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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