copyright © 2001 houghton mifflin company. all rights reserved. chapter 10 corporate development:...

Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Chapter 10Chapter 10

Corporate Development: Building Corporate Development: Building and Restructuring the Corporationand Restructuring the Corporation

StrategicStrategic Charles W. L. HillCharles W. L. Hill

ManagementManagement Gareth R. JonesGareth R. Jones

Fifth EditionFifth Edition

PowerPoint Presentation PowerPoint Presentation by Charlie Cookby Charlie Cook

An Integrated ApproachAn Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved. 10-2

Building on Corporate Building on Corporate DevelopmentDevelopmentCorp Dev:Corp Dev:

WhichWhich business opportunities to pursue business opportunities to pursue

HowHow to pursue them (internal venturing; to pursue them (internal venturing; acquisitions; joint ventures)acquisitions; joint ventures)

How it should How it should exitexit those opportunities that no those opportunities that no longer work for them (divestment, harvest, longer work for them (divestment, harvest, liquidation)liquidation)

This requires looking at the company’s PortfolioThis requires looking at the company’s Portfolio


Reviewing the Corporate Reviewing the Corporate PortfolioPortfolioPortfolio Planning under the Boston Portfolio Planning under the Boston Consulting Group (BCG) matrix:Consulting Group (BCG) matrix:

Identifying the Strategic Business Units (SBUs) by Identifying the Strategic Business Units (SBUs) by business area or product marketbusiness area or product market

Assessing each SBU’s prospects (using Assessing each SBU’s prospects (using relative relative market sharemarket share and and industry growth rateindustry growth rate) relative to ) relative to other SBUs in the portfolio.other SBUs in the portfolio.

Developing strategic objectives for each SBU.Developing strategic objectives for each SBU.


The BCG MatrixThe BCG Matrix

FIGURE 10.1

Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.


The BCG MatrixThe BCG Matrix

StarsStars High relative market shares in fast growing industries.High relative market shares in fast growing industries.

Question marksQuestion marks Low relative market shares in fast growing industries.Low relative market shares in fast growing industries.

Cash cowsCash cows High relative market shares in low-growth industries.High relative market shares in low-growth industries.

DogsDogs Low relative market shares in low-growth industries.Low relative market shares in low-growth industries.


The Strategic Implications of the The Strategic Implications of the BCGBCGCash cowsCash cows

Investments sufficient to maintain competitive position. Cash Investments sufficient to maintain competitive position. Cash surpluses used in developing and nurturing stars and selected surpluses used in developing and nurturing stars and selected question mark firms.question mark firms.

StarsStars Aggressive investments to support continued growth and Aggressive investments to support continued growth and

consolidate competitive position of firms.consolidate competitive position of firms.

Question marksQuestion marks Selective investments; divestiture for weak firms or those with Selective investments; divestiture for weak firms or those with

uncertain prospects and lack of strategic fit.uncertain prospects and lack of strategic fit.

DogsDogs Divestiture, harvesting, or liquidation and industry exit.Divestiture, harvesting, or liquidation and industry exit.

Co then considers acquisitions, divestments and new Co then considers acquisitions, divestments and new ventures to get a “balanced” portfolioventures to get a “balanced” portfolio


Limitations on Portfolio PlanningLimitations on Portfolio PlanningFlaws in portfolio planning:Flaws in portfolio planning:

The BCG model is simplistic if used blindly; considers only two competitive The BCG model is simplistic if used blindly; considers only two competitive environment factors– relative market share and industry growth rate.environment factors– relative market share and industry growth rate.

High relative market share is no guarantee of a cost savings or competitive High relative market share is no guarantee of a cost savings or competitive advantage (but normally does a good job of predicting cash flow)advantage (but normally does a good job of predicting cash flow)

Low relative market share is not always an indicator of competitive failure Low relative market share is not always an indicator of competitive failure or lack of profitability (but normally does a good job of predicting cash or lack of profitability (but normally does a good job of predicting cash flow).flow).

Multifactor models (e.g., the McKinsey matrix or the GE Grid) are better Multifactor models (e.g., the McKinsey matrix or the GE Grid) are better though imperfect. though imperfect.

Importantly, goals other than cash flow may be more critical (such as ROI). Importantly, goals other than cash flow may be more critical (such as ROI). If so, use the BCG with caution If so, use the BCG with caution

Fail to look at “dependencies” among SBUs wrt transferring competencies, Fail to look at “dependencies” among SBUs wrt transferring competencies, economies of scope,etc.economies of scope,etc.


The McKinsey MatrixThe McKinsey Matrix

FIGURE 10.2


Corp as a Portfolio of Corp as a Portfolio of “Competencies”“Competencies”Identify current competenciesIdentify current competencies

Compare competencies to opportunities and Compare competencies to opportunities and threatsthreats

Develop an agenda for corporate developmentDevelop an agenda for corporate development

Advantage is that this method recognizes need Advantage is that this method recognizes need to add value by looking at inter-dependenciesto add value by looking at inter-dependencies


FIGURE 10.3

The Corporation The Corporation as a Portfolio of as a Portfolio of Core Core CompetenciesCompetencies

Establishing a Core Establishing a Core Competence AgendaCompetence Agenda

Source: G. Hamel and C. K. Prahalad, Competing for the Future (Cambridge, Mass.: Harvard Business School Press, 1994), p. 227.


From Agenda to ActionFrom Agenda to Action

Based on the analysis of the portfolio and Based on the analysis of the portfolio and “what do you have to do” the next step is “what do you have to do” the next step is “how to you get there”“how to you get there”

Internal New VenturesInternal New Ventures

AcquisitionsAcquisitions

Joint VenturesJoint Ventures


Internal New VenturingInternal New Venturing

Internal new venturing is attractive when:Internal new venturing is attractive when: Entering as a science-based company.Entering as a science-based company. Entering an emerging industry with no established competitors.Entering an emerging industry with no established competitors. Good if company has key competencies that can be leveragedGood if company has key competencies that can be leveraged

Pitfalls of new venturing (very high failure rate):Pitfalls of new venturing (very high failure rate): Scale of entry– Low-scale entry reduces probability of long-Scale of entry– Low-scale entry reduces probability of long-

term success (low share drives high costs and low revenue)term success (low share drives high costs and low revenue) Commercialization– Failure to develop a product that meets Commercialization– Failure to develop a product that meets

basic customer needs.basic customer needs. Poor Implementation– Using “shotgun” approach, not setting Poor Implementation– Using “shotgun” approach, not setting

clear strategic objectives, abandoning projects too soon.clear strategic objectives, abandoning projects too soon.


Scale of Entry, Profitability, and Cash Scale of Entry, Profitability, and Cash FlowFlow

FIGURE 10.4


Internal New VenturingInternal New Venturing

Guidelines for successful new venturing:Guidelines for successful new venturing: Adopt a structural approach with clear strategic Adopt a structural approach with clear strategic

objectives setting R&D direction.objectives setting R&D direction. Foster close links between R&D and marketing.Foster close links between R&D and marketing. Use project teams to reduce development time.Use project teams to reduce development time. Use a selection process to pick venture projects with Use a selection process to pick venture projects with

the highest probability of success.the highest probability of success. Monitor progress of ventures in gaining initial market Monitor progress of ventures in gaining initial market

share goals.share goals. Large-scale entry is important for venture success.Large-scale entry is important for venture success.


Acquisitions as an Entry StrategyAcquisitions as an Entry Strategy

Acquisition is an attractive strategy when:Acquisition is an attractive strategy when: Competencies important in a new business area are Competencies important in a new business area are

lacking in the entering firm.lacking in the entering firm. Speed of entry is considered important.Speed of entry is considered important. Acquisition is perceived as a less risky form of entry.Acquisition is perceived as a less risky form of entry. Barriers to entry can be overcome Barriers to entry can be overcome

by acquisition of a firm in the by acquisition of a firm in the industry targeted for entry.industry targeted for entry.



Pitfalls of acquisitions:Pitfalls of acquisitions: Failing to follow through on postacquisition Failing to follow through on postacquisition

integration of the acquired firm.integration of the acquired firm. Overestimating the economic Overestimating the economic

benefits of the acquisition.benefits of the acquisition. Underestimating the expense Underestimating the expense

of an acquisition.of an acquisition. Failing to properly screen candidates Failing to properly screen candidates

before acquisition.before acquisition.



Guidelines for successful acquisitions:Guidelines for successful acquisitions: Properly identify acquisition targets and conduct a Properly identify acquisition targets and conduct a

thorough preacquisition screening of the target firm.thorough preacquisition screening of the target firm. Use a bidding strategy with proper timing to avoid Use a bidding strategy with proper timing to avoid

overpaying for an acquisition.overpaying for an acquisition. Follow through on postacquisition integration synergy-Follow through on postacquisition integration synergy-

producing activities of the acquired firm.producing activities of the acquired firm. Dispose of unwanted residual acquisition assets.Dispose of unwanted residual acquisition assets.


Joint Ventures as an Entry Joint Ventures as an Entry StrategyStrategyAttractionsAttractions

Sharing new project costs and risks.Sharing new project costs and risks. Increasing the probability of success Increasing the probability of success

in establishing the new business.in establishing the new business.

DrawbacksDrawbacks Requires a sharing of control with partner firms.Requires a sharing of control with partner firms. Requires that partner firms share profits.Requires that partner firms share profits. Risks giving away critical knowledge.Risks giving away critical knowledge. Risks creating a potential competitor.Risks creating a potential competitor.


RestructuringRestructuring

Why restructure?Why restructure? Pull-back from overdiversification.Pull-back from overdiversification. Attacks by competitors on core Attacks by competitors on core

businesses.businesses. Diminished strategic advantages of Diminished strategic advantages of

vertical integration and diversification.vertical integration and diversification.

Exit strategiesExit strategies Divestment– spinoffs of profitable SBUs to investors; Divestment– spinoffs of profitable SBUs to investors;

management buy outs (MBOs).management buy outs (MBOs). Harvest– halting investment, maximizing cash flow.Harvest– halting investment, maximizing cash flow. Liquidation– Cease operations, write off assets.Liquidation– Cease operations, write off assets.


Turnaround StrategyTurnaround Strategy

The causes of corporate declineThe causes of corporate decline Poor management– incompetence, neglectPoor management– incompetence, neglect Overexpansion– empire-building CEO’sOverexpansion– empire-building CEO’s Inadequate financial controls– no profit responsibilityInadequate financial controls– no profit responsibility High costs– low labor productivityHigh costs– low labor productivity New competition– powerful emerging competitorsNew competition– powerful emerging competitors Unforeseen demand shifts– major market changesUnforeseen demand shifts– major market changes Organizational inertia– slow to respond to new Organizational inertia– slow to respond to new

competitive conditionscompetitive conditions


The Main Steps of TurnaroundThe Main Steps of Turnaround

Changing the leadershipChanging the leadership Replace entrenched management with new managers.Replace entrenched management with new managers.

Redefining strategic focusRedefining strategic focus Evaluate and reconstitute the organization’s strategy.Evaluate and reconstitute the organization’s strategy.

Asset sales and closuresAsset sales and closures Divest unwanted assets for investment resources.Divest unwanted assets for investment resources.

Improving profitabilityImproving profitability Reduce costs, tighten finance and performance controls. Reduce costs, tighten finance and performance controls.

AcquisitionsAcquisitions Make acquisitions of skills and competencies to strengthen Make acquisitions of skills and competencies to strengthen

core businesses.core businesses.

copyright © 2001 houghton mifflin company. all rights reserved. chapter 10 corporate development:...

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