George Presentation

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STRATEGIC ANALYSIS AND CHOICE IN THE

MULTIBUSINESS COMPANY:RATIONALIZING

DIVERSIFICATION AND BUILDING SHAREHOLDERSVALUE

PREPARED BY:GEORGE LUGEMBE

MALYETA.REG: No. 2010-06-01774



Rationalizing Diversification and

Building Shareholder Value • This is a situation where a company have numerous

businesses or want to conduct multibusiness. In a suchsituation Managers have to examine and choose whichbusiness the company have to own and which one has toforgo or divest. There two major concern here.

How do we plan to capture and exploit competitiveadvantage in each business

How to allocate resources across those business

• In making strategic decisions in multibusiness companies weare going to discuss and look at different approaches which

managers should use to analyse and choose what businessto be carried in and how to allocate recourses across thosebusinesses.



Rationalizing Diversification and

Building Shareholder Value (Contd.) • Nowadays it is has become normal to see that businesses seek to acquire

other businesses in order to grow and to diversify. There several reasonsbehind that causes the companies or businesses to come at this decision.1. To enter businesses with greater growth potential

2. To diversify inherent risks

3. To increase vertical integration

4. To instantly have a market presence rather than slower internal growth

5. To capture value added

• There big challenge in managing the resource needs of diversebusinesses and their respective strategic missions, particularly in timesof limited resources.

•

The following approaches or techniques are used to help managers tobalance the flow of cash resources among their various businesses whilealso identifying their basic strategic purpose within the overall portfolio.



Approaches

• The Portfolio Approach

• The Synergy Approach: Leveraging Capabilities

and Core Competencies

• Parenting Framework Approach

• Patching Approach



The portfolio Approach or Techniques

• The approach looks at the company as a portfolio of businesses.

• This portfolio is then examined and evaluated based oneach business’ growth potential, market position andneed for and ability to generate cash.

• Corporate strategists then allocate resources, divestand acquire businesses based on the balance acrossthis portfolio of businesses or possible businesses.

• The approach or techniques analyse multibusinessusing four matrixes



The Portfolio Approach

BCG Growth-Share

Industry Attractiveness-

Business Strength

Matrix

BCG’s Strategic

Environments Matrix

Life Cycle-Competitive

Strength Matrix



The BCG Growth – Share Matrix

• BCG matrix analyse each of the company’s

businesses according to market growth rate

and relative competitive position.



Market growth rate

• This is projected rate of sales growth for the

market being served by a particular business.

• Usually measured as the percentage increase

in a market’s sales or volume per unit over

two most recent years, this rate used as an

indicator of the relative attractiveness of the

markets served by each business in the firm’sportfolio of businesses.



Relative competitive position

• It is expressed as the market share of a

business divided by the market share of its

largest competitor. Thus, relative competitive

position provides a basis for comparing the

relative strengths of the businesses in the

firm’s portfolio in terms of their positions in

their respective markets.



The BCG Growth-Share Matrix

Cash generation (market share)

StarProblem

child

Cash

CowDog

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)

C a s h u s e ( G r o w t h

R a t e )

High Low

High

Low

Description of Dimensions

Growth Rate: Industry growth rate in constant dollars (diving point is typically the

GNP’s growth rate)



Factors Considered in Constructing an Industry

Attractiveness-Business strength Matrix

(Industry attractiveness)

Nature of Competitive Rivalry

• Number of

competitors• Size of competitors

• Strength of competitors’

corporate parents

• Price war• Competition on

multipledimensions

Bargaining Power of Suppliers /Customers

• Relative size of

typical players• Number of each

• Importance of purchases fromsales to

• Ability to verticallyintegrate

Threat of SubstituteProducts/New

• Technological

maturity/stability• Diversity of the

market

• Barriers to entry

• Flexibility of

distribution system



Factors Considered in Constructing an Industry

Attractiveness-Business strength Matrix

(Industry attractiveness) Contd.

EconomicFactors

• Sales

volatility• Cyclicality of

demand

• Market

growth• Capital

intensity

FinancialNorms

• Average

profitability• Typical

leverage

• Credit

practices

Socio-politicalConsiderations

• Government

regulation• Community

support

• Ethical

standards



(Business Strength)

Cost Position

• Economies of scale

• Manufacturing costs

• Overhead

• Scrap/waste/rework

• Experience effects

• Labour rate

• Proprietaryprocesses

Level of Differentiation

• Promotioneffectiveness

• Product quality

• Company image

• Patented products

• Brand awareness

Response Time

• Manufacturingflexibility

• Time needed tointroduce newproducts

• Delivery time

• Organizationalflexibility



(Business Strength) Contd.

FinancialStrength

• Solvency

• Liquidity• Break-even

point

• Cash flows

• Profitability• Growth in

revenue

Human Assets

• Turnover

• Skill level• Relative

wage/salary

• Morale

• Managerialcommitment

• Unionization

PublicApproval

• Goodwill

• Reputation• Image



The Industry Attractiveness-Business

Strength MatrixIndustry attractiveness

Invest

SelectiveGrowth

Grow orLet go

SelectiveGrowth

Grow orlet go

Harvest

Grow orLet go

Harvest

Divest


B u s i n

e s s S t r e n g t h

Low

Medium

High

High Medium LowIndustry attractiveness: subjective

assessment based on broadest possible

range of external opportunities and

threats beyond the strict control of

management

Business strength: subjective assessment

of how strong a competitive advantage is

created by a broad range of the firm’sinternal strengths and weaknesses

Depending on the location of a business within the

matrix as shown above, one of the following

strategic approaches is suggested:

•Invest to grow

•Invest selectively and manage for earnings

•Harvest or divest for resources



Improvement of The Industry Attractiveness-

Business Strength Matrix Over the BCG Matrix

• The resources allocation decisions remainquite similar to those of the BCG approach.

1. The industry attractiveness- business strength matrixis preferred because it is less offensive and moreunderstandable.

2. The multiple measures associated with eachdimension of the business strength matrix tap manyfactors relevant to business strength and market

attractiveness.3. Besides market share and market growth. Allows for

broader assessment during both strategy formulationand implementation for a multibusiness company



The Market Life Cycle-Competitive

Strength Matrix

Stage Market Life Cycle Description of Dimensions

Introduction Growth Maturity Decline

C o m p e

t i t i v e S t r e n g t h

High

Moderate

Low

Competitive Strength: Overall

subjective rating, based on a

wide range of factors regarding

the likelihood of gaining and

maintaining a competitive

advantage



BCG’S Strategic Environments Matrix

Many

Few S o u r c e s o f A d v a n t a

g e

Fragmented

Apparel, house building, jewellery retailing,

sawmill

Specialization

Pharmaceuticals,luxury cars, chocolate

confectionery

Stalemate

Basic chemicals,volume-grade paper,ship owning (VLCCs),

wholesale banking

Volume

Jet engines,supermarkets,

motorcycles, standard

microprocessors

Size of Advantage

Small Big




• The matrix has two dimensions. The number

of sources of competitive advantage could be

many with complex products and services

(e.g. automobiles, financial services)and few

with commodities(chemicals,

microprocessors). Complex products offer

multiple opportunities for differentiation aswell as cost advantages to survive.



Description of Dimension

• The second dimension is size of competitive advantage.How big is the advantage available to the industryleader? The two dimensions then define four industryenvironments as follows:-

Volume businesses are those that have few source of advantage, but the size is large typically the result of scaleeconomies. Advantage established in one such businessmay be transferable to another as Honda has done with itsscale and expertise with small gasoline engines.

Stalemate businesses have few sources of advantage, withmost of those small. This result in very competitivesituations. Skills in operational efficiency, low overheadand cost management are critical to profitability.




• Fragmented businesses have many source of advantage, but they are all small. This typically involvesdifferentiated products with low brand loyalty, easilyreplicated technology, and minimal scale economies.

Skills in focused market segments, typically geographic,the ability to respond quickly to changes and low costsare critical in this environment.

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

sizable. Skills in achieving differentiation productdesign, branding expertise, innovation, first-mover, andperhaps scale characterize winners here.



Contributions of Portfolio Approaches

Convey large amounts of information aboutdiverse businesses and corporate plans in asimplified format

Illuminate similarities and differences amongbusinesses, conveying the logic behind corporatestrategies for each business

Simplify priorities for sharing corporate resourcesacross diverse businesses

Provide a simple prescription of what should beaccomplished – a balanced portfolio of businesses



Limitations of Portfolio Approaches

Does not address how value is created across business units True accurate measurement for matrix classification not as

easy as matrices implied The underlying assumption about relationship between

market share and profits varies across different industries

and market segments The limited strategic options viewed as basic strategic

missions The portfolio approach portrays notion that firms need to

be self-sufficient in capital markets

The portfolio approach typically fails to comparecompetitive advantage a business receives from beingowned by a particular company with costs of owning it.



The synergy Approach: leveraging capabilities

and core competencies

• Opportunities to build value via diversification,integration, or joint venture strategies are usuallyfound

In market- related

operating-related

Management activities.

• Each business’s basic value chain activities or

infrastructure becomes a source of potentialsynergy and competitive advantage for anotherbusiness in the corporate portfolio.



Value Building in Multibusiness Companies

(Market-Related Opportunities)

Opportunitiesto Build Value

or Sharing

Shared salesforce activitiesor shared sales

office, or both

PotentialCompetitiveAdvantage

Lower selling costs

Better market coverage

Stronger technical advice tobuyers

Enhanced convenience forbuyers(can buy from single

source)

Improved access to buyers( havemore product to sell)

Impediments toAchieving

Enhanced Value

Buyers have different purchasinghabits toward the products

Different salespersons are moreeffective in representing the

product

Some products get more

attention than others

Buyers prefer to multiple-sourcerather than single-source their

purchases




(Market-Related Opportunities) Contd.

Opportunities toBuild Value or

Sharing

Shared after-sales serviceand repair work

Shared brand name

Shared advertising andpromotional activities


Low servicing costs

Better utilization of servicepersonnel

Faster servicing of customercalls

Stronger brand image andcompany reputation

Increased buyer confidence inthe brand

Lower costs

Greater clout in purchasing ads

Stronger brandimage and company

reputation

Different equipment or

different labor skills, or both,are needed to handle repairs

Buyers may do some in-houserepairs

Company reputation is hurt if quality of one product is lower

Appropriate forms of messagesare different

Appropriate timing of promotionsis different

V l B ildi i M ltib i



Value Building in Multibusiness

Companies(Market-Related Opportunities) Contd.


or Sharing

Commondistribution

channels

Shared orderprocessing


Lower distributioncosts

Enhanced bargaining powerwith distributors and retailers

to gain shelf space, shelf positioning, stronger push and

more dealer attention, andbetter profit margins

Lower order processingcosts

One-stop shopping forbuyer enhances service

and, thus, differentiation


Enhanced Value

Dealers resist beingdominated by a singlesupplier and turn to

multiple sources and lines

Heavy use of the sharedchannel erodes

willingness of otherchannels to carry or push

the firm’s products

Differences in orderingcycles disrupt order

processing economies






or Sharing

Joint procurements of purchased inputs

Shared inbound oroutbound shipping

and materialshandling


Lower input costs

Improved input quality

Improved service fromsuppliers

Lower freight and handlingcosts

Better delivery reliability

More frequent deliveries, suchthat inventory costs are reduced


Enhanced Value

Input needs are different

in terms of quality orother specifications

Inputs are needed at differentplant locations, and centralizedpurchasing is not responsive toseparate needs of each plant

Input sources or plant

locations, or both, are indifferent geographic areas

Needs for frequency andreliability of

inbound/outbound deliverydiffer among the business units






or Sharing

Shared manufacturing andassembly facilities


Lowermanufacturing/assemblycosts

Better capacity utilization,because peak demand for

one product correlates withvalley demand for other

Bigger scale of operationimproves access to bettertechnology and results in

better quality


Enhanced Value

Buyers have differentpurchasing habits towardthe products Higherchangeover costs in

shifting from one productto another

High-cost special toolingor equipment is required to

accommodate qualitydifferences or design

differences






or Sharing

Shared product andprocess technologies or

technology developmentor both

Shared administrativesupport activities

PotentialCompetitiveAdvantage Lower product or process

design costs, or both, becauseof shorter design times andtransfers of knowledge from

area to area.

More innovative ability,owing to scale of effortand attraction of better

R&D personnel

Lower administrativeand operating overhead

costs


Enhanced Value Technologies are the

same, but theapplications in different

business units aredifferent enough to

prevent much sharing of value

Support activities are nota large proportion of cost,and sharing has little costimpact (and virtually nodifferentiation impact)




(Market-Related Opportunities)Contd.


or Sharing

Shared managementknow-how, operating

skills, and proprietaryinformation


Efficient transfer of adistinctive competence – can create cost savings orenhance differentiation.

More effectivemanagement as concerns

strategy formulation,strategy implementation,

and understanding of key success factors


Enhanced Value

Actual transfer of know-how is costly or stretches

the key skill personneltoo thinly, or both.

Increased risks thatproprietary information

will leak out



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 attheir 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 orwill we emerge a winner?• What can our company learn by diversifying, and

are we sufficiently organized to learn it?



Parenting Framework

• How corporate parent add value to its business in amultibusiness company?

• The parenting framework focuses on ten areas of opportunity managers should carefully examine to findways the parent organization might add value to one ormore businesses and overall company.

• This perspective sees multibusiness companies as creatingvalue by influencing or parenting the businesses they own.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.Advocates of this perspective call the potential forimprovement within a business “ a parenting opportunity.”



Ten Areas to look for parenting

opportunities

Size and age

Management

Business definition

Predictable errors

Linkages

Common capabilities

Specialized expertise

External relations

Major decisions

Major changes



The Patching Perspective

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

• Patching can take form of Adding Splitting Transferring Exiting combining chunk of businesses

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

• The patching approach concentrates on multibusiness companies inturbulent markets of twenty first century where managers need to makequick, small shifts and adjustments in processes, markets and offers five

types of simple rules which manager use as guide lines to structure quickdecisions throughout a multibusiness company on a continuous basis.• Manager competing in business can choose among three distinct ways to

fight. They can build a fortress and defend it; they can nurture andleverage unique resources; or they can flexibly pursue fleetingopportunities within simple rules, Each approach requires different skillsets and works best under different circumstances.



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 opportunitiesFinish strong

Strategic question Where should we

be?

What should we be? How should we

proceed?

Source of

advantage

Unique, valuable

position with tightlyintegrated activity

system

Unique, valuable,

inimitable resources

Key processes and

unique simple rules



Three Approaches to Strategy (Contd.)

Position Resources Simple Rules

Works best in Slowly changing,

well-structured

markets

Moderately

changing, well-

structured markets

Rapidly changing,

ambiguous markets

Duration of advantageSustained 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



Simple Rules, Summarized

Type Purpose

How-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.

In turbulent markets, Managers should flexibly seize opportunities-but flexibility

must be disciplined. Smart companies focus on key processes and simple rules.

Different types of rules help executives manage different aspects of seizing

opportunities.



THANK YOU

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