Strategic Choice4. The corporate parent & value creation

JS&W propose 3 main value-creating roles of the corporate parent:

(i) Envisioning: the process of creating a clear vision of the corporate intent

(ii) Intervention: to improve business performance or develop business strategy that takes a number of forms:

- Monitoring and control of performance against plan

4.1 Value Creation

- Coaching and training- Facilitating co-operation and collaboration

between SBUs(iii) Provision of services, resources &

expertise to its SBUs:- Financial assistance- Resource sharing- Managerial assistance- Providing access to central services such IT

& HR

- Providing access to markets, suppliers & sourced of finance

The existence of corporate parent imposes costs related to its size, therefore it must create value at least equal to these costs

The ways of destroying values are as follows:a) The added bureaucracy resulting from

organisational structure may;(i) Slow decision making process(ii) Limit organisation’s flexibility;(iii) Slow speed of response to customers &

environmental changes

4.2 Value destruction

b) The size and complexity of very large organisation may hinder and obscure the development of clear & useful corporate vision

c) The high administrative costs of corporate parent may exceed the benefits provided to SBUs

JS&W identify 3 main approaches to value creation that the corporate parent might adopt. They call these approaches strategic rationales:

- Portfolio managers- Synergy managers- Parental developers

4.3 Strategic rationale

Provide service to investor by applying financial disciplines

It seek undervalued companies as purchase targets, acquire them, and improves their value and performance

They keep their own costs low and provide few central services

Their SBUs are largely autonomous and their managers are judged by financial results

4.3.1 Portfolio managers

Pursues economies of scope Synergy managers aim to achieve high

efficiency in the shared use of resources and competences. To do this they must be able to overcome some difficulties:

(i) The cost involved in sharing(ii) Incompatibility of system and culture

among SBUs(iii) Variation in local condition

4.3.2 Synergy managers

Parental developer add value to its SBUs by developing its own specific competences to aid SBUs in their operations and development

Need to have a clear view of their value-adding capabilities and needs of SBUs

4.3.3 Parental developer

Strategic choicePortfolio analysis

Many companies have a portfolio of products or services with different characteristics such as:

(i) market growth, (ii) investment requirements, (iii) projected profitability, and (iv) volumes of product sales

5. Portfolio analysis tools

Build: A build strategy forgoes short-term earnings & profits in order to increase the market share

Hold: a hold strategy seek to maintain current position

Harvest: a harvest strategy seeks short-term earnings & profits at the expense of long-term development

Divest: divestment reduces negative cash flows

Four policies parent may deploy towards its SBUs

Is designed to reveal whether the organisation has:

- Should be applied to SBUs as they are the one dealing with particular market segment

- Too many declining products or services- Too few products or services with growth

potential- Insufficient product or service profit

generators to maintain organisation performance or to provide investment funds

Portfolio analysis

Classifies businesses, division or products according to the present market share and future growth of that market

The Boston Consulting Group (BCG) Matrix

The BCG Matrix

starsProblem

child

Cash cow dogs

Relative market share

Mark

et

gro

wth

High Low

High

Low

A cash cow has high market share and low growth rate and this should generate substantial cash inflows

Product life-cycle is in the maturity or declining stage

Market is less attractive to existing competitors and new entrants

Products generate cash in excess of what is needed to sustain their current market position

Profits support the growth of other products

Cash cows

A star product has high relative market share and high growth rate

May be cash neutral despite its strong position

Competitors are attracted to such market due to the high growth rate

Needs sufficient funds to sustain its current market share

Represents the best future prospects of an organisation

Star

A problem is characterised by low market share in a high growth market

Substantial cash input is needed to maintain or increase the market share

The question is whether the product can compete successfully with adequate support and what will the cost of that support be

Problem child/question mark

The dog product has a low relative market share in a low growth market

Products tends to have negative cash flows

Dog

The matrix uses only two measures (market growth & market share) and these may be too limited as a basis for policy decisions

The matrix encourages companies to adopt holding strategies

The matrix implies only those products with large market share should remain

The matrix implies that most profitable markets are those with high growth

Not all dogs should be condemned

Criticisms of the BCG Matrix

Public sector portfolio matrix Directional policy matrix Market attractiveness matrix

Other portfolios