Chapter 7: Corporate Level Strategy - Mix and Composition of Business Units

Mysticism and Strategic Management
Chapter 7: Corporate Level Strategy - Mix and Composition of Business Units
Chapter 7: Corporate Level Strategy – Mix and Composition of
Business Units
Corporate portfolio approaches
Experience curve -- Economies of scale -- On stars, cash cows, question marks and dogs
Cash flow, return on investment, and industry life cycle
Why my Zeide rode in a car on the Sabbath
This book focuses on both business level and corporate level strategy. Corporate level
strategy has to do with the mix and composition of the corporation’s business units. There are
several corporate portfolio approaches to review the business units’ mix and composition.
The growth-share matrix, generally known as the BCG (Boston Consulting Group) matrix,
was the first corporate portfolio approach developed. This two-dimensional presentation of
business unit positions, determined by market growth rate and relative market share, had an
immediate and profound effect on corporate strategy making in the U.S.A. and the world. The
development of the matrix was an outgrowth of the work done by the Boston Consulting
Group on experience-curve effects, which indicated that variable cost per unit decreases by
10% to 30% every time production experience (accumulated volume) is doubled. It was
found that in any market segment of an industry, price levels tend to be very similar for
similar products; therefore, what makes one company more profitable than the next must be
the levels of its costs. The experience-curve phenomenon is presented below. The other
cornerstone for the BCG growth-share matrix is the product life cycle concept, which has
been with us for many decades, and has already been presented in this book. (Its graphs show
the rise, stabilization and decline over time of product sales for all competitors combined, as
well as the number of competitors and industry profits.)
*
The experience-curve phenomenon lies behind the growth-share matrix and corporate
strategy: costs decrease by a certain characteristic percentage each time that a doubling occurs
in the cumulative number of units manufactured, distributed and sold. Experience-curve
Copyright © 2006 Eli Segev

Mysticism and Strategic Management 2
principles have taught that when the number of times a task is performed doubles, the variable
cost of performing that task declines by approximately 20 percent. The experience-curve
concept observes that overall costs associated with a product line decline with time in the
manner of learning curve behavior. When cost per unit is plotted on a log-log scale against
cumulative total units, the result is a straight line. The experience curve has no thresholds,
and is applied to ALL functions: purchasing, production, accounting, marketing, and the like.
The experience curve illustrates the advantages of:
Lower production costs,
Lower distribution costs (distribution strength of the organization are existing distribution
links with retail and wholesale customers, its reputation in the trade, sales force skills and its
physical distribution network; also included are capacity and length of the distribution
channels), and
Lower selling costs
of a particular product due to accumulated experience.
The concept states that the total constant-dollar-per-unit cost of producing,
distributing, and selling a particular product will decline by a constant percentage (usually
between 10 and 30 percent) with every doubling of the accumulated production volume in
units. Thus the experience curve effect is very important in fast-growing markets, which
accumulate experience very quickly. The following chain is assumed for the business unit:
• High accumulated volume, implies,
• Low unit cost, implies,
• High profitability.
Experience-curve effects can be measured at all stages of the value-added chain. The
user is not required to calculate the experience-curve slope for each link of the chain, but
rather to make a subjective assessment of the overall experience of the business unit by
separate factors at each link, relative to other competitors. The factors are:
personal learning of a task,
standardization of a task performed many times,
product and process improvements,
methods and system rationalization
introducing automation and computerization,
economies of scale.
The business unit may gain advantages by producing large batches, with minimal set-
up time between batches; cost advantages may also be gained by large procurement orders,
allowing for reductions from suppliers, or the simultaneous delivery of large quantities to
several customers.
EXAMPLE: When movie star Tom Hanks wanted to create an expensive TV drama, he knew
that he had to go to HBO. Why was HBO the only company willing to produce From the
Earth to the Moon, at a cost of over 60$ million? The obvious answer is size. HBO dominates
the pay-cable networks market of 34 million customers, much more than its rivals. Therefore,
the investment HBO made was distributed over a large number of customers. The more
clients HBO has the cheaper the movie gets. Therefore, HBO’s main objective is to increase
the number of clients it has. (Source: Business Week, 1997, "Call it Home Buzz Office," December 8, pp. 77-80.)
The combination of economies of scale (total annual volume) and the experience-
curve effect (total cumulative volume) can have a dramatic impact on the cost position of a
firm by diminishing overall costs by some given percentage. This ability to reduce costs over
time accords a quantifiable value to market share, which thus became a strategic variable in
the BCG approach, on account of the inference that long-range profitability and cash
generation are functions of market share because of the reduced costs. In a mature market,
the dominant firm – the largest-volume competitor, will have the lowest costs, and hence, the
highest profits. Market share and profitability are strongly related. On the average,
businesses whose absolute market shares exceed 50% are more than three times as profitable
as businesses with absolute shares of less than 10%. (Market share is the sales of the business
as a percentage of the total dollar sales in the market served by the business.) Market share is
both a measure of the business unit's performance and an important organizational capability.
The market share of many business units in mature markets is more or less constant over time.
If the gain or loss is due to short-term pricing activities or dealer promotions, then the average
market share should be used, because these changes are easily countered and the business unit
is vulnerable. However, if the change is a result of inherent change (such as creation of new
distribution channels), the change in the market share should be studied. If the new contender
is serious, you have to be serious too in defending your market share.
You must distinguish between market share and gain in market share. Here the focus
is on current market share relative to competitors. Usually it is easier to gain market share in
growth markets than in stable or declining markets. More opportunities exist from yet
uncommitted new users. When total sales are growing, competitors tend to react less
aggressively to erosion in market share. Conversely, in flat or declining markets, you must
guard against your competitors. They will be as aggressive as you are in trying to protect
their existing market share and in gaining new market share. Sometimes markets are
composed of a few product lines. In some cases, an organization may also produce and
market peripheral products and product lines. To measure market share using this framework,
you should use only the organization's main product lines.
EXAMPLE: In the 1990s, Levi Strauss & Co. suffered erosion of its market share. In 1990,
Levi’s held 30.9% of the U.S. blue-jeans market. By 1997, this share had dropped to a mere
18.7%. Although the process took place over a period of several years, it was only in 1997
that Levi’s managers understood the full extent of the problem. The fading market share was
caused, mainly, by the failure to attract young customers. Trends such as wide-legged pants
did not affect Levi’s, which remain faithful to its traditional models. The denim giant once a
symbol of youth and rebellion was viewed by teenagers as an “uncool” brand. Once they
faced up to the problem, Levi’s acted to gain its former position among the young population.
(Source: Business Week, 1997, "Levi’s is hiking up its pants," December 1, pp. 70-75.)
The experience-curve concept resulted in The Rule of Three and Four: a stable
competitive market never has more than three significant competitors, the largest of which has
no more than four times the market share of the smallest. The experience-curve concept
emphasizes cost discontinuities between different products and different markets, including
geographic markets.
*
My Zeide was a one person United Fund. Every year, about a week before the Day of
Atonement, I went with him to the “settlement” to buy a paper plate. Petach Tikva had
already been a town for more than fifty years, but the veterans still “went to the settlement”.
Buying the single paper plate took about two hours. Since my grandfather was blind, I had to
find the right size, unbent, clean plate. We visited several shops and compared prices.
Recently, when I hurriedly bought a package of fifty plastic coated decorated paper plates I
remembered the complicated transactions of my childhood. Then we bought a perforated
paper doily to put on the paper plate, and it had to be the right size!
On the morning before the Day of Atonement I helped my Zeide to carry his very
heavy stand all the way from his far end seat, near the ark, at the “grand” synagogue to the
entrance hall of the synagogue. We came early to take his usual place: left of the main gates,
near a door to a side hall. He would sit there, the stand in front of him, with the empty paper
plate covered with the nice doily. Soon the hall was completely full with others raising
donations for various causes. For the next few hours almost everyone stopped in front of my
Zeide, putting a note or two on his plate. He recognized everyone by their voice, many by
their footsteps. Recognizing the old rabbi’s footsteps (that was easy, even I could recognize
those footsteps), he would stand up waiting for him to approach. He never asked me how
much the rabbi, or anybody else, put on the paper plate. He also had at home a small
inventory of utensils used by sick or bedridden people. Those who borrowed them for any
period of time, and could afford it, left donations. Every month my Zeide prepared many
envelops with varying sums of money. He asked me to check, but though the same size, he
never switched a note of a hundred, for a fifty, ten, five, or a single. Later the envelopes
would disappear.
*
The BCG matrix took America by storm. Experience curves became the key concept
for corporate strategy. It has become the best known and most widely used portfolio model,
and at the same time the most frequently criticized one. The planning focus of the BCG
portfolio matrix is the cash flow provided to or extracted from each one of the business units
comprising the corporation. Cash generation and use is a strong function of market growth
rate and relative market share. The growth rate of a business unit affects the rate at which it
will use cash. The experience-curve position relative to competitors will affect the margins
and the rate at which a business unit generates cash. The sources of, and need for, cash
should be balanced without jeopardizing market position. The thrust of the BCG is to balance
the cash flows among the various business units and thereby develop and meet the growth
objectives of the corporation, while simultaneously accommodating its cash requirements.
During the middle and late stages of their life cycle, successful business units generate
cash, which in turn should be invested in business units that are anticipated to be the major
future cash generators. This is a continuous process since, if implemented successfully, in
years to come these newly successful businesses units will generate cash to be invested in yet
newer promising businesses.
*
The BCG model, widely used in determining corporate strategy, goes one step further,
introducing the "BCG Zoo." Figure B: The BCG Model, presents this zoo.
Figure B: The BCG Model
Stars are business units that have a relatively large market share and operate in fast-growing
markets. These are usually new units in growing industries, with resulting high profits. They
are leaders in their industry and generate relatively large revenues from sales, though they are
frequently in rough balance with respect to bottom-line net cash flow, since they require large
investments in fixed and working capital to ensure high growth rate in a growing market.
Cash Cows have, in the past, gained large market shares, but they currently compete in
industries whose growth rate has slowed down. They usually are the Stars of the past, which
today supply the corporation with enough profits to maintain the current market position.
Cash generation is good and cash needs are minimal. These businesses can generate large cash
surpluses. They form the foundation of the corporation, providing the cash flow necessary to
pursue other strategic goals.
Problem Childs or Question Marks compete in a growth market but they have a relatively
small market share. This combination leads to increasing amounts of investments to defend
their (small) share of the market and secure survival. High growth requires cash to support it,
but the Question Marks have difficulty generating cash because of their low share. They are
net users of cash, and will probably remain that way unless measures are taken to improve
their market share. There are significant uncertainties about these units: they may be very
profitable or not. Without substantial investment they are very likely to become Dogs.
Dogs are small market-share business units in non-growing industries, condemned to low
profits. Net cash flow is typically small and frequently negative. Any move to gain market
share is forcefully counter-attacked by the dominant competitors. These Dogs are low-profit
business units – frequently losers that require large investments of top management time and
skill to keep them alive.
EXAMPLE: In 1994, Viacom Inc. bought out Blockbuster Entertainment Corp. for $8.4
billion. Using Blockbuster as a “cash cow”, Viacom subsequently acquired Paramount
Communications Inc. But then Blockbuster began its deterioration from “cash cow” to “dog”,
and by three years after the acquisition was trading for half the sum it was worth in 1993.
Some saw the shrinking market as the explanation. Blockbuster had done well when the
market was flourishing and margins were fat, but was now having trouble adjusting to less
propitious circumstances, even though some of its rivals were still managing to increase sales.
Others sought answers within Blockbuster. In a period of little over a year Blockbuster had
changed its CEO three times, and not just the CEO. A third of its executives and two-thirds
of it staff left when headquarters moved from Fort Lauderdale to Dallas. Then, Blockbuster’s
strategic decision to expand to books, magazines, T-shirts, and toys proved wrong. That
wasn’t the first time that Blockbuster had tried to diversify and failed. Perhaps Blockbuster’s
decision to concentrate on video-rentals will prove to be a better scenario. (Source: Business Week,
1997, " The script doctor is in at Blockbuster-again " July 28, pp. 101-103.)
*
I twice missed the opportunity of participating in the strategic planning process at Tel
Aviv University. On the first occasion I was a very new member of the Faculty, without
tenure. A few months prior to the three-day planning retreat of the university leaders I co-
authored a paper entitled “The Decision to Decide”. It suggested, and discussed, the
optimized behavior for a manager deciding which one out of a stream of random decision
problems to solve. Sounds great, doesn’t it? And very applicable too! Then they found the
paper references what the operation research guys call “the streetwalker dilemma”. The same
problem, though a different application. I was told my name was “mentioned” a few times
during the three-day retreat. I was sure I would never get tenure. Twenty years later I
attended a weekend retreat to discuss the future of the university. This time I made a formal
presentation suggesting to view the university as a portfolio of faculties, schools, units, and
departments. I spoke about decentralization, and possible alternative options for the mix and
composition of large and small, old and new, established and growing departments.
Everyone, from the president of the university to the last participant denounced this
suggestion. They disapprovingly pointed out that an approach that, presumably, might be
good for a business organization was certainly not suitable for a reputable university. I think
they resented the idea that their departments might be termed “dogs” or “cash cows”.
*
From organizational performance point of view, the main use of the BCG matrix is
for cash balancing. Since every corporation is active in the financial market there is no
requirement that the portfolio be perfectly balanced at all times. Short-term excess funds are
appropriately invested when they are available. Also, there are accepted financial strategies
for a corporation facing a permanent change in the level of its funding requirements.
Depending on the corporation's preferred financial risk level (and market opportunities) long-
term loans and stock issues are used for raising additional funds.
Sometimes, as in cases of mature products or shrinking markets, a corporation may
face permanent excess funds, with no use in the current strategic array. From a purely
economic point of view, the corporation should return these funds to its stockholders for
reinvestment in other ventures. But usually, managerial behavior and taxing laws, trigger a
search for new investments (entry into new industries, market segments, countries, and so on).
Over time, significant cash flow imbalances within the corporation are not viable, even with
all these financial tools and strategies. Since the growth-share matrix is fundamentally aimed
at the balancing of cash flows, the matrix may be of most use to companies that must operate
with limited cash resources.
An abundance of Stars in the portfolio may sound very attractive, but it will require a
constant stream of investment for several years to come. Considering the lag between the
initial development of a product-market business (from innovation, to application, to building
a market), investment may continue for five to ten years before the business unit starts
generating substantial positive cash flows (if ever!). Most corporations cannot support an
unbalanced Star-heavy portfolio. Moreover, even if financial requirements can be met, other
resources such as skilled labor, equipment, plant, and particularly additional management
skills and time, are constantly being invested in the Stars. The end result is that these
corporations deplete their resources and are taken over by unbalanced "Cash-Cow-heavy
portfolio" corporations with the resources (financial and managerial) to maintain Stars. Every
high-paced product-market innovation organization faces these problems, and they are
especially prevalent in high-technology industries. In these businesses, life cycles become
increasingly short, products are aimed at specific markets that are getting narrower and
narrower, while the investments in innovation, application, production, market development,
and sales are staggering.
When the portfolio is Cash Cow tilted, the corporation's very future is at stake.
Though cash is generously available, such a portfolio indicates a near-term demise, since
Cash Cows tend to eventually dry out. Cash-Cow-heavy corporations with scant future
alternatives in their portfolio are doomed to stagnation and consolidation. Thus, corporations
heavy with Cash Cows are usually engaged in a frantic search for Stars (by acquisition, or in-
house development); they are ready to pay large multiples of current earnings to acquire Stars,
in an effort to attain future stability and growth.
A primary goal of the corporation is to protect the position of the Cash Cows, but to
guard against excessive investment in these business units. The first priority for usage of cash
from the Cash Cows is to support the Stars that are not self-sustaining. However, if at any
point a business (Cash Cow or Star) has a higher value to someone outside the corporation
than to the parent company the business unit should be sold. The second priority is to work on
the development of future Stars. The third priority for this cash is to fund a number of
promising Question Marks in order to move them to dominant positions as Stars in their
industries. The Question Marks that cannot or should not be funded are candidates for
divestment. It may be hard to find interested buyers for a Question Mark, and if so the price
will be low. It may be better to simply hold on to it, especially if it requires little of the
corporation's management resources. A Dog can sometimes be made viable by specialization
into a niche that it can dominate. Otherwise, a significant increase in share may be an
expensive proposition. Other alternatives are managing the business unit for cash, cutting off
all investment, or divesting. The overall strategy is to strike a balance such that the cash
generated by the Cash Cows, plus that from the divestment of Question Marks and Dogs, is
sufficient to support the Stars and to fund selected Question Marks in moves to dominant
positions in their industries.
*
Dr. Schlossberg was Egypt King Faruk’s personal physician. The last I heard about
the family, his son was a nuclear physicist in the USA. When Dr. Schlossberg’s father-in-law
had to be driven to a hospital on the Sabbath, he said he wouldn’t go without my Zeide. My
Zeide went to consult his Rabbi. The rabbi said it was clearly a matter of life and death and
therefore permissible. It was the only time my Zeide drove in a car on the Sabbath. Part of
my mother’s family lived in Egypt. Many times I heard stories about aunt so-and-so who
lived in Cairo, and uncle so-and-so who lived in Alexandria. So when the Schlossbergs
arrived from Egypt it seemed only natural. It was the Jewish second exodus from Egypt, in
1956, after the short and unsuccessful Suez Canal affair, in which Great Britain, France and
Israel tried to open the blockade of the canal imposed by General Nasser of Egypt. This time
there was no forty years of desert wandering before arriving in Israel. It took exactly two
hours. For the next thirty years I heard about Mrs. Schlossberg’s hardships. Their financial
situation and status in Egypt were very different from those of the family of a physician
working for the health services in Israel. The economy in Israel of the mid-fifties was very
modest. There was no huge mansion, servants, vacations on the French Rivera. Mrs.
Schlossberg never got used to it.
*
The BCG approach recommends setting market-share objectives early in the product
life cycle, gaining and maintaining market share through growth phases, and only in maturity
sacrificing market share objectives for cash. The optimal strategy for a business unit is to be
in a strong market-share position when the market matures. Balancing a portfolio means a
continuous effort to keep Stars on course and turn some of the Question Marks into Stars,
which the ever-progressing life cycle will eventually turn into Cash Cows. This is
accompanied by house cleaning of Dogs when they have really proved to be expendable.
By plotting a current portfolio on the BCG matrix a pattern emerges. The pattern
reveals current cash generation and cash use tendencies. Expected future positions, and thus
some notion of overall value to the corporation, can be plotted and assessed on the grid as
well. The BCG model is not confined to large corporations. The concept applies to small
firms as well. In large firms the portfolio can consist of business units in several industries
and markets. In a small firm the portfolio revolves around products and markets. Thus the
BCG model can be used for various sizes and structures of organizations.
The main limitation of the growth-share matrix is that by itself it is not very useful in
determining strategy for a particular business. The advice to "harvest" or "grow into a Star" is
far from sufficient to guide managerial action. Use of the BCG model does not substitute for
business-level strategy making, and it does not dictate a strategy. The growth-share matrix is
best applied to portfolios whose business units make items in large quantities, and which
compete strongly in simple, unsophisticated markets based on strict price competition. In
such markets competitive strategies are based on early embankment on the learning curve.
Therefore, only in such industries do relative costs strongly determine success. In some
product-market situations, the customer's needs are more complex, and can be met by a
number of alternative products/technologies. In these markets relative costs are less
important than other marketing variables. The experience curve model only holds in high
volume industries. It has been most successfully applied in situations of high growth, high
value-added, continuous-process manufacturing, and capital-intensive industries. It is less
useful in mature industries where the curve is almost flat; in industries where purchased raw
materials represent most of the costs; in mining and forestry; and most of all in service
industries. It is also of limited use in highly volatile high-tech businesses, where new
technologies may emerge before experience-based costs become a decisive competitive
factor.
*
The Strategic Planning Grid, developed by General Electric and McKinsey & Co.,
the strategy consulting firm, had, by the early 1980s, become the most popular of the
multifactor portfolio approaches to strategic planning. It was developed as part of an attempt
to solve the problem of sorting and comparing its 43 separate and distinct major businesses.
This approach was seen as a breakthrough because it provided a partial solution to the
problem of finding a common comparative strategic base for businesses that were diverse and
disparate in nature. It was the recognition of this need that led to the planning work that drew
these decentralized businesses together under a single strategic umbrella. Whereas the
business units were charged with doing their own planning, strategic decisions concerning
issues such as trade-offs and intra-business unit resource allocations were to be made at the
corporate level. The interplay of the two separate functions enabled the functioning of the
General Electric system as a whole. An important aspect of this approach is that it not only
considers objective factors (such as sales, profit and return on investment), but it also gives
weight to subjectively estimated factors (such as volatility of market share, technology,
employee loyalty, competitive stance and social need). Figure C: The Strategic Planning Grid,
shows the business units as spheres on the two dimensions, Market attractiveness and relative
market dominance.
*
Figure C: The Strategic Planning Grid
The planning focus of the Strategic Planning Grid is performance, specifically, future
profit, or the future return on investment. The main thrust of the planning of this approach is
the profit implications of short-term additional investment in each business unit. The main
focus of the approach is the balancing of investments. Still, it cannot be used to effectively
answer the compelling question of how to reshape the portfolio. This is a question that the
corporate manager must answer. But, the model can offer strategic guidelines in the form of
generic strategies. In general, the strategy will be to increase resources to business units with
high market attractiveness and strong relative market dominance. Conversely, business units
with low market attractiveness and a weak competitive position will have their resource
allocations reduced.
One of the main contributions of this approach was the change in the reward system
for managers that it brought in its wake. General Electric had, until the introduction of the
strategic business unit concept, rewarded its managers identically, on the basis of residual
earnings: controllable profits minus charges for corporate capital and corporate services
rendered. Switching over to the business unit concept led to a redefining of the compensation
schedule for managers based on long-term goals versus short-term goals according to the
strategies found to be appropriate.
EXAMPLE: Portfolio planning models such as those developed by General Electric or the
Boston Consulting Group are widely used and commonly known. Nevertheless, proving that
popularity in itself is not necessarily a guarantee of suitability, Ciba-Geigy decided to develop
a customized model to fit its intention “to improve the process of resource allocation and
performance assessment.” The main idea was to differentiate the various strategic business
units – to give them different objectives, different types of managers, and to allow them to
adopt the organization structure that was appropriate to them. The model that Ciba-Geigy
developed categorizes strategic business units into five types:
1. Development – new products at the beginning of the product life cycle.
2. Growth – products that have the potential to become profitable.
3. Pillar – profitable products targeted to wide-breadth markets.
4. Niche – similar to pillar products, but differing in the size of the market.
5. Core – traditional products that compete in mature markets and should therefore be
managed as such. (Source: "Portfolio Planning at Ciba-Giegy and the Newport Investment Proposal", 1995, Harvard
Business School Case Services Order Number 9-795-040 Rev. 6/95.)
The Strategic Planning Grid is frequently misused in two ways. First, managers tend
to use it as a prescription for strategic management. This is a serious mistake as the model is
descriptive rather than prescriptive. In other words, the matrix should be used as an aid to
decision making rather than a solution to the strategic problem at hand. The role of the matrix
is twofold. It describes the present situation of the business unit and it can help in making
accurate future projections. Second, managers’ teams tend to rate a business at an
intermediate position on most factors. It seems that when managers use the model in group
decision analysis or planning session, the ‘medium’ range is often used as a compromise for
diverging opinions. This of course is misleading.
*
Imported from their field by industrial engineers, the planning mode was always too
ponderous, too precise, and too uncreative for strategy. Professor George Steiner, then at
UCLA, was my definitive expert on strategic, or top management, planning. I had met him
several times during my year with the Management Department at UCLA, but even in the late
seventies strategic planning, once a central topic in management, was already out. Professor
Steiner had showed how a top-down planning approach is used as a future-based integrated
tool. Admittedly his approach was highly detailed, required heavy investments in time and
human resources, and deep understanding of all functional areas (marketing, finance,
production, accounting, and so on), and an unforeseeable event could render all this effort
useless, but it was elegant! It was also very useful in explaining to young MBAs what top
management is supposed to do. Strategic management first exchanged strategic planning with
contingency planning then absorbed it as one of the modes in which strategies are made. I
know entrepreneurship is more exciting than planning, but how do you teach it?
*
The product-market evolution approach, which followed the BCG and the GE
matrices, presented a new outlook on balancing portfolios. Figure D: The Product-Market
Evolution Approach is an example for this model. In addition to the assorted strategies
assigned to each business unit, different performance criteria for each stage of the life cycle
are introduced. Another factor that triggered the development of this portfolio approach was
the fact that very few had made the distinction between corporate-level strategy and business-
level strategy. The model clearly makes this distinction.
Figure D: The Product-Market Evolution Approach
There are three separate levels of strategy formulation: the corporate level, the
business level and the functional level. Five principles should be addressed in the strategic
process:
The separation of goal-formulation and strategy-formulation processes.
The division of strategy formulation into two levels: corporate and business.
The inclusion of social and political analyses in the process.
The prime necessity of contingency planning. And,
The exclusion of budgeting and implementation planning from the strategy-formulation
process.
There are three types of ideal portfolios at the corporate level:
a growth portfolio,
a profit portfolio, and
a balanced portfolio.
Corporations strive to achieve one of these three "ideal" portfolios, whose objectives,
goals, and required resource levels are different, and lead the corporation to different future
scenarios. A growth portfolio has many business units at the early stages of the life cycle. Its
goals emphasize the long term, and it may run into cash-flow problems in the short term. A
profit portfolio has many business units in the mature stage, and profit is a short-term goal.
This type of portfolio may encounter problems in the future, when the product-markets begin
to decline. A balanced portfolio has, as its name implies, a balanced mix of business units at
all stages. In all three of these "ideal" portfolios the business units are strong compared to the
competition. An ideal portfolio does not include average or weak business units.
*
The exact circumstances of my stepping on a beehive are debatable. I clearly
remember I took a shortcut home through the neighbors’ yard. My mother claims a bunch of
angry kids were after me. Maybe. Anyhow, my mother carried me on her back to the nearest
clinic. I was seven or eight years old, small and fat. This time it was an easy task for my
mother, since a year earlier she had carried me back home with a cast on my leg. The
physician counted 29 different bee stings on my back and head. Some of them were very easy
to find since the dead bees were trapped in my hair, others were inside my shirt. The
physician told my mother that 29 bee stings, for my size, was a borderline case. A few more
would probably have killed me. Even without the sedatives I was high. I truly can not report
any vision, but everything was very relaxed, highly illuminated, and blurred around the
corners. Maybe it was mid-summer; maybe I was unable to focus my eyes. However, as an
active avoider of uncertainty, and a practicing risk averter, I missed all the drug parties of the
sixties, or of any other decade. Maybe I was always afraid of the thirtieth bee sting.
*
There should be a clear distinction between the corporate and business levels. A top-
down approach for analyzing multi-industry organizations should be used. The first step is to
establish the desired corporate portfolio profile. The next step is the formulation of specific
business strategies for the separate business units. Afterwards, any gaps existing between
corporate and business unit level strategies are closed through consultation between managers
at the two levels.
Corporate portfolio strategies are analogous to business unit strategies: how to meet
the corporate goals, while allocating limited resources. There are other actions that may be
taken apart from changing the portfolio strategy, such as:
changing the resource-procurement strategy,
changing the political strategy, or
changing the corporate goals.
Thus, the portfolio may be balanced by achieving one of the ideal portfolios in the following
manner:
• Invest in newly evolving business units so that they can secure strong competitive
positions in the future.
• Invest in average or weak business units in order to nurture them into strong
competitive positions. Resource constraints will determine how many such business units
the corporation can afford to cultivate.
• Harvest very weak business units in growth markets that are unlikely to attain strong
positions in the future, weak business units in saturated or declining markets that are
producing negative cash flows, and business units that are so different from the other
business units in the corporation that top management cannot manage them effectively.
• Acquire new business units with strong competitive positions, if they do not exist
internally. Acquisition decisions must take into consideration compatibility, synergies,
and timing.
EXAMPLE: Acquisitions played a major role in the growth of Loews Corporation, thanks
largely to the Tisch brothers. Until 1958, Larry and Bob Tisch, had been in the hotel industry,
growing from humble beginning in 1946 (with the purchase of a resort hotel in New Jersey) to
a worth of 65$ million in 1959. But that was about to change, the hotels would soon become a
subsidiary of a much larger operation. In 1958 Larry Tisch started buying the stocks of the
Loews Corporation, which was then battling against a hostile takeover, and within a year had
obtained full control. Larry was appointed CEO and Bob was appointed president and COO.
In 1968, Loews purchased Lorillard, a tobacco company manufacturing cigarette brands such
as Kent and Newport. After the acquisition, Larry Tisch made some changes at Lorillard. As
Lorillard’s core business was selling cigarettes, operations other then those relating to the
cigarettes were to be sold. The Lorillard executive team was also replaced.
CNA is a large insurance company that Loews acquired a few years later. In 1974, before the
acquisition, CNA had lost 208$ million. As with other companies, the Tisch brothers made
some changes at CNA. They decreased the number of employees by 1400 and hired a new
CEO. In 1975, CNA showed a profit of 110$ million (although half of it was due to capital
gains).
The next in line for acquisition by Loews was the Bulova Watch Company, known for its
state-of-the-art tuning-fork technology. In the 1970s, failing to keep up with the change in the
industry brought about by the advent of the quartz watch, the company found itself facing
bankruptcy in 60 days. Loews was called to the rescue, and by 1979 had acquired 95% of the
Bulova Watch Company.
In 1986, Loews added CBS Inc. to their shopping list. By then, Loews’ market value was
estimated to be 5.5$ billion. (Source: "Loews Corporation", 1989, Harvard Business School Case Services Order
Number 9-387-131 Rev. 9/89.)
Concurrently with the above corporate strategies the corporation should maximize
resource generation in accordance with the level of risk the main shareholders are willing to
take (risk is discussed below), developing political strategies to support the portfolio changes.
In some cases, it may be necessary to change political strategies. Changing the corporate
goals is of course only a last resort, when all other alternatives have failed.
A portfolio with too many weak business units in later stages of the life cycle often
suffers from insufficient cash flow, profits and growth. An excess of weak business units in
early stages of the life cycle leads to deficient cash flow and profits. Too many strong,
established business units produce surplus cash flow but provide no growth areas for
investment. A portfolio with a profusion of developing, potentially strong business units
demands a great amount of attention and offers negative cashflow and unstable growth and
profits in return. In general, unbalanced portfolios produce less stable, less reliable growth
and profits and entail greater corporate risk than balanced portfolios.

Chapter 7: Corporate Level Strategy - Mix and Composition of Business Units

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Chapter 7: Corporate Level Strategy - Mix and Composition of Business Units

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Mysticism and Strategic Management

Chapter 7: Corporate Level Strategy - Mix and Composition of Business Units

Chapter 7: Corporate Level Strategy – Mix and Composition of

Copyright © 2006 Eli Segev

Figure B: The BCG Model

Figure D: The Product-Market Evolution Approach

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