3. VIII SM Strategic Analysis and Choice in Multi business.ppt · 03.09.2015 · Why Do Firms Diversify? ... • Does the company’s business portfolio ... is primarily concerned

BBA VIII Semester

Strategic Management

1

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.


• 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


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)


or Sharing


Advantage


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


or Sharing


Advantage


Enhanced Value

Shared manufacturing and

assembly facilities

Lower manufacturing/assembly

costs

Better capacity utilization,

•Higher changeover costs in

shifting from one product to

another


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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


or Sharing


Advantage


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


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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)


or Sharing


Advantage


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?


• 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


• 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)


• 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?


• 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


• 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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Documents

3. VIII SM Strategic Analysis and Choice in Multi business.ppt · 03.09.2015 · Why Do Firms Diversify? ... • Does the company’s business portfolio ... is primarily concerned