POKHARA UNIVERSITY

1. Chapter-III
Strategic Analysis
and Choices in a
Multi-business
Company
1

2. The Concept of Corporate-Level Strategy
Primary Question - Where to Compete?
Are there other business opportunities?
Entering or exiting Industries
Corporate Level Strategy – Whether to Diversify?
Synergies
Growth Opportunities
Agency Issues – “Empire Building”
2

3. Multi-business Corporations
• Corporations comprised of multiple business are
often referred to as having a portfolio of business.
• Strategic analysis and choice is more complicated.
Corporate
Strategy
SBU 1 SBU 2 SBU 3
Finance Marketing
Finance Marketing
Finance Marketing
3

4. 4
Strategic Business Unit (SBU) characteristics
To Be Designated as an SBU, Businesses should:
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

5. Functions of Corporate Management
Functions
1. Managing the
Corporate Profile
-Decisions over diversification,
acquisition, divestment
-Resource allocation between
business
2. Managing the
Individual Business
-Business strategy formulation
-Monitoring and controlling
business performance
3. Managing
Linkages between
Businesses
- Sharing and transferring resources
and capabilities
5

6. Rationalizing Diversification and
Integration
• Opportunities for Sharing Infrastructure and
Capabilities
• Capitalizing on Core Competencies
• Balancing Financial Resources
• Portfolio Analytical Techniques
6

7. Questions Related to Diversification
and Integration
7
• Are opportunities for sharing infrastructure
and capabilities forthcoming?
• Are we capitalizing on our core
competencies?
• Does the company’s business portfolio
balance financial resources?
• Does our business portfolio achieve
appropriate levels of risk and growth?

8. Diversification and Corporate Strategy
• A company is diversified when it is in two or more
lines of business
• Strategy-making in a diversified company is a bigger
picture exercise than crafting a strategy for a single
line-of-business
– A diversified company needs a multi-industry,
multi-business strategy
– A strategic action plan must be developed for
several different businesses competing in diverse
industry environments
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9. When Does Diversification Start to Make Sense?
Strong competitive
position, rapid market
growth -- Not a good
time to diversify
Strong competitive
position, slow market
growth -- Diversification
is top priority
consideration
Weak competitive
position, rapid market
growth -- Not a good
time to diversify
Weak competitive
position, slow market
growth -- Diversification
merits consideration
9

10. Critical Elements for Shared
Opportunities to Be Meaningful
1. Shared opportunities must be a significant
portion of the value chain of businesses involved
2. Businesses involved must truly have shared
needs or there is no basis for synergy in the first
place
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11. Evaluating the Role of Core Competencies
Is each core competency providing a relevant
competitive advantage to the intended
businesses?
Are businesses in the
portfolio related in ways
that make the company’s
core competence(s)
beneficial?
Are our combination
of competencies
unique or difficult to
create?
11

12. Balancing Financial Resources:
Portfolio Techniques
BCG Growth-Share
Matrix
Industry Attractiveness-
Business Strength Matrix
Life Cycle-Competitive
Strength Matrix
BCG’s Strategic
Environments Matrix
12

13. The BCG Growth-Share Matrix
Star Question
Marks
Cash Cow Dog
Cash Generation (Market Share)
High Low
High
Low
CashUse(GrowthRate)
Description of Dimensions
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)
Description of Dimensions
Growth Rate: Industry growth rate in constant dollars (dividing
point is usually the GNP’s growth rate)
13

14. The Industry Attractiveness-Business
Strength Matrix
High Medium Low
Industry Attractiveness
High
Low
BusinessStrength
Medium
Invest
Selective
Growth
Grow or
Let Go
Harvest
Divest
Grow or
Let Go
Harvest
Selective
Growth
Grow or
Let Go
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
14

15. 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
15

16. (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
16

17. (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
17

18. (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
18

19. Advantages of the Industry Attractiveness-
Business Strength Matrix Over the BCG Matrix
Terminologies are 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
multi-business company
19

20. The Market Life Cycle-Competitive
Strength Matrix
Caution:
Invest Selectively
Push:
Invest Aggresively
Danger:
Harvest
Introduction Growth Maturity Decline
High
Low
CompetitiveStrength
Description of
Dimensions
Stage of Market Life
Cycle: Introduction,
Growth, Maturity,
Decline
Competitive Strength:
Overall subjective
rating, based on a
wide range of factors
regarding the
likelihood of gaining
and maintaining a
competitive
advantage
20
Moderate
Stages of Market Life Cycle

21. BCG’s Strategic Environments Matrix
Fragmented
apparel, house
building, jewelry
retailing, sawmills
Specialization
pharmaceuticals, luxury cars,
chocolate confectionery
Stalemate
basic chemicals, petroleum
refining, gas, aluminum,
pulp and paper
Volume
jet engines, motorcycles,
standard microprocessors
Many
Few
Small Big
Size of Advantage
Sourcesof
Advantage
21

22. Contd…
Volume Businesses are those that have few sources
of advantage, but the size is large- typically the result
of scale of economies. Advantages established in one
such business may be transferable to another.
Stalemate businesses have few sources of
advantage, with most of those small. This results in
very competitive situations. Skills in operational
efficiency, low overhead, and cost management are
critical to profitable.
22

23. Contd…
Fragmented businesses have many source of
advantage, but they are all small. This typically
involves differentiated products with low brand
loyalty, easily replicated technology, and minimal
scale economies. Skills in focused market segments ,
typically geographic, the ability to respond quickly to
changes, and low costs are critical in this
environment.
Specialization businesses have many sources of
advantages potentially sizable. Skills in achieving
differentiation- product design, branding expertise,
innovation, first-mover, and perhaps scales-
characterize winners here.
23

24. 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
24

25. 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
25

26. Behavioral Considerations Affecting Strategic Choice
• Role of current strategy
• Degree of firm’s external dependence
• Attitudes toward risk
• Managerial priorities different from stockholder interests
• Internal political considerations
• Competitive reaction
26

27. Behavioral Considerations Affecting Strategic
Choice
• Role of current strategy
– What is the amount of time and resources invested
in previous strategies?
– How close are new strategies to the old?
– How successful were previous strategies?
• Degree of firm’s external dependence
– How powerful are firm’s owners, customers,
competitors, unions, and its government?
– How flexible is firm with its environment?
27

28. Behavioral Considerations Affecting Strategic
Choice
• Attitudes toward risk
– Industry volatility and industry evolution affect
managerial attitudes
– Risk-oriented managers prefer offensive,
opportunistic strategies
– Risk-averse managers prefer defensive, conservative
strategies
• Managerial priorities different from
stockholder interests
– Agency theory suggests managers frequently place
their own interests above those of their
shareholders 28

29. Behavioral Considerations Affecting Strategic Choice
• Internal political considerations
– Major sources of company power are CEO, key
subunits, and key departments
– Power can affect corporate decisions over analytical
considerations
– The content of strategic decisions and the process
of arriving at such decisions are politically charged
• Competitive reaction
– Probable impact of competitor response must be
considered during strategy design process
– Competitor response can alter the success of
strategy
29

30. Building Shareholder’s Value
• To build shareholder value:
1 + 1 = 3
• Diversification is capable of increasing
shareholder value if it passes three tests
1. Industry Attractiveness Test
2. Cost of Entry Test
3. Better-Off Test
30

31. Strategic Management Principle
To create shareholder value, a diversifying
firm must get into businesses that can
perform better under common management
than they could perform operating as
independent stand-alone enterprises!
31

32. Value Building in Multi-business Companies
(Market-Related Opportunities)
Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Obstacles 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 for their purchases
32

33. Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Obstacles 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
Value Building continued…
(Market related)
33

34. Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Obstacles 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
Value Building continued…
(Market Related)
34

35. Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Obstacles 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
Value Building continued…
(operating opportunities)
35

36. Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Obstacles 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
Value Building continued…
(operating opportunities)
36

37. Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Obstacles 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)
Value Building continued…
(operating opportunities)
37

38. Opportunities to Build
Value or Sharing
Potential Competitive
Advantage
Obstacles 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
Value Building continued...
(Management opportunities)
38

39. Political Activity in Phases of Strategic
Decision Making
Phases of Strategic
Decision Making
Focus of Political
Action
Examples of Political
Activity
Identification and
diagnosis of political
issues
Control of:
•Issues to be discussed
•Cause-and-effect
relationships to be
examined
•Control agenda
•Interpretation of past
events and future
trends
Narrowing the
alternative strategies
for serious condition
Control of alternatives Mobilization:
•Coalition formation
•Resource commitment
for information search
39

40. Phases of Strategic
Decision Making
Focus of Political
Action
Examples of Political
Activity
Examining and choosing
the strategy
Control of choice Selective advocacy of
criteria. Search and
representation of
information to justify
choice
Initiating
implementation of the
strategy
Interaction between
winners and losers
Winners attempt to
“sell” or propose losers.
Losers attempt to
prevent decisions and
activate fresh strategic
issues
Designing procedures
for the evaluation of
results
Representing oneself as
successful
Selective advocacy of
criteria
Contd…
40

41. Some Multi-Business Organization
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SONY PICTURES STUDIOS

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