chap008
DESCRIPTION
Strategic ManagementPEARCE & ROBINSONTRANSCRIPT
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
CHAPTER 8
Strategic Analysis and Choice in the Multibusiness Company: Rationalizing Diversification
and Building Shareholder Value
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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
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The Portfolio Approach
BCG Growth-Share Matrix
Industry Attractiveness-
Business Strength Matrix
Life Cycle-Competitive
Strength Matrix
BCG’s Strategic Environments
Matrix
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Ex. 8-1: The BCG Growth-Share Matrix
Star Problem Child
Cash Cow Dog
Cash Generation (Market Share)
High Low
High
Low
Cas
h U
se (
Gro
wth
Rat
e)
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 DimensionsGrowth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)
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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
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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
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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
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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
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Ex. 8-4: The Industry Attractiveness-Business Strength Matrix
High Medium Low
Industry Attractiveness
High
Low
Bus
ines
s S
tren
gth
Medium
InvestSelectiveGrowth
Grow orLet Go
Harvest
Divest
Grow orLet Go
Harvest
SelectiveGrowth
Grow orLet Go
Description of Dimensions
Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of managementBusiness Strength: Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths and weaknesses
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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
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Ex. 8-5: The Market Life Cycle-Competitive Strength Matrix
Caution:
Invest Sele
ctively
Push:
Invest A
ggresively
Danger:
Harvest
Stage of Market Life Cycle
Introduction Growth Maturity Decline
High
Low
Com
peti
tive
Str
engt
h
Description of DimensionsStage of Market Life Cycle: See p. 146Competitive Strength: Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage
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Ex. 8-6: BCG’s Strategic Environments Matrix
Fragmentedapparel, house building,
jewelry retailing, sawmills
Specializationpharmaceuticals, luxury
cars, chocolate confectionery
Stalematebasic chemicals, volume-grade paper, ship owning,
wholesale banking
Volumejet engines, supermarkets,
motorcycles, standard microprocessors
Many
Few
Small Big
Size of Advantage
Sour
ces
of A
dvan
tage
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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
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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
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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
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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
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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
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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
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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
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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)
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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
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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?
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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
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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
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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
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Ex. 8-10 (contd.)
Works best in Slowly changing, well-structured markets
Moderately changing, well-structured markets
Rapidly changing, ambiguous markets
Duration of advantage
Sustained 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
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Ex. 8-11: Simple Rules, Summarized(Adapted)
Type PurposeHow-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.