Corporate Strategy

1.

Corporate Strategy
2. Models of Corporate Influence
Catherine Magelssen
London Business School
April 30, 2018

2.

Our Focus
Corporate Strategy
Corporate Head Office
Business Strategy
Division A
Division B
Finance
Finance
Production
Production
Marketing/Sales
Marketing
Functional Strategies

3.

Business strategy involves a
single business model and
value chain

4.

… while corporate strategy spans business models/ value
chain activities
1
2
3
4
5
6
7

5.

HQ
1
2
3
4
5
6
7

6.

A corporation is a portfolio of value chain
activities
Corporate advantage exists if portfolio
performance exceeds the sum of performance
of individual activities

7.

1. All strategy depends on market
imperfections.
In addition to the market imperfections you looked at in core
strategy (e.g. barriers to entry), important market
imperfections in corporate strategy are
capital market imperfections (which help some firms grow
faster than others),
imperfect human resource markets (which help some firms
gain talent more cheaply than others),
and political capital (which give some firms privileged
rights to operate).

8.

2. Strategy is easy for incumbents when
market imperfections are high.
In the 50s-70s, Grand Met could acquire multiple companies
without doing anything to add value to their operations.
As capital markets became more perfect, adding value
through operational improvements became imperative.

9.

Diversification Boom: 1950-1975
(Fortune 500)
70
64
54
54
46
63
60
46
36
40
37
30
1949
1954
1959
1964
1969
1974
Percentage of specialized companies (single-business,
vertically-integrated and dominant-business)
Percentage of diversified companies

10.

Diversification in the UK
Specialized companies
Diversified companies

11. What Explains the Diversification Boom?

Good economic conditions
Firms emphasized growth over profitability
Rise to eminence of consulting firms
Spread of the M-form (multidivisional)
structure
Belief in general management techniques and
skills
Portfolio management techniques

12.

The 1970s

13.

Portfolio Planning Models: BCG GrowthShare Matrix
Annual real rate of market growth (%)
HIGH
Earnings: high, growing
Earnings: low, unstable
Cash flow: neutral
Cash flow: negative
Strategy: invest for growth
Strategy: analyze (likely to
become star or dog?)
Earnings: high, stable
Earnings: low, unstable
Cash flow: high, stable
Cash flow: neutral or
negative
Strategy: milk
?
Strategy: divest
LOW
HIGH
Relative market share
LOW

14.

Annual real rate of market
(%)
growth
10
8
6
4
2
0
-2
Portfolio Planning Models: Applying the BCG
Matrix to a Foods Company
Frozen food
division
Health foods
division
Fruit juices
division
2
1.5
1
Bakery division
0.5
Relative market share
Current position
Previous position. Area of circle
proportional to $ sales.
0.1

15.

Portfolio Planning Models: The GE/McKinsey
Matrix
Industry Attractiveness
Business unit position
Low
Medium
High
Low
Medium
High
Industry Attractiveness Criteria
Business Unit Position
Market size
Market share (domestic, global,
and relative)
Industry profitability
Competitive position
Entry/exit barriers
Relative profitability
Market growth
Overseas sales ratio

16.

Do Portfolio Planning Models Help
or Hinder Corporate Strategy?
ADVANTAGES
• Simplicity and big picture
• Analytically versatile
DISADVANTAGES
• Sensitive to market definition
• Ignores synergy
• Ignores financing from
capital markets

17.

The 1980s

18.

Re-focusing in the 1980s
Drop in diversification index of Fortune
500 by 33% between 1980 and 1990
M&A levels were high, but divestments
were even higher

19.

Stick to Your Knitting
Idea comes from In Search of Excellence
(Peters and Waterman, 1982)
Most widely held library book in the US
Based on study of 43 “excellent companies”
These companies focused on
business sectors they knew well,
And had lean HQ.

20.

But…?
Is the sample reliable?
Need to understand the practices of
unsuccessful firms too
Atari, Wang Laboratories…
Compare In Search of Stupidity

21.

More Fundamental Drivers
Tightening economic conditions
Shift in goals from growth to profitability
Weakness of large bureaucracies in the face
of turbulent market conditions
Shareholder activism and shareholder value
ideology
Rise of finance professors
Emergence of CalPERS
Innovations in debt financing (LBO)

22.

23.

Founded 1984 - 1987

24.

Corporate Restructuring to Create Value:
McKinsey Pentagon
Current market
value
1
Current perceptions
gap
Company
value as is
2
Maximum raider
opportunity
RESTRUCTURING
FRAMEWORK
Strategic and
operating
opportunities
Total company
opportunities
3
Potential value
with internal
improvements
5
Optimal
restructured
value
4
Disposal/acquisition
opportunities
Potential value
with external
improvements

25.

The 1990s onwards

26.

27.

Honda’s
competence in
small, highpowered engines

28.

Corporate Strategy in the 1990s
Distinguishing related from unrelated
diversification
Not all diversification is bad
Diversify around your core competence
Organizational economics
Multiple alternatives for entering new
businesses
M&A, alliances, JVs

29.

Core Competence of the Corporation
A core competence (Prahalad & Hamel, 1990)
1. Provides access to wide range of markets,
2. Makes important contribution to perceived value of
the product, and
3. is difficult to imitate.
NEC: Diversified, yes, but “not a collection of strategic
business units, but a portfolio of core competencies”
SONY: Capacity to miniaturize
Philips: Optical-media expertise
Useful lesson: Don’t think about relatedness in terms of
industry similarity
Relatedness depends on assets/competencies

30.

Emerging Model: The Distributed
Organization
The Distributed Organization
reduces the scope of what it
owns…
…yet increases the scope of
what it does!

31.

Governance Profile: GM and Ford
vs. Toyota
Percent of
Total
Component
Costs
Arm’s-length
Suppliers
Arms-length
(Independent)
Suppliers
35%
25%
Partner
Suppliers*
Partner
Suppliers*
10%
48%
Internally
Manufactured
Internally
Manufactured
55%
27%
* 2 or fewer suppliers for a
product category
General Motors
Toyota
and Ford
Source: Jeff Dyer, Collaborative Advantage, Oxford Press 2000

32.

Across the Decades
Era
Trends
1960s, 1970s
Conglomerate premium
Diversification and portfolio planning
1980s
Conglomerate discount
Specialization
1990s ~
Core competence
Synergies guiding diversification
More recently
Distributed organization
Capture benefits of ownership without the
costs

33.

Publicis Groupe
Case Discussion

34.

Publicis Groupe

35.

Groupe Publicis in 2016
Publicis Groupe
Maurice Levy
Jean-Michel Etienne
Anne Heilbronner, Kevin Roberts
Publicis Healthcare
Nick Colucci
Publicis Groupe
Laura Desmond
Publicis.Sapient
Alan Herrick
Publicis Media
Steve King
Publicis Communications
Arthur Sadoun

36. In 2016

How well are they doing?

37.

LEVY’S ACHIEVEMENT
• Third largest advertising and marketing
communications company in the world
Grown through acquisitions
Many accolades and awards

38.

LEVY’S VISION OF THE FUTURE
“to be the admired force for business
transformation, driven through alchemy of
creativity and technology.”
“No silo, no solo, no bozo” (2016)

39.

THE REALITY
Failed Omnicon merger
Many threats
• Ad-blocking
• Lack of transparency
• Disintermediation
• Questionable necessity

40. DEBATE

“The Power of One reorganization
from holding company to “connecting
company” will be a success for Groupe
Publicis.”

41.

A corporation is a portfolio of value chain
activities
Corporate advantage exists if portfolio
performance exceeds the sum of performance
of individual activities

42.

How does Publicis Groupe Add
Value?
Financial
Accounting, finance, treasury
Human resources
Compensation, hiring
Strategic development
Partnerships, synergy, leverage
Procurement
Practice development
Virtual companies

43.

Obstacles
Conflict of interest
Collaboration with particular businesses
rather than with Publicis Groupe in
general
Best for customer vs. best for Publicis
Groupe
Potentially only small gains from
collaboration for larger businesses
How to overcome these?

44.

Opportunities:
Media buying
New technology/media
Emerging markets
Internal communication
Recruitment

45.

Integration between HQ-division
Synergy Proposals for Publicis
Groupe
HR/Talent engine
Consultant/
Back office
I-Bank function consolidation
Media buying
One stop shop
Cross selling
Knowledge
transfer
Parenting
Financial Brand
Integration between divisions

46.

Integration between HQ-division
Synergy Proposals for Publicis
Groupe
Sharing activities
Restructuring
Transferring skills
Parenting
Portfolio
Integration between divisions

47.

Corporate HQ
Costs
Benefits
Overhead, no revenues
Corporate reporting
requirements
Imprecise knowledge of
businesses
Not subject to oversight
Investment banker/ consultant
Infrastructure, R&D
Superior management skills/
business model
Enables collaboration between
units

48.

Proposition 1
Absent capital market imperfections,
corporate advantage – the improvements
in profits from creating a portfolio of
businesses over and above the profits of
the same businesses operating
individually – must rest on some form of
synergy*.
* Synergy exists between businesses when linking them creates more
value than the sum of the value created by the two businesses when
operated independently.

49.

Corporate Advantage
Value
Independent
Businesses
Integrated
Corporation

50.

Value chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
SERVICE
& SALES
What activities are necessary to support
a business model?
In which activities are we performing
well (poorly)?

51.

Horizontal Synergies across Value Chains
PURCHASE
R&D
MANUFAC.
SALES & DIST.
PURCHASE
R&D
MANUFAC.
SALES & DIST.

52.

Vertical Synergies across Value Chains
Upstream
Downstream

53.

Management Synergies across Value
Chains

54.

Synergies between Businesses
Horizontal Synergies
Between similar VCAs
Vertical Synergies
Between successive VCAs
Management Synergies
Supporting functional
synergies
Note: Management synergies are a special kind of horizontal synergy.

55.

Proposition 2
Whether HQs are actually creating or
destroying value over and above the sum
of the parts is typically hard to tell (or do
anything about) except in the most
egregious cases.

56.

Akzo Nobel 2006
Corporate
office
Pharmaceuticals
(Organon)
Coatings and
Paints
Chemicals
(bulk, paper)
$4,463m sales
$6,559m sales
$5,373m sales
$870m op. profit
$542m op. profit
$407m op. profit
£360m net profit
$207m net profit
145m net profit
Actual market capitalisation: $10,200m

57.

Akzo Nobel 2006
Corporate
office
Pharmaceuticals
(Organon)
Coatings and
Paints
Chemicals
(bulk, paper)
$4,463m sales
$6,559m sales
$5,373m sales
$870m op. profit
$542m op. profit
$407m op. profit
£360m net profit
$207m net profit
145m net profit
Sector P/E
~20
~15
~15
Market Cap.
$7,200m
$3,200m
$2,200m
Break-up value= $12,600m

58.

Akzo Nobel 2008
Corporate
office
Pharmaceuticals
(Organon)
Coatings and
Paints
Chemicals
(bulk, paper)
$4,463m sales
$6,559m sales
$5,373m sales
$870m op. profit
$542m op. profit
$407m op. profit
SOLD to Schering Plough
for $14 billion
Merger with ICI
completed Jan 08

59.

Proposition 3
Corporate HQ has a better chance of
creating (or destroying) observable value
during periods of change (e.g.
diversification, reorganization,
outsourcing, M&A, alliances) than during
steady state.

60.

Reflections on Session 2
1. What synergies might be possible across
different activities in your company?
2. What obstacles do you face in bringing about
collaboration?
3. How can you overcome them?

61. For Next Session

Prepare Ayala case
If interested, skim Campbell, Goold & Alexander:
Corporate Strategy: The Quest for Parenting
Advantage

62.

COURSE STRUCTURE
INTRODUCTION
1. Recap of core strategy; introduction to corporate strategy
2. Corporate parenting
PORTFOLIO COMPOSITION
3. Diversification
4. Governance of the diversified firm
PORTFOLIO ORGANIZATION
5. Organization design
PORTFOLIO CHANGE
6. M&A
7. Outsourcing
8. Presentations (and miscellaneous topics)
9. Alliances
10. Exam