Strategic Analysis At The Corporate Level
For multi-industry and multiproduct/market firms, strategic analysis begins at the corporate level. Large companies are often involved in many different kinds of businesses and sell products in many different countries.
The various businesses in the portfolio are called strategic business units (SBUs). The strategic business unit is the smallest identifiable business of the company, which pursues a substrategy, and is involved in an identifiable business or industry.
The advantage of multibusiness organizations is that they can transfer cash from business units that are highly profitable but have low growth potential to other units that have high growth and high profit potential. Therefore, the strategists for a multiply-SBU firm attempt also to achieve the answers to three basic in any strategic situation questions:
- How attractive is the group of businesses the company is in?
- Assuming the company sticks with its present lineup of businesses, how good is its performance outlook in the years ahead?
- If the previous two answers are not satisfactory, what should the company do in the ways of getting out of some existing businesses, strengthening the positions of remaining businesses, and getting into new businesses to boost the performance prospects of its business portfolio?
However, corporate strategy, in contrast to business-unit strategy, applies to different levels of organization, and it differs in content. Moreover, multi-industry companies require different analytical treatment than single-product companies.
Those companies need to develop a portfolio of various businesses in order to assure corporate growth and provide cash flow.The procedure for evaluating the strategy of a diversified company and deciding what corporate strategy moves to make next consists of eight steps:
- Identifying the present corporate strategy.
- Analyzing the makeup of the company's business portfolio- usually by constructing one or more business portfolio matrixes.
- Comparing the long-term attractiveness of each industry represented in the company's business portfolio.
- Comparing the competitive strength for each of the company's unit.
- Determining how well the business units have performed in comparison to each other in years past and how they rank in terms of prospects for the future.
- Assessing each business units compatibility with corporate strategy and determining the value of any strategic-fit relationship among existing business units.
- Ranking the business units in term of priority for new capital investment and developing a general strategy direction for each business unit-grow and build, hold and maintain, overhaul and reposition, or harvest/divest.
- Choosing strategic moves to improve overall corporate performance - acquiring new businesses and/or coordinating the activities of related business units in ways which produce a 2 + 2 = 5 type of corporate - level competitive advantage. These questions and activities center around portfolio analysis.
Portfolio analysis originally was developed as method for personal and institutional investing in securities.
The basic concept is to hold a "balanced" portfolio of investments so as to reduce risk and promote a steady and even stream of earnings in prosperous, average, and down economic times. The same general thinking and approach have been widely adapted to the strategic planning and management tasks within companies.
The "business portfolio" concept provides a superior approach for developing the differentiated strategic business objectives which are necessary for any company to make the most of its opportunities.
In a multidivisional company, a good portfolio has several dimensions. Four are always significant:
- growth and profitability of the business-units considered separately;
- synergy among the units;
- risk and profit balance;
- ash-flow balance.
Among the various approaches of the business portfolio analysis, the most popular seem to be the growth-share matrix, the industry attractiveness-business strength matrix, and the life-cycle approach.