1. Rationalizing Diversification and Building Shareholder Value
SESSION 12: CORPORATE LEVEL STRATEGY: 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. 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

5. 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

6. Questions to Ask
What can our company do better than any of its competitors in its current market?
What strategic assets 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 strategic assets 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 ssufficiently organized to learn it?

7. 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

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

9. 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!

10. Concentric Diversification
Primary Industry
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 A B C

11. Examples Pepsi Co. Canon Johnson & Johnson
Bought Taco Bell, KFC, Pizza Hut, and Frito Lay
Canon
Cameras to Photocopiers
Johnson & Johnson
Baby shampoo and Neutrogena skin care products

12. Conglomerate Diversification
Primary Industry
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 A B

13. Examples General Electric Samsung Virgin Group Limited
Radios, fridges, and wind turbines
TV networks
Financial service firms
Oil drilling
Jet Aircraft Engines
Samsung
Phones, TVs, and tablets
Military hardware
Apartments
Korean amusement parks
Virgin Group Limited
Travel and entertainment
Financial services
Wineries
Mobile phones
Space Tourism

14. Multibusiness Corporations
Corporations comprised of multiple businesses are often referred to as having a portfolio of businesses

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

25.                                                                                                      
                                                         
SONY PICTURES STUDIOS

29. CADBURY SCHWEPPES, PLC. DR. PEPPER/SEVEN UP, INC
DR. PEPPER/SEVEN UP, INC .
SNAPPLE LA CASERA
ORANGINA CANADA DRY
 MOTT’S HAWAIIAN PUNCH
TRINA CLAMATO
SOLO A & W
GINI SUNKIST
CANADA DRY SQUIRT
ENERGADE CRUNCHIE
FRUIT & NUT MINIHEROES

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

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

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

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

34. 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)

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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 182
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

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

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