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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
Shared sales force activities or shared sales office, or both

Potential Competitive Advantage
Lower selling costs Better market coverage Stronger technical advice to buyers Enhanced convenience for buyers Improved access to buyers

Impediments to Achieving Enhanced Value
•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 multiplesource rather than singlesource their purchases

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Ex. 8-1 (contd.)
Opportunities to Build Value or Sharing
Shared after-sales service and repair work

Potential Competitive Advantage
Low servicing costs Better utilization of service personnel Faster servicing of customer calls

Impediments to Achieving Enhanced Value
•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
Lower costs Greater clout in purchasing ads

•Company reputation is hurt if quality of one product is lower

Shared advertising and promotional activities

•Appropriate forms of messages are different •Appropriate timing of promotions is different

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Ex. 8-1 (contd.)
Opportunities to Build Value or Sharing
Common distribution channels

Potential Competitive Advantage
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
Lower order processing costs One-stop shopping for buyer enhances service and, thus, differentiation

Impediments to Achieving Enhanced Value
•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
•Differences in ordering cycles disrupt order processing economies

Shared order processing

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Ex. 8-1 (contd.)
(Operating Opportunities)

Opportunities to Build Value or Sharing
Joint procurements of purchased inputs

Potential Competitive Advantage
Lower input costs Improved input quality Improved service from suppliers

Impediments to Achieving Enhanced Value
•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.)
Opportunities to Build Value or Sharing
Shared manufacturing and assembly facilities

Potential Competitive Advantage
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

Impediments to Achieving Enhanced Value
•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.)
Opportunities to Build Value or Sharing
Shared product and process technologies or technology development or both

Potential Competitive Advantage
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
Lower administrative and operating overhead costs

Impediments to Achieving Enhanced Value
•Technologies are the same, but the applications in different business units are different enough to prevent much sharing of value

Shared administrative support activities

•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)

Opportunities to Build Value or Sharing
Shared management knowhow, operating skills, and proprietary information

Potential Competitive Advantage
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

Impediments to Achieving Enhanced Value
•Actual transfer of knowhow 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 GrowthShare Matrix

Industry AttractivenessBusiness Strength Matrix

BCG’s Strategic Environments Matrix Life CycleCompetitive Strength Matrix
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Ex. 8-4: The BCG Growth-Share Matrix
Cash Generation (Market Share)

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)

High High

Low

Star

Problem Child

Low

Cash Cow

Dog

Description of Dimensions Growth 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
•Number of competitors •Size of competitors •Strength of competitors’ corporate parents •Price wars •Competition on multiple dimensions
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Bargaining Power of Suppliers/Customers
•Relative size of typical players •Numbers of each •Importance of purchases from or sales to •Ability to vertically integrate

Threat of Substitutes/New Entrants
•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
•Government regulation •Community support •Ethical standards

•Sales volatility •Average profitability •Cyclicality of demand •Typical leverage •Market growth •Credit practices •Capital intensity

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Ex. 8-5 (contd.)
(Business Strength)

Cost Position
•Economies of scale •Manufacturing costs •Overhead •Scrap/waste/rework •Experience effects •Labor rates •Proprietary processes

Level of Differentiation
•Promotion effectiveness •Product quality •Company image •Patented products •Brand awareness

Response Time
•Manufacturing flexibility •Time needed to introduce new products •Delivery times •Organizational flexibility

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Ex. 8-5 (contd.)
Financial Strength
•Solvency •Liquidity •Break-even point •Cash flows •Profitability •Growth in revenues

Human Assets
•Turnover •Skill level •Relative wage/salary •Morale •Managerial commitment •Unionization

Public Approval
•Goodwill •Reputation •Image

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Ex. 8-6: The Industry AttractivenessBusiness Strength Matrix
Industry Attractiveness

High

Medium

Low

High

Invest

Selective Growth

Grow or Let Go

Medium

Selective Growth

Grow or Let Go

Harvest

Low

Grow or Let Go

Harvest

Divest

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

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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 CycleCompetitive Strength Matrix
Stage of Market Life Cycle 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
Introduction
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High

Low

Growth

Maturity

Decline
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Ex. 8-8: BCG’s Strategic Environments Matrix

Sources of Advantage

Fragmented
Many
apparel, house building, jewelry retailing, sawmills

Specialization
pharmaceuticals, luxury cars, chocolate confectionery

Stalemate
Few
basic chemicals, volumegrade paper, ship owning, wholesale banking

Volume
jet engines, supermarkets, motorcycles, standard microprocessors

Small

Big
Size of Advantage

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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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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?

• 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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Behavioral Considerations Affecting Strategic Choice
• 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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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 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
Identification and diagnosis of political issues

Focus of Political Action
Control of: •Issues to be discussed •Cause-and-effect relationships to be examined

Examples of Political Activity
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
Examining and choosing the strategy

Focus of Political Action
Control of choice

Examples of Political Activity
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
Selective advocacy of criteria

Designing procedures for the evaluation of results

Representing oneself as successful

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