1. CHAPTER 8
Strategic Analysis and Choice in the Multibusiness Company: Rationalizing Diversification and Building Shareholder Value

2. Chapter Topics
The Portfolio Approach
The Synergy Approach: Leveraging Capabilities and Core Competencies
Strategic Analysis and Choice in Multi-business Companies: The Corporate Parent Role

3. The Portfolio Approach
BCG Growth-Share Matrix
Industry Attractiveness-Business Strength Matrix
BCG’s Strategic Environments Matrix
Life Cycle-Competitive Strength Matrix

4. Ex. 8-1: The BCG Growth-Share Matrix
Cash Generation (Market Share)
Description of Dimensions
High
Low
Market share: sales relative to those of other competitors in the market (dividing point is usually selected to have only the two-three largest competitors in any market fall into the high market share region)
Star
Problem Child
High
Cash Use (Growth Rate)
Cash Cow
Dog
Low
Description of Dimensions
Growth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)

5. Ex. 8-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (Industry Attractiveness)
Nature of Competitive Rivalry
Bargaining Power of Suppliers/Customers
Threat of Substitutes/New Entrants
Number of competitors
Size of competitors
Strength of competitors’ corporate parents
Price wars
Competition on multiple dimensions
Relative size of typical players
Numbers of each
Importance of purchases from or sales to
Ability to vertically integrate
Technological maturity/stability
Diversity of the market
Barriers to entry
Flexibility of distribution system

6. Sociopolitical Considerations
Ex. 8-3 (contd.)
Economic Factors
Financial Norms
Sociopolitical Considerations
Sales volatility
Cyclicality of demand
Market growth
Capital intensity
Average profitability
Typical leverage
Credit practices
Government regulation
Community support
Ethical standards

7. Ex. 8-3 (contd.) (Business Strength)
Cost Position
Level of Differentiation
Response Time
Economies of scale
Manufacturing costs
Overhead
Scrap/waste/rework
Experience effects
Labor rates
Proprietary processes
Promotion effectiveness
Product quality
Company image
Patented products
Brand awareness
Manufacturing flexibility
Time needed to introduce new products
Delivery times
Organizational flexibility

8. Ex. 8-3 (contd.) Financial Strength Human Assets Public Approval
Solvency
Liquidity
Break-even point
Cash flows
Profitability
Growth in revenues
Turnover
Skill level
Relative wage/salary
Morale
Managerial commitment
Unionization
Goodwill
Reputation
Image

9. Ex. 8-4: The Industry Attractiveness-Business Strength Matrix
High
Medium
Low
Description of Dimensions
Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of management
Business Strength: Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths and weaknesses
Selective
Growth
Grow or
Let Go
Invest
High
Selective
Growth
Grow or
Let Go
Harvest
Business Strength
Medium
Grow or
Let Go
Harvest
Low
Divest

10. 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

11. Ex. 8-5: The Market Life Cycle-Competitive Strength Matrix
Stage of Market Life Cycle
Description of Dimensions
Stage of Market Life Cycle: See p. 146
Competitive Strength: Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage
High
Invest Aggresively
Push:
Competitive Strength
Invest Selectively
Caution:
Low
Danger:
Harvest
Introduction
Growth
Maturity
Decline

12. Ex. 8-6: BCG’s Strategic Environments Matrix
Fragmented
apparel, house building, jewelry retailing, sawmills
Specialization
pharmaceuticals, luxury cars, chocolate confectionery
Many
Sources of Advantage
Stalemate
basic chemicals, volume-grade paper, ship owning, wholesale banking
Volume
jet engines, supermarkets, motorcycles, standard microprocessors
Few
Small
Big
Size of Advantage

13. 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

14. 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

15. Ex. 8-7: Value Building in Multibusiness Companies (Market-Related Opportunities)
Opportunities to Build Value or Sharing
Potential Competitive Advantage
Impediments to Achieving Enhanced Value
Shared sales force activities or shared sales office, or both
Lower selling costs
Better market coverage
Stronger technical advice to buyers
Enhanced convenience for buyers
Improved access to buyers
Buyers have different purchasing habits toward the products
Different salespersons are more effective in representing the product
Some products get more attention than others
Buyers prefer to multiple-source rather than single-source their purchases

16. Ex. 8-7 (contd.) Opportunities to Build Value or Sharing
Potential Competitive Advantage
Impediments to Achieving Enhanced Value
Shared after-sales service and repair work
Low servicing costs
Better utilization of service personnel
Faster servicing of customer calls
Different equipment or different labor skills, or both, are needed to handle repairs
Buyers may do some in-house repairs
Shared brand name
Stronger brand image and company reputation
Increased buyer confidence in the brand
Company reputation is hurt if quality of one product is lower
Shared advertising and promotional activities
Lower costs
Greater clout in purchasing ads
Appropriate forms of messages are different
Appropriate timing of promotions is different

17. Ex. 8-7 (contd.) Opportunities to Build Value or Sharing
Potential Competitive Advantage
Impediments to Achieving Enhanced Value
Common distribution channels
Lower distribution costs
Enhanced bargaining power with distributors and retailers to gain shelf space, shelf positioning, stronger push and more dealer attention, and better profit margins
Dealers resist being dominated by a single supplier and turn to multiple sources and lines
Heavy use of the shared channel erodes willingness of other channels to carry or push the firm’s products
Shared order processing
Lower order processing costs
One-stop shopping for buyer enhances service and, thus, differentiation
Differences in ordering cycles disrupt order processing economies

18. Ex. 8-7 (contd.) (Operating Opportunities)
Opportunities to Build Value or Sharing
Potential Competitive Advantage
Impediments to Achieving Enhanced Value
Joint procurements of purchased inputs
Lower input costs
Improved input quality
Improved service from suppliers
Input needs are different in terms of quality or other specifications
Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plant
Shared inbound or outbound shipping and materials handling
Lower freight and handling costs
Better delivery reliability
More frequent deliveries, such that inventory costs are reduced
Input sources or plant locations, or both, are in different geographic areas
Needs for frequency and reliability of inbound/outbound delivery differ among the business units

19. Ex. 8-7 (contd.) Opportunities to Build Value or Sharing
Potential Competitive Advantage
Impediments to Achieving Enhanced Value
Shared manufacturing and assembly facilities
Lower manufacturing/assembly costs
Better capacity utilization, because peak demand for one product correlates with valley demand for other
Bigger scale of operation improves access to better technology and results in better quality
Higher changeover costs in shifting from one product to another
High-cost special tooling or equipment is required to accommodate quality differences or design differences

20. Ex. 8-7 (contd.) Opportunities to Build Value or Sharing
Potential Competitive Advantage
Impediments to Achieving Enhanced Value
Shared product and process technologies or technology development or both
Lower product or process design costs, or both, because of shorter design times and transfers of knowledge from area to area.
More innovative ability, owing to scale of effort and attraction of better R&D personnel
Technologies are the same, but the applications in different business units are different enough to prevent much sharing of value
Shared administrative support activities
Lower administrative and operating overhead costs
Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)

21. Ex. 8-7 (contd.) (Management Opportunities)
Opportunities to Build Value or Sharing
Potential Competitive Advantage
Impediments to Achieving Enhanced Value
Shared management know-how, operating skills, and proprietary information
Efficient transfer of a distinctive competence – can create cost savings or enhance differentiation.
More effective management as concerns strategy formulation, strategy implementation, and understanding of key success factors
Actual transfer of know-how is costly or stretches the key skill personnel too thinly, or both.
Increased risks that proprietary information will leak out

22. Ex. 8-9: Six Critical Questions for Diversification Success
What can our company do better than any of its competitors in its current market(s)?
What core competencies do we need in order to succeed in the new market?
Can we catch up to or leapfrog competitors at their own game?
Will diversification break up our core competencies that need to be kept together?
Will we be simply a player in the new market or will we emerge a winner?
What can our company learn by diversifying, and are we sufficiently organized to learn it?

23. Places to Look for Parenting Opportunities
Size and age
Management
Business definition
Predictable errors
Linkages
Common capabilities
Specialized expertise
External relations
Major decisions
Major changes

24. The Patching Perspective
Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities.
Patching can be
Adding
Splitting
Transferring
Exiting, or combining businesses
Patching is more critical in turbulent and rapidly changing markets, than in stable, unchanging markets

25. Ex. 8-10: Three Approaches to Strategy
Position
Resources
Simple Rules
Strategic logic
Identify an attractive market
Locate a defensible position
Fortify and defend
Establish a vision
Build resources
Leverage across markets
Jump into the confusion
Keep moving
Seize opportunities
Finish strong
Strategic question
Where should we be?
What should we be?
How should we proceed?
Source of advantage
Unique, valuable position with tightly integrated activity system
Unique, valuable, inimitable resources
Key processes and unique simple rules

26. Ex. 8-10 (contd.) Works best in Duration of advantage Risk
Slowly changing, well-structured markets
Moderately changing, well-structured markets
Rapidly changing, ambiguous markets
Duration of advantage
Sustained
Unpredictable
Risk
It will be difficult to alter position as conditions change
Company will be too slow to build new resources as conditions change
Managers will be too tentative in executing on promising opportunities
Performance goal
Profitability
Long-term dominance
Growth

27. Ex. 8-11: Simple Rules, Summarized (Adapted)
Type
Purpose
How-to rules
They spell out key features of how a process is executed – “What makes our process unique?”
Boundary rules
They focus managers on which opportunities can be pursued and which are outside the pale.
Priority rules
They help managers rank the accepted opportunities.
Timing rules
They synchronize managers with the pace of emerging opportunities and other parts of the company.
Exit rules
They help managers decide when to pull out of yesterday’s opportunities.