-> OBJ: manage financial resources allocation to the portfolio of different Strategic Business Unit the overall company is made of.
-> Key Issue:
- Analyze and compare the competitive positioning of each business, and of the overall business portfolio;
- Suggest strategic orientation to each business (that will be further speified at a Business Strategy Level);
- Define criteria and priorities for financial resource allocation to each business (cash generating vs cash absorbing SBU) looking for an overall portfolio’s financial equilibrium.
-> SCOPE:
- PRODUCT SCOPE -> product range: how specialize how company is in a rage of products;
- GEOGRAPHICAL SCOPE -> geographical coverage: what is the optimal geographical of spread activities;
- LEVEL OF VERTICAL INTEGRATION: another scope decision taken from the corporate level.
-> We can chose between:
- DIVERSIFICATION (hierarchy);
- BRAND FRANCHISING (market);
Diversification Strategy:
-> DEF: Choice of “hierarchy” that is internalizing a new business within the corporate portfolio.
- Strategy aimed at entering new business areas which the corporation is not currently serving (and create new SBUs to serve such new business area);
-> Diversification is more favorable than other alternatives (e.g. brand franchising) when:
- SCOPE ECONOMIES: scale economies applied to a wider range or family of activities performed;
- 🔺 TRANSACTION COSTs: costs to bear to set up an agreement with the “market”;
History:
-> From the era of diversification (1950-80) to refocusing:
- Emphasis on shareholders value;
- Turbolene -> Specialization;
- Sharing resources and capabilities as real source of advantage;
Creating value:
- Attractiveness test (industry must be attractive);
- The Cost-of-Entry test;
- The better–off test (is the combination the more profitability?);
🔗 Digital Era:
- Industry boundariest are growingly fuzzy;
- More and more business areas may be loosely related.
Portfolio Analysis:
-> The analysis depend on:
- Business Area Attractiveness;
- Competitive Positioning of the SBU;
-> It is a synthesis of external and internal strategy analysis.
-> OBJ:
- Analyze the competitive advantage coming from the managing of a SBU’s portfolio;
- To support the choich of a business portfolio;
- To provide some guidelines to SBUs;
- To analyze the corporate strategies of competitors;
Correlated VS Non-Correlated Portfolios:
-> Real portfolios are a mix of the two extreme solutions.
-> Type of corporate portfolios:
| Correlated Portfolio: | Non Correlated Portfolio: |
| ✔ADVANTAGES: Operational Synergies; Sharing of resources and competencies; Similarities in markets and customers; ❌DISAVANTAGES: Higher risk (all markets are similar); High managerial complexity; | ✔ADVANTAGES: Risk diversification; Bank Effect: using the income from the best activity to finance others; Better use of top human resources; Sharing infrastructural activities; ❌DISAVANTAGES: Organizational complexity (different company need to speak the same languages); Cultural heterogeneity; Few operational heterogeneity; Few operational synergies. -> Levers that corporate managers should use: Operational synergies within correlated portfolios; Financial synergies within non-correlated portfolios (Bank Effect); |
Matrixes:
-> Type of Portfolio matrixes:
- BCG Matrix (Boston Consulting Group);
- GE-McKinsey Matrix (McKinsey consultancy for General Electric)
-> IDEA: rapresent a diversified company’s BA in a simple graphical model to support Corporate Strategy definition.
Boston Consulting Group (BCG) Matrix:
-> DEF: Describe the portfolion with two factors:
- BA Attractiveness (Market Growth Rate);
- Competitive Positioning of the SBU (Relative Markets Share)
- If > 1 => the SBU is the market leader;
- If < 1 => the SBU is a follower;
-> HP:
- Business Area attractiveness can be measured through “Market growth rate”:
- Price wars are less likely
- Customer base expands, and offer can catch up with demand
- SBU competitive positioning can be measured through “Relative market share”:
- SBU can benefit from cost advantages depending on size (for instance, economies of scale and experience, production capacity saturation, etc.)
-> OBJ:
- Verify the “bank effect“
- To shape a business portfolio that is well balanced from a financial point of view
- To define a “virtuous circle” strategy
- To analyse the strategies of competitors
The Matrix:
Description:
-> Talking about products…
| STAR High market share = High reveue; MKT grow = high investments NCF = 0 | QUESTION MARK Low revenue; High investmens; NCF << 0 |
| CASH COW High revenues (Large customer base); Low investments (Mkt maturity) NCF >> 0 | DOGGO Low revenues; Low investmets; NCF = 0 |
❓ products with high growth but low share.
-> They require large amounts of cash to mantain the market share and still larger amounts fo gain share.
- Ex: Start Up
- Lot of investment.
- Not a mature market.
📌TIPS:
- Think about the number of treshold.
Relative market share = your market share / your largest competitor’s market share.
- Company’s MKT share = own revenue / industry’s total revenue (over fiscal period).
The Virtuous Circle
-> DEF: is the cycle that a SBU should do, when it’s born is a ?, then should become a star and in the end should be a cash cow… but even a dog :(.
| ⭐️: | hold or buld share; |
| 🐮: | “milk” for cash; |
| ❓: | Buld Share or Divest; |
| 🐶: | Harvest or Divest. |
The Balanced Portfolio:
-> All products become cash-cow or dogs!
-> VALUE of product depend upon obtaining the leading share of its market before the growth slows.
-> Balanced Portfolio HAS:
| ⭐️: | 🔺 shares & growth assure the future |
| 🐮: | That supply funds for that future growth |
| ❓: | To be converted into stars |
| 🐶: | They need a dedicated strategies! |
📌Good Website to made a BCG Matrix.
GE-McKinsey Matrix:
| Industry Attractiveness: | Business Strenghts: |
| -> On the basis of their relevance, the decision maker associate a weighting factor; -> After, the decision maker assign a rating between 1-10 to each of them; -> In the end calculate the final score multiplying the weighting factor for the rating. | -> The SBU with desirable positioning are in the top left part; the one’s with undesirable are in the lower righ. SBU with an in between should be put in the diagonals positions. |
⭐️We are not interest in positioning but in reasoning about the company.
| PREMIUM INVEST/ GROW: -> 🎯 Investment; -> 💪 Strengths; -> 🔺 Returns on investment & CA; -> Are in the attractive market. -> Should receive financial/managerial support to maintain their strong position and long term profitability. | SELECTIVE INVEST/GROW: -> Good Strength in industry loosing its attractiveness; -> Sholud be supported but may be self-supporting in cash flow terms. | PROTECTIVE SELECTIVITY/EARNINGS: -> Strong business; -> Unattractive market; -> Cash generator; -> Investment -> keeping business in dominant position. ⚠Don’t over-invest! |
| CHALLENGE INVEST/GROW: -> Attractive industries; -> Average Strength; -> Invest => long-term competitive position | PRIME SELECTIVITY/EARNINGS: -> Average Strength; -> Creative segmentation and selective investment -> 🔺 position; -> Segment to differentiate and returns. | RESTRUCTURED HARVEST/DIVEST: -> Average Sterngth; -> Unactractive MKT; -> Use strategy to prevent defeat and to upset competitors. |
| OPPORTUNISTIC SELECTIVE/EARNINGS: -> Attractive MKT; -> 🔻 Strength; -> No self-founding; -> Disinvest if business can’t improve strength. | OPPORTUNISTIC HARVEST/DISINVEST: -> 🔻 Strength; -> Attractive industries; -> Exit or Disinvest; -> 🔺 MKT shares and business strengths could be expensive and must be donw qith coution. | HARVEST/DIVEST: -> 🔻 Strength; -> 🔻 Attractive industry; -> Exited industry; -> Investments only after found exit. |
Matrix Comparison:
-> BCG is simple, but simplistic;
-> GE-McKinesy is comprehensie but expensie and subjective (to decision maker).
-> We can combine both the matrix to create a corporate strategy.
