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SESSION 7: Strategic Analysis and SESSION 7: Strategic Analysis and Choice in The Multi-Business CompanyChoice in The Multi-Business Company

Rationalizing Diversification and Building Shareholder Value

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The Concept of Corporate-Level StrategyThe Concept of Corporate-Level Strategy

Primary Question - Where to Compete?

Are there other business opportunities?

Entering or exiting Industries

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CL Strategy – Whether to Diversify?CL Strategy – Whether to Diversify?

Synergies

Growth Opportunities

Agency Issues – “Empire Building”

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Multibusiness Corporations Multibusiness Corporations

Corporations comprised of multiply businesses are often referred to as having a portfolio of

businesses

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By Definition a change in Corporate Level Strategy should be reflected in a

change in Mission Statement

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SONY PICTURES STUDIOS

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The Portfolio Approach to Corporate Level The Portfolio Approach to Corporate Level Strategy Strategy

Research Allocation Decisions

How does Corporate Affiliation Provide Value?

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GE and McKinseyGE and McKinsey

The Concept of The SBU

Corporate Review Capability

Matrices to Facilitate/Illuminate the Resource Allocation Decision

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To Be Designated an SBU, Businesses had to:To Be Designated an SBU, Businesses had to:

Have a unique mission independent of other SBUs

Have a clearly definable set of competitorsCompete in external marketsBe able to carry out integrative planning

relatively independent of other SBUsBe able to manage resources in key areasBe large enough to justify senior management

attention

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Balancing Financial Resources: Portfolio TechniquesBalancing Financial Resources: Portfolio Techniques

Industry Attractiveness-

Business Strength Matrix

BCG Growth-Share Matrix

Life Cycle-Competitive

Strength Matrix

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BCG Growth-Share MatrixBCG Growth-Share Matrix

High

Low

Cas

h U

se (

Gro

wth

Rat

e)

StarProblem

Child

Cash Cow Dog

Cash Generation (Market Share)High Low

Market Share: Sales relative to those of other competitors in market (dividing point is usually selected to have only 2-3 largest competitors in any market fall into high market share region)

Growth Rate: Industry growth rate in constant dollars (dividing point is typically GNP’s growth rate)

Description of Dimensions

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Factors Considered in Constructing an Industry Factors Considered in Constructing an Industry Attractiveness-Business Strength MatrixAttractiveness-Business Strength Matrix

Nature of Competitive Rivalry

• Number of competitors

• Size of competitors

• Strength of competitors’ corporate parents

• Price wars

• Competition on multiple dimensions

Bargaining Power of Suppliers/Customers

• Relative size of typical players

• Numbers of each

• Importance of purchases from or dales to

• Ability to vertically integrate

Threat of Substitutes/ New Entrants

• Technological maturity/stability

• Diversity of the market

• Barriers to entry

• Flexibility of distribution system

Industry Attractiveness FactorsIndustry Attractiveness Factors

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Fig. 9-3: Factors Considered in Constructing an Industry Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Attractiveness-Business Strength Matrix (continued)

Economic Factors

• Sales volatility

• Cyclicality of demand

• Market growth

• Capital intensity

Financial Norms

• Average profitability

• Typical leverage

• Credit practices

Sociopolitical Considerations

• Government regulation

• Community support

• Ethical standards

Industry Attractiveness FactorsIndustry Attractiveness Factors

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Fig. 9-3: Factors Considered in Constructing an Industry Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Attractiveness-Business Strength Matrix (continued)

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

Business Strength FactorsBusiness Strength Factors

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Fig. 9-3: Factors Considered in Constructing an Industry Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (concluded) Attractiveness-Business Strength Matrix (concluded)

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

Business Strength FactorsBusiness Strength Factors

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Fig. 9-4: Industry Attractiveness-Business Strength MatrixFig. 9-4: Industry Attractiveness-Business Strength Matrix

InvestSelective Growth

Grow or Let Go

SelectiveGrowth

Grow orLet Go

Harvest

Grow orLet Go

Harvest DivestLow

High

Medium

Bu

sin

ess

Str

engt

h

MediumHigh Low

Industry Attractiveness

Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond control of management

Business Strength: Subject assessment of how strong a competitive advantage is created by a broad range of a firm’s internal strengths and weaknesses

Description of Dimensions

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Advantages of the Industry Attractiveness-Business Advantages of the Industry Attractiveness-Business Strength Matrix over the BCG Matrix 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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Fig. 9-5: Market Life Cycle-Competitive Strength MatrixFig. 9-5: Market Life Cycle-Competitive Strength Matrix

Stage of Market Life Cycle: See page 184

Competitive Strength: Overall subjective rating, based on wide range of factors regarding likelihood of gaining and maintaining a competitive advantage

Description of Dimensions

Low

High

Moderate

Com

pet

itiv

e St

ren

gth

GrowthIntroduction Maturity

Stage of Market Life Cycle

Decline

Push:

Invest

Aggre

ssively

Caution:

Invest

Selecti

vely

Danger:

Harvest

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Contributions of Portfolio ApproachesContributions of Portfolio Approaches

Convey large amounts of information about diverse businesses and corporate plans in a simplified format

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

Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business

Simplify priorities for sharing corporate resources across diverse businesses

Simplify priorities for sharing corporate resources across diverse businesses

Provide a simple prescription of what should be accomplished - a balanced portfolio of businesses

Provide a simple prescription of what should be accomplished - a balanced portfolio of businesses

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Limitations of Portfolio ApproachesLimitations of Portfolio Approaches

Does not address how value is created across business unitsDoes not address how value is created across business units

Accurate measurement for matrix classification not as easy as matrices implied

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

Underlying assumption about relationship between market share and profits varies across different industries and market segments

Limited strategic options viewed as basic strategic missionsLimited strategic options viewed as basic strategic missions

Portrays notion that firms need to be self-sufficient in capitalPortrays 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

Fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it