Multibusiness Strategy

LECTURE 7

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The Portfolio Approach The portfolio approach is a historical starting

point for strategic analysis and choice in multibusiness firms.

The portfolio approach helps allocate resources in multibusiness companies.

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Portfolio Techniques

An approach pioneered by the Boston Consulting Group that attempted to help managers balance the flow of cash resources among their various businesses while also identifying their basic strategic purpose within the overall portfolio.

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The BCG Growth-Share MatrixDimensions Market Growth Rate

The projected rate of sales growth for the market being served by a particular business

Relative Competitive Position The market share of a business divided by the

market share of its largest competitor.

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Ex. 9.2 The BCG Growth-Share Matrix

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The BCG Growth-Share MatrixTypes of Businesses

Stars Businesses in rapidly growing markets with

large market shares. Cash Cows

Businesses with a high market share in low-growth markets or industries.

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The BCG Growth-Share MatrixTypes of Businesses (contd.)

Dogs Low market share and low growth businesses

Question Marks Businesses whose high growth rate gives

them considerable appeal but whose low market share makes their profit potential uncertain.

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Ex. 9.3 Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix

(adapted)

Industry Attractiveness Nature of competitive rivalry Bargaining power of suppliers/customers Threat of substitute products/new entrants Economic factors Financial norms Sociopolitical considerations

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Ex. 9.3 Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (adapted)

Business Strength Cost position Level of differentiation Response time Financial strength Human assets Public approval

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The directional policy(GEMcKinsey) matrix (2)

Figure 7.8 Strategy guidelines based on the directional policy matrix

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Ex. 9.5 BCGs Strategic Environments Matrix

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BCGs Strategic Environments MatrixTypes of Businesses

Volume Businesses Businesses that have few sources of

advantage, but the size is large typically the result of scale economics

Stalemate Businesses Businesses with few sources of advantage,

most of them small. Skills in operational efficiency, low overhead, and cost management are critical to profitability.

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BCGs Strategic Environments MatrixTypes of Businesses (contd.)

y Fragmented BusinessesyBusinesses with many sources of advantage,

but they are all small. They typically involve differentiated products with low brand loyalty, easily replicated technology, and minimal scale economies.

y Specialization BusinessesyBusinesses with many sources of advantage.

Skills in achieving differentiation (product design, branding expertise, innovation, and perhaps scale) characterize winning specialization businesses.

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Limitations of Portfolio Approach

y It does not address how value is being created across business units

y Truly accurate measurement for matrix classification was not as easy as the matrices portrayed

y The underlying assumption about the relationship between market share and profitability varied across industries and market segments

y The limited strategic options came to be seen more as basic strategic missions

y It ignored capital raised in capital marketsy It typically failed to compare the competitive

advantage a business received from being owned by a particular company with the costs of owning it

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The Synergy Approach: Leveraging Core Competencies

y Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operations-related, and management activities

y Strategic analysis is concerned with whether or not the potential competitive advantages expected to arise from each value opportunity have materialized

y The most compelling reason companies should diversify can be found in situations where core competencieskey value-building skillscan be leveraged with other products or into markets that are not a part of where they were created

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The Synergy Approach

Each core competency should provide a relevant competitive advantage to the intended businesses

Businesses in the portfolio should be related in ways that make the companys core competencies beneficial

Any combination of competencies must be unique or difficult to recreate

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Elements Critical in Meaningful Shared Opportunities

The shared opportunities must be a significant portion of the value chain of the businesses involved.

The businesses involved must truly have shared needs need for the same activity or there is no basis for synergy in the first place.

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Strategy Development Directions

Exhibit 7.1Exhibit 7.1Source:Source: Adapted from H. Adapted from H. AnsoffAnsoff, , Corporate StrategyCorporate Strategy, Penguin, 1988, Chapter 6., Penguin, 1988, Chapter 6.

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The Parenting Framework

The perspective that the role of corporate headquarters (the parent) in multibusiness(the children) companies is that of a parent sharing wisdom, insight, and guidance to help develop its various businesses to excel.

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The Parenting Framework (contd.)

` The parenting framework perspective sees multibusiness companies as creating value by influencingor parentingtheir businesses

` The best parent companies create more value than any of their rivals do or would if they owned the same businesses

` To add value, a parent must improve its businesses

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Figure 7.9 The Parenting Matrix: the Ashridge Portfolio DisplaySource: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley, 1994

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The parenting matrix (2)1. Heartland business units - the parent understands these well

and can add value. The core of future strategy. 2. Ballast business units - the parent understands these well but

can do little for them. They could be just as successful as independent companies.If not divested, they should be spared corporate bureaucracy.

3. Value-trap business units are dangerous. There are attractive opportunities to add value but the parents lack of feel will result in more harm than good The parent needs new capabilities to move value-trap businesses into the heartland. It is easier to divest to another corporate parent which could add value.

4. Alien business units are misfits. They offer little opportunity to add value and the parent does not understand them. Exit is the best strategy.

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The Corporate Parent Role: Can It Add Tangible Value?

Realizing synergies from shared capabilities and core competencies is a key way value is added in multibusiness companies. 1. Research suggests that figuring out if the synergies are real and, if so, how to capture those synergies is most effectively accomplished by business unit managers, not the corporate parent. 2. How can the corporate parent add value to its businesses in a multibusiness company?

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10 Sources of Parenting Opportunities

Size & Age Management Business Definition Predictable Errors Linkages

Common capabilities

Specialized expertise

External relations Major decisions Major changes

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Patching

The process by which corporate executives routinely remap their businesses to match rapidly changing market opportunities adding, splitting, transferring, exiting, or combining chunks of businesses.

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The Patching Approach

It can take the form of adding, splitting, transferring, exiting, or combining chunks of businesses

Patching is not seen as critical in stable, unchanging markets

When markets are turbulent and rapidly changing, patching is seen as critical to the creation of economic value in a multibusiness company

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Proponents of Patching` View traditional corporate strategy as creating

defensible strategic positions for business units by acquiring or building valuable assets, wisely allocating resources to them, and weaving synergies among them

` In volatile markets, they argue, this traditional approach results in business units with strategies that are quickly outdated and competitive advantages rarely sustained beyond a few years

` As a result, strategic analysis should center on strategic processes more than strategic positioning

` In these volatile markets, patchers strategic analysis focuses on making quick, small, frequent changes in parts of businesses and organizational processes

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Patching (contd.) Strategic Processes

Decision making, operational activities, and sales activities that are critical business processes.

Strategic Positioning The way a business is designed and

positioned to serve target markets.

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Ex. 9.9 Three Approaches to Strategy

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References Pearce, J.A. & Robinson, R.B. 2013. Strategic

Management: Formulation, Implementation & Control, 13th Edition. McGraw-Hill International edition, Chapter 9.

Johnson, G., Scholes, K. & Whittington, R. 2011. Exploring Corporate Strategy, 9th Edition, Prentice Hall. Chapter 7.

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Multibusiness StrategyThe Portfolio ApproachPortfolio TechniquesThe BCG Growth-Share MatrixDimensionsEx. 9.2 The BCG Growth-Share MatrixThe BCG Growth-Share MatrixTypes of BusinessesThe BCG Growth-Share MatrixTypes of Businesses (contd.)Ex. 9.3 Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (adapted)Ex. 9.3 Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (adapted)Ex. 9.5 BCGs Strategic Environments MatrixBCGs Strategic Environments MatrixTypes of BusinessesBCGs Strategic Environments MatrixTypes of Businesses (contd.)Limitations of Portfolio ApproachThe Synergy Approach: Leveraging Core CompetenciesThe Synergy ApproachElements Critical in Meaningful Shared OpportunitiesStrategy Development DirectionsThe Parenting FrameworkThe Parenting Framework (contd.)The parenting matrix (2)The Corporate Parent Role: Can It Add Tangible Value?10 Sources of Parenting OpportunitiesPatchingThe Patching ApproachProponents of PatchingPatching (contd.)Ex. 9.9 Three Approaches to StrategyReferences