Lonrho’s Corporate Strategy Free Essay Example

An evaluation of Lonrho’s corporate strategy should start from the two main key issues: in what businesses the firm should compete and how corporate headquarter should manage those businesses. Lonrho’s profile in 1996 included Agriculture, Sugar, General Trade, Hotels, Manufacturing, Mining&Refining and Motor&Equipment. The level of diversification was clearly high and the firm was pursuing a unrelated strategy, with less than 70% of revenues that came from the dominant business (Mining ) and without common links between businesses.

The corporation was divided into country groups or related business lines and each division had a top manager whose responsibilities were similar to those of a group CEO.

So the headquarter control of these groups was not very formal and all important decisions were in the hands of Rowland, that used to follow his strategies without consulting the board. Tiny Rowland wasn’t a pure manager but an entrepreneur interested in doing deals, so he made no efforts to share activities or to transfer core competences between different areas.

The main interest was to find undervalued assets and try to make them profitable.

Hence we can easily analyse the operational relatedness, since the firm didn’t share either primary or support activities. Corporate relatedness needs a deeper analysis. All these businesses seem to be related by Rowland’s huge experience in conducting affairs and by his effective skill in building relationships with African leaders, pursuing the policy of “investment in people”. But no more corporate-level competences were transferred among Lonrho’s assets, maybe because businesses were too different and Tiny did not want to move key people into new management positions.

So from these evaluations, the natural conclusion is that Lonrho’s corporate strategy is an unrelated diversification.

In my opinion the corporate level strategy in itself was good (exhibit 1 and 2: high revenues until 1991), but the way in which Rowland managed it was totally wrong. The main strength in its extreme diversification, was the reduction of the risk among the firm’s businesses. However, this is not enough to make the evaluation positive because there were also several negative aspects.

Starting with corporate governance, the first big problem was the lack of power by board’s members: Tiny surrounded himself with “yes-men” and he, not the board, decided what to do in case of critical issues. So the entire conglomerate was managed by a man who used to define himself as an entrepreneur and not a manager. Besides the level of control was low, if we consider that Lonrho was a big and really complex company. Moreover, and here we have the second big problem, among Tiny’s investments, several ones defected in economic rationality.

For instance, he became interested in trophy investments, only to gain prestige (that the company couldn’t exploit properly because corporate relatedness was low) although they may have been loss making. Finally, the firm was facing huge cash flow problems, due to large headquarters’ payroll, an inefficient dividend policy and Rowland’s excessive lifestyle. All these issues contributed to destroy the level of revenues and profits over the years and conducted to the only practicable way: an internal restructuring of assets.

What future direction(s) should Lonrho take in terms of its corporate-level strategy? The two main options that Lonrho has for come out to the crisis are move in the direction of focusing the business, or continue as a conglomerate. Most important, the company must immediately start a corporate restructuring strategy. The main purpose should be the limitation of losses, instead of the value and profitability creation. Lonrho could pursue this restructuring strategy both in related business lines and in country groups.

For related business lines, hotel and general trade segments were cyclical, capital intensive and they were performing below average, so the firm should try to sell its remaining assets to other companies. Regarding country groups, exhibit 2 shows that in United Kingdom, Europe and America, Lonrho was not doing well, so the board should find a way to leave these areas. With this easier structure, now the firm has to take a definite position. i) A business focusing means that Lonrho will concentrate only on one of the three businesses left.

Sugar represented 6% of Lonrho revenues and 18% of operating profit in 1996, and despite low production costs and an access to a favourable mix of markets, this seems the most suitable for being abandoned, just because is the smallest asset in the company’s portfolio. Lonrho Africa is diversified both geographically and in business lines. With an operating profit of ? 52 millions, is a valuable segment, but with Tiny no longer in the picture, Lonrho do not have a real Africa specialist.

Finally the mining segment is the most important asset for the firm, because represented 22% of 1996 revenue and 41% of operating profit. In my opinion, if the company has to make a choice, this could be the right market to sustain. Some investments are required for Ashanti Goldfields in Ghana and to improve the export capacity of Duiker mining subsidiary in South Africa. However, if Lonrho will be focused only on this business I think that it will have the types and levels of resources and capabilities needed.

Nevertheless I do not think that this corporate strategy is the best. This strategy is mainly concerned with making choices among the last two alternatives. So the corporation would be constrained to relinquish the enormous promise of African continent, or the 41% of mining profit if it chooses to focus in Lonrho Africa. ii) The firm can continue as a conglomerate but for the reason said above, also in this case Lonrho should leave the sugar market. Now we have two businesses left and I would like to make a comparison with the Boston Consulting Group chart.

With this corporate strategy, the firm could use mining as a “cash cow” market, trying to exploit the high percentage of the revenues that comes from the asset. Than it can use this cash flow in Lonrho Africa, a proper “star” market, with its enormous promise but also with a lot of investments needed. So with its management expertise, technical skills and a respected name, mixed with new financial resources, Lonrho could undertake some projects in Africa that few other firms could. I think that these are the right actions that the firm should take in term of corporate strategy.