Copyright © 2001 Houghton Mifflin Company. All rights reserved. Chapter 10 Corporate Development: Building and Restructuring the Corporation Strategic Charles W. L. Hill Management Gareth R. Jones Fifth Edition PowerPoint Presentation by Charlie Cook An Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-2 Reviewing the Corporate Portfolio Portfolio Planning under the Boston Consulting Group (BCG) matrix:  Identifying the Strategic Business Units (SBUs) by business area or product market  Assessing each SBU’s prospects (using relative market share and industry growth rate ) relative to other SBUs in the portfolio.  Developing strategic objectives for each SBU.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-3 The BCG Matrix FIGURE 10.1 Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-4 The BCG Matrix Stars  High relative market shares in fast growing industries. Question marks  Low relative market shares in fast growing industries. Cash cows  High relative market shares in low-growth industries. Dogs  Low relative market shares in low-growth industries.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-5 The Strategic Implications of the BCG Matrix Stars  Aggressive investments to support continued growth and consolidate competitive position of firms. Question marks  Selective investments; divestiture for weak firms or those with uncertain prospects and lack of strategic fit. Cash cows  Investments sufficient to maintain competitive position. Cash surpluses used in developing and nurturing stars and selected question mark firms. Dogs  Divestiture, harvesting, or liquidation and industry exit.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-6 Limitations on Portfolio Planning Flaws in portfolio planning:  The BCG model is simplistic; considers only two competitive environment factors– relative market share and industry growth rate.  High relative market share is no guarantee of a cost savings or competitive advantage.  Low relative market share is not always an indicator of competitive failure or lack of profitability.  Multifactor models (e.g., the McKinsey matrix) are better though imperfect.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-7 The McKinsey Matrix FIGURE 10.2

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-8 FIGURE 10.3 The Corporation as a Portfolio of Core Competencies Establishing a Core Competence Agenda Source: G. Hamel and C. K. Prahalad, Competing for the Future (Cambridge, Mass.: Harvard Business School Press, 1994), p. 227.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.10-9 Internal New Venturing Internal new venturing is attractive when:  Entering as a science-based company.  Entering an emerging industry with no established competitors. Pitfalls of new venturing:  Scale of entry– Low-scale entry can reduce the probability of long-term success.  Commercialization– Failure to develop a product that meets basic customer needs.  Poor Implementation– Using “shotgun” approach, not setting clear strategic objectives, abandoning projects too soon.

Copyright © 2001 Houghton Mifflin Company. All rights reserved Scale of Entry, Profitability, and Cash Flow FIGURE 10.4

Copyright © 2001 Houghton Mifflin Company. All rights reserved Internal New Venturing Guidelines for successful new venturing:  Adopt a structural approach with clear strategic objectives setting R&D direction.  Foster close links between R&D and marketing.  Use project teams to reduce development time.  Use a selection process to pick venture projects with the highest probability of success.  Monitor progress of ventures in gaining initial market share goals.  Large-scale entry is important for venture success.

Copyright © 2001 Houghton Mifflin Company. All rights reserved Acquisitions as an Entry Strategy Acquisition is an attractive strategy when:  Competencies important in a new business area are lacking in the entering firm.  Speed of entry is considered important.  Acquisition is perceived as a less risky form of entry.  Barriers to entry can be overcome by acquisition of a firm in the industry targeted for entry.

Copyright © 2001 Houghton Mifflin Company. All rights reserved Acquisitions as an Entry Strategy Pitfalls of acquisitions:  Failing to follow through on postacquisition integration of the acquired firm.  Overestimating the economic benefits of the acquisition.  Underestimating the expense of an acquisition.  Failing to properly screen candidates before acquisition.

Copyright © 2001 Houghton Mifflin Company. All rights reserved Acquisitions as an Entry Strategy Guidelines for successful acquisitions:  Properly identify acquisition targets and conduct a thorough preacquisition screening of the target firm.  Use a bidding strategy with proper timing to avoid overpaying for an acquisition.  Follow through on postacquisition integration synergy-producing activities of the acquired firm.  Dispose of unwanted residual acquisition assets.

Copyright © 2001 Houghton Mifflin Company. All rights reserved Joint Ventures as an Entry Strategy Attractions  Sharing new project costs and risks.  Increasing the probability of success in establishing the new business. Drawbacks  Requires a sharing of control with partner firms.  Requires that partner firms share profits.  Risks giving away critical knowledge.  Risks creating a potential competitor.

Copyright © 2001 Houghton Mifflin Company. All rights reserved Restructuring Why restructure?  Pull-back from overdiversification.  Attacks by competitors on core businesses.  Diminished strategic advantages of vertical integration and diversification. Exit strategies  Divestment– spinoffs of profitable SBUs to investors; management buy outs (MBOs).  Harvest– halting investment, maximizing cash flow.  Liquidation– Cease operations, write off assets.

Copyright © 2001 Houghton Mifflin Company. All rights reserved Turnaround Strategy The causes of corporate decline  Poor management– incompetence, neglect  Overexpansion– empire-building CEO’s  Inadequate financial controls– no profit responsibility  High costs– low labor productivity  New competition– powerful emerging competitors  Unforeseen demand shifts– major market changes  Organizational inertia– slow to respond to new competitive conditions

Copyright © 2001 Houghton Mifflin Company. All rights reserved The Main Steps of Turnaround Changing the leadership  Replace entrenched management with new managers. Redefining strategic focus  Evaluate and reconstitute the organization’s strategy. Asset sales and closures  Divest unwanted assets for investment resources. Improving profitability  Reduce costs, tighten finance and performance controls. Acquisitions  Make acquisitions of skills and competencies to strengthen core businesses.