3. VIII SM Strategic Analysis and Choice in Multi business.ppt · 03.09.2015 · Why Do Firms...
Transcript of 3. VIII SM Strategic Analysis and Choice in Multi business.ppt · 03.09.2015 · Why Do Firms...
BBA VIII Semester
Strategic Management
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Strategic Management
POST RAJ POKHAREL
M.Phil. (TU) 01/2010), Ph.D. in Progress
Strategic Analysis and Choices in a
Multi-business Company
6 hours Concept and nature of multi-business company, Rationalizing Diversification and company, Rationalizing Diversification and integration, Behavioral considerations affects strategic choice, Building shareholders' value, Analysis of external dependence, Internal political considerations
Concept of Multi-Business
• In a multi-business firm corporate strategy takes a
broad overview role that is more encompassing
(around) than crafting strategy for a single business.
• Major tasks include devising actions (formulating) to
improve long-term performance of a corporation’simprove long-term performance of a corporation’s
portfolio of businesses; capturing strategic fit
benefits existing within and between business
units; and evaluating profit prospects of each
business unit and steering corporate resourcesinto the most attractive strategic opportunities.
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Why Do Firms Diversify?
• To Grow
• Increase sales & profitability beyond what firm’s core businesses can provide
• Managerial self-serving behavior --compensationcompensation
• Managerial “hubris” -- pride or status that come from managing a large business
• To more fully utilize existing resources and capabilities
• Skills in sales & marketing, general management skills & knowledge, distribution channels, etc.
Why Do Firms Diversify?
• Risk reduction and/or spreading• Escape from unattractive or undesirable industries
(e.g., tobacco & oil companies)
• Stability of profit flows (CAPM: systematic vs. unsystematic risks; shareholders & diversified portfolios)portfolios)
• To make use of surplus cash flows• Large cash balances attract corporate raiders
• Use cash balances to avoid hostile takeovers
• To build shareholder value• Create synergy among the businesses of a firm
• Make 2 + 2 = 5: The whole should be greater than the sum of the parts
Why Do Firms Diversify
• Synergy can be obtained in three ways• Exploiting economies of scale
• Exploiting economies of scope
• Efficient allocation of capital through the use of portfolio management techniques
• Problems that prevent diversified firms from realizing synergies• A poor understanding of how diversification activities
will “fit” or be coordinated with existing businesses
• Dangers or risks associated with the acquisition of businesses
• Problems with the development of internal businesses
Major Chapter Topics
• Rationalizing Diversification and Integration
• Opportunities for Sharing Infrastructure and Capabilities
• Capitalizing on Core Competencies
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• Capitalizing on Core Competencies
• Balancing Financial Resources
• Portfolio Analytical Techniques (always ask in exam)
• Behavioral Considerations Affecting Strategic Choice
Managers seeking to rationalize diversification or vertical/horizontal integration attempt to answer four basic questions:
• Are opportunities for sharing infrastructure and capabilities forthcoming (helpful)?
• Are we capitalizing on our core competencies?
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competencies?
• Does the company’s business portfolio balance financial resources?
• Does our business portfolio achieve appropriate levels of risk and growth?
Q: Explain the various questions that are to be addressed while making decisions regarding diversification and integration by a multi business. 8m (Spring, 2010, 3a)
Value Building in Multi-business Companies
• Value Building in Multi-business Companiesis primarily concerned with market-related, operations-related, and management-related opportunities to build value through sharing. opportunities to build value through sharing.
• It describes the possible opportunities, potential competitive advantages that may arise, and impediments managers can anticipate attempting to achieve the enhanced value.
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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
•Buyers have different
purchasing habits toward
the products
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office, or bothStronger technical advice
to buyers
Enhanced convenience
for buyers
Improved access to
buyers
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
Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Impediments to
Achieving Enhanced
Value
Shared after-sales service
and repair work
Low servicing costs
Better utilization of
service personnel
Faster servicing of
•Different equipment or
different labor skills, or
both, are needed to
handle repairs
Value Building in Multi business Companies(Market-Related Opportunities)
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Faster servicing of
customer calls •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
Opportunities to Build Value
or Sharing
Potential Competitive
Advantage
Impediments to Achieving
Enhanced Value
Common distribution channels Lower distribution costs
Enhanced bargaining power with
distributors and retailers to gain
•Dealers resist being dominated by a
single supplier and turn to multiple
sources and lines
Value Building in Multibusiness Companies(Market-Related Opportunities)
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distributors and retailers to gain
shelf space, shelf positioning,
stronger push and more dealer
attention, and better profit margins
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
Value Building in Multibusiness Companies(Operating Opportunities)
Opportunities to Build Value
or Sharing
Potential Competitive
Advantage
Impediments to Achieving
Enhanced 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
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Improved service from suppliers •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
Opportunities to Build Value
or Sharing
Potential Competitive
Advantage
Impediments to Achieving
Enhanced Value
Shared manufacturing and
assembly facilities
Lower manufacturing/assembly
costs
Better capacity utilization,
•Higher changeover costs in
shifting from one product to
another
Value Building in Multibusiness Companies(Operating Opportunities)
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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
•High-cost special tooling or
equipment is required to
accommodate quality
differences or design
differences
Opportunities to Build Value
or Sharing
Potential Competitive
Advantage
Impediments to Achieving
Enhanced 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
•Technologies are the same, but the
applications in different business
units are different enough to prevent
much sharing of value
Value Building in Multibusiness Companies(Operating Opportunities)
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More innovative ability, owing to
scale of effort and attraction of
better R&D personnel
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)
(Management Opportunities)
Opportunities to Build Value
or Sharing
Potential Competitive
Advantage
Impediments to Achieving
Enhanced Value
Shared management know-how,
operating skills, and proprietary
information
Efficient transfer of a
distinctive competence – can
create cost savings or enhance
differentiation.
•Actual transfer of know-how
is costly or stretches the key
skill personnel too thinly, or
both.
Value Building in Multi business Companies
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differentiation.
More effective management as
concerns strategy formulation,
strategy implementation, and
understanding of key success
factors
both.
•Increased risks that
proprietary information will
leak out
•Perhaps the most compelling reason companies should
diversify can be found in situations where its core
competencies, competencies that already provide a
sustained competitive advantage in one industry, can be
leveraged across new products or markets or industries.
Are We Capitalizing on Our Core Competencies?
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•Diversification usually works when
•1) each core competence is a relevant competitive
advantage in the intended business;
•2) businesses that would comprise the new corporate
portfolio are related in ways that leverage the company's
core competencies;
•3) the combination of competencies generated through
diversification are unique or difficult to recreate.
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Evaluating the Role of Core Competencies
Is each core competency providing a relevant competitive advantage to the intended businesses?
Are businesses in portfolio related in ways making the company’s core competence(s) beneficial?
Is the combination of competencies unique or difficult to recreate?
Evaluating the Role of Core Competencies
Is each core competency providing a relevant competitive advantage to the
intended businesses?
Are businesses in the portfolio related in
Are our combination of portfolio related in
ways that make the company’s core competence(s)
beneficial?
combination of competencies
unique or difficult to create?
Why Do Firms Diversify?
• Diversification is capable of increasing shareholder value if it passes three tests:
• The attractiveness test: The industry must bestructurally attractive or capable of being madeattractiveattractive
• The cost-of-entry test: The cost of entry must notcapitalize all future profits
• The better-off test: Either the new unit must gaincompetitive advantage from its link with thecorporation or vice versa (i.e. synergy)
Does the Company's Business Portfolio BalanceFinancial Resources?
•Diversification and vertical/horizontal integration
create multiple businesses within a company with
each competing for resources to pursue their
potential.
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•Corporate managers make diversification work
better when they can effectively balance resource
needs among the portfolio of businesses.
Several techniques are:
Balancing Financial Resources: Portfolio Techniques
BCG Growth-Share Matrix
Industry Attractiveness-
Business Strength BCG’s Strategic
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Business Strength Matrix
Life Cycle-Competitive
Strength Matrix
BCG’s Strategic Environments
Matrix
Q. Discuss the concept of portfolio approach of strategic analysis and choice in Multi business company. 5m (Spring 2010, 2 b)
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 •Relative size of •Technological
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•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
(contd.)
Economic Factors
Financial Norms Sociopolitical Considerations
•Sales volatility •Average profitability •Government regulation
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•Cyclicality of demand
•Market growth
•Capital intensity
•Typical leverage
•Credit practices
regulation
•Community support
•Ethical standards
(contd.)(Business Strength)
Cost Position Level of Differentiation
Response Time
•Economies of scale •Promotion effectiveness
•Manufacturing flexibility
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•Manufacturing costs
•Overhead
•Scrap/waste/rework
•Experience effects
•Labor rates
•Proprietary processes
effectiveness
•Product quality
•Company image
•Patented products
•Brand awareness
flexibility
•Time needed to introduce new products
•Delivery times
•Organizational flexibility
(contd.)
Financial Strength
Human Assets Public Approval
•Solvency •Turnover •Goodwill
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•Solvency
•Liquidity
•Break-even point
•Cash flows
•Profitability
•Growth in revenues
•Turnover
•Skill level
•Relative wage/salary
•Morale
•Managerial commitment
•Unionization
•Goodwill
•Reputation
•Image
Advantages of the Industry Attractiveness-Business Strength
Matrix Over the BCG Matrix
�Terminology is less offensive and more understandable
�Multiple measures associated with each
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�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
The Market Life Cycle-Competitive Strength Matrix
Stage of Market Life Cycle
High
Description of DimensionsStage of Market Life CycleCompetitive Strength: Overall
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Introduction Growth Maturity Decline
Low
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
Fragmentedclothing, house
building, jewelry
retailing,
Specializationpharmaceuticals, luxury
cars,Many
So
urc
es
of
Ad
va
nta
ge
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Stalematebasic chemicals,
volume-grade paper,
ship owning, wholesale
banking
Volumejet engines,
supermarkets,
motorcycles, standard
microprocessors
Few
Small Big
Size of Advantage
So
urc
es
of
Ad
va
nta
ge
Contributions of Portfolio Approaches
� Convey large amounts of information about diverse businesses and corporate plans in a simplified format
� Illuminate similarities and differences among
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� 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
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
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• 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
Behavioral Considerations Affecting Strategic Choice
Role of current
strategy
Degree of
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Attitudes
toward risk
Degree of
firm’s external
dependence
Managerial
priorities
different from
stockholders
Internal political
considerations
Competitive
reaction
Behavioral Considerations Affecting Strategic Choice
• Role of current strategy
• Degree of firm’s external dependence
• Attitudes toward risk
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• Managerial priorities different from stockholder interests
• Internal political considerations
• Competitive reaction
Q. Explain how behavioral conditions can influence the choice of strategies ? 8m (Spring 2010, 5a)
Behavioral Considerations Affecting Strategic Choice
• Role of current strategy
• What is the amount of time and resources invested in previous strategies?
• How close are new strategies to the old?
• How successful were previous strategies?
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• How successful were previous strategies?
• Degree of firm’s external dependence
• How powerful are firm’s owners, customers, competitors, unions, and its government?
• How flexible is firm with its environment?
Behavioral Considerations Affecting Strategic Choice
• Attitudes toward risk
• Industry volatility and industry evolution affect managerial attitudes
• Risk-oriented managers prefer offensive, opportunistic strategies
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opportunistic strategies
• Risk-averse managers prefer defensive, conservative strategies
• Managerial priorities different from stockholder interests
• Agency theory suggests managers frequently place their own interests above those of their shareholders
Behavioral Considerations Affecting Strategic Choice
• Internal political considerations
• Major sources of company power are CEO, key subunits, and key departments
• Power can affect corporate decisions over analytical considerations
• The content of strategic decisions and the process of arriving
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• The content of strategic decisions and the process of arriving at such decisions are politically charged
• Competitive reaction
• Probable impact of competitor response must be considered during strategy design process
• Competitor response can alter the success of strategy
Group Presentation
Roll No. 1 to 5a. Chapter 4
Roll No. 6 to 10
Chapter 5
Roll No. 21 to 25:
Chapter 7 (b)
Roll No. 26 to 30:
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Chapter 5
Roll No. 11 to 15
Chapter 6
Roll No. 16 to 20
Chapter 7 (a)
Roll No. 26 to 30:
Chapter 7 (b)
Roll No. 31 to 35:
Chapter 7 (c)
Roll No. 36 to 42:
Chapter 7 (d)
Political Activity in Phases of Strategic Decision Making
Phases of Strategic
Decision Making
Focus of Political
Action
Examples of
Political Activity
Identification and
diagnosis of political
issues
Control of:
•Issues to be
discussed
Control agenda
Interpretation of past
events and future
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discussed
•Cause-and-effect
relationships to be
examined
events and future
trends
Narrowing the
alternative strategies
for serious condition
Control of
alternatives
Mobilization:
•Coalition formation
•Resource
commitment for
information search
(contd.)Phases of Strategic
Decision Making
Focus of
Political Action
Examples of Political
Activity
Examining and
choosing the strategy
Control of
choice
Selective advocacy of
criteria. Search and
representation of
information to justify
choice
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choice
Initiating
implementation of
the strategy
Interaction
between winners
and losers
Winners attempt to “sell”
or co-opt losers. Losers
attempt to thwart
decisions and trigger
fresh strategic issues
Designing
procedures for the
evaluation of results
Representing
oneself as
successful
Selective advocacy of
criteria
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