chapter  10
31 Pages

Theoreticalunderpinnings

This chapter aims to put the corporate configurations model into the context of the academic theories and consultancy frameworks that exist in the area of corporate strategy. As stated at the beginning of the book, the reality is that most of the strategy research and literature focuses on the strategies of business units rather than the overall corporate level strategy. Indeed, even where the theory or framework states that it is considering corporate strategy, inmanycases itmerely regards the total organisation as a single entity without highlighting the specific role of the corporate centre. Twomainbodies of work, one byHenryMintzberg and the other by

Michael Goold and Andrew Campbell, do deal with the specific role of the corporate centre in multi-business groups and hence they are considered in some detail here. However, before comparing in detail our model with other existing work, this chapter briefly looks at the different types of corporate strategy so that the more detailed analysis is placed in an appropriate context. The corporate configurations model is then analysed in terms of the

fundamental theoretical building blocks of strategy theory, namely the Resource Based View of the firm with its related theory of Dynamic Capabilities, and Transaction Cost Economics. This is done because our model was, as already stated, developed from first principles rather than being deduced from studying a number of ‘successful’ multi-business groups. Hence the four corporate configurations should be capable of rational, economic justifications in terms of the valueadding potential of each style of corporate centre. These justifications were briefly discussed at the end of Chapter 1 but we now have the

opportunity to deal with these issues more substantively. Several other popular strategic models are also discussed and compared to the conclusions of the configurations framework at the end of this chapter.

In the literature that was considered inwriting this chapter, it is argued that there are eight basic logics behind corporate strategies. Some of these can equally be applied to the individual business units within larger groups, but they are still defended as being relevant to strategy at the overall corporate level. Obviously we are interested in how each of these types of corporate strategy can actually create shareholder value when applied in a multi-business group. The first type can be categorised as the spreading of risk through

diversification so that the corporation protects its own future by having a range of relatively unrelatedbusiness units. In developed capital markets, this justification for having a group has very largely been undermined. Shareholders can spread their risk by creating their own diversified portfolio of investments, and they can do it much more cost efficiently than anycorporate centre can.Thus the corporate centre still needs to add value to the diversified businesses that it controls. In less developed financial markets or where the group is family controlled, there can still be a shareholder value enhancing logic for the risk reducing diversified group. The second kind of corporate strategy is quite closely linked to the

diversification theme as it is based on ensuring the survival of the organisation.This means that the group looks for new areas of activity once its existing business units have ceased growing or have already moved into long-term decline. In many cases this search results in a strategy of diversification that can take the group into new areas where it has little knowledge or relevant managerial expertise.This has led to the use of the term‘over-diversified’.This implies that some level of diversification may be value adding but, beyond a certain point, the group is destroying value rather than increasing or preserving it. Of course it is also true that the logic of ‘preserving the group at all costs’ is not appropriate from a shareholder’s perspective. If the continued survival of a groupwill result in significant value destruction, economically rational shareholders would prefer the business to be wound up or sold now so that the current value could be paid out to them. Portfolio management is the third type of corporate strategy and

this can also be linked into the ideas of diversification and survival.

However, the most common philosophy behind portfolio management is for a group to have a relatively balanced portfolio of business units. This ‘balance’ can be achieved in several ways. The original, and still most common, usage of a balanced portfolio of businesses within a group, as opposed to the financial theory of an efficiently designedportfolio of investments, is to have some mature, cash generating business units that provide the funding for the high growth and start-up businesses that represent the longer-term future of the group. This was, of course, highly developed by the Boston Consulting Group through the use of short titles for each box (question mark, star, cash cow and dog) in its Directional Policy Matrix which is shown as Figure 10.1. The reinvestment of the high profits and cash flows generated by these successful mature businesses was designed to ensure not only the longterm survival of the group but also value-adding growth. Unfortunately, once again, the reinvestment opportunities were

often in industries that were unrelated to the group’s original successful areas of operation. Also the risk associated with these newer, high growth industries was much greater than that of the now mature, normally more stable industries from which the group was generating its current stream of profits and cash flow. This meant that the group should have set a much higher required rate of return for any such reinvestments than was required for its existing business units. Normally this financial adjustment was not made by the corporate centres which were often overly keen to find new investment opportunities. These higher growth opportunities can be addressed organically by

the group setting up new business units or by the acquisition of existing businesses in these new industries or sectors. If the acquisition route is followed, portfolio planning strategies can be regarded as a form of diversification through acquisition.