Strategic Analysis And Choice In The Multibusiness Company

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McGraw-Hill/Irwin © 2003 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

• Rationalizing Diversification and Integration• Opportunities for Sharing Infrastructure and

Capabilities

• Capitalizing on Core Competencies

• Balancing Financial Resources• Portfolio Analytical Techniques

• Behavioral Considerations Affecting Strategic Choice

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Questions Related to Diversification and Integration

• Are opportunities for sharing infrastructure and capabilities forthcoming?

• Are we capitalizing on our core competencies?• Does the company’s business portfolio balance

financial resources?• Does our business portfolio achieve appropriate

levels of risk and growth?

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Ex. 8-1: 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. 8-1 (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. 8-1 (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. 8-1 (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. 8-1 (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. 8-1 (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. 8-1 (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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Critical Elements for Shared Opportunities to Be Meaningful

1. Shared opportunities must be a significant portion of the value chain of businesses involved

2. Businesses involved must truly have shared needs or there is no basis for synergy in the first place

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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 the portfolio related in ways that make the

company’s core competence(s)

beneficial?

Are our combination of competencies

unique or difficult to create?

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Balancing Financial Resources: Portfolio Techniques

BCG Growth-Share Matrix

Industry Attractiveness-

Business Strength Matrix

Life Cycle-Competitive

Strength Matrix

BCG’s Strategic Environments

Matrix

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Ex. 8-4: 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. 8-5: 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. 8-5 (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. 8-5 (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. 8-5 (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. 8-6: 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. 8-7: 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. 8-8: 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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Behavioral Considerations Affecting Strategic Choice

• Role of current strategy

• Degree of firm’s external dependence

• Attitudes toward risk

• Managerial priorities different from stockholder interests

• Internal political considerations

• Competitive reaction

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• 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?

• 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?

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• Attitudes toward risk– Industry volatility and industry evolution affect managerial

attitudes

– Risk-oriented managers prefer offensive, 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

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• 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 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

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Ex. 8-11: 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

•Cause-and-effect relationships to be examined

Control agenda

Interpretation of past events and future trends

Narrowing the alternative strategies for serious condition

Control of alternatives Mobilization:

•Coalition formation

•Resource commitment for information search

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Ex. 8-11 (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

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

Strategic Analysis And Choice In The Multibusiness Company

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