1. Rationalizing Diversification and Building Shareholder Value
SESSION 13: Strategic Analysis and Choice in The Multi-Business Company
Rationalizing Diversification and Building Shareholder Value

2. The Concept of Corporate-Level Strategy
Primary Question - Where to Compete?
Are there other business opportunities?
Entering or exiting Industries

3. CL Strategy – Whether to Diversify?
Synergies
Growth Opportunities
Agency Issues – “Empire Building”

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

5. By Definition a change in Corporate Level Strategy should be reflected in a change in Mission Statement

15.                                                                                                      
                                                         
SONY PICTURES STUDIOS

19. The Portfolio Approach to Corporate Level Strategy
Research Allocation Decisions
How does Corporate Affiliation Provide Value?

20. GE and McKinsey
The Concept of The SBU
Corporate Review Capability
Matrices to Facilitate/Illuminate the Resource Allocation Decision

21. To Be Designated an SBU, Businesses had to:
Have a unique mission independent of other SBUs
Have a clearly definable set of competitors
Compete in external markets
Be able to carry out integrative planning relatively independent of other SBUs
Be able to manage resources in key areas
Be large enough to justify senior management attention

22. Balancing Financial Resources: Portfolio Techniques
BCG Growth-Share Matrix
Industry Attractiveness-Business Strength Matrix
Life Cycle-Competitive Strength Matrix

23. BCG Growth-Share Matrix
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
Star
Problem Child
Cash Cow
Dog
High
Low
Cash Use (Growth Rate)

24. Industry Attractiveness Factors
Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix
Industry Attractiveness Factors
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

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

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

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

28. Fig. 9-4: Industry Attractiveness-Business Strength Matrix
Medium
High
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
Invest
Selective Growth
Grow or Let Go
Selective
Growth
Grow or
Let Go
Harvest
Divest
Low
High
Medium
Business Strength

29. Terminology is less offensive and more understandable
Advantages 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

30. Fig. 9-5: Market Life Cycle-Competitive Strength Matrix
Growth
Introduction
Maturity
Stage of Market Life Cycle
Decline
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
Invest Aggressively
Push:
Caution:
Invest Selectively
Danger:
Harvest
Low
High
Moderate
Competitive Strength

31. Contributions of Portfolio Approaches
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
Simplify priorities for sharing corporate resources across diverse businesses
Provide a simple prescription of what should be accomplished - a balanced portfolio of businesses

32. 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 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