CHAPTER 8 Strategic Analysis and Choice in the Multibusiness Company: Rationalizing Diversification and Building Sharehold...
Chapter Topics <ul><li>The Portfolio Approach </li></ul><ul><li>The Synergy Approach: Leveraging Capabilities and Core Com...
The Portfolio Approach BCG Growth-Share Matrix Industry Attractiveness-Business Strength Matrix Life Cycle-Competitive Str...
Ex. 8-1: The BCG Growth-Share Matrix Star Problem Child Cash Cow Dog Cash Generation (Market Share) High Low High Low Cash...
Ex. 8-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (Industry Attractiveness) ...
Ex. 8-3  (contd.) <ul><li>Government regulation </li></ul><ul><li>Community support </li></ul><ul><li>Ethical standards </...
Ex. 8-3  (contd.) (Business Strength) <ul><li>Manufacturing flexibility </li></ul><ul><li>Time needed to introduce new pro...
Ex. 8-3  (contd.) <ul><li>Goodwill </li></ul><ul><li>Reputation </li></ul><ul><li>Image </li></ul><ul><li>Turnover </li></...
Ex. 8-4: The Industry Attractiveness-Business Strength Matrix High Medium Low Industry Attractiveness High Low Business St...
Advantages of the Industry Attractiveness-Business Strength Matrix Over the BCG Matrix <ul><li>Terminology is less offensi...
Ex. 8-5: The Market Life Cycle-Competitive Strength Matrix Caution: Invest Selectively Push: Invest Aggresively Danger: Ha...
Ex. 8-6: BCG’s Strategic Environments Matrix Fragmented apparel, house building, jewelry retailing, sawmills Specializatio...
Contributions of Portfolio Approaches <ul><li>Convey large amounts of information about diverse businesses and corporate p...
Limitations of Portfolio Approaches <ul><li>Does not address how value is created across business units </li></ul><ul><li>...
Ex. 8-7: Value Building in Multibusiness Companies (Market-Related Opportunities) <ul><li>Buyers have different purchasing...
Ex. 8-7  (contd.) <ul><li>Appropriate forms of messages are different </li></ul><ul><li>Appropriate timing of promotions i...
Ex. 8-7  (contd.) <ul><li>Differences in ordering cycles disrupt order processing economies </li></ul>Lower order processi...
Ex. 8-7  (contd.) (Operating Opportunities) <ul><li>Input sources or plant locations, or both, are in different geographic...
Ex. 8-7  (contd.) <ul><li>Higher changeover costs in shifting from one product to another </li></ul><ul><li>High-cost spec...
Ex. 8-7  (contd.) <ul><li>Support activities are not a large proportion of cost, and sharing has little cost impact (and v...
Ex. 8-7  (contd.) (Management Opportunities) <ul><li>Actual transfer of know-how is costly or stretches the key skill pers...
Ex. 8-9: Six Critical Questions for Diversification Success <ul><li>What can our company do better than any of its competi...
Places to Look for Parenting Opportunities <ul><li>Size and age </li></ul><ul><li>Management </li></ul><ul><li>Business de...
The Patching Perspective <ul><li>Patching  is the process by which corporate executives routinely remap businesses to matc...
Ex. 8-10: Three Approaches to Strategy Key processes and unique simple rules Unique, valuable, inimitable resources Unique...
Ex. 8-10  (contd.) Growth Long-term dominance Profitability Performance goal Managers will be too tentative in executing o...
Ex. 8-11: Simple Rules, Summarized (Adapted) They help managers decide when to pull out of yesterday’s opportunities. Exit...
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Chap008

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Strategic Management
PEARCE & ROBINSON

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Chap008

  1. 1. CHAPTER 8 Strategic Analysis and Choice in the Multibusiness Company: Rationalizing Diversification and Building Shareholder Value
  2. 2. Chapter Topics <ul><li>The Portfolio Approach </li></ul><ul><li>The Synergy Approach: Leveraging Capabilities and Core Competencies </li></ul><ul><li>Strategic Analysis and Choice in Multi-business Companies: The Corporate Parent Role </li></ul>
  3. 3. The Portfolio Approach BCG Growth-Share Matrix Industry Attractiveness-Business Strength Matrix Life Cycle-Competitive Strength Matrix BCG’s Strategic Environments Matrix
  4. 4. Ex. 8-1: The BCG Growth-Share Matrix Star Problem Child Cash Cow Dog Cash Generation (Market Share) High Low High Low Cash Use (Growth Rate) 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 Dimensions Growth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)
  5. 5. Ex. 8-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (Industry Attractiveness) <ul><li>Technological maturity/stability </li></ul><ul><li>Diversity of the market </li></ul><ul><li>Barriers to entry </li></ul><ul><li>Flexibility of distribution system </li></ul><ul><li>Relative size of typical players </li></ul><ul><li>Numbers of each </li></ul><ul><li>Importance of purchases from or sales to </li></ul><ul><li>Ability to vertically integrate </li></ul><ul><li>Number of competitors </li></ul><ul><li>Size of competitors </li></ul><ul><li>Strength of competitors’ corporate parents </li></ul><ul><li>Price wars </li></ul><ul><li>Competition on multiple dimensions </li></ul>Threat of Substitutes/New Entrants Bargaining Power of Suppliers/Customers Nature of Competitive Rivalry
  6. 6. Ex. 8-3 (contd.) <ul><li>Government regulation </li></ul><ul><li>Community support </li></ul><ul><li>Ethical standards </li></ul><ul><li>Average profitability </li></ul><ul><li>Typical leverage </li></ul><ul><li>Credit practices </li></ul><ul><li>Sales volatility </li></ul><ul><li>Cyclicality of demand </li></ul><ul><li>Market growth </li></ul><ul><li>Capital intensity </li></ul>Sociopolitical Considerations Financial Norms Economic Factors
  7. 7. Ex. 8-3 (contd.) (Business Strength) <ul><li>Manufacturing flexibility </li></ul><ul><li>Time needed to introduce new products </li></ul><ul><li>Delivery times </li></ul><ul><li>Organizational flexibility </li></ul><ul><li>Promotion effectiveness </li></ul><ul><li>Product quality </li></ul><ul><li>Company image </li></ul><ul><li>Patented products </li></ul><ul><li>Brand awareness </li></ul><ul><li>Economies of scale </li></ul><ul><li>Manufacturing costs </li></ul><ul><li>Overhead </li></ul><ul><li>Scrap/waste/rework </li></ul><ul><li>Experience effects </li></ul><ul><li>Labor rates </li></ul><ul><li>Proprietary processes </li></ul>Response Time Level of Differentiation Cost Position
  8. 8. Ex. 8-3 (contd.) <ul><li>Goodwill </li></ul><ul><li>Reputation </li></ul><ul><li>Image </li></ul><ul><li>Turnover </li></ul><ul><li>Skill level </li></ul><ul><li>Relative wage/salary </li></ul><ul><li>Morale </li></ul><ul><li>Managerial commitment </li></ul><ul><li>Unionization </li></ul><ul><li>Solvency </li></ul><ul><li>Liquidity </li></ul><ul><li>Break-even point </li></ul><ul><li>Cash flows </li></ul><ul><li>Profitability </li></ul><ul><li>Growth in revenues </li></ul>Public Approval Human Assets Financial Strength
  9. 9. Ex. 8-4: The Industry Attractiveness-Business Strength Matrix High Medium Low Industry Attractiveness High Low Business Strength Medium Invest Selective Growth Grow or Let Go Harvest Divest Grow or Let Go Harvest Selective Growth Grow or Let Go Description of Dimensions Industry 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’s internal strengths and weaknesses
  10. 10. Advantages of the Industry Attractiveness-Business Strength Matrix Over the BCG Matrix <ul><li>Terminology is less offensive and more understandable </li></ul><ul><li>Multiple measures associated with each dimension tap many factors relevant to business strength and market attractiveness </li></ul><ul><li>Allows for broader assessment during both strategy formulation and implementation for a multibusiness company </li></ul>
  11. 11. Ex. 8-5: The Market Life Cycle-Competitive Strength Matrix Caution: Invest Selectively Push: Invest Aggresively Danger: Harvest Stage of Market Life Cycle Introduction Growth Maturity Decline High Low Competitive Strength Description of Dimensions Stage of Market Life Cycle : See p. 146 Competitive Strength : Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage
  12. 12. Ex. 8-6: BCG’s Strategic Environments Matrix Fragmented apparel, house building, jewelry retailing, sawmills Specialization pharmaceuticals, luxury cars, chocolate confectionery Stalemate basic chemicals, volume-grade paper, ship owning, wholesale banking Volume jet engines, supermarkets, motorcycles, standard microprocessors Many Few Small Big Size of Advantage Sources of Advantage
  13. 13. Contributions of Portfolio Approaches <ul><li>Convey large amounts of information about diverse businesses and corporate plans in a simplified format </li></ul><ul><li>Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business </li></ul><ul><li>Simplify priorities for sharing corporate resources across diverse businesses </li></ul><ul><li>Provide a simple prescription of what should be accomplished – a balanced portfolio of businesses </li></ul>
  14. 14. Limitations of Portfolio Approaches <ul><li>Does not address how value is created across business units </li></ul><ul><li>Accurate measurement for matrix classification not as easy as matrices implied </li></ul><ul><li>Underlying assumption about relationship between market share and profits varies across different industries and market segments </li></ul><ul><li>Limited strategic options viewed as basic strategic missions </li></ul><ul><li>Portrays notion that firms need to be self-sufficient in capital </li></ul><ul><li>Fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it </li></ul>
  15. 15. Ex. 8-7: Value Building in Multibusiness Companies (Market-Related Opportunities) <ul><li>Buyers have different purchasing habits toward the products </li></ul><ul><li>Different salespersons are more effective in representing the product </li></ul><ul><li>Some products get more attention than others </li></ul><ul><li>Buyers prefer to multiple-source rather than single-source their purchases </li></ul>Lower selling costs Better market coverage Stronger technical advice to buyers Enhanced convenience for buyers Improved access to buyers Shared sales force activities or shared sales office, or both Impediments to Achieving Enhanced Value Potential Competitive Advantage Opportunities to Build Value or Sharing
  16. 16. Ex. 8-7 (contd.) <ul><li>Appropriate forms of messages are different </li></ul><ul><li>Appropriate timing of promotions is different </li></ul>Lower costs Greater clout in purchasing ads Shared advertising and promotional activities <ul><li>Company reputation is hurt if quality of one product is lower </li></ul>Stronger brand image and company reputation Increased buyer confidence in the brand Shared brand name <ul><li>Different equipment or different labor skills, or both, are needed to handle repairs </li></ul><ul><li>Buyers may do some in-house repairs </li></ul>Low servicing costs Better utilization of service personnel Faster servicing of customer calls Shared after-sales service and repair work Impediments to Achieving Enhanced Value Potential Competitive Advantage Opportunities to Build Value or Sharing
  17. 17. Ex. 8-7 (contd.) <ul><li>Differences in ordering cycles disrupt order processing economies </li></ul>Lower order processing costs One-stop shopping for buyer enhances service and, thus, differentiation Shared order processing <ul><li>Dealers resist being dominated by a single supplier and turn to multiple sources and lines </li></ul><ul><li>Heavy use of the shared channel erodes willingness of other channels to carry or push the firm’s products </li></ul>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 Common distribution channels Impediments to Achieving Enhanced Value Potential Competitive Advantage Opportunities to Build Value or Sharing
  18. 18. Ex. 8-7 (contd.) (Operating Opportunities) <ul><li>Input sources or plant locations, or both, are in different geographic areas </li></ul><ul><li>Needs for frequency and reliability of inbound/outbound delivery differ among the business units </li></ul>Lower freight and handling costs Better delivery reliability More frequent deliveries, such that inventory costs are reduced Shared inbound or outbound shipping and materials handling <ul><li>Input needs are different in terms of quality or other specifications </li></ul><ul><li>Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plant </li></ul>Lower input costs Improved input quality Improved service from suppliers Joint procurements of purchased inputs Impediments to Achieving Enhanced Value Potential Competitive Advantage Opportunities to Build Value or Sharing
  19. 19. Ex. 8-7 (contd.) <ul><li>Higher changeover costs in shifting from one product to another </li></ul><ul><li>High-cost special tooling or equipment is required to accommodate quality differences or design differences </li></ul>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 Shared manufacturing and assembly facilities Impediments to Achieving Enhanced Value Potential Competitive Advantage Opportunities to Build Value or Sharing
  20. 20. Ex. 8-7 (contd.) <ul><li>Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact) </li></ul>Lower administrative and operating overhead costs Shared administrative support activities <ul><li>Technologies are the same, but the applications in different business units are different enough to prevent much sharing of value </li></ul>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 Shared product and process technologies or technology development or both Impediments to Achieving Enhanced Value Potential Competitive Advantage Opportunities to Build Value or Sharing
  21. 21. Ex. 8-7 (contd.) (Management Opportunities) <ul><li>Actual transfer of know-how is costly or stretches the key skill personnel too thinly, or both. </li></ul><ul><li>Increased risks that proprietary information will leak out </li></ul>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 Shared management know-how, operating skills, and proprietary information Impediments to Achieving Enhanced Value Potential Competitive Advantage Opportunities to Build Value or Sharing
  22. 22. Ex. 8-9: Six Critical Questions for Diversification Success <ul><li>What can our company do better than any of its competitors in its current market(s)? </li></ul><ul><li>What core competencies do we need in order to succeed in the new market? </li></ul><ul><li>Can we catch up to or leapfrog competitors at their own game? </li></ul><ul><li>Will diversification break up our core competencies that need to be kept together? </li></ul><ul><li>Will we be simply a player in the new market or will we emerge a winner? </li></ul><ul><li>What can our company learn by diversifying, and are we sufficiently organized to learn it? </li></ul>
  23. 23. Places to Look for Parenting Opportunities <ul><li>Size and age </li></ul><ul><li>Management </li></ul><ul><li>Business definition </li></ul><ul><li>Predictable errors </li></ul><ul><li>Linkages </li></ul><ul><li>Common capabilities </li></ul><ul><li>Specialized expertise </li></ul><ul><li>External relations </li></ul><ul><li>Major decisions </li></ul><ul><li>Major changes </li></ul>
  24. 24. The Patching Perspective <ul><li>Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities. </li></ul><ul><li>Patching can be </li></ul><ul><ul><li>Adding </li></ul></ul><ul><ul><li>Splitting </li></ul></ul><ul><ul><li>Transferring </li></ul></ul><ul><ul><li>Exiting, or combining businesses </li></ul></ul><ul><li>Patching is more critical in turbulent and rapidly changing markets, than in stable, unchanging markets </li></ul>
  25. 25. Ex. 8-10: Three Approaches to Strategy Key processes and unique simple rules Unique, valuable, inimitable resources Unique, valuable position with tightly integrated activity system Source of advantage How should we proceed? What should we be? Where should we be? Strategic question Jump into the confusion Keep moving Seize opportunities Finish strong Establish a vision Build resources Leverage across markets Identify an attractive market Locate a defensible position Fortify and defend Strategic logic Simple Rules Resources Position
  26. 26. Ex. 8-10 (contd.) Growth Long-term dominance Profitability Performance goal Managers will be too tentative in executing on promising opportunities Company will be too slow to build new resources as conditions change It will be difficult to alter position as conditions change Risk Unpredictable Sustained Sustained Duration of advantage Rapidly changing, ambiguous markets Moderately changing, well-structured markets Slowly changing, well-structured markets Works best in
  27. 27. Ex. 8-11: Simple Rules, Summarized (Adapted) They help managers decide when to pull out of yesterday’s opportunities. Exit rules They synchronize managers with the pace of emerging opportunities and other parts of the company. Timing rules They help managers rank the accepted opportunities. Priority rules They focus managers on which opportunities can be pursued and which are outside the pale. Boundary rules They spell out key features of how a process is executed – “What makes our process unique?” How-to rules Purpose Type

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