Deck 7: Formulating Corporate-Level Strategy

Question 1

What is the "business portfolio" of a corporation. Distinguish the terms "corporation" and "strategic business unit".

Answer 1

$\bullet$ Nearly all private entities are legally organized as "corporations", either for-profit or not-for-profit. A few are partnerships. Organizations usually start out as one kind of business, operating in a single market and industry, offering one or a few related products and services. As they grow, they expand into other markets and even industries, adding new, not closely related products and services. Eventually, revenues from individual product or service lines become so substantial that it makes sense to begin treating them as something like an independent freestanding business. They are called "strategic business units" (SBUs). Even though they are legally part of the parent corporation (or the parent has a controlling ownership interest if they are legally independent), corporate management grants them considerable budgetary and decision making autonomy. The collection of SBUs owned or controlled by a corporation is referred to as its "portfolio". The composition of the portfolio is actively managed to ensure that there is some coherent connection among the SBUs and that, together, they move the corporation toward its vision.

Question 2

Describe five ways in which the management of a multi-SBU corporation can add value to the operation of the individual SBU's in its portfolio.

Answer 2

$\bullet$ Raise financial capital for allocation to the SBUs.
$\bullet$ Allocate other resources and services available at the corporate center to the separate SBUs.
$\bullet$ Facilitate synergies among the SBUs, including the sharing of resources and competencies.
$\bullet$ Practice a parenting style vis-à-vis the SBUs that supports their individual endeavors.
$\bullet$ Participate, to one degree or another, in the SBU strategic planning and management process.
$\bullet$ Oversee and monitor the performance of the SBUs, making demands and offering incentives for certain levels of accomplishment.
$\bullet$ Manage the corporation's relationships with external stakeholders.

Question 3

Explain the three generic strategic directions that the corporate center can follow in managing its business portfolio.

Answer 3

$\bullet$ Growth: expand the portfolio, in terms of numbers of SBUs, their sales, profits or some other metric.
$\bullet$ Stabilization: maintain the portfolio without active pursuit of growth.
$\bullet$ Retrenchment: cut back on the portfolio to fewer SBUs, usually leading to lower revenues and profits, at least in the short term

Question 4

Under what circumstances is corporate management likely to employ a stabilization or a retrenchment portfolio strategy?

Question 5

Describe the differences in growth strategies based on concentration, related diversification, and unrelated diversification.

Question 6

How might a corporation assess the degree of relatedness of a proposed diversification move in its business portfolio? Why does related diversification often work better than unrelated diversification?

Question 7

Describe several examples of synergy that may be possible among the SBU's in a related diversified business portfolio.

Question 8

Compare vertical integration and horizontal expansion within an industry value chain.

Question 9

Explain the difference between "owned" and "virtual" integration.

Question 10

Describe the components in a vertically integrated health care delivery system and how they interact with each other.

Question 11

List and describe several methods that a corporation can use to add new businesses to its portfolio.

Question 12

Explain the different forms that a retrenchment strategy can take - ranging from the most modest to the most severe.

Question 13

Explain how portfolio analysis matrices work and their function in making portfolio management decisions. Use either the BCG Growth-Share Matrix or the GE Business Screen as examples.

Question 14

What is meant by the "parenting style" of the managers of a multi-SBU corporation?