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CHAPTER 8

CHAPTER 8. Strategic Analysis and Choice in the Multibusiness Company: Rationalizing Diversification and Building Shareholder Value. Chapter Topics. Rationalizing Diversification and Integration Opportunities for Sharing Infrastructure and Capabilities Capitalizing on Core Competencies

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CHAPTER 8

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

  2. Chapter Topics • Rationalizing Diversification and Integration • Opportunities for Sharing Infrastructure and Capabilities • Capitalizing on Core Competencies • Balancing Financial Resources • Portfolio Analytical Techniques • Behavioral Considerations Affecting Strategic Choice

  3. Questions Related to Diversification and Integration • 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?

  4. Ex. 8-1: Value Building in Multibusiness Companies(Market-Related Opportunities)

  5. Ex. 8-1 (contd.)

  6. Ex. 8-1 (contd.)

  7. Ex. 8-1 (contd.)(Operating Opportunities)

  8. Ex. 8-1 (contd.)

  9. Ex. 8-1 (contd.)

  10. Ex. 8-1 (contd.)(Management Opportunities)

  11. Critical Elements for Shared Opportunities to Be Meaningful • 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

  12. 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?

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

  14. Ex. 8-4: 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) Dog Cash Cow Low Description of Dimensions Growth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)

  15. Ex. 8-5: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix(Industry Attractiveness)

  16. Ex. 8-5 (contd.)

  17. Ex. 8-5 (contd.)(Business Strength)

  18. Ex. 8-5 (contd.)

  19. Ex. 8-6: The Industry Attractiveness-Business Strength Matrix Industry Attractiveness Medium Low High 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 Divest Low

  20. 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

  21. Ex. 8-7: 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 Push: Invest Aggresively High Competitive Strength Caution: Invest Selectively Danger: Harvest Low Introduction Growth Maturity Decline

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

  23. 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. 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. 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. 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. 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. 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. Ex. 8-11: Political Activity in Phases of Strategic Decision Making

  30. Ex. 8-11 (contd.)

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