Chapter 9

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives1. Understand the portfolio approach to strategic

analysis and choice in multibusiness companies.

2. Understand and use three different portfolio approaches to conduct strategic analysis and choice in multibusiness companies

3. Identify the limitations and weaknesses of the various portfolio approaches

4. Understand the synergy approach to strategic analysis and choice in multibusiness companies

5. Evaluate the parent company role in strategic analysis and choice to determine whether and how it adds tangible value in a multibusiness company

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The Portfolio Approach The portfolio approach is a historical

starting point for strategic analysis and choice in multibusiness firms

Boston Consulting Group (BCG) pioneered an approach called portfolio techniques that attempted to help managers “balance” the flow of cash resources among their various businesses while identifying their basic strategic purpose within the overall portfolio

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Ex. 9.2 The BCG Growth-Share Matrix

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Ex. 9.4 The Industry Attractiveness-Business Strength Matrix

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Ex. 9.5 BCG’s Strategic Environments Matrix

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BCG’s Strategic Environments Matrix

Volume businesses are those that have few sources of advantage, but the size is large—typically the result of scale economies

Stalemate businesses have few sources of advantage, with most of those small

Fragmented businesses have many sources of advantage, but they are all small

Specialization businesses have many sources of advantage and find those advantages potentially sizable

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Limitations of Portfolio Approach It does not address how value is being created

across business units Truly accurate measurement for matrix

classification was not as easy as the matrices portrayed

The underlying assumption about the relationship between market share and profitability varied across industries and market segments

The limited strategic options came to be seen more as basic strategic missions

It ignored capital raised in capital markets It typically failed to compare the competitive

advantage a business received from being owned by a particular company with the costs of owning it

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The Synergy Approach: Leveraging Core Competencies

Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operations-related, and management activities

Strategic analysis is concerned with whether or not the potential competitive advantages expected to arise from each value opportunity have materialized

The most compelling reason companies should diversify can be found in situations where core competencies—key value-building skills—can be leveraged with other products or into markets that are not a part of where they were created

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The Synergy Approach

Each core competency should provide a relevant competitive advantage to the intended businesses

Businesses in the portfolio should be related in ways that make the company’s core competencies beneficial

Any combination of competencies must be unique or difficult to recreate

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The Corporate Parent Role:Can It Add Tangible Value?

Realizing synergies from shared capabilities and core competencies is a key way value is added in multibusiness companies.

1. Research suggests that figuring out if the synergies are real and, if so, how to capture those synergies is most effectively accomplished by business unit managers, not the corporate parent. 2. How can the corporate parent add value to its businesses in a multibusiness company?

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The Parenting Framework The parenting framework perspective

sees multibusiness companies as creating value by influencing—or parenting—their businesses

The best parent companies create more value than any of their rivals do or would if they owned the same businesses

To add value, a parent must improve its businesses

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10 Sources of Parenting Opportunities Size & Age Management Business

Definition Predictable Errors Linkages

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Common capabilities

Specialized expertise

External relations

Major decisions

Major changes

The Patching Approach Patching is the process by which

corporate executives routinely remap businesses to match rapidly changing market opportunities

It can take the form of adding, splitting, transferring, exiting, or combining chunks of businesses

Patching is not seen as critical in stable, unchanging markets

When markets are turbulent and rapidly changing, patching is seen as critical to the creation of economic value in a multibusiness company

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Proponents of Patching View traditional corporate strategy as creating

defensible strategic positions for business units by acquiring or building valuable assets, wisely allocating resources to them, and weaving synergies among them

In volatile markets, they argue, this traditional approach results in business units with strategies that are quickly outdated and competitive advantages rarely sustained beyond a few years

As a result, strategic analysis should center on strategic processes more than strategic positioning

In these volatile markets, patchers strategic analysis focuses on making quick, small, frequent changes in parts of businesses and organizational processes

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Ex. 9.9 Three Approaches to Strategy

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