Management Policy And Strategy

© 2000 The McGraw-Hill Companies, Inc.

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MANAGEMENT POLICY AND STRATEGY

SESSION - VIII

Strategic Analysis and Choice in Multi-business

Companies Prof. Sushil

Department of Management Studies

Indian Institute of Technology, DelhiINDIA

Email: [email protected]


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Questions Related to Diversification and Integration

1. Are opportunities for sharing infrastructure and capabilities forthcoming?

1. Are opportunities for sharing infrastructure and capabilities forthcoming?

2. Are we capitalizing on our core competencies?

2. Are we capitalizing on our core competencies?

3. Does the company’s business portfolio balance financial resources?

3. Does the company’s business portfolio balance financial resources?

4. Does our business portfolio achieve appropriate levels of risk and growth?

4. Does our business portfolio achieve appropriate levels of risk and growth?


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COMBINATION OF MEANS AND FORMS OF DIVERSIFICATION

Vertical Horizontal Global

Acquisitions Time Inc. acquires WarnerCommunications, creatinga vertically integratedentertainment business

Phillip Morris buys Kraftand General Foods in aneffort to diversify out ofthe cigarette business

BASF, a Germanchemical producer, buysInmont, a US chemicalscompany, to overcomelimited growthopportunities at home

StrategicAlliances

Cetus, a leading firm in thebiotechnology field, teamsup with larger corporationswhich provide the capitaland marketing needed tointroduce new Cetustechnology

Dow Chemical andCorning Glass join forcesto create a joint venturemore profitable thaneither of its parents.

Fuji Photo Films andXerox, Inc. form a singleimport sales operationthat later grows tobecome one of theworld’s leading producersof photocopiers

InternalDevelopment

Humana develops a full lineof health care services,vertically integrating acrossinsurance, hospitals, andfollow-up treatmentservices

3M consistently getsmore than 25% of itsrevenues from products ithas developed within thelast five years

Anheuser-Busch attemptsto open up new marketsby taking Budweiser, itsflagship product intoBritain

Forms

Mean

s


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Maintain Growth

Maintain Growth

BalancingCash FlowsBalancing

Cash FlowsSharing

InfrastructureSharing

InfrastructureIncreasing

Market PowerIncreasing

Market Power

Capitalizing on Core

Competencies

Capitalizing on Core

Competencies

Reducing Risk

Reducing Risk

EVALUATING REASONS TO EVALUATING REASONS TO DIVERSIFY

Least Power to Create Value

Most Power to Create Value

NotRecommendedas a Reason to Diversify

Recommended as a Reason to Diversity


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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 portfolio related in ways making the company’s core competence(s)

beneficial?

Is the combination of competencies unique or difficult to recreate?


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Balancing 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 Matrix

High

Low

Cash

Use (

Gro

wth

Rate

)

Star Problem 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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Strategies

Question Marks - Build Market Share

Star - Hold Market Share

Cash Cows - Harvest

Dogs – Divest


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10Factors Considered in Constructing an Industry Attractiveness-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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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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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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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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Industry Attractiveness-Business Strength Matrix

InvestSelecti

ve Growth

Grow or

Let Go

Selective

Growth

Grow or

Let Go

Harvest

Grow or

Let Go

Harvest

DivestLow

High

Medium

Bu

sin

ess S

tren

gth

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



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15Advantages 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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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


Low

High

Moderate

Com

peti

tive S

tren

gth

GrowthIntroduction Maturity

Stage of Market Life Cycle

Decline

Push:

Inve

st A

ggress

ively

Caution:

Inve

st S

elect

ively

Danger:

Harvest


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Contributions 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 Approaches

Does not address how value is created across business units

Does 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 missions

Limited strategic options viewed as basic strategic missions

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

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

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

Attitudes toward risk

Degree of firm’s

external dependenc

eManagerial priorities different

from stockholder

s

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 See Fig. 9-6

Competitive reaction Probable impact of competitor response must be

considered during strategy design process Competitor response can alter strategy success


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GE: Strategic Circles

In 1981, John E. Welch Jr., Chairman and CEO of General Electric designed the company’s operations on the basis of three `strategic circles’:

Core manufacturing units such as lighting and locomotives

Technology -intensive businesses services

To achieve the first or second position in the global market for each of its businesses: By 1986, this strategic orientation had taken shape with 14 distinct businesses, including aircraft engines, medical systems, engineering plastics, major appliances, television and financial services.


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IBM’s Partners

Sears

Toshiba

Siemens

Mitsubishi

Borland

1988

1989

1990

19911991

Jointly own Prodigy, an interactive computer service for consumersJointly built a US $200 million plant in Japan to manufacture high-resolution colour flat screens for laptopsJointly developing future chips and jointly built 16-Mb DRAM memory chips in France Mitsubishi Electric sells IBM mainframes in Japan under its own name


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Wang

Novell

AppleMotorol

aIntel

1991

1991

1991199119911991

Developing tools to make it easier to create software for the OS/2 systemSells IBM’s PCs and RS/6000 workstations under its own nameIBM sells Novell networking softwareTwo joint ventures: Taligent and KaleidaJointly developing the RISC microprocessorJointly developing a new generation of integrated microprocessor chips

IBM’s Partners


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Reebok’s Outsourcing Reebok’s Outsourcing

Its main function is marketing with a current staff strength of 35 in India. The other activities are outsourced as given below:

Apparel design National Institute of Fashion Technology Warehouse management Bakshi Associates Logistics Nexus Logistics Retailing Phoenix Advertising Hindustan Thompson Store design and execution Aakar Sports management 21st Century Gymnasium A private firm Manufacturing Shoes: Phoenix, Aero, Lakhani Apparel Viniyoga and six others Selection Prospects


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Major Elements in a Successful Major Elements in a Successful International Strategic AlliancesInternational Strategic Alliances

Complementary skills: which can contribute to the strength of the venture.

Cooperative cultures: cognizant of the important of cooperation

Compatible goals: based on their particular firm’s goals and not just convenience

Commensurate levels of risk: consider the risks involved


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28Different Types of Strategic Different Types of Strategic AlliancesAlliances

Contd….Contd….Alliance Types

Collaborative advertising

R&D partnerships

Lease service agreements

Shared distribution

Technology transfer

Cooperative bidding

Examples American Express and Toys R Us (cooperative

efforts for television advertising and promotion) Cytel and Sumitomo chemicals (alliance to

develop the next generation of biotechnology drugs)

Cigna and United Motor Works (arrangement to provide financing for non-US firms and governments)

Nissan and Volkswagen (Nissan sells Volkswagens in Europe and Volkswagen distributes Nissan’s cards also in Europe)

IBM and Apple Computers (arrangement to develop the next generation of operating system software)

Boeing, General Dynamics and Lockheed (cooperated together in winning the contract for an advanced tactical fighter)


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Alliance TypesCross -manufacturing

Resource venturing

Government and industry partneringInternal spin-offs

Cross-licensing

ExamplesFord and Mazda (design and build similar cards on the same manufacturing/assembly line)Swift Chemical Co., Texasgulf, RTZ and US Borax (Canadian-based mining natural resources venture)DuPont and National Cancer Institute (DuPont worked with NCI in the first phase of the clinical cancer trial on IL)Cummins engine and Toshiba Corporation (created a new company to develop/market silicon nitride products)Hoffman-LaRoche and Glaxo (HL and Glaxo agreed for BHL to sell Zantac, an anti-ulcer drug in the United States)

Different Types of Strategic AlliancesDifferent Types of Strategic Alliances


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Stages of an AllianceStages of an Alliance

Strategy development The focus is on development of resource strategies for production, technology and manpower. This has to be aligned to the objectives of corporate strategy alliances.

Partner assessment The attempt to assess the strengths and weaknesses of a partner and understand a partner’s motives for alliance formation.

Contract negotiations It is necessary to have realistic objectives, defining each partner’s contributions and rewards. It is also necessary to incorporation termination clauses, penalties for poor performance and arbitration procedures.

Alliance operations This is concerned with the management’s commitment, and linking of budgets and resources with priorities.


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British Airways

The alliance between British Airways and American Airlines was announced in June 1996. BA and American together control 60 per cent of the flights between the UK and the US, 70 per cent of the traffic between London and New York, 90 per cent between London and Chicago, and all flights between London and Dallas.

Bermuda II, the UK-US aviation agreement, was concluded in 1977 which gives details of which airlines can fly between specified US and UK cities, and the number of flights they can operate. BA was against the scrapping of the agreement till recently.


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British AirwaysContd...

American Airlines was against the trend towards code-sharing agreements which allows airlines to sell tickets on routes they do not serve. This was considered to be anti-competitive. Now both BA and American have to retreat from their respective positions.

BA has a partnership with US Air in which it has a 24.6 per cent stake. The US government has not granted anti-trust immunity to the alliance to coordinate their operations more closely. Therefore, BA and American are asking for anti-trust immunity and requesting their governments to negotiate a new, liberalized aviation agreement.


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Modes of CooperationModes of Cooperation Joint ventures and research corporations Combinations of at

least two firms into a `distinct’ firm with shared equity investments. Profits and losses accrue on the basis of investment.

Joint R&D Joint research agreements to establish joint undertaking of R&D projects with shared resources.

Technology exchange agreement Technology sharing agreements, cross-licensing and mutual second-souring of existing technologies.

Equity investment Large firms partnering with a smaller high tech company with a minority sharing coupled with research contracts.

Customer-supplier relationships There can be many forms such as co-production contracts, co-marketing relationships, and research contracts.

Unilateral technology flows Second-sourcing and licensing agreements (Hagedoorn and Schakenraad, 1994)


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Samsung Group A joint venture with Texas Instruments to manufacture semiconductors - they

are building a semiconductor plant in Portugal. Cooperation with General Instrument in developing high definition televisions

(HDTV). The sharing of technology for flash memory devices with Toshiba. Co-developing computer workstations with Hewlett Packard-they have a joint

venture, Samsung -Hewlett Packard-which markets the American company’s products in Korea.

Supply of memory chip technology to Oki Electric. Partnership with General Electric in high-tech medical equipment. Lockheed for F-16 jet fighters (local assembly) Pratt and Whitney for jet engines (supplies components) Amoco for textile raw materials Corning for TV glass and building plants in China and Malaysia Mitsui Petrochemical for petrochemicals


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Toshiba

An agreement with Apple Computers for new technology creation for multimedia.

A technology -sharing agreement with IBM to develop new data storage devices using `NAND-flash’ memory chips semiconductor devices; it has developed the world’s smallest 256-Mb D-Ram.

Through an alliance with IBM, Japan, it opened a second large-size thin-film transistor (TFT) LCD plant in 1995.

Alliances with National Semiconductor and Samsung Electronics of Korea to jointly develop and market flash memory chips.


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ToshibaContd….

An alliance with Sun Microsystems Inc. of the US in the areas of rightsizing, Internet and interactive technology. They will share product development, marketing and distribution in these fast-growth areas. Toshiba plans to develop and build systems based on Sun’s 64-bit UltraSPARC microprocessor. The rightsizing or integration of in-house information systems is aimed at enhancing the efficiency of the company’s white-collar workers. Toshiba will invest about US $303 million to rightsize its computer systems between 1995 and 1999. Sun Microsystems will bring in the technology for the projects, while Toshiba will provide the hardware to enhance efficiency of information technology.


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HitachiHitachi An R&D agreement with Texas Instruments to develop a next-

generation computer memory chip. Providing chip manufacturing technology to Goldstar Electron of

Korea. Supplying mainframe computers to Germany’s Comparex and

Italy’s Olivetti. A joint venture with GE to sell lighting products in Japan. Joint development of a new RISC computer chip with Hewlett

Packard. Joint development of medical equipment with Boehringer-

Mannheim of Germany Research cooperation between Hitachi Cambridge Laboratory

and Cambridge University for developing a single electron memory device.