Introduction to Strategic Management

Transcription

1 Introduction to Strategic Management Session 5 Corporate strategy and portfolio management Jens Schmidt

2 I. A company as a diversified portfolio of businesses

3 Managing a business portfolio Nordic USA International strategy What markets should we be in? BU China Europe C BU BU BU BU India R&D Manufacturing Marketing Sales Corporate strategy What businesses should we be in? Human resource management Competitive or business strategy How do we win in this business? Functional strategies How can function X support our strategy?

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7 II. Expanding and restructuring the business portfolio

8 Expanding the business portfolio: Directions for organizational growth Market development Find new purposes for existing products and adapt them for new market Market penetration More products to current customers or more customers for current products Diversification New products in new markets, departing from the existing Product development New or improved products to the same or similar customers existing new Products/services Ansoff (1957)

9 Expanding the business portfolio: Directions for organizational growth New geographic markets New customer segments Increase market share Grow with the market Entirely new line of business Improve products More to existing customer base existing new Products/services Ansoff (1957)

10 Decomposing revenue growth Total growth Inorganic growth (acquisitions/ divestments) Greenfield entry Organic growth Current market growth Outgrowing competitors Changes in portfolio (new products and markets) Growth in current portfolio (existing products/markets)

11 What businesses is Philips in?

12 Philips sectors in 2014 source: annual report

13 Examples of Philips products

14 Philips share price ( )

15 Philips sectors: revenues % % % 6% 4% 2% others lighting consumer lifestyle healthcare EBIT % % -2%

16 Philips sectors: growth vs. profitability Profitability (EBIT as % of revenues) 15% % % 2010 healthcare consumer lifestyle lighting % growth -40% -30% -20% -10% 0% 10% 20% 30% -5% 2011

17 Philips portfolio recomposition: Acquisitions and divestments Sleep and respiratory care TV business acquired Respironics in 2008 divested in 2011/2012 Total purchase price 3.2bn EUR Joint venture with TPV from Hong Kong (70% The business sells products to improve sleep and ownership) and Philips (30% ownership) respiratory functions for both home and Philips sold its 30% to TPV in 2014 professional use TPV continues using the Philips brand through a license agreement

18 Why did Philips divest its TV business? How attractive is the TV business?

19 Why did Philips divest its TV business? Philips consumer lifestyle business (TV vs. other consumer products) revenues mio. mio profits other than TV TV other than TV TV

20 How will Philips business portfolio change? Why these changes?

21 Philips new structure: split into two HealthTech 15bn EUR Lighting 7bn EUR Divested: Sold 80.1% to Chinese investor in March 2015 for 2.8bn

22 Rationale for new strategic focus on HealthTech and the split into two next strategic step to capitalize on fundamental market changes, by creating two market-leading companies focused on the HealthTech and Lighting solutions opportunities capitalize on the convergence of professional health care and consumer end-markets across the health continuum, from healthy living and prevention, to diagnosis, treatment, recovery and home care combination of our Healthcare and Consumer Lifestyle portfolios and the integration of the data from the connected products on Philips cloud-based digital health platform giving independence to our Lighting solutions business will better enable it to expand its global leadership position and venture into adjacent market opportunities New strategic focus Opportunity (market for integrated solutions) Strategic capabilities (integration) Divestment of non-core business Source (Philips press release):

23 Medical device manufacturers: Philips vs. competitors (2014) % % % 20% % % % 0 Johnson & Johnson GE Healthcare Medtronic Baxter Siemens Healthcare Philips Medical Systems 00% revenue profit sales margin

24 Philips perspective on HealthTech Source: Philips annual report 2014

25 Investing in HealthTech Supports HealthTech strategy Synergies with existing capabilities and products

26 Investing in HealthTech

27 But how attractive is the health technology industry/market?

28 Opportunity- and capability-driven investments Sources of performance Strategic driver Key questions Average industry performance Opportunity Industry attractiveness What makes an industry attractive (Five Forces)? Opportunities and threats Company performance + Is this an an attractive industry for us? Performance relative to competitors Capability Adding value that others cannot What strategic capabilities are the basis for outperforming competitors? Strengths and weaknesses

29 Building on strengths: Some potential sources of synergies Technological capabilities used in different products Product/service sold to different types of customers Operations used for different products Sales, marketing & distribution channels used for different products Bundling several products sold to the same customers

30 Why does a bank and insurance company invest into health care? OP invests 120 mio. EUR to open healthcare centers in several cities OP s insurance company is a major customer of health care providers (so this is a form of backward integration) OP believes it can cut costs (provide same services cheaper than established health care providers) by organizing around the customer

31 III. Managing and adding value to a business portfolio

32 Portfolio planning in the 1970s: Balancing market share, growth and cash flow Stars Generate cash, but also consume a lot of cash (to finance growth) Cash cows Generate more cash than they consume high The BCG growth-share matrix Question marks Growing rapidly, consuming lots of cash, but generating (yet) little cash Market share Dogs Cash traps: Money tied up in business with low potential low Assumptions Different businesses are at different stages in their lifecycle Management must balance the cash generation and cash needs of different businesses Investment in new growth businesses eventually yields new cash cows due to experience curve effects Limitations Neglects other important factors than market share and growth Many possible definitions of a market Only financial view; assumes businesses are independent, but they might be based on a common factor

33 The BCG matrix is an application of the experience curve Idea: Use current cash cows to finance future cash cows Identify potential future cash cows among stars and question marks Invest into gaining market share to create sufficient experience to get a cost advantage

34 Focus and synergies: Portfolio around core competences Business 6 Business 7 Business 8 Assumptions Core competences Business 1 Business 2 Different businesses can build on the same competences (synergies) Managers are able to identify and nurture these competences The competences give firms advantage in different markets where they are applied Business 5 Business 4 Business 3 Limitations Difficulty in identifying core competences Companies without clear operational linkages between businesses can be very successful

35 Synergies increase performance of a diversified company Performance Single business Related diversification (Synergies) Unrelated diversification Level of diversification

36 Portfolio management to balance efficiency and innovation Corporate entrepreneurship Aalto University Executive Education 36

37 The challenge: Balancing between efficiency and innovation Routine activities Focus on efficiency Little experimentation Division of labor Detailed work rules and processes Specialized resources Formalized decision making Innovation activities Focus on creating new solutions Experimentation Cross-functional teams with integrated tasks Limited work rules and processes Generalist resources Ad-hoc decision making

38 Corporate strategy is more than portfolio management: Parenting advantage Key question: How does the corporate headquarters (the parent ) add value to the business portfolio as a whole as well as individual businesses? Parenting advantage: Being able to create more value to a business that you own than other potential owners Portfolio approach: portfolio manager, synergy managers, parental developer Creating and extracting synergies as sources of parenting advantage: stand-alone influence, linkage influence, central functions and services, corporate development

39 Negative synergies? Investor demands divestment of business

40 But top management disagrees: Says there are synergies

41 Three types of corporate headquarters adding value Portfolio manager Headquarters as active investor, identifies undervalued businesses, invests and intervenes Synergy manager Headquarters fosters cooperation and provides central services to create and extract synergies across businesses Parental developer Headquarters creates value through developing and applying central capabilities to businesses and create synergies

42 Berkshire Hathaway: A portfolio manager

43 Warren Buffett Why haven t others been able to copy his strategy?

44 Inditex: A synergy manager Synergies from Applying the same business model across retail formats Shared practices (e.g., dealing with suppliers) Support in business development (e.g., dealing with e-commerce)

45 Sources of parenting advantage: Four ways headquarters can add value Stand-alone influence Common processes Leadership appointments Investment decisions Product market strategy HR development Linkage influence Promoting common processes and practices Sharing activities Building networks Central functions and services R&D and technology Common HR and talent development practices Corporate development Matching business structure and market opportunities Creating new ventures Goold, Campbell & Alexander, 1994

46 Corporate strategy and managing a business portfolio Active portfolio management Portfolio management approaches and tools BCG growth-share matrix: Exploit experience curve effects Three horizons: Efficiency vs. innovation Parenting advantage: Create and exploit synergies Portfolio expansion/restructuring Ansoff matrix: Direction of expansion Organic growth vs. inorganic (acquisitions, divestments) Opportunity- and capability-driven investments Value creation through synergies Forms of synergies Create and extract synergies (e.g. parenting advantage)

47 Homework as preparation for next session Read the case about how Ikea adapted its strategy and business model in China (course website, Materials section) Think about the following questions: Why did Ikea adapt its strategy and business model? Which international strategy does Ikea pursue: multi-domestic, global or transnational (see course book chapter 8.4)?