Multibusiness Strategy Chapter 9 Multibusiness Strategy © 2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Learning Objectives Understand the portfolio approach to strategic analysis and choice in multibusiness companies. Understand and use three different portfolio approaches to conduct strategic analysis and choice in multibusiness companies Identify the limitations and weaknesses of the various portfolio approaches Understand the synergy approach to strategic analysis and choice in multibusiness companies Evaluate the parent company role in strategic analysis and choice to determine whether and how it adds tangible value in a multibusiness company

The Portfolio Approach The portfolio approach is a historical starting point for strategic analysis and choice in multibusiness firms. The portfolio approach helps allocate resources in multibusiness companies.

Portfolio Techniques An approach pioneered by the Boston Consulting Group that attempted to help managers “balance” the flow of cash resources among their various businesses while also identifying their basic strategic purpose within the overall portfolio.

The BCG Growth-Share Matrix Dimensions Market Growth Rate The projected rate of sales growth for the market being served by a particular business Relative Competitive Position The market share of a business divided by the market share of its largest competitor.

The BCG Growth-Share Matrix Types of Businesses Stars Businesses in rapidly growing markets with large market shares. Cash Cows Businesses with a high market share in low-growth markets or industries.

The BCG Growth-Share Matrix Types of Businesses (contd.) Dogs Low market share and low growth businesses Question Marks Businesses whose high growth rate gives them considerable appeal but whose low market share makes their profit potential uncertain.

Ex. 9.2 The BCG Growth-Share Matrix

The Industry Attractiveness-Business Strength Matrix This approach has a much broader focus than the growth-share matrix It uses multiple factors to assess industry attractiveness and business strength rather than the single measures employed in the BCG matrix It also has 9 cells instead of BCG’s 4 to allow for finer distinctions among business portfolio positions.

Industry Attractiveness Ex. 9.4 Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (adapted) Industry Attractiveness Nature of competitive rivalry Bargaining power of suppliers/customers Threat of substitute products/new entrants Economic factors Financial norms Sociopolitical considerations

Ex. 9.4 Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (adapted) Business Strength Cost position Level of differentiation Response time Financial strength Human assets Public approval

Ex. 9.5 The Industry Attractiveness-Business Strength Matrix

BCG’s Strategic Environments Matrix This approach uses the idea that it was the nature of competitive advantage in an industry that determined the strategies available to a company’s businesses, which in turn determined the structure of the industry. BCG believed that such a framework could help ensure that individual businesses' strategies were consistent with strategies appropriate to their strategic environment. This allowed corporate managers in multiple-business companies one way to rationalize which businesses they are in.

Ex. 9.6 BCG’s Strategic Environments Matrix

BCG’s Strategic Environments Matrix Types of Businesses Volume Businesses Businesses that have few sources of advantage, but the size is large – typically the result of scale economics Stalemate Businesses Businesses with few sources of advantage, most of them small. Skills in operational efficiency, low overhead, and cost management are critical to profitability.

BCG’s Strategic Environments Matrix Types of Businesses (contd.) Fragmented Businesses Businesses with many sources of advantage, but they are all small. They typically involve differentiated products with low brand loyalty, easily replicated technology, and minimal scale economies. Specialization Businesses Businesses with many sources of advantage. Skills in achieving differentiation (product design, branding expertise, innovation, and perhaps scale) characterize winning specialization businesses.

Limitations of Portfolio Approach It does not address how value is being created across business units Truly accurate measurement for matrix classification was not as easy as the matrices portrayed The underlying assumption about the relationship between market share and profitability varied across industries and market segments The limited strategic options came to be seen more as basic strategic missions It ignored capital raised in capital markets It typically failed to compare the competitive advantage a business received from being owned by a particular company with the costs of owning it

The Synergy Approach: Leveraging Core Competencies Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operations-related, and management activities Strategic analysis is concerned with whether or not the potential competitive advantages expected to arise from each value opportunity have materialized The most compelling reason companies should diversify can be found in situations where core competencies—key value-building skills—can be leveraged with other products or into markets that are not a part of where they were created

The Synergy Approach Each core competency should provide a relevant competitive advantage to the intended businesses Businesses in the portfolio should be related in ways that make the company’s core competencies beneficial Any combination of competencies must be unique or difficult to recreate

Elements Critical in Meaningful Shared Opportunities The shared opportunities must be a significant portion of the value chain of the businesses involved. The businesses involved must truly have shared needs – need for the same activity – or there is no basis for synergy in the first place.

The Parenting Opportunities Framework The perspective that the role of corporate headquarters (the “parent”) in multibusiness (the “children”) companies is that of a parent sharing wisdom, insight, and guidance to help develop its various businesses to excel.

The Parenting Opportunities Framework (contd.) The parenting opportunities framework perspective sees multibusiness companies as creating value by influencing—or parenting—their businesses The best parent companies create more value than any of their rivals do or would if they owned the same businesses To add value, a parent must improve its businesses

The Corporate Parent Role: Can It Add Tangible Value? Realizing synergies from shared capabilities and core competencies is a key way value is added in multibusiness companies. 1. Research suggests that figuring out if the synergies are real and, if so, how to capture those synergies is most effectively accomplished by business unit managers, not the corporate parent. 2. How can the corporate parent add value to its businesses in a multibusiness company?

10 Sources of Parenting Opportunities Size & Age Management Business Definition Predictable Errors Linkages Common capabilities Specialized expertise External relations Major decisions Major changes

The Parenting Strategy Approach According to BCG, corporate parents add value through five types of levers: Corporate functions and resources Strategy development Financing advantages Business synergies Operational engagement

Parenting Strategy Types Hands-off owner Financial sponsor Family builder Strategic guide Functional leader Hands-on manager

Patching The process by which corporate executives routinely “remap” their businesses to match rapidly changing market opportunities – adding, splitting, transferring, exiting, or combining chunks of businesses.

The Patching Approach It can take the form of adding, splitting, transferring, exiting, or combining chunks of businesses Patching is not seen as critical in stable, unchanging markets When markets are turbulent and rapidly changing, patching is seen as critical to the creation of economic value in a multibusiness company

Proponents of Patching View traditional corporate strategy as creating defensible strategic positions for business units by acquiring or building valuable assets, wisely allocating resources to them, and weaving synergies among them In volatile markets, they argue, this traditional approach results in business units with strategies that are quickly outdated and competitive advantages rarely sustained beyond a few years As a result, strategic analysis should center on strategic processes more than strategic positioning In these volatile markets, patchers strategic analysis focuses on making quick, small, frequent changes in parts of businesses and organizational processes

Patching (contd.) Strategic Processes Strategic Positioning Decision making, operational activities, and sales activities that are critical business processes. Strategic Positioning The way a business is designed and positioned to serve target markets.

Ex. 9.11 Three Approaches to Strategy

Key Terms Businesses Cash cows Dogs Fragmented businesses Market growth rate Parenting framework Patching Portfolio techniques

Key Terms (contd.) Position Question marks Stalemate businesses Stars Strategic positioning Strategic processes Volume businesses