© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 1 SESSION 12: CORPORATE LEVEL STRATEGY: Analysis and Choice in The Multi-Business Company Rationalizing Diversification and Building Shareholder Value

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 2 The Concept of Corporate-Level Strategy Primary Question - Where to Compete? Are there other business opportunities? Entering or exiting Industries

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 3 CL Strategy – Whether to Diversify? Synergies Growth Opportunities Agency Issues – “Empire Building”

Diversification Corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that market

When? Expand into a business activity that doesn’t negatively react to the same economic downturns as your current business activity Growth potential in present business Attractiveness of opportunities to transfer Potential cost-savings opportunities Availability of adequate resources Managerial expertise to cope with complexity

Questions to Ask 1.What can our company do better than any of its competitors in its current market? 2.What strategic assets do we need in order to succeed in the new market? 3.Can we catch up to or leapfrog competitors at their own game? 4.Will diversification break up strategic assets that need to be kept together? 5.Will we be simply a player in the new market or will we emerge a winner? 6.What can our company learn by diversifying, and are we ssufficiently organized to learn it?

Motives for Diversification To grow To more fully utilize existing resources and capabilities To escape from undesirable or unattractive industry environments To make use of surplus cash flows

Risks & Rewards Increased Sales and Revenue Dependency Reduction Operational Stress Brand Damage

Failed BP and Exxon: tried to use their knowledge of exploration, extraction, and large-scale management capabilities in the mineral business. What they didn’t have? Access to deposits Coca-Cola: tried to use their intimate knowledge of consumers, marketing and branding expertise, and distribution capabilities in the wine business. So, what was the problem? They knew nothing about wine!

Concentric Diversification Expanding into market or products that are related to current business Related diversification Opportunities to expand product offerings or expand into new geographical areas Very complex and difficult to coordinate different but related businesses Primary Industry A B C

Examples Pepsi Co. Bought Burger King, Pizza Hut, and Frito Lay Canon Cameras to Photocopiers Johnson & Johnson Baby shampoo and Neutrogena skin care products

Conglomerate Diversification Expanding into industries unrelated to its current business Unrelated diversification Helps the company to continue to grow after a core business has matured or started to decline Company can’t lack expertise about their new business Primary Industry B A

Examples General Electric Radios, fridges, and wind turbines TV networks Financial service firms Oil drilling Computer manufacturin g Samsung Phones, TVs, and tablets Military hardware Apartments Korean amusement park Virgin Group Limited Travel and entertainmen t Financial services Wineries Mobie phones

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 14 Multibusiness Corporations Corporations comprised of multiple businesses are often referred to as having a portfolio of businesses

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 15 By Definition a change in Corporate Level Strategy should be reflected in a change in Mission Statement

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© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 25 SONY PICTURES STUDIOS

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© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 29. SNAPPLELA CASERA ORANGINACANADA DRY MOTT’SHAWAIIAN PUNCH TRINACLAMATO SOLOA & W GINISUNKIST CANADA DRYSQUIRT ENERGADECRUNCHIE FRUIT & NUTMINIHEROES CADBURY SCHWEPPES, PLC. DR. PEPPER/SEVEN UP, INC

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 30 The Portfolio Approach to Corporate Level Strategy Research Allocation Decisions How does Corporate Affiliation Provide Value?

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 31 GE and McKinsey The Concept of The SBU Corporate Review Capability Matrices to Facilitate/Illuminate the Resource Allocation Decision

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 32 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 33 Balancing Financial Resources: Portfolio Techniques Industry Attractiveness- Business Strength Matrix BCG Growth- Share Matrix Life Cycle- Competitive Strength Matrix

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 34 BCG Growth-Share Matrix High Low Cash Use (Growth Rate) Star Problem Child Cash Cow Dog 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 35 Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix 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 Industry Attractiveness Factors

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 36 Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) 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 Industry Attractiveness Factors

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 37 Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) 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 Business Strength Factors

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 38 Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (concluded) 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 Business Strength Factors

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 39 Fig. 9-4: Industry Attractiveness-Business Strength Matrix Invest Selective Growth Grow or Let Go Selective Growth Grow or Let Go Harvest Grow or Let Go Harvest Divest Low High Medium Business Strength MediumHighLow 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 40 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 41 Fig. 9-5: Market Life Cycle-Competitive Strength Matrix Stage of Market Life Cycle: See page 182 Competitive Strength: Overall subjective rating, based on wide range of factors regarding likelihood of gaining and maintaining a competitive advantage Description of Dimensions Low High Moderate Competitive Strength GrowthIntroductionMaturity Stage of Market Life Cycle Decline Push: Invest Aggressively Caution: Invest Selectively Danger: Harvest

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 42 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 43 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