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1-2.2: Corporate Portfolio
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Del curso dictado por University of Illinois at Urbana-Champaign
Corporate Strategy
308 calificaciones
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University of Illinois at Urbana-Champaign
308 calificaciones
Curso 6 de 7 en SpecializationStrategic Leadership and Management
De la lección
Module 1: Vertical Integration and Diversification
This module focuses on corporate strategy with particular emphasis on vertical integration and diversification. It seeks to explain when vertical integration and diversification can create a competitive advantage.
Conoce a los instructores
Joe MahoneyProfessor of Business Administration
University of Illinois, Urbana-Champaign College of Business Department of Business Administration
Our next topic is looking at the BCG matrix or
the Boston Consulting Group matrix.
And it's sometimes called within corporate strategy,
the corporate portfolio or corporate planning decision.
So we see in this matrix on the y axis we have market growth that's
projected moving forward and isn't projected to be low or high.
And on the x axis from left to right, we have a low market share and
a high market share.
One of the assumptions of the Boston Consulting Group is that this relative
market share is an indicator of how much capabilities the firm has.
So if you have low market share, the presumption is you have low capabilities
in the area and high market share, you have high capabilities.
So let's start with the lower right hand corner that's sometimes referred to as
you can think of a company like General Electric might have businesses that
are question marks, businesses that are stars, and businesses that are cash cows.
And hopefully, they don't have any businesses that are dogs,
who we'll get to in a moment.
Let us think of a market that's a cash cow, and
a cash cow means they have really high market share, really high capabilities.
But it's also a segment of the market where demand growth is slowing, and
it may not be the future of the organization.
So you may also have companies might want to think about a portfolio about
gas powered engines and what's the world going to be like 30 years from now.
Are there going to be more hybrids, more electric cars?
So it very well may be that you start to move into star businesses can move
into cash cow businesses where the demand growth can be slowing for
the projected growth can be slowing for the future.
So that can be called a Cash Cow because it's generating a lot of revenues now.
You have a lot of market share, a lot of capabilities, and
it's currently driving a lot of your profitability but you also kind of have
some signals that this may be a market that's going to be shrinking over time.
Moving up on the right hand side.
A star business that's kind of a know brainer for
the company that's a business in which the markets has high potential growth and
at the same time, the relative market share is really high.
So those are businesses that the managers want to protect.
Quickly moving from right to left on the top,
we have a question mark businesses and those are the firm currently doesn't
have much capabilities or market share in that part of the business.
But that's a segment of the market that's really growing.
China has the company Build Your Dreams which is focusing on
electric battery operated car.
And so they're really putting a lot of investments into what they think is
going to be a high growth market in the future.
And finally of course, you have the dogs which currently you're not in it,
and it also has really low potential.
So in some ways, the really easy answers for
managers are if you're in star businesses where you have great profitability and
a great future, you stick with those businesses.
You avoid the businesses where the projected growth is low and
you currently aren't in.
The really tough questions for the managers come between choosing
between how much of money do you put into your cash cow businesses,
and how much do you put into question mark?
An example, we talked earlier about Pepsi being in the restaurant business.
So for a time they owned Taco Bell, Pizza Hut and
KFC, which was the fast food part of the business.
That's a cash cow business for them.
Doing very well good market share but the growth in that area was slowing, and
they were going into more upscale dining like even
something like California Pizza Kitchen,
which is kind of an upscale pizza experience relative to KFC.
So then the managers have a tougher decision.
Do they stick with their cash cow business of Pizza Hut or which has good returns,
and they have lots of capabilities, were they which is the cash cow.
But then going along that diagonal to the upper left hand corner,
do they move into the question mark business of California Pizza Kitchen.
They currently don't have much skills in upscale dining, but
they can see that that's where the trends in the market are.
So that becomes the tough question.
If and when you start shifting from the cash cow to the question marks.
Now, the material I just gave you could have been taught in the 1970s.
Nowadays, people who use the following terms.
Managers need to balance exploration and exploitation.
The connection I want to make for
you though is even though this is the new language of today,
it's very much connected to what was taught in the BCG matrix.
So the analogy is in the example I just gave, the knowledge generation and
exploration would be, do we explore the new market of California Pizza Kitchen or
do we keep with our exploitation of what we're doing good
now which is the staying within the Pizza Hut?
So a manager balancing between exploration and exploitation to go
back to our previous slide, the question mark area of the BCG is what
a lot of people today call the knowledge exploration or in this terms,
market exploration and the cash cow is the market exploitation.
Now if we were having a course on knowledge management, we would drill down
into all these details through the middle part of these concepts and
then on to the various applications.
But that's really not the emphasis I want to have here.
I just want to make the connection that this language being used of knowledge
exploration and knowledge exploitation is connected to the BCG matrix.
Now corporate diversification, when you diversify into these various
markets you can think of General Electric as being an internal capital market.
And what does that mean?
Well if you were a banker and you had various people coming to you to ask for
funds to support starting a business, that's the external capital market.
It's external to the firm but in some sense,
you can think of the corporate managers of GE as being like a bank.
That is the people at the top, they have to decide and
they may have 192 different divisions within that company.
And then they have to figure out how much resources to allocate to each of those
divisions.
So they become essentially like a bank trying to
figure out which projects are going to be profitable in the future,
and that's what we mean by an internal capital market.
Then of course the issue becomes, the internal capital market is
competing with the external capital market of banks and
other venture capitalists providing money to various market opportunities.
So then that becomes another type of competition.
Does the conglomerate firm?
How does it match up?
As a matter of fact we in the United States,
there was the conglomerate merger era of the 1970s.
That didn't pan out very well in the United States.
And so but on the other hand,
a company like General Electric did absolutely fantastic.
So it's a mixed bag of which does better, the internal market or
the external market, but they're always in competition.
We said earlier that the make or buy decision in the marketplace or
any of the hybrids in between, they're all competing and over time,
you find out which one wins out.
This is a financial version of the same thing.
The internal capital mark is like the make decision and
the external capital market like to buy decision and
once again they completing with each other to see which one is more effective.
We talked before about vertical integration it's the same issues with
the diversification you have the coordination cost just like there's
coordination within the value chain there's also coordination across
the businesses.
We define corporate strategies that way.
If you may recall that's the multi market activities that are coordinated.
The other thing that happens though in a conglomerate or a diversified firm or
an academic institution for that matter is the concept of influence cost.
So the influence cost is the political maneuvering by managers to
influence the capital and resource allocation.
So I'm sure there's lobbying by our business administration department,
our finance department,
our accountancy department to get more resources from the dean, The Dean of
the College of Business is competing with the other Deans at the university.
And so they're competing with the provost for the resources for
each of the colleges.
So the same thing happens within business firms as well.
So we can call these influence cost because it's not just the objective
numbers that are determining the allocations, but
it also can be very much a political process.
And of course, this political process can be very costly and inefficient.
That's why as you get a larger more diversified conglomerate firm in general,
they didn't do very well because these can become very inefficient and
unproductive activities by people spending their whole day with influence costs
rather than getting productive work done.
Finally, the last concept for this particular slide is bandwagon effects.
And that is some of the diversification we may see is that firms copy other moves.
Sometimes it may be rational, as we saw in your discussion question.
When Pepsi purchased bottlers, we saw a few years later Coca Cola for
12.2 billion acquired their bottlers.
So that's kind of a mimicking move.
Sometimes it actually makes sense for them to do that.
Other times it just may be a myth in ceremony, that people are doing.
They don't really know why we're doing it,
they're just copying without really having a rationale for doing so.
When that occurs, it's called a bandwagon effect.
Your question for discussion then is, consider these bandwagon effects.
That is firms copy the moves of their industry rivals for diversification.
I'll take a moment to read the three bullet points on the screen for
three different examples from IBM, HP, and Dell.
Now following IBM, do you interpret the subsequent moves by HP and
by Dell as mere imitation or as moves to create value or both, or neither?
Please explain your interpretation of the subsequent moves by
the other companies following IBM's move.
So please reflect on this question and
post your response to the discussions for this video.
Thank you.
Finally, this last slide is just to point out that we've been talking up
until now about vertical integration separately from diversification.
What this slide is attempting to show is that in actuality a company
is doing these activities simultaneously and
looking at both related diversification, unrelated backward and forward.
So we're just taking a moment to check out Oracle's Enterprise software and
looking at their various moves, their backward vertical integration,
their forward vertical integration,
related diversification moves and unrelated diversification.
That's it for this video.
I look forward to seeing you in the next video.
Take care, bye.
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