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8/3/2019 George Presentation
http://slidepdf.com/reader/full/george-presentation 1/39
STRATEGIC ANALYSIS AND CHOICE IN THE
MULTIBUSINESS COMPANY:RATIONALIZING
DIVERSIFICATION AND BUILDING SHAREHOLDERSVALUE
PREPARED BY:GEORGE LUGEMBE
MALYETA.REG: No. 2010-06-01774
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Rationalizing Diversification and
Building Shareholder Value • This is a situation where a company have numerous
businesses or want to conduct multibusiness. In a suchsituation Managers have to examine and choose whichbusiness the company have to own and which one has toforgo or divest. There two major concern here.
How do we plan to capture and exploit competitiveadvantage in each business
How to allocate resources across those business
• In making strategic decisions in multibusiness companies weare going to discuss and look at different approaches which
managers should use to analyse and choose what businessto be carried in and how to allocate recourses across thosebusinesses.
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Rationalizing Diversification and
Building Shareholder Value (Contd.) • Nowadays it is has become normal to see that businesses seek to acquire
other businesses in order to grow and to diversify. There several reasonsbehind that causes the companies or businesses to come at this decision.1. To enter businesses with greater growth potential
2. To diversify inherent risks
3. To increase vertical integration
4. To instantly have a market presence rather than slower internal growth
5. To capture value added
• There big challenge in managing the resource needs of diversebusinesses and their respective strategic missions, particularly in timesof limited resources.
•
The following approaches or techniques are used to help managers tobalance the flow of cash resources among their various businesses whilealso identifying their basic strategic purpose within the overall portfolio.
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Approaches
• The Portfolio Approach
• The Synergy Approach: Leveraging Capabilities
and Core Competencies
• Parenting Framework Approach
• Patching Approach
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The portfolio Approach or Techniques
• The approach looks at the company as a portfolio of businesses.
• This portfolio is then examined and evaluated based oneach business’ growth potential, market position andneed for and ability to generate cash.
• Corporate strategists then allocate resources, divestand acquire businesses based on the balance acrossthis portfolio of businesses or possible businesses.
• The approach or techniques analyse multibusinessusing four matrixes
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The Portfolio Approach
BCG Growth-Share
Industry Attractiveness-
Business Strength
Matrix
BCG’s Strategic
Environments Matrix
Life Cycle-Competitive
Strength Matrix
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The BCG Growth – Share Matrix
• BCG matrix analyse each of the company’s
businesses according to market growth rate
and relative competitive position.
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Market growth rate
• This is projected rate of sales growth for the
market being served by a particular business.
• Usually measured as the percentage increase
in a market’s sales or volume per unit over
two most recent years, this rate used as an
indicator of the relative attractiveness of the
markets served by each business in the firm’sportfolio of businesses.
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Relative competitive position
• It is expressed as the market share of a
business divided by the market share of its
largest competitor. Thus, relative competitive
position provides a basis for comparing the
relative strengths of the businesses in the
firm’s portfolio in terms of their positions in
their respective markets.
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The BCG Growth-Share Matrix
Cash generation (market share)
StarProblem
child
Cash
CowDog
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)
C a s h u s e ( G r o w t h
R a t e )
High Low
High
Low
Description of Dimensions
Growth Rate: Industry growth rate in constant dollars (diving point is typically the
GNP’s growth rate)
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Factors Considered in Constructing an Industry
Attractiveness-Business strength Matrix
(Industry attractiveness)
Nature of Competitive Rivalry
• Number of
competitors• Size of competitors
• Strength of competitors’
corporate parents
• Price war• Competition on
multipledimensions
Bargaining Power of Suppliers /Customers
• Relative size of
typical players• Number of each
• Importance of purchases fromsales to
• Ability to verticallyintegrate
Threat of SubstituteProducts/New
• Technological
maturity/stability• Diversity of the
market
• Barriers to entry
• Flexibility of
distribution system
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Factors Considered in Constructing an Industry
Attractiveness-Business strength Matrix
(Industry attractiveness) Contd.
EconomicFactors
• Sales
volatility• Cyclicality of
demand
• Market
growth• Capital
intensity
FinancialNorms
• Average
profitability• Typical
leverage
• Credit
practices
Socio-politicalConsiderations
• Government
regulation• Community
support
• Ethical
standards
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(Business Strength)
Cost Position
• Economies of scale
• Manufacturing costs
• Overhead
• Scrap/waste/rework
• Experience effects
• Labour rate
• Proprietaryprocesses
Level of Differentiation
• Promotioneffectiveness
• Product quality
• Company image
• Patented products
• Brand awareness
Response Time
• Manufacturingflexibility
• Time needed tointroduce newproducts
• Delivery time
• Organizationalflexibility
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(Business Strength) Contd.
FinancialStrength
• Solvency
• Liquidity• Break-even
point
• Cash flows
• Profitability• Growth in
revenue
Human Assets
• Turnover
• Skill level• Relative
wage/salary
• Morale
• Managerialcommitment
• Unionization
PublicApproval
• Goodwill
• Reputation• Image
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The Industry Attractiveness-Business
Strength MatrixIndustry attractiveness
Invest
SelectiveGrowth
Grow orLet go
SelectiveGrowth
Grow orlet go
Harvest
Grow orLet go
Harvest
Divest
Description of Dimensions
B u s i n
e s s S t r e n g t h
Low
Medium
High
High Medium LowIndustry 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’sinternal strengths and weaknesses
Depending on the location of a business within the
matrix as shown above, one of the following
strategic approaches is suggested:
•Invest to grow
•Invest selectively and manage for earnings
•Harvest or divest for resources
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Improvement of The Industry Attractiveness-
Business Strength Matrix Over the BCG Matrix
• The resources allocation decisions remainquite similar to those of the BCG approach.
1. The industry attractiveness- business strength matrixis preferred because it is less offensive and moreunderstandable.
2. The multiple measures associated with eachdimension of the business strength matrix tap manyfactors relevant to business strength and market
attractiveness.3. Besides market share and market growth. Allows for
broader assessment during both strategy formulationand implementation for a multibusiness company
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The Market Life Cycle-Competitive
Strength Matrix
Stage Market Life Cycle Description of Dimensions
Introduction Growth Maturity Decline
C o m p e
t i t i v e S t r e n g t h
High
Moderate
Low
Competitive 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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BCG’S Strategic Environments Matrix
Many
Few S o u r c e s o f A d v a n t a
g e
Fragmented
Apparel, house building, jewellery retailing,
sawmill
Specialization
Pharmaceuticals,luxury cars, chocolate
confectionery
Stalemate
Basic chemicals,volume-grade paper,ship owning (VLCCs),
wholesale banking
Volume
Jet engines,supermarkets,
motorcycles, standard
microprocessors
Size of Advantage
Small Big
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Description of Dimensions
• The matrix has two dimensions. The number
of sources of competitive advantage could be
many with complex products and services
(e.g. automobiles, financial services)and few
with commodities(chemicals,
microprocessors). Complex products offer
multiple opportunities for differentiation aswell as cost advantages to survive.
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Description of Dimension
• The second dimension is size of competitive advantage.How big is the advantage available to the industryleader? The two dimensions then define four industryenvironments as follows:-
Volume businesses are those that have few source of advantage, but the size is large typically the result of scaleeconomies. Advantage established in one such businessmay be transferable to another as Honda has done with itsscale and expertise with small gasoline engines.
Stalemate businesses have few sources of advantage, withmost of those small. This result in very competitivesituations. Skills in operational efficiency, low overheadand cost management are critical to profitability.
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Description of Dimensions
• Fragmented businesses have many source of advantage, but they are all small. This typically involvesdifferentiated products with low brand loyalty, easilyreplicated technology, and minimal scale economies.
Skills in focused market segments, typically geographic,the ability to respond quickly to changes and low costsare critical in this environment.
• Specialization businesses have many sources of advantage, and find those advantages potentially
sizable. Skills in achieving differentiation productdesign, branding expertise, innovation, first-mover, andperhaps scale characterize winners here.
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Contributions of Portfolio Approaches
Convey large amounts of information aboutdiverse businesses and corporate plans in asimplified format
Illuminate similarities and differences amongbusinesses, conveying the logic behind corporatestrategies for each business
Simplify priorities for sharing corporate resourcesacross diverse businesses
Provide a simple prescription of what should beaccomplished – a balanced portfolio of businesses
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Limitations of Portfolio Approaches
Does not address how value is created across business units True accurate measurement for matrix classification not as
easy as matrices implied The underlying assumption about relationship between
market share and profits varies across different industries
and market segments The limited strategic options viewed as basic strategic
missions The portfolio approach portrays notion that firms need to
be self-sufficient in capital markets
The portfolio approach typically fails to comparecompetitive advantage a business receives from beingowned by a particular company with costs of owning it.
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The synergy Approach: leveraging capabilities
and core competencies
• Opportunities to build value via diversification,integration, or joint venture strategies are usuallyfound
In market- related
operating-related
Management activities.
• Each business’s basic value chain activities or
infrastructure becomes a source of potentialsynergy and competitive advantage for anotherbusiness in the corporate portfolio.
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Value Building in Multibusiness Companies
(Market-Related Opportunities)
Opportunitiesto Build Value
or Sharing
Shared salesforce activitiesor shared sales
office, or both
PotentialCompetitiveAdvantage
Lower selling costs
Better market coverage
Stronger technical advice tobuyers
Enhanced convenience forbuyers(can buy from single
source)
Improved access to buyers( havemore product to sell)
Impediments toAchieving
Enhanced Value
Buyers have different purchasinghabits toward the products
Different salespersons are moreeffective in representing the
product
Some products get more
attention than others
Buyers prefer to multiple-sourcerather than single-source their
purchases
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Value Building in Multibusiness Companies
(Market-Related Opportunities) Contd.
Opportunities toBuild Value or
Sharing
Shared after-sales serviceand repair work
Shared brand name
Shared advertising andpromotional activities
PotentialCompetitiveAdvantage
Low servicing costs
Better utilization of servicepersonnel
Faster servicing of customercalls
Stronger brand image andcompany reputation
Increased buyer confidence inthe brand
Lower costs
Greater clout in purchasing ads
Stronger brandimage and company
reputation
Different equipment or
different labor skills, or both,are needed to handle repairs
Buyers may do some in-houserepairs
Company reputation is hurt if quality of one product is lower
Appropriate forms of messagesare different
Appropriate timing of promotionsis different
V l B ildi i M ltib i
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Value Building in Multibusiness
Companies(Market-Related Opportunities) Contd.
Opportunitiesto Build Value
or Sharing
Commondistribution
channels
Shared orderprocessing
PotentialCompetitiveAdvantage
Lower distributioncosts
Enhanced bargaining powerwith distributors and retailers
to gain shelf space, shelf positioning, stronger push and
more dealer attention, andbetter profit margins
Lower order processingcosts
One-stop shopping forbuyer enhances service
and, thus, differentiation
Impediments toAchieving
Enhanced Value
Dealers resist beingdominated by a singlesupplier and turn to
multiple sources and lines
Heavy use of the sharedchannel erodes
willingness of otherchannels to carry or push
the firm’s products
Differences in orderingcycles disrupt order
processing economies
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Value Building in Multibusiness Companies
(Market-Related Opportunities) Contd.
Opportunitiesto Build Value
or Sharing
Joint procurements of purchased inputs
Shared inbound oroutbound shipping
and materialshandling
PotentialCompetitiveAdvantage
Lower input costs
Improved input quality
Improved service fromsuppliers
Lower freight and handlingcosts
Better delivery reliability
More frequent deliveries, suchthat inventory costs are reduced
Impediments toAchieving
Enhanced Value
Input needs are different
in terms of quality orother specifications
Inputs are needed at differentplant locations, and centralizedpurchasing is not responsive toseparate needs of each plant
Input sources or plant
locations, or both, are indifferent geographic areas
Needs for frequency andreliability of
inbound/outbound deliverydiffer among the business units
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Value Building in Multibusiness Companies
(Market-Related Opportunities) Contd.
Opportunitiesto Build Value
or Sharing
Shared manufacturing andassembly facilities
PotentialCompetitiveAdvantage
Lowermanufacturing/assemblycosts
Better capacity utilization,because peak demand for
one product correlates withvalley demand for other
Bigger scale of operationimproves access to bettertechnology and results in
better quality
Impediments toAchieving
Enhanced Value
Buyers have differentpurchasing habits towardthe products Higherchangeover costs in
shifting from one productto another
High-cost special toolingor equipment is required to
accommodate qualitydifferences or design
differences
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Value Building in Multibusiness Companies
(Market-Related Opportunities) Contd.
Opportunitiesto Build Value
or Sharing
Shared product andprocess technologies or
technology developmentor both
Shared administrativesupport activities
PotentialCompetitiveAdvantage Lower product or process
design costs, or both, becauseof shorter design times andtransfers of knowledge from
area to area.
More innovative ability,owing to scale of effortand attraction of better
R&D personnel
Lower administrativeand operating overhead
costs
Impediments toAchieving
Enhanced Value Technologies are the
same, but theapplications in different
business units aredifferent enough to
prevent much sharing of value
Support activities are nota large proportion of cost,and sharing has little costimpact (and virtually nodifferentiation impact)
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Value Building in Multibusiness Companies
(Market-Related Opportunities)Contd.
Opportunitiesto Build Value
or Sharing
Shared managementknow-how, operating
skills, and proprietaryinformation
PotentialCompetitiveAdvantage
Efficient transfer of adistinctive competence – can create cost savings orenhance differentiation.
More effectivemanagement as concerns
strategy formulation,strategy implementation,
and understanding of key success factors
Impediments toAchieving
Enhanced Value
Actual transfer of know-how is costly or stretches
the key skill personneltoo thinly, or both.
Increased risks thatproprietary information
will leak out
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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 attheir 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 orwill we emerge a winner?• What can our company learn by diversifying, and
are we sufficiently organized to learn it?
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Parenting Framework
• How corporate parent add value to its business in amultibusiness company?
• The parenting framework focuses on ten areas of opportunity managers should carefully examine to findways the parent organization might add value to one ormore businesses and overall company.
• This perspective sees multibusiness companies as creatingvalue by influencing or parenting the businesses they own.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.Advocates of this perspective call the potential forimprovement within a business “ a parenting opportunity.”
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Ten Areas 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 remapbusinesses to match rapidly changing market opportunities.
• Patching can take form of Adding Splitting Transferring Exiting combining chunk of businesses
• Patching is more critical in turbulent and rapidly changing markets, than instable, unchanging markets.
• The patching approach concentrates on multibusiness companies inturbulent markets of twenty first century where managers need to makequick, small shifts and adjustments in processes, markets and offers five
types of simple rules which manager use as guide lines to structure quickdecisions throughout a multibusiness company on a continuous basis.• Manager competing in business can choose among three distinct ways to
fight. They can build a fortress and defend it; they can nurture andleverage unique resources; or they can flexibly pursue fleetingopportunities within simple rules, Each approach requires different skillsets and works best under different circumstances.
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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 opportunitiesFinish strong
Strategic question Where should we
be?
What should we be? How should we
proceed?
Source of
advantage
Unique, valuable
position with tightlyintegrated activity
system
Unique, valuable,
inimitable resources
Key processes and
unique simple rules
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Three Approaches to Strategy (Contd.)
Position Resources Simple Rules
Works best in Slowly changing,
well-structured
markets
Moderately
changing, well-
structured markets
Rapidly changing,
ambiguous markets
Duration of advantageSustained 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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Simple Rules, Summarized
Type Purpose
How-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.
In turbulent markets, Managers should flexibly seize opportunities-but flexibility
must be disciplined. Smart companies focus on key processes and simple rules.
Different types of rules help executives manage different aspects of seizing
opportunities.
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THANK YOU