Strategies for Multi-Business Corporations Strategic Review

7/31/2019 Strategies for Multi-Business Corporations Strategic Review

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9Strategies for Multi-Business Corporations

Strategic Review, Evaluation, and Restructuring

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Levels of Strategy: important distinctions

Network

Corporate

Business

Functional

Ansoff

Boston

MatrixAlliances

Mergers andAcquisitions

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Four Different Organisational Approaches to

Change / Growth Miles and Snow (1978)

Prospectors Risk-takers, opportunity-seekers

Almost continually search for market opportunities

Defenders Keep existing products, protect market share

Work with narrow product-market domains

Analyzers Build on strengths, look for add-on options

Often operate in two types of product-market domains, one

relatively stable, the other changing Reactors

Respond, dont look for change

Top mangers frequently perceive change and uncertainty occurringin their organizational environments but are unable to respondeffectively

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Ansoff Matrixchoosing strategies

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Motives for Diversification

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Growth - Deploying existing capabilities innew product markets

Risk Reduction - the returns of projects/assetsmust be independent of each other,i.e. thedifferent corporate businesses must not be linkedthrough the corporate value chain

Profitability only achieved if diversificationleads to value creation

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When Business Diversification Becomes

a Consideration

It is faced with diminishing growth prospectsinpresent business

When an expansion opportunity exists in an industrywhose technologies and products complement itspresent business

It can leverage existing competencies andcapabilitiesby expanding into an industry thatrequires similar resource strengths

It can reduce costsby diversifying into closely related

businesses It has a powerful brand nameit can transfer to

products of other businesses

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Corporate Configuration

De Wit & Meyer (2004:Ch.6)

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What should be theprofile of the corporation?

Corporate CompositionCorporate ManagementWhat organizational system is

needed?

In whatbusinesses

shouldthe corporation

be active?

What shouldbe the relative

weightof each business?

Howshouldsynergiesbetween

businessesbe realized?

Whoshouldensure

that synergiesare realized?


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Corporate Control StylesGoold & Campbell (1987) in De Wit & Meyer (2004:301),

Grant (2010:434-440)

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Depending on the mix of control & cooperation :

Financial control (based on financial objectives - output)

o highly autonomous SBUs, few activities centralized orstandardized except for the financial reporting system

Strategic control (based on strategic objectives - input)

o the SBUs are closely related to the corporate center, somesystems & activities centralized & standardized, the HQexplicitly coordinates activities across SBUs

Strategic planning (input control)

o direct supervision by the HQ, SBUs have little autonomy;many key activities are standardized & centralized


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The Multidivisional Structure (M-Form)

Grant (2010:424-430)

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Multibusiness firms are typically organized into strategic

business units (SBU)

The M-form:

o business decisions are located at the SBU levelo the corporate centre exercises overall coordination & control

Efficiency advantages of the M-form:

o Adaptation to bounded rationality through dispersed decision

makingo Allocation of decisions according to their frequency: high

frequency (operating) decisions are made at the SBU level

o Minimization of coordination costs: decisions concerning aparticular business area do not have to pass up to the top


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Corporate Strategy Options: Related vs.

Unrelated Diversification

Related diversificationattempts to increaseshareholder value by capturing cross-businessstrategic fitsalong value chain segments

Unrelated diversificationattempts to build

shareholder value by doing a superior job ofchoosing businesses to diversifyintoand managing the wholecollection of businesses

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Related Diversification and Competitive

Advantage

Strategic fitexists when one or moreactivities included in the value chains of of adiversified companys businesses presentopportunities to

Transferexpertise/capabilities/technology

from one business to another

Reduce costs by combiningrelatedactivities of different businesses intoa single operation

Transferuse of firms brand namefrom onebusiness to another

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What Is Unrelated Diversification?

Involves diversifyinginto businesses with Nostrategic fit

Nomeaningful value chain relationships

Nounifying strategic theme Basic approach Diversifyinto any industry

where potential existsto realize good financialresults

While industry attractiveness and cost-of-entrytests are important, better-off test is secondary

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Combination Related-Unrelated

Diversification Strategies

Dominant-business firms One major core business accounting for 50 -

80 percent of revenues, with several smallrelated or unrelated businesses accounting forremainder

Narrowly diversified firms Diversification includes afew (2 - 5) related or

unrelated businesses

Broadly diversified firms

Diversification includes a wide collection ofeither related or unrelated businesses or amixture

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Four Main Tasks in Crafting Corporate

Strategy

Picking new industriesto enteranddecidingonmeans of entry

Pursuing opportunities to leverage cross-business value chain relationshipsinto

competitive advantage Steering resourcesinto most attractive business

units

Initiating actionsto boost the combinedperformanceof businesses

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BCG assists multidivisional firms in formulatingtheir

strategies

Autonomous divisions = business portfolio. Eg, AdidasAG comprised, Adidas, Reebok & Taylormade competingin footware, sports apparel; sports related goods.

Divisions may compete in different industries: Eg, Hewlett

Packard comprisedtechnology solutions services;commercial & consumer PCs; printing hardware & supplies,andfinancial services

BCG focuses on market-share position & industry growth

ratehelps CEOs make stay or go decisions

Boston Consulting Group Matrix

matching stage: BCG

(Corporate level strategy)

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Stars Question marks

Cash Cows Dogs

Relative competitive position (market share)

MarketGrowthrate

The Boston Consulting Group(BCG) Matrix (Adapted from Johnson et al 2008)

High

Med

Low

High Med Low

See David 2010:217 for elaboration17


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BCG Matrix

Question Marks

Low relative market share, competes in high-growthindustry

Cash needs are high

Cash generation is low

STRATEGY: Decision to strengthen (intensive strategies:market penetration / market development / productdevelopment) or divest

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BCG Matrix

Stars

High relative market share and high growth rate

Best long-run opportunities for growth & profitability

STRATEGY: Substantial investment to maintain orstrengthen dominant position;

Backward or forward Integration, market penetration,market development, product development, joint ventures

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BCG Matrix

Cash Cows

High relative market share, competes in low-growth industry

Generates cash in excess of their needs

Milked for other purposes

STRATEGY: Maintain strong position as long as possibleProduct development, closely related diversification

If weakens retrenchment or divestiture

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BCG Matrix

Dogs

Low relative market share, competes in slow or nomarket growth industry

Weak internal & external position

STRATEGY:Liquidation, divestiture, retrenchment

Note. Many businesses fall right in the middle of the BCGmatrix and thus are not easily classified

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How to Evaluate a

Diversified Companys Strategy

Corporate-Level Decision Making

Step 1: Assess the long-term attractiveness of each industry thecompany has diversified into

Step 2:Assess competitive strength of each of the companysbusiness units

Step 3: Check potential for cross-business strategic fits amongbusiness units

Step 4: Check whether the firms resources fit the requirements of its

business unitsStep 5: Rank performance and determine priority for resource

allocation

Step 6: Craft new strategic moves to improve overall companyperformance

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Strategy Implications of 9 Cell

Attractiveness/Strength Matrix

Businesses in upper left corner

Receive top investment priority

Strategic prescriptiongrow and build

Businesses in three diagonal cells

Given medium investment priority

Some businesses in this category may have brighteror dimmer prospects than others

Businesses in lower right corner

Candidates for divestitureor managed to take cashout of the business

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Nine Cell Industry Attractiveness Matrix

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Evaluating Resource Fit and Sufficiency

Good resource fitexists when

A companys businesses, individually, add to itscollective resource strengths, either

financially or strategically

Firm has resources to adequately support itsbusinesses without spreading itself too thin

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Determining Financial Resource Fit

Determine cash flowand investmentrequirementsof business units

Which are cash hogsand which are cash cows?

Aside from cash flow,financial resource fit alsoincludes

Assessing the individual contributionstocompanywide performance targets by each businessunit

Determining if the company has the financial

strength to provide proper fundingto its businessunit and maintain a healthy credit rating

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Examining a Companys Nonfinancial

Resource Fits

Diversified companies must ensure a good fitbetween its collection of resources and theKSFsof each industry it has diversified into

Does the company have or can it develop specific

resources and capabilities needed to be successfulin each of its businesses?

Do recent acquisitions strengthenthe collection ofresources or cause them to be stretched too

thinly?

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ki i i f


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Ranking Business Units for Resource

Allocation

Factors to consider injudging SBU (strategicbusiness-unit) performance

Sales growth

Profit growth

Contribution to company earnings

Cash flow generation

Return on capital employed in business

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Crafting New Strategic Moves

Stick closelywith existing business lineupand pursue opportunities it presents

Broadencompanys business scopebymaking new acquisitions in new industries

Divestcertain businesses and retrench

to a narrower base of business operations

Restructurecompanys business lineup, putting a

whole new face on business makeup

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Business Responsiveness:


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Business Responsiveness:

Major Problems for Multi-business Firms

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High governance costs

Slower decision-making

Dulled incentives

Dysfunctional control

Strategy incongruence

Coordinating activities

More layers of management

Misfit with business demand

Corporate center misses specificbusiness know-how

Lack of autonomy has anegative impact on motivation

Documents

Strategies for Multi-Business Corporations Strategic Review