Models of Corporate Influence

Session 2: Models of Corporate Influence

Introduction

In this session, we look first at the historical development of the corporate strategy field. We then consider the kinds of challenges CEOs today face in creating value at the corporate HQ of large diversified firms.

Corporate Strategy in the 1960s and 1970s: The era of portfolio planning

Corporate strategy is only relevant in diversified companies. Until the 1950s, most firms were specialized. The diversification boom took place in the following two decades. The Fortune 500 and large UK firms show the same trend: by the late 1960s, diversified firms outnumbered undiversified firms. The reasons can be traced to the upbeat post-war economy and an emphasis on growth rather than profitability. Consultants also contributed to the diversification boom. In particular, they disseminated managerial innovations such as the M-form organization, a belief that generic management skills were valuable, and portfolio planning models.

The best known portfolio planning models are the BCG growth-share matrix and the GE/McKinsey model. These models directly extend business strategy ideas into corporate strategy.

Here’s how. What makes for a strategically sound business? An attractive industry and a superior resource position relative to your competition. These are the same two dimensions found in most portfolio models - some measure of industry attractiveness on one side, and the business’s competitive position on the other. The resulting space can then be populated by dogs, cows etc. The tool was used by corporate level managers in

• Allocating resources - the analysis indicates the investment requirements of different businesses and their likely returns.
• Formulating business-unit strategy - the analysis yields simple strategy recommendations (e.g.  “build”, “hold”, or “harvest”).
• Setting performance targets - the analysis indicates likely performance outcomes in terms of cash flow and ROI.
• Portfolios balance - the analysis can assist in corporate goals such as a balanced cash flow and balance of growing and declining businesses.

Why did such a simple idea become so big? In part, because the idea is simple. The framework allows corporate managers with limited knowledge about the workings of different businesses, to make capital allocation decisions across businesses. Imagine getting proposals from various business units, all of which appear to meet the company’s ROI and cost of capital hurdles. Keep in mind that the numbers are generated by people who know more about the business than you do. How do we select from among these proposals? The frameworks tell you to “milk the cows” for cash flow, to reinvest this cash into “stars” (and, perhaps, question marks), and to let the dogs bark away…