edge
of Unilever's heartland. The perfume and up-
market cosmetics businesses, part of the personal
products division, were also global, requiring a
management approach that Unilever was less
comfortable with. This led to the personal prod
ucts businesses as a group being positioned dif
ferently from the food businesses.
In 2000 Unilever reorganised in a way that reo
flects these differences. In essence the company
CHAPTER 6 CORPORATE-LEVEL STRATEGY 295
.. ,=_ .... ...
-----
-
High
---------r--------------- I
\
\ vi
Fit between
business unit
critical success
factors and the
parent's skills,
resources and
characteristics
/
I
I
\
\
"-
\
\
I
,,/
'\
\
\
\
Speciality
\ products i
\ I
\ /
"..... /
Tea plantations
/ '\
I \
I \
\ I
" ",/
Low
Animal feed
Low .. High
Fit between business unit parenting opportunities and
the parent's skills, resources and characteristics
split into two divisions - a food business and a
home and personal care business - enabling the
management teams of the two divisions to
develop different parenting skills reflecting the
different needs of these two product areas.
Prepared by Andrew Campbell, Ashridge Strategic Management
Centre.
Questions
1. How might the results of this parenting matrix
exercise differ from a portfolio exercise using the
growth/share matrix?
2 What are the benefits and disadvantages of
keeping the two divisions set up in 2000 in one
company? Should Unilever consider a de-merger?
296 PART III STRATEGIC CHOICES
consists of businesses which are related to each other in such terms' the
. .. ' sons
of competence analysts suggested ill sectIOn 4.4.2 and the questions On b
of relatedness raised in section 6.5.1 and Exhibit 6.14 below may help i e ~
this. The second is the extent of manageability by the corporate parent' tl:
, us
will depend on a number of factors.
II! Benefits will accrue providing the centre is able not only to identify sUch
relatedness, but also to manage the interaction of the businesses so that
transference of resources, capabilities and competences across businesses
can be achieved. This is likely to mean that the number of businesses in the
portfolio will be limited since a good understanding of those businesses Wil!
be required.
In turn, for benefits to be realised, there is a need for managers in different
businesses to be willing to learn from each other.
s Third, the cost of this transference and learning needs to be less than the
benefits which result; and the problem can be that the cost in managerial
time of such transference and learning can be considerable.
Clearly this is the logic of the synergy manager. Borrowing the terminology of
the Ashridge portfolio (see Exhibit 6.11 above), corporate parents should be
aiming to identify a limited number of 'heartland' businesses which are related
to each other and where the release of synergies can be managed. However,
the dangers are that they identify potential relatedness which cannot be man
aged, or is too costly to manage (the equivalent of the value trap); or spend
time trying to achieve synergies where opportunities for them do not exist
because of lack of meaningful relatedness - here termed 'distractions'.
6.4.6 Trends in portfolio management
The trend in management thinking has been to move away from focusing
mainly on the balance and attractiveness criteria (Le. sections 6.4.1 and 6.4.3
above) towards focusing more on the fit criterion (i.e. 6.4.4 and 6.4.5 above).
In other words, the challenge the corporate parent increasingly faces is to
justify how a portfolio of businesses achieves greater value than the sum of
its parts either because of the synergistic fit between the businesses, or the fit
between business needs and parental competences, or both. Many companies
diversified in the 1970s and 1980s in order to get into more attractive busi-
nesses and balance their portfolios. Most of these initiatives failed and the late
1980s and 1990s were periods of unbundling, break-ups, and de-mergers of
portfolios that had, at best, spurious relatedness. Corporate parents sought to
achieve greater focus on technologies or markets they could understand and in
which there were greater chances of achieving such fit.
The increasing sophistication of the capital markets has, in turn, encouraged
this trend. As explained at the beginning of the chapter, shareholders no longer
need corporate managers in conglomerates to act on their behalf to smooth
earnings over a portfolio of businesses because they can smooth their returns
themselves by investing in a selection of companies with different earnings
CHAPTER 6 CORPORATE-LEVEL STRATEGY 297
rofiles. Moreover, shareholders can move money into attractive sectors, such
health care or emerging technologies, more easily than corporate parents
The argument is that corporate parents should stop doing tasks that share-
can.
holders can more easily do for themselves and focus on creating additional
value from the application of management expertise.
There has been a parallel trend in the public sector, with increasing political
ress
ure
by governments to challenge what large and often bureaucratic bod-
ies have to offer to more local delivery of services. Here the driving forces have
been the combination of a desire to reduce the cost of central government and
the demand for more local accountability for services.
Each of the portfolio logics discussed in this section assumes a role of the
centre. In turn, the role of the centre and the logic of the portfolio make
assumptions about the diversity of businesses within a corporate portfolio.
This is the subject of the next section.
6.5 THE EXTENT OF CORPORATE DIVERSITY
The different rationales of corporate parents discussed in section 6.3 have
different implications about the diversity of portfolios. As suggested above, a
portfolio manager or restructurer may have a very diverse portfolio because
they are not seeking to intervene in or even know a great deal about those busi-
nesses. On the other hand, a synergy manager and parental developer need
to know about the businesses in order to add value. To do so, it is unlikely that
they can cope with high degrees of diversity. Moreover, they are likely to need
to manage businesses which have a degree of relatedness in some way. The
converse of this argument is also important; the extent of diversity of a cor-
porate portfolio should inform the role played by the corporate parent. For
example, it would be foolish for managers of a highly diverse, unrelated POlt-
folio to try to adopt the role of a synergy manager; unless of course they chose
to radically change the portfolio.
The nature of diversity and the degree of relatedness of business units in a
portfolio are therefore important issues to examine. The rest of this section
therefore considers the topic of diversification. Diversification is typically
defined as a strategy which takes the organisation away from its cunent
markets or products or competences (also see the discussion in section 8.2.4).
The extent to which this occurs can be thought of in terms of the relatedness
(or unrelatedness) of diversification.
6.5.1 Related diversification
Related diversification is strategy development beyond current products and
markets, but within the value system (see section 4.4) or 'industry' in which
the company operates. For example, Unilever is a diversified corporation, but
Virtually all of its interests are in the fast-moving consumer goods industry.
Beginning with this definition, related diversification could take different forms,
as Exhibit 6.13 shows.
Diversification is typically
defined as a strategy which
takes the organisation away
from its current markets or
products or competences
Related diversification is
strategy development beyond
current products and markets,
but within the value system
or 'industry' in which the
company operates
298 PART III STRATEGI C CHOICES
Related diversification options for a manufacturer
----
BACKWARD
INTEGRATION
Raw materiaIs
manufacture
t
Raw materials
supply
HORIZONTAL
INTEGRATION
Competitive
products
Complementary
products
FORWARD
INTEGRATION
Distribution
outlets
Components
manufacture
t
Components
supply
Transport
Machinery
manufacture
Machinery
supply
Marketing
information
By-products
Product/process l
research/design
Repairs and
servicing
Note: Some companies will manufacture components or semi-finished items. In those cases there will be additional integration
opportunities into assembly or finished product manufacture.
Vertical integration
describes either backward
or forward integration into
adjacent activities in the
value system
Vertical integration describes either backward or forward integration into
adjacent activities in the value system. Backward integration refers to
development into activities which are concerned with the inputs into the
company's current business (i.e. are further back in the value system). For
example, raw materials, machinery and labour are all important inputs into
a manufacturing company, so the acquisition by a car manufacturer of a
component manufacturer would be related diversification through back
ward integration. Forward integration refers to development into activities
CHAPTER 6 CORPORATE-LEVEl STRATEGY 299
Some reasons for related diversification
EXAMPLES/COMMENTS
POSSIBLE ADVANTAGES
-; control of supplies
_ Quantity Tea processors own plantations to secure continuity of supply.
_ Quality Components for motor cars may need to be manufactured by the company.
_ Price Printing facilities can be cheaper if in-house.

control of markets Manufacturers own retail outlets to gain guaranteed distribution.
Access to information Car manufacturers own credit services, car hire firms and servicing firms to
access information on customer preferences.
Cost savings
Fully integrated steel plants save costs of reheating and transport.
Spreading risk
Building on:
- Core competences
- Technology
Firm of accountants moving into tax advice or corporate recovery.
Precision engineering equipment manufacturer in one market entering
another with similar technical requirements.
-------------
Avoids over-reliance on one product or market, but builds on related
experience.
Resource utilisation
Parenting
Manufacturer acquiring company for compatible products to fill capacity.
$0 the corporate parent can understand business units.
which are concerned with a company's outputs (Le. are further forward
in the value system), such as transport, distribution, repairs and servicing.
Illustration 6.5 shows how car manufacturers have begun to diversify
through forward integration.
Horizontal integration is development into activities which are competitive
with, or complementary to, a company's present activities. For example,
many organisations have realised that there are opportunities in other
markets for the exploitation of the organisation's competences - perhaps to
displace the current providers as a new entrant. For example, the Auto-
mobile Association (AA) had been founded as a members' club for motorists
in the UK and extended into providing rescue services for breakdowns. As
this market came under fierce attack from specialist breakdown organisa-
tions in the 1990s, the AA extended into new markets by exploiting its
expertise in rapid response to crisis. It launched a home service for electrical
and plumbing emergencies, a development pioneered by similar motoring
organisations in Australia.
Exhibit 6.14 summarises some reasons given for related diversification or,
conversely, could be used to give reasons why highly diversified companies
might divest activities to increase their degree of specialisation on more related
activities.
However, potentially the definition of related diversification so far employed
masks a problem of significant strategic importance. Should relatedness be
Horizontal integration is
development into activities
which are competitive with,
or complementary to, a
company's present activities
Questions
1. What other areas of forward integration might
car manufacturers consider and why?
2. How might the resources and competences of a
car manufacturer differ from the downstream
activities they are moving into?
3. Bearing in mind the answer to question 2, is the
diversification downstream related or unrelated
diversification?
Prepared by Urmilla Lawson, University of Strathclyde
Graduate School of Business
Source: Adapted from T. Burt, 'Carmakers eye route to III
twin track revenues', The Financial Times, 28 Feb. 2001,
Auto Section, p. 1.
t
As cars become more sophisticated, the f
l
'.
accompanying technology has also become more t
advanced. Manufacturers have been explOring "
new business opportunities in in-car Internet t
and telematics systems. The most promising 1
technologies are those being explored in naviga I....
tion systems, safety and security controls, and !
mobile multimedia functions. This could become
the interface for customer contact; for example,
General Motor's OnStar mutimedia business
offers voice-activated services, emergency
assistance, stolen vehicle tracking and e-mail.
The focus is on accessing customers and
selling directly to them, rather than centring on
the car as a one-time sale. Manufacturers want
to develop customer relationship strategies
whereby the purchaser of the vehicle is retained
in a long-term relationship with the manufac-
turer for the duration of ownership. The manu-
facturers also want to establish links with the
used vehicle's future owners, ensuring that they
capture more of the life cycle of the product. In
this way, they can leverage their customer base
to cross-sell and promote other products and
services, such as repair, mortgages and credit.
A global downturn in automobile sales led
manufacturers to rationalise their operations by
decreasing production, brands, jobs and cap-
acity. However, they also geared up to exploit
new opportunities to earn revenue and de-
crease costs by diversifying into downstream
activities. Margins from such downstream activ-
ities as selling vehicle financing, leasing and
insurance, and providing parts, servicing and
repair are higher than those of vehicle sales. But
there are other advantages too.
Ford has been attempting to redefine itself
as 'the world's leading consumer company for
automotive products and services', rather than
solely as a manufacturer of vehicles. In addition
to Ford's traditional business units, the com-
pany has been seeking higher returns from their
downstream activities, which include Ford
Credit, Hertz, and direct sales and e-business
initiatives. The most pertinent features of these
ventures are that the companies can collate
information on customer preferences, which
can be fed to the manufacturing plants. In fact,
one of Ford's motives for its 1999 acquisition of
KwikFit was to access its database of customers.
In an attempt to lift their service, repair and
maintenance businesses to a more prominent
role, both General Motors (Europe) through its
Vauxhall MasterFit operations and Ford through
its RapidFit division have launched initiatives to
enable their franchised dealers to win back some
of the servicing and repair business for older
cars. There has also been an increasing trend
of manufacturers buying formerly independent
dealerships in their own brands, with some
manufacturers taking large equity stakes in the
super-dealers.
Diversification through forward integration
in the car industry
Companies may see benefits in
diversifying by means offorward
integration.
300 PART III e STRATEGIC CHOICES
-
CHAPTER 6 CORPORATE-LEVEL 5,: :'.1;:;>\ 301
ht
of in terms of the value system of organisations, as described above, or
thoug . j:
ld it be thought of 111 other terms, lor example 111 terms of competences
shoU I' b l' h . ful
anisations? To continue an examp e gIven a ove: w llC IS more use ,
of org I d d' ifi " f' . d
el
've of Unilever's re ate Ivers catIOn 111 terms 0 moves 111to pro -
to cone .
d m
arkets within the fast-mov111g consumer goods industry, or in terms
ucts an
f moves into companies in which competences such as marketing and
o rch and development are crucial? In the case of Unilever these may go
res
ea
hand in hand, but for other. they rna: well not. For example, a
firm may justify backward 111tegratIOn 111tO financ111g or raw material manu-
facturing (see Exhibit 6.13) as related diversification when in fact the com-
etences required for such businesses are fundamentally different. Certainly
this has led to some strangely diversified businesses. In the 1980s,
UK brewing companies followed diversification strategies justified by them
as related developments. Historically brewers had been vertically integrated
forward from production into pubs. Diversification then took the form of
buying hotel businesses and opening restaurant chains on the grounds that
these were related to pubs. This then took the brewers further into the
leisure industry; and diversification into holiday companies and bookmakers
followed. Each move in itself was arguably related to the activities of the
business as it progressively diversified; and was justified in terms of potential
synergies. However, it was difficult to see how the resulting overall portfolio
was related, not least in terms of the sorts of competences reqUired to brew
beer as compared with those required to run a bookmaker! Unsurprisingly,
many of these diversified brewing conglomerates have now been broken up.
Indeed, over the past decade there have been many instances of large con-
glomerates choosing to de-merge to form more focused corporations; a tend-
ency which appears to have improved profits, net worth and reduced risk of
takeovers. 15
Aproblem which many established firm are finding in the new millennium
further illustrates the same point. Diversification into e-businesses which, on
the face of it, are highly related in terms of product can prove problematical
in terms of the competences reqUired to develop business ideas suited to that
medium and keep pace with changes in it. The products may be related to the
original core business but the competences are not.
The 'ownership' of more value activities within the value system through
vertical or horizontal integration does not therefore guarantee improved per-
formance for the organisation, or better value for money for the consumer or
client. Some of the reasons why related diversification could be problematical
have already been raised. Others include:
The time taken up by top management on trying to ensure that the benefits
of relatedness are achieved through sharing or transference across business
units.
The reluctance of business unit managers to share and learn from other busi-
ness units: this is particularly likely if they are incentivised and rewarded on
the basis of the performance of their own business alone.
Alack of new ideas or innovation because of the lack of diversity and the
focus on a limited number of technologies and markets.
302 PART III STRATEGIC CHOICES
The received wisdom that relatedness matters has therefore been questioned 16
There has been increasing emphasis on improving performance Within h'
. t e
value system through external lmkages and the management of relationshi
with the various parties in the supply and distribution chains. Arguably, ~
ability to achieve this could itself be a core competence. It would inclUde the
need to ensure that innovation and improvement of value for money are oee e
Ur
ring within other organisations in the value system on which the organisatio
depends, such as suppliers and distributors. n
6.5.2 Unrelated diversification
Unrelated diversification
is an organisation moving
beyond its current value
system or industry
Typically, unrelated diversification is thought of as an organisation moving
beyond its current value system or industry. So unrelatedness has tended to be
defined in somewhat narrow terms: that is, opportunities beyond the current
product and market base of the organisation and outside the current industry
(or value system). However, as the discussion above has revealed, this narrow
definition tends to hide important differences in the degree of relatedness of
diversification opportunities and the basis of such relatedness. Again, this is
where considering organisational competences could be important. If the
competence perspective is taken into account, then the traditional notion of
unrelated diversification might be thought of in terms of degrees of relatedness
and unrelatedness as follows.
Diversification into quite new markets and new products by exploiting the
current competences of the organization. For example, a university business
school might argue that it could build on its research and teaching skills to
develop consultancy services for industry; or a manufacturer might seek to
exploit its distribution and logistics skills, as in Illustration 6.6.
To continue the discussion of corporate rationales (see section 6.3 above),
the global development of conglomerate businesses is more likely to work
if subsidiaries are related such that they are conducive to effective parenting
from the centre. This might be by means of (a) building a portfolio of busi
nesses with sufficient common competences between them to allow for
effective 'synergy management' (see section 6.3.3 above) or (b) by ensuring
that the businesses are such that they can benefit from the competences at
the centre of a 'parental developer' (see section 6.3.4).
Diversification by the exploitation of competences may go beyond simply
moving into markets which already exist: it may involve the creation of
genuinely new markets. There are some elements of this in relation to the
AA example above. It was the absence of an efficient and reliable means for
individual households to access the fragmented suppliers of electrical and
plumbing services which created the AA's opportunity. Another example is
the way in which research and development based on microelectronics
technology has progressively spawned whole new markets, such as personal
electronic organisers, interactive video games, and so on which did not exisi
twenty years ago. However, such diversification requires very good market
CHAPTER 6 CORPORATE-LEVEL STRATEGY 303
Standard Photographic's diversification
A diversification programme may build
on its historical competences but is takes
a company far from its origins.
Based in Leamington Spa in the UK, Standard
Photographic'S business was originally based on
the production of photographic film, though
this ceased in 1967. Up to then it had about
10 per cent of the market in the UK under the
Standard brand. However, following competi-
tion from Kodak, Fuji and Agfa it turned to film
packaging. By 1999 it was buying over 40 million
rolls of film a year and repackaging these for
own-brand labels for Boots, Dixons, Superdrug
and Tesco, achieving a 60 per cent share of the
own-brand film market in Europe. The turnover
of the packaging operation was 9.4 million (at
margins of 5 per cent) of the firm's 235 mil-
lion but was expected to decline.
Standard also moved into other businesses,
including the conversion of photographic paper
(7 per cent margins on sales of7.8 million) and
film processing (8 per cent margins on 1.8 mil-
lion turnover). However, the latter was under
threat from digital photography. Standard also
had a logistics business turning over 9 million
(11 per cent margins) and a 20 per cent growth
record. This business provided a maximum
36-hour delivery of film to retailers. Orders
transmitted hefore 5.30 p.m. were packed in
the evening and delivery guaranteed to more
than 2,500 retail outlets by 9 a.m. the next day.
had built up skills to handle this rapid
dehvery. Gordon Bott, the managing director
that inventory levels were kept to
mmunum: 'Stock management is the key to the
process because of the cash flow implications.
It' diffi
is cult to forecast levels of buffer stock
because of market volatility caused by pro-
motion campaigns, in-store activities and the
weather'; and cash flow management was vital
since retailers did not pay Standard till two
months after delivery. In 1999 it built on this
logistics business by delivering printing and
publishing products, floppy discs as well as
cosmetic products to 250 high street Boots
shops.
By 2000, Standard Photographic had decided
on a further area of diversification into 'order
fulfilment for e-businesses'. Gordon Bott: 'The
heaviest criticism of dotcoms is their order
fulfilment service. We strongly believe the
consumer increasingly wants reliable delivery
more than next day delivery ... We have proven
expertise in handling rapid fulfilment of orders
received electronically ... the challenge of
fulfilment companies will be to be flexible
enough to offer delivery at a specific time when
the customer wants it.' However, the company
recognises that in moving into this area it will
be competing against established competitors
such as Exel, Parcel Force and White Arrow
Express.
Source: Adapted from The Sunday Times, 1 October 2000.
Questions
1. What are the reasons for the diversification
strategy of Standard Photographic?
2. Compare the diversification programme of
Standard with that of the car manufacturers
in Illustration 6.5 in terms of (a) product/market
relatedness and (b) competence relatedness.
Consider which of the diversification pro-
grammes is more or less related.
304 PART III .. STRATEGIC CHOICES
J Some reasons for unrelated diversification
l.-___._- ,----._.__
POSSIBLE ADVANTAGES
Exploiting underutilised resources
and competences
Escape from present business
Spreading risk
Even out cyclical effects in a given sector
Need to use excess cash or safeguard profits
Personal values or objectives of
powerful figures
EXAMPLES/COMMENTS
Farmers use fields for camp sites.
Local authorities use plastic waste for new materials.
--
A company's products may be in decline and unrelated
diversification presents the only possible 'escape'.
Some companies believe that it is good sense not
have all their 'eggs in one basket' and so diversify into
unrelated areas.
Toy manufacturers make subcontract plastic moulded
products for industry.
Buying a tax loss situation.
Personal image locally or nationally may be a motive
for high-profile diversification.
knowledge and the creativity to better provide for market needs. Arguably,
it is these competences on which such apparently unrelated diversification
may be built.
The most extreme form of unrelated diversification is where new compel
ences are developed for new market opportunities. This extreme end of the
diversification spectrum is less common, though it is tempting to argue that
firms that have tried to move from traditional ways of operating to e-business
have found themselves in just this position. However, if a pedantic defin
ition of unrelatedness were taken, entirely new competences might never
be observed at all since it usually proves possible to identify some degree of
relatedness in the market or resources or competences in any development
opportunity.
Exhibit 6.15 summarises some of the reasons for unrelated diversification. It
is worth noting that synergy is a commonly cited reason for both related
and unrelated diversification. It should be evident from the discussion above
why this is the case: because synergy can be thought of in terms of products,
markets, technology and also competences.
6.5.3 Diversification and performance
Diversification has been one of the most frequently researched strategic issues
of business. In particular, there have been a number of studies which have
investigated the relationship between the choice of diversification as a strategy
and the performance of the organisation in financial terms. Overall, it needs to
be said that the various attempts to demonstrate the effects of diversification
CHAPTER 6 CORPORATE-LEVEL STRATEGY 305
erformance are inconclusive. Early researchP suggested that firms
on . Ph developed through related diversification outperformed both those
vvhlC .
m
ained specialised and those whlCh developed through unrelated
that re . . 18
l
ineation These findmgs were later questlOned. The sum total of all of
divers" . . " .
e research work linking patterns of dlversificatlOn to finanClal performance
th I Th" h '"
'ns somewhat unc ear. is is, per aps, not surpnsmg smce so many stud-
remat
ies rely on measures of relatedness whilst acknowledging that it is difficult to
be recise as to what related and unrelated diversification means or to measure
p . . . I H I
accurately what constitutes orgall1SatlOna competences. owever, t lere are
some insights from the research over the years.
The balance of evidence is that relatedness of diversification is financially
beneficial in so far as it allows an organisation to build on and leverage
d
19
common resources an competences.
There are, however, limits to the extent to which diversity is advantageous.
The costs and complexity of managing diversity are considerable; imagine
attempting to act as a synergy manager across a large portfolio of related
businesses. The cost and time of corporate managers involved in trying to
understand and involve themselves in managing synergies across the busi-
nesses would be not only high, but probably highly inefficient. So whilst
profitability does increase with diversity, this is only up to a limit of com-
plexity, beyond which this relationship reverses.
20
Complexity, as measured
by customer numbers or communication costs, also reduces profit potential,
particularly for service-based businesses.
21
Similar patterns are also found when it comes to international diversifica-
tion. Whilst geographic diversification tends to increase profitability, the
combination of diverse locations and diverse business units again gives rise
to level of complexity beyond which benefits are not gained.
22
Interestingly,
there is also evidence that, as international diversity grows, levels of innova-
tion internal to the firm also decline, as the focus becomes more and more
to do with co-ordination of the portfolio and diversified growth through
acquisition. 23
Other studies
24
argue that a key factor is the resource situation of the organ-
isation - particularly the area of underutilised resources. Underutilisation
of physical resources or intangible resources (brand name, etc.) is likely
to encourage related developments, whereas excess financial resources
may well be used to underwrite unrelated developments (e.g. through
acquisition), particularly if other resources and competences are difficult
to develop or grow quickly. This raises the question of whether success-
ful performance is a result of choosing diversification or if the relationship
is, in fact, the reverse. Perhaps successful organisations choose diversifica-
tion because opportunities in their current product or market domain look
limited.
The final point that needs to be made here is to do with the theme of this
chapter. The extent to which diversification is likely to enhance performance
will also depend on whether the nature and extent of diversification are com-
patible with the other challenges of corporate strategy, namely:
306 PART III II STRATEGIC CHOICES
the compatibility with the corporate parenting rationale (see section 6.3);
the logic of the corporate portfolio (see section 6.4); and
.. the nature of corporate control exercised by the parent and therefore th
relationship of the parent with its business units: this is the subject of the
. e
next sectIon.
6.6 CORPORATE CONTROl
25
Clearly much of the above also has implications for how a multi-business car.
poration is organised and managed. In particular there are implications about
the way in which the corporate centre interacts with and seeks to exercise
more or less control over the businesses. Much of this has already been inti.
mated above. A portfolio manager or restructurer is likely to be focusing on
minimal strategic control, leaving business-level strategy to chief executives
of the businesses, and exercising control more through clear and challenging
financial targets. On the other hand, the synergy manager and parental devel.
oper may be intervening a good deal in the businesses in order to achieve syn.
ergies across the business units or provide parental benefits. What would be
very counterproductive is for the means of control to be inconsistent with the
logic of the corporate centre. For example, if a portfolio manager were to have
a diverse portfolio but try to intervene in the strategies of the businesses, it
would very likely lead to disaster. Conversely, if a synergy manager tried to
make transferences between business units without haVing an understanding
of those businesses and involving themselves in the strategy of those busi
nesses, it could be chaos.
In Chapter 9 (section 9.3.2) this issue of corporate control is discussed more
fully. What matters here is to understand that there is a necessary link between
organisational design, corporate control and the logic of the corporate entity.
6.7 CORPORATE-lEVEL COMPETITION
The chapters that follow go on to focus on competitive strategy at the business
level. However, before doing so it is important to emphasise that competition
also occurs at the corporate level. At the business level the competition is, in
effect, between businesses for the right to serve customers. At the corporate
level the competition takes place between corporate parents for the right to
own businesses. Investors and potential investors are continually seeking ways
to achieve better returns, and this means that they are reviewing not only the
performance but also the corporate strategies of the sorts of organisation dis
cussed in this chapter. In so doing they make choices between one corpora
tion and another, and do so on the basis of many of the issues discussed in this
chapter.
This competition is most visible during a hostile takeover. The managers
in one parent company are saying to the shareholders of another, 'We cail
do a better job of managing these businesses than their current parent has
CHAPTER 6 CORPORATE-LEVEL STRATEGY 307
The Royal Bank of Scotland and the takeover
of NatWest
Investors may decide who would make
the best parent for a business on the
basis of corporate rationale, portfolio
logic and managerial track record.
In autumn 1999, fund managers had to decide
between three competing groups of parent
managers, all of whom wanted to run the
financial services businesses that made up
the National Westminster Group. The Bank of
scotland bid for National Westminster in
September 1999. By Christmas 1999, the exist-
ing managers at National Westminster had
resigned or been dismissed and a new' team
with a new strategy was in place. In addition,
the Royal Bank of Scotland (RBS) had made a
counter-offer. All three sets of managers were
trying to persuade the shareholders that they
could do the best job of parenting the NatWest
businesses.
The decision facing the shareholders was
not straightforward. There was no obvious
higher bidder and the financial case for the take-
over was much the same for RBS as for the
Bank of Scotland. They both claimed roughly
the same potential cost savings, proposed to sell
off businesses worth more to others and argued
similar revenue increases could be found. As
a result the fund managers could not avoid
deciding which of the three they thought would
be the best parent. RBS, who eventually suc-
ceeded, was able to base its case on three
advantages over its rivals.
First, the combined RBS/NatWest would rep-
resent a portfolio of businesses with more mar-
ket power within each business unit. Sir George
Mathewson, then RBS's chief executive, argued
that the business portfolio of Natwest was more
'congruent' with RBS than with the Bank of
Scotland and would increase market power in
key sectors substantially. The combined bank
would be the largest corporate bank in the UK,
in retail banking it would stand second to Uoyds
TSB; with Direct Line it would be the largest UK
motor insurer; and even on life assurance and
pensions it would not be far behind other banks
such as Uoyds TSB and Abbey National.
Second, RBS was clear that the businesses
would be organised in customer-focusing divi-
sions, leaving the branch networks largely
intact to ensure substantial geographic presence
throughout the country. The corporate centre
would take responsibility for only a limited
number of roles, including treasury and setting
up a 'central manufacturing unit' to ensure that
financial products were aligned.
Investment bankers also believed the RBS
management's track record to be more credible
when it came to cost savings. One investment
banker offered another reason for preferring
RBS management. 'Investment bankers don't
like to be proved silly: the share growth of RBS
had been better than the Bank of Scotland;
that's much the same as saying that the manage-
ment is better.'
Source: Adapted from Financial Times, 10 February III
2000.
Questions
1. Based on the content of the chapter, identify
the main ways in which corporate executives
might argue for parenting advantage over rival
corporations.
2. Choose another example of a takeover battle
and identify reasons why the successful bidder
won.
308 PART III OJ STRATEGIC CHOICES
done.' This is shown in Illustration 6.7 with regard to the takeover battle
the National Westminster Group. Indirectly this competition between p for
companies is going on all the time. Almost every company is being conSl'darent
ered
as a possible takeover target by some other company. What the aggressor has
to be able to argue is that he or she can create more value than the incumbe
How parent managers create value is, therefore, central not only to t ~ t
performance of companies but also to their survival. It helps identify h i c ~
businesses they should buy and sell, it guides how they should 'parent' these
businesses and it determines whether they should be taken over by another
company.
SUMMARY
e Corporate strategy is the concern of the corporate parent, by which is
meant levels of management above that of business units.
9 There is no 'best' corporate strategy. What matters is the consistency With
which a corporate strategy is developed in terms of (a) clarity of the ratio.
nale of the corporate parent in seeking to add value to business units; (b) the
logic of the corporate portfolio; (c) the nature and extent of the diversity of
the portfolio; and (d) the nature of corporate control exercised by the cor.
porate parent.
e Different roles of the corporate parent could include portfolio managers,
restructurers, synergy managers and parental developers.
Portfolio logic might focus on achieving (a) balance between types of busi
ness units; (b) business units which are more or less attractive in terms
of industry characteristics and their market positions; or (c) fit between
competences of the business units or between the business units and the
competences of the corporate parent.
e The nature and extent of diversification can be considered in terms of
the degree of relatedness of business units within the portfolio. Bases of
relatedness have traditionally been considered with regard to linked activo
ities within the organisation's value system; but increasingly, relatedness is
being considered in terms of similarities or compatibilities of organisations'
competences.
The extent of diversification should also be considered in relation to the
rationale of the corporate strategy, the diversity of the portfolio and the
relationship of the business units with the parent. Portfolio managers and
restructurers may be able to handle diverse portfolios employing largely
financial control mechanisms. Synergy managers and parental developers
are likely to require less diverse portfolios and closer relationships with busi
ness units.
Corporate control is concerned with the way in which the corporate
parent interacts with and guides the business units within its portfolio. It
is important that the nature of this control is compatible with the other
aspects of corporate strategy discussed in this chapter.
RECOMMENDED KEY READINGS
n
O
verview of strategic issues facing multi-
For a
. esS firms and readings (some of which are
bUSl11 .,
referenced in this chapter) whlCh provlde an extens-
've coverage of ways of understanding these, see
Goold and K.S. Luchs, Managing the Multibusi-
ness Company, Routledge, 1996.
The issue of parenting is covered in detail with many
examples in M. Goold, A. Campbell and M. Alexander,
C01porate Level Strategy, Wiley, 1994.
REFERENCES
1. The opening chapters of M. Goold and K.S. Luchs,
Managing the Multibusiness Company, Routledge,
1996, provide a good introduction to the theories
underpinning the value-adding capabilities of multi-
product firms.
2. Transaction cost economics was developed by Oliver
Williamson: see Markets and Hierarchies, Free Press,
1975. However, key arguments are summarised in the
book by M. Goold and K.S. Luchs (see reference 1
above).
3. For a discussion of the role of a clarity of mission,
see A. Campbell, M. Devine and D. Young, A Sense
of Mission, Hutchinson Business, 1990. However,
G. Hamel and e.K. Prahalad argue in Chapter 6 of
their book, Competing for the Future, Harvard Busi-
ness School Press, 1994, that mission statements have
insufficient impact for the competence of a clarity of
'strategic intent'. This is more likely to be a brief but
clear statement which focuses more on clarity of stra-
tegic direction (they use the word 'destiny') than on
how that strategic direction will be achieved. See also
Hamel and Prahalad on strategic intent in the Harvard
Business Review, vol. 67, no. 3 (1989), pp. 63-76.
4. M. Goold, A. Campbell and M. Alexander, Corporate
Level Strategy, Wiley, 1994, is concerned with both the
value-adding and value-destroying capacity of corporate
parents.
5. The extent and means of the value-adding capabil-
ities of corporate parents is the theme of M. Goold,
A. Campbell and M. Alexander (see reference 4
above).
6. The first three rationales discussed here are based on a
paper by Michael Porter, 'From competitive advantage
to COrporate strategy', Harvard Business Review,
voL 65, no. 3 (1987), pp. 43-59.
7. For an account of Hanson see A. Brummer and
R. Cowe, Hanson: A biography, Fourth Estate, 1994.
CHAPTER 6 CORPORATE-LEVEL STRATEGY 309
A summary of different portfolio. analyses, their
benefits and limitations, is provided in D. Faulkner,
'Portfolio matrices', in V. Ambrosini (ed.) with
G. Johnson and K. Scholes, Exploring Techniques of
Analysis and Evaluation in Strategic Management,
Prentice Hall, 1998.
The issue of corporate diversity and corporate
strategy is discussed extensively in D.]. Collis and
e.A. Montgomery, Corporate Strategy: Resources
and the scope of the firm, Irwin, 1997.
8. See A. Campbell and K. Luchs, Strategic Synergy,
Butterworth/ Heinemann, 1992.
9. Here the rationales of the 'synergy manager' and 'skills
transferer' described by Porter (see reference 6 above),
have been combined.
10. The logic of parental development is explained exten-
sively in Goold, Campbell and Alexander (see reference
4 above).
11. For a more extensive discussion of the use of the
growth share matrix see A.e. Hax and N.S. Majluf
in R.G. Dyson (ed.), Strategic Planning: Models and
analytical techniques, Wiley, 1990; and D. Faulkner,
'Portfolio matrices' in V. Ambrosini (ed.), Exploring
Techniques of Analysis and Evaluation in Strategic
Management, Prentice Hall, 1998; for source explana-
tions of the BCG matrix see B.D. Henderson, Henderson
on Corporate Strategy, Abt Books, 1979.
12. See A. Hax and N. Majluf, 'The use of the industry
attractiveness-business strength matrix in strategic
planning', in R. Dyson (ed.), Strategic Planning:
Models and analytical techniques, Wiley, 1990.
13. The discussion in this section draws on M. Goold,
A. Campbell and M. Alexander, COl1Jorate Level Strat-
egy, Wiley, 1994, which provides an excellent basis for
understanding issues of parenting.
14. For a useful discussion of relatedness as applied to cor-
porate portfolios see D. Collis, 'Related corporate port-
folios', in Goold and Luchs (see reference 1 above).
15. See P. Comment and G. Jarrell, 'Corporate focus and
stock returns', Journal of Financial Economics,
vol. 37 (1995), pp. 67-87, and e.e. Markides, Diver-
sification, Refocusing and Economic Performance,
MIT Press, 1995.
16. This question is raised in the discussion on synergy by
Campbell and Luchs (see reference 8 above).
17. R.P. Rumelt, Strategy, Structure and Economic Perform-
ance, Harvard University Press, 1974.
310 PART III '" STRATEGIC CHOICES
18. C.A. Montgomery, 'The measurement of firm diver-
sification: some new empirical evidence', Academy of
Management journal, vol. 25, no. 2 (1982), pp. 299-
307; and R.A. Bettis, 'Performance differences in related
and unrelated diversified firms', Strategic Management
journal, vol. 2 (1981), pp. 379-393.
19. For example, see c.c. Markides and P.}. Williamson,
'Related diversification, core competencies and cor-
porate performance', Strategic Management journal,
vol. 15 (1994), pp. 149-165; D.D. Bergh, 'Size and
relatedness of units sold: an agency theory and resource
based perspective'. Strategic Management journal,
vol. 16 (1995), pp. 221-239.
20. For example, R.M. Grant, A.P. ]ammine and H. Thomas,
'Diversity, diversification and profitability among
British manufacturing companies, 1972-84', Academy
of Management journal, vol. 31, no. 4 (1988),
pp. 771-801; and D.]. Collis and c.A.
Corporate Strategy: Resources and the SCohe If '
OJ the
firm, Irwin, 1997.
21. See T. Clayton, 'Services in focus', PIMSletter no, 49
PIMS Europe Ltd, 1992. '
22. A useful review of the international dimension'.
M. Ritt, R.E. Hoskisson and H. Kim, 'International d' IS,
ifi
f'" . . d !Ver
s cation: e on mnovatIon an firm perfonnan
in product-diversified firms', Academy ofManage Ce
mell/
journal, vol. 40, no. 4 (1997), pp. 767-798.
23. See reference 22 above.
24. S. Chatterjee and B. Wernerfelt, 'The link: betw
een
resources and type of diversification', Strategic
Management journal, vol. 12, no. 1 (1991), pp. 33-48.
25. The discussion here and in section 9.3 in Chapter 9
builds on the work of M. Gould and A. Campbell
Strategies and Styles, Blackwell, 1987. '
* Refers to a case study in the Text and Cases edition. * Denotes more advanced work assignments.
6.1 Drawing on evidence from your reading in the
financial press, do you believe that corporate parents
of multi-business firms add or destroy the value created
by those businesses? Give examples to support your
arguments.
6.2 Identify the corporate rationales for a number of
different multi-business corporations: e.g.
(a) Virgin
(b) News Corporation*
(c) Royal Bank of Scotland*
(d) CRH*.
6.3 * Choose a number of companies with portfolios
of business units (e.g. Virgin, The News Corporation*,
CRH* or South African Breweries*). Identify and
explain the role of the corporate parent and how, if
at all, the parent enhances or could enhance business
unit strategies.
6.4 * Obtain the annual report of a major multi-
business corporation and apply different techniques of
portfolio analysis to understand and explain the logic
for the mix of businesses. Which portfolio approach II
most appropriate given the corporate rationale you
think is being followed by the corporate parent?
6.5 Based on the discussion in section 6.5, explain
what is meant by related and unrelated diversification,
Bearing in mind your explanation, is related diver-
sification a more sensible strategy than unrelated
diversification?
6.6 Many corporate parents argue that they search for
synergies between the businesses in their portfolio,Do
you think this is a realistic aspiration? Give examplel
from organisations with which you are familiar to
support your arguments.
6.7 Using the framework in Exhibit 6.2 and the argu-
ments in this chapter, evaluate the corporate strategy
of:
(a) The News Corporation*
(b) CRH*
(c) An organisation of your choice.
CHAPTER 6 CORPORATE-LEVEL STRATEGY 311
- ~ = = = = = . =----
The Virgin Group
Introduction
V
;" Group is one of the UK's largest private
The lrg
Lu

'es with an annual turnover estimated at

compam ,
bn er annum by 2000. Virgin's highest-profile
3 . P
s
was Virgin Atlantic, which had developed
busllles . .. .
to be a major force in the internatiOnal alfl111e bUSl-
How
ever the group spanned over 200 busi-
ness.' .
nesses from financial services through to railways;
from entertainment megastores and soft drinks
to cosmetics and condoms. (Figure 1 shows the
breadth of the group's activities.) Its name was
instantly recognisable. Research showed that the
Virgin name was associated with words such as
'fun', 'innovative', 'daring' and 'successful'. The
personal image and personality of the founder,
Richard Branson, were high profile; in British
advertisements for Apple Computers, together
with Einstein and Gandhi, he was featured as a
'shaper of the 20th century'.
Origins and ownership
Virgin was founded in 1970 as a mail order record
business and developed as a private company
Figure 1 The Virgin Group
in music publishing and retailing. In 1986 the
company was floated on the stock exchange with
a turnover of 250 million. However, Branson
became tired of the public listing obligations.
Compliance with the rules governing public lim-
ited companies and reporting to shareholders were
expensive and time-consuming, and he resented
making presentations in the City to people whom,
he believed, did not understand the business. The
pressure to create short-term profit, especially as
the share price began to fall, was the final straw:
Branson decided to take the business back into
private ownership and the shares were bought
back at the original offer price, which valued the
company at 240 million.
Virgin had grown fast, becoming profitable and
entering and claiming a significant share of new
markets without the traditional trappings of the
typical multinational. There was little sense of
management hierarchy and there seemed to be a
minimum of corporate bureaucracy. There was no
'group' as such; financial results were not consolid-
ated either for external examination or, so Virgin
claimed, for internal use. Its financial operations
were managed from Geneva.
The Virgin Group
l
Virgin Travel Virgin Rail Virgin Cinemas
Virgin Atlantic Virgin Rail Virgin Cinemas
Virgin Holidays
Virgin Aviation
Virgin Balloon
Virgin Media Virgin Hotels
Virgin Publishing Virgin Hotels
Virgin Hotels
Mktg
Virgin Group
Virgin Direct
Virgin Net
Virgin Money
Virgin Mobile
Telecoms
Virgin Music
Virgin Records
Virgin Radio
EMI Virgin Music
Virgin Digital
Studios
Virgin Trading
Virgin Megastores
Virgin Enterprises
Virgin Clubs
Virgin Cosmetics
312 PART III STRATEGIC CHOICES
Each business or group of businesses ran its
own affairs but they were tied together through
a degree of shared ownership and shared values.
Some argued that Virgin's ownership structure
enabled it to take long-term views, free from
investors' fixation with short-term returns. Indeed,
Branson argued that, as he expanded, he would
rather sacrifice short-term profits for long-term
growth and the capital value of the various busi-
nesses. Others argued that financing purely through
equity slowed the group's ability to expand. Still
others suggested that the complex web of busi-
nesses, with ownership in offshore trusts in the
Channel Islands and the British Virgin Islands, did
little to support Branson's image of honesty and
openness.
Corporate structure
The structure of Virgin Group was so opaque that
the true financial position of Virgin Group was
unclear. Due to its status as a private company,
the complex group structure, and unavailability
of consolidated accounts, it was difficult to arrive
at accurate figures for the Group's collective
turnover and profit. Companies within the group
did not even share a common accounting year-end.
The Group has been described as a 'keiretsu'
organisation - a structure of loosely linked
autonomous units run by self-managed teams that
use a family brand name. Branson's philosophy
was that if a business got to a certain size, he
would spin off a new business from the existing
one. Branson has argued that, as Virgin almost
wholly comprised private companies, the running
of the Group must be fundamentally different from
that of a public limited company, which must keep
shareholders, stakeholders and analysts happy, and
must pay attention to short-term goals of high tax-
able profits and healthy dividends. The advantage
of a private conglomerate was that the owners can
ignore short-term objectives and concentrate on
long-term profits, reinvesting for this purpose.
Historically, the Virgin Group had been control-
led mainly by Branson and his trusted lieutenants,
--.....
many of whom had stayed with him for
Ulore
than twenty years. The approach to manage
. . Ulent
was one that decentrahsed decISion maki
with an emphasis on autonomous
decision making and responsibility for their
development.
In 2000 the head office consisted of ab
Out
30 people. Senior staff had often had successful
careers in large, multinational corporations. With
businesses scattered across a wide range of indus.
tries and markets, the approach was hands,off
and until he was needed to finalise big deals or
settle strategy, Branson ruled with a loose rein by
delegating to managers and giving them leeway to
use their initiative. However, when it came to mar.
keting and promotion, Branson would take amore
involved role. And when it came to the financing
of the group and its deals, Branson's operating
style was expressed in his autobiography: 'In the
early 1970s I spent my time juggling different
banks and suppliers and creditors in order to play
one off against the other and stay solvent. I am
now juggling bigger deals instead of the banks. Ills
only a matter of scale.'
Corporate rationale
Whilst the diversity of Virgin's business interests
has been questioned, Branson has insisted that
their core values and approach have remained the
same. The name Virgin was chosen to represent
the idea of the company being a virgin in every
business they enter. However, before entering a
new market, it was thoroughly researched to
decide whether Virgin could offer something truly
different: the aim being to extend the brand name
at a low cost into selected areas where its reputa
tion could be used to shake up a relatively static
market. Virgin would only put its name to a project
if it met four out of five criteria: it must be innovat
ive, challenge authority, offer value for money by
being better than the competitors, be good
and the market must be growing.
Branson's method of adding value to businesses
revolved around four main elements. The Virgin
-
CHAPTER 6 CORPORATE-LEVEL STRATEGY 313
-
d
W
as the single most important asset of the
bran .
any Based on a set of attnbutes and values
camp . . b b' 1
rather than a market sector, It :vas a out t le
consumer's champion. But this was underpmned
b their public relations and marketing skills;
vir in'S understanding of the opportunities pre-
by 'institutionalised' markets; and their
experience with greenfield start-ups. saw
an 'institutionalised' market as one dommated by
few competitors, not giving good value to customers
because they had become either inefficient or
preoccupied with each other; and Virgin did well
when it identified complacency in the marketplace
and offered more for less. Virgin had taken on one
established industry after another, from British
Airways to Coca-Cola and railways, in an effort to
shake up 'fat and complacent business sectors'.
The Virgin brand made it possible to overcome
barriers to entry in various industries and sectors.
Branson and his business development team
reviewed about 50 business proposals a week,
with about four new projects under discussion at
anyone time. Good prospects would be those that
addressed institutionalised markets, fitted the
Virgin brand, could respond to the Virgin method
of treatment, offered an enticing reward-to-risk
ratio, and could be represented by a capable
management team.
Some have described the Virgin Group as a
branded venture capital house, with the use of
partners providing flexibility and limiting risk.
Each business was 'ring-fenced', so that lenders to
one company had no rights over the assets of
another, even if that company went bankrupt.
Virgin's expansion into new markets had been
through a series of joint ventures whereby Virgin
provided the brand and its partner provided the
majority of capital. For example, Virgin's stake
in Virgin Direct required an initial outlay of only
15m, whilst its partner, AMP, ploughed 450m
into the joint venture. Virgin Group's move into
clothing and cosmetics required an initial outlay
of only 1,000, whilst its equal partner, Victory
Corporation, invested 20m. With Virgin Mobile,
Virgin built a business in the wireless industry by
forming partnerships with existing operators to
seil mobile services under the Virgil) brand name.
The carriers' competences lay in network manage-
ment, not branding. Virgin set out to differentiate
itself by offering innovative services such as no
line rentals, no monthly fees and cheaper prepaid
offerings. Although it did not operate its own net-
work, Virgin won an award for the best wireless
operator in the UK.
Management style
Branson has sought out people with innovative
ideas who are willing to start new businesses, want
to be the best at whatever they do, and with a
strong desire to beat the competition. Organisa-
tional participants must share certain values
specific to the Group and everyone was expected
to be familiar with the corporate culture. Within
the business units, Branson adopted his own per-
sonal style of management, priding himself on
actively involVing employees and seeking their
ideas on ways of further adding value to his cus-
tomers. Employees were expected to internalise
values and behave accordingly. This internalisation
of corporate values meant a greatly reduced need
for external controls, but employees were still
held accountable for their performance. Human
resource management systems were in place to
keep people committed by stock options, bonusts
and profit sharing, and wherever possiblt, there
was promotion from within.
Challenges for the future
By 2001 commentators had a number of concerns.
Virgin appeared to be highly dependent on the
profits of Virgin Atlantic; this was troubling as the
airline industry was cyclical and facing increased
competition as a result of deregulation. There
were also few other businesses making substantial
profits and many seemed to be operating at a
loss. For example, both Virgin Express and Virgin
Sun had reported continuous losses since their
inception. In 1999, Virgin Direct Banking reported
314 PART III STRATEGIC CHOICES
losses of 20.4m. Virgin Cinema, Virgin Cola and
Virgin Clothing all made losses. Virgin Vodka,
launched in 1994, was to be found in just a few
duty-free shops and on Virgin Atlantic flights. In
2000, Branson finally folded his UK clothing line,
Virgin Clothing.
Selling chunks of some businesses to fund new
and existing businesses had become a familiar
story at Virgin - they sold off their UK and Irish
cinema houses, sold Virgin Music, sold a 49 per
cent stake in Virgin Atlantic to Singapore Airlines,
and in 2001 were seeking buyers for Virgin Sun
and Virgin Express.
The most public problem was Virgin Rail, whose
Cross Country and West Coast lines were ranked
23rd and 24th out of 25 train operating franchises
according to the Strategic Rail Authority's Review
in 2000. It was cited as one of the most unpopular
and inefficient train operators in Britain, with com-
plaints that the service was worse than it had been
prior to privatisation. It was estimated that Virgin
needed to double the number of passengers to be
a success and spend 750 million on new rolling
stock and service improvements. There were other
costs too. Government subsidies would decline up
to 2002 from around 77 million in 1998 and it
would be necessary for Virgin to be paying the
UK government annual franchise fees rising from
3.9 million to 220 million in 2012. The loss of
rail passengers in 2001, following rail disasters and
the consequent national disruption to rail traffic
as a result of emergency upgrading of track, did
nothing to help this situation.
.........
Another concern was whether Virgin had
become purely an endorsement brand, rather than
one that could offer real expertise to the b .
USl
nesses with whom it was associated. BecaUSe
Branson was so closely linked to the Virgin brand
there was also a risk he could undermine Virgin"
value if some of his high-publicity ventures
spectacularly. Critics also argued that Branson's
foray into so many diverse products and services
could dilute the strength of the brand, and the
Virgin brand, arguably its most precious asset
could become associated with major problems'
even failure. At the end of 2000, Branson wa;
struck a blow when his People's Lottery con.
sortium failed in their bid to run the UK National
Lottery and Virgin Rail failed to win the East Coast
main line franchise.
Sources: The Economist, 21 February 1998; P. McCosker
'Stretching the brand: a review of the Virgin Group',
Case Clearing House, 2000.
This case was updated and revised by Urmilla Lawson,
of Strathclyde Graduate School of Business.
Questions
1. What is the corporate rationale of the Virgin
Group?
2. Are there any relationships of a strategic nature
between businesses within the Virgin portfolio?
3. Does the Virgin Group, as a corporate parent, add
value to its businesses? If so how?
4. What are the main issues facing the Virgin Group
and how should they be tackled?