Diversification
Session 7, part 2
Corporate Strategy – Diversification, Acquisition,
and Internal New Ventures
Reviewing the Corporate Portfolio
Long range planning must begin with an assessment of the firm’s current lines of business (Strategic Business Units or SBUs) for growth potential, as well as surveying opportunities in new areas.
Portfolio planning as a guide to development: At least annually, if not more often (even quarterly), it’s important to review the different SBU’s that make up the different parts of a diversified company. While each SBU may have a different strategy, all of these strategies should be driven by an overarching Corporate-level strategy that provides a rationale for why the company is involved in the various businesses (e.g., helping build barriers to entry by vertical integration or product bundling). Ideally, the different businesses might be linked by sharing core competencies. For example, HP has used its competence in digital imaging for items as diverse as laser printers and digital cameras. One way to look at the mix of businesses the company is currently in is to think about how the mix exploits current core competencies and is helping to develop new competencies.
The book outlines the Hamel and Prahalad model. Another alternative is the BCG matrix. The point of any portfolio review process is to determine the SBU’s relative standing in its industry (or among its strategic group). An analysis should also determine the SBU’s prospects for growth and whether the SBU is an up and comer in its industry (a “star”: that is, a growing business in a growing industry) or whether its best days are behind it, so it can milked for the cash flow it spins off (a “cash cow”). If a company is pursuing unrelated diversification it should have a mix of stars and cash cows to allow for the best allocation of resources. Think about why this would be.
Limitations of portfolio planning: There are some limitations to portfolio...
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