Chap008

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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

CHAPTER 8

Strategic Analysis and Choice in the Multibusiness Company: Rationalizing Diversification

and Building Shareholder Value

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Chapter Topics

• The Portfolio Approach

• The Synergy Approach: Leveraging Capabilities and Core Competencies

• Strategic Analysis and Choice in Multi-business Companies: The Corporate Parent Role

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The Portfolio Approach

BCG Growth-Share Matrix

Industry Attractiveness-

Business Strength Matrix

Life Cycle-Competitive

Strength Matrix

BCG’s Strategic Environments

Matrix

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Ex. 8-1: The BCG Growth-Share Matrix

Star Problem Child

Cash Cow Dog

Cash Generation (Market Share)

High Low

High

Low

Cas

h U

se (

Gro

wth

Rat

e)

Description of Dimensions

Market share: sales relative to those of other competitors in the market (dividing point is usually selected to have only the two-three largest competitors in any market fall into the high market share region)

Description of DimensionsGrowth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)

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Ex. 8-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix

(Industry Attractiveness)

Nature of Competitive Rivalry

Bargaining Power of Suppliers/Customers

Threat of Substitutes/New

Entrants

•Number of competitors

•Size of competitors

•Strength of competitors’ corporate parents

•Price wars

•Competition on multiple dimensions

•Relative size of typical players

•Numbers of each

•Importance of purchases from or sales to

•Ability to vertically integrate

•Technological maturity/stability

•Diversity of the market

•Barriers to entry

•Flexibility of distribution system

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Ex. 8-3 (contd.)

Economic Factors Financial Norms Sociopolitical Considerations

•Sales volatility

•Cyclicality of demand

•Market growth

•Capital intensity

•Average profitability

•Typical leverage

•Credit practices

•Government regulation

•Community support

•Ethical standards

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Ex. 8-3 (contd.)

(Business Strength)

Cost Position Level of Differentiation

Response Time

•Economies of scale

•Manufacturing costs

•Overhead

•Scrap/waste/rework

•Experience effects

•Labor rates

•Proprietary processes

•Promotion effectiveness

•Product quality

•Company image

•Patented products

•Brand awareness

•Manufacturing flexibility

•Time needed to introduce new products

•Delivery times

•Organizational flexibility

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Ex. 8-3 (contd.)

Financial Strength Human Assets Public Approval•Solvency

•Liquidity

•Break-even point

•Cash flows

•Profitability

•Growth in revenues

•Turnover

•Skill level

•Relative wage/salary

•Morale

•Managerial commitment

•Unionization

•Goodwill

•Reputation

•Image

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Ex. 8-4: The Industry Attractiveness-Business Strength Matrix

High Medium Low

Industry Attractiveness

High

Low

Bus

ines

s S

tren

gth

Medium

InvestSelectiveGrowth

Grow orLet Go

Harvest

Divest

Grow orLet Go

Harvest

SelectiveGrowth

Grow orLet Go

Description of Dimensions

Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of managementBusiness Strength: Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths and weaknesses

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Advantages of the Industry Attractiveness-Business Strength Matrix Over the BCG Matrix

Terminology is less offensive and more understandable

Multiple measures associated with each dimension tap many factors relevant to business strength and market attractiveness

Allows for broader assessment during both strategy formulation and implementation for a multibusiness company

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Ex. 8-5: The Market Life Cycle-Competitive Strength Matrix

Caution:

Invest Sele

ctively

Push:

Invest A

ggresively

Danger:

Harvest

Stage of Market Life Cycle

Introduction Growth Maturity Decline

High

Low

Com

peti

tive

Str

engt

h

Description of DimensionsStage of Market Life Cycle: See p. 146Competitive Strength: Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage

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Ex. 8-6: BCG’s Strategic Environments Matrix

Fragmentedapparel, house building,

jewelry retailing, sawmills

Specializationpharmaceuticals, luxury

cars, chocolate confectionery

Stalematebasic chemicals, volume-grade paper, ship owning,

wholesale banking

Volumejet engines, supermarkets,

motorcycles, standard microprocessors

Many

Few

Small Big

Size of Advantage

Sour

ces

of A

dvan

tage

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Contributions of Portfolio Approaches

Convey large amounts of information about diverse businesses and corporate plans in a simplified format

Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business

Simplify priorities for sharing corporate resources across diverse businesses

Provide a simple prescription of what should be accomplished – a balanced portfolio of businesses

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Limitations of Portfolio Approaches

• Does not address how value is created across business units

• Accurate measurement for matrix classification not as easy as matrices implied

• Underlying assumption about relationship between market share and profits varies across different industries and market segments

• Limited strategic options viewed as basic strategic missions

• Portrays notion that firms need to be self-sufficient in capital

• Fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it

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Ex. 8-7: Value Building in Multibusiness Companies

(Market-Related Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

Value

Shared sales force activities or shared sales office, or both

Lower selling costs

Better market coverage

Stronger technical advice to buyers

Enhanced convenience for buyers

Improved access to buyers

•Buyers have different purchasing habits toward the products

•Different salespersons are more effective in representing the product

•Some products get more attention than others

•Buyers prefer to multiple-source rather than single-source their purchases

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Ex. 8-7 (contd.)




Value

Shared after-sales service and repair work

Low servicing costs

Better utilization of service personnel

Faster servicing of customer calls

•Different equipment or different labor skills, or both, are needed to handle repairs•Buyers may do some in-house repairs

Shared brand name Stronger brand image and company reputation

Increased buyer confidence in the brand

•Company reputation is hurt if quality of one product is lower

Shared advertising and promotional activities

Lower costs

Greater clout in purchasing ads

•Appropriate forms of messages are different•Appropriate timing of promotions is different

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Ex. 8-7 (contd.)




Value

Common distribution channels Lower distribution costs

Enhanced bargaining power with distributors and retailers to gain shelf space, shelf positioning, stronger push and more dealer attention, and better profit margins

•Dealers resist being dominated by a single supplier and turn to multiple sources and lines•Heavy use of the shared channel erodes willingness of other channels to carry or push the firm’s products

Shared order processing Lower order processing costs

One-stop shopping for buyer enhances service and, thus, differentiation

•Differences in ordering cycles disrupt order processing economies

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Ex. 8-7 (contd.)

(Operating Opportunities)




Value

Joint procurements of purchased inputs

Lower input costs

Improved input quality

Improved service from suppliers

•Input needs are different in terms of quality or other specifications•Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plant

Shared inbound or outbound shipping and materials handling

Lower freight and handling costs

Better delivery reliability

More frequent deliveries, such that inventory costs are reduced

•Input sources or plant locations, or both, are in different geographic areas•Needs for frequency and reliability of inbound/outbound delivery differ among the business units

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Ex. 8-7 (contd.)




Value

Shared manufacturing and assembly facilities

Lower manufacturing/assembly costs

Better capacity utilization, because peak demand for one product correlates with valley demand for other

Bigger scale of operation improves access to better technology and results in better quality

•Higher changeover costs in shifting from one product to another

•High-cost special tooling or equipment is required to accommodate quality differences or design differences

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Ex. 8-7 (contd.)




Value

Shared product and process technologies or technology development or both

Lower product or process design costs, or both, because of shorter design times and transfers of knowledge from area to area.

More innovative ability, owing to scale of effort and attraction of better R&D personnel

•Technologies are the same, but the applications in different business units are different enough to prevent much sharing of value

Shared administrative support activities

Lower administrative and operating overhead costs

•Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)

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Ex. 8-7 (contd.)

(Management Opportunities)




Value

Shared management know-how, operating skills, and proprietary information

Efficient transfer of a distinctive competence – can create cost savings or enhance differentiation.

More effective management as concerns strategy formulation, strategy implementation, and understanding of key success factors

•Actual transfer of know-how is costly or stretches the key skill personnel too thinly, or both.

•Increased risks that proprietary information will leak out

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Ex. 8-9: Six Critical Questions for Diversification Success

• What can our company do better than any of its competitors in its current market(s)?

• What core competencies do we need in order to succeed in the new market?

• Can we catch up to or leapfrog competitors at their own game?

• Will diversification break up our core competencies that need to be kept together?

• Will we be simply a player in the new market or will we emerge a winner?

• What can our company learn by diversifying, and are we sufficiently organized to learn it?

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Places to Look for Parenting Opportunities

• Size and age

• Management

• Business definition

• Predictable errors

• Linkages

• Common capabilities

• Specialized expertise

• External relations

• Major decisions

• Major changes

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The Patching Perspective

• Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities.

• Patching can be– Adding– Splitting– Transferring– Exiting, or combining businesses

• Patching is more critical in turbulent and rapidly changing markets, than in stable, unchanging markets

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Ex. 8-10: Three Approaches to Strategy

Position Resources Simple Rules

Strategic logic Identify an attractive market

Locate a defensible position

Fortify and defend

Establish a vision

Build resources

Leverage across markets

Jump into the confusion

Keep moving

Seize opportunities

Finish strong

Strategic question

Where should we be?

What should we be?

How should we proceed?

Source of advantage

Unique, valuable position with tightly integrated activity system

Unique, valuable, inimitable resources

Key processes and unique simple rules

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Ex. 8-10 (contd.)

Works best in Slowly changing, well-structured markets

Moderately changing, well-structured markets

Rapidly changing, ambiguous markets

Duration of advantage

Sustained Sustained Unpredictable

Risk It will be difficult to alter position as conditions change

Company will be too slow to build new resources as conditions change

Managers will be too tentative in executing on promising opportunities

Performance goal

Profitability Long-term dominance

Growth

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Ex. 8-11: Simple Rules, Summarized(Adapted)

Type PurposeHow-to rules They spell out key features of how a process is executed –

“What makes our process unique?”

Boundary rules They focus managers on which opportunities can be pursued and which are outside the pale.

Priority rules They help managers rank the accepted opportunities.

Timing rules They synchronize managers with the pace of emerging opportunities and other parts of the company.

Exit rules They help managers decide when to pull out of yesterday’s opportunities.

Chap008

Business

Transcript of Chap008