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Grand Strategies
Grand strategies are also called strategic thrusts. They provide basic direction for specific strategic actions and functional tactics. Some grand strategies are used together and reinforce each other and some are usually employed singly.
Grand Strategy
General plan of major action to achieve long-term goals
Falls into three general categories
1. Growth
2. Stability
3. RetrenchmentA separate grand strategy can be defined for global operations
Grand Strategy: Growth
Growth can be promoted internally by investing in expansion or externally by acquiring additional business divisions- Internal growth = can include development of new
or changed products- External growth = typically involves diversification
– businesses related to current product lines or into new areas
Grand Strategy: Stability
Stability, sometimes called a pause strategy, means that the organization wants
to remain the same size or
to grow slowly and in a controlled fashion
Grand Strategy: Retrenchment Retrenchment = the organization goes through a
period of forced decline by either shrinking current business units or selling off or liquidating entire businesses
Liquidation = selling off a business nit for the cash value of the assets, thus terminating its existence
Divestiture = involves selling off of businesses that no longer seem central to the corporation
Three Levels of Strategy in Organizations
Corporate-Level Strategy: What business are we in?
Corporation
Business-Level Strategy: How do we compete?
Textiles Unit Chemicals Unit Auto Parts Unit
Functional-Level Strategy: How do we support the business-level strategy?
Finance R&D Manufacturing Marketing
Global Corporate Strategies
Need for National Responsiveness HighLow
Low
High Transnational Strategy• Seeks to balance global efficiencies
and local responsiveness• Combines standardization and
customization for product/advertising strategies
Globalization Strategy
• Treats world as a single global market
• Standardizes global products/advertising strategies
Multi-domestic Strategy• Handles markets independently for each
country• Adapts product/advertising to local tastes
and needs
Nee
d f
or
Glo
bal
In
teg
rati
on
ExportStrategy
•Domestically focused
•Exports a few domestically produced products to selected countries
Global Strategy
Globalization = product design and advertising strategies are standardized around the world
Multi-domestic = adapt product and promotion for each country
Transnational = combine global coordination with flexibility to meet specific needs in various countries
Purpose of Strategy The plan of action that prescribes
resource allocation and other activities for dealing with the environment, achieving a competitive advantage, that help the organization attain its goals
Strategies focus on:● Core competencies● Developing synergy● Creating value for customers
long-term objectives?
Profitability Productivity Competitive Position Employee Development Employee Relations Technological Leadership Public Responsibility
The Grand Strategy MatrixThe Grand Strategy Matrix Rapid Market Growth
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
7. Concentric diversification
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification `3. Conglomerate diversification
4. Conglomerate diversification 4. Joint ventures
5. Divestiture
6. Liquidation
Slow Market Growth
Weak Competitive Position
Strong Competitive Position
I II
IV III
Ex. 7-9: Grand Strategy Selection Matrix
III
III IV
Overcome weaknesses
Maximize strengths
Internal (redirected resources within the firm)
External(acquisition or merger for resource capability)
Turnaround or retrenchmentDivestitureLiquidation
Vertical integrationConglomerate diversification
Concentrated growthMkt. DevelopmentProd. DevelopmentInnovation
Horizontal integrationConcentric diversificationJoint venture
Diversification andCorporate Strategy A company is diversified when it is in two or more
lines of business that operate in diverse market environments
Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business
A diversified company needs a multi-industry,multi-business strategy
A strategic action plan must be developedfor several different businesses competingin diverse industry environments
Four Main Tasks inCrafting Corporate Strategy Pick new industries to enter
and decide on means of entry
Initiate actions to boost combinedperformance of businesses
Pursue opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage
Establish investment priorities, steering resources into most attractive business units
Resources can be focused on
Improving competitiveness
Expanding into new geographic markets
Responding to changing market conditions
Responding to evolving customer preferences
Competitive Strengths of aSingle-Business Strategy
Putting all the “eggs” in one industry basket
If market becomes unattractive, a firm’s prospects can quickly dim
Unforeseen changes can undermine a single business firm’s prospects
Technological innovation
New products
Changing customer needs
New substitutes
Risks of a Single Business Strategy
It is faced with diminishing growth prospects in present business
It has opportunities to expand into industries whose technologies and products complement its present business
It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors
It can reduce costs by diversifyinginto closely related businesses
It has a powerful brand name it cantransfer to products of other businesses toincrease sales and profits of these businesses
When Should a Firm Diversify?
Related Diversification
Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with value chain(s) of firm’s present business(es)
Unrelated Diversification
Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm’s present business(es)
Related vs. Unrelated Diversification
Fig. 9.1: Strategy Alternatives for a Company Looking to Diversify
Involves diversifying into businesses whose valuechains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es)
Capturing the “strategic fits” makes related diversification a 1 + 1 = 3 phenomenon
What Is Related Diversification?
Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for
Transferring competitively valuableexpertise or technological know-howfrom one business to another
Combining performance of commonvalue chain activities to achieve lower costs
Exploiting use of a well-known brand name
Cross-business collaboration to create competitively valuable resource strengths and capabilities
Core Concept: Strategic Fit
Why Diversify? To build shareholder value!
Diversification is capable of building shareholder value if it passes three tests
1. Industry Attractiveness Test — the industry presents good long-term profit opportunities
2. Cost of Entry Test — the cost of entering is not so high as to spoil the profit opportunities
3. Better-Off Test — the company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders
1 + 1 = 31 + 1 = 3
Strategies for EnteringNew Businesses
Acquire existing company
Internal start-up
Joint ventures/strategic partnerships
Acquisition of an Existing Company Most popular approach to diversification Advantages
Quicker entry into target market Easier to hurdle certain entry barriers
Acquiring technological know-how Establishing supplier relationships Becoming big enough to match rivals’
efficiency and costs Having to spend large sums on
introductory advertising and promotion Securing adequate distribution access
Good way to diversify when Uneconomical or risky to go it alone Pooling competencies of two partners provides more
competitive strength Only way to gain entry into a desirable foreign market
Foreign partners are needed to Surmount tariff barriers and import quotas Offer local knowledge about
Market conditions Customs and cultural factors Customer buying habits Access to distribution outlets
Joint Ventures and Strategic Partnerships
Raises questions
Which partner will do what
Who has effective control
Potential conflicts
Conflicting objectives
Disagreements over how to best operate the venture
Culture clashes
Drawbacks of Joint Ventures
Fig. 9.2: Related Businesses Possess Related ValueChain Activities and Competitively Valuable Strategic Fits
Strategic Appeal of Related Diversification Reap competitive advantage benefits of
Skills transfer Lower costs Common brand name usage Stronger competitive capabilities
Spread investor risks over a broader base Preserve strategic unity across businesses Achieve consolidated performance greater than the
sum of what individual businesses can earn operating independently (1 + 1 = 3 outcomes)
Cross-business strategic fits can exist anywhere along the value chain
R&D and technology activities
Supply chain activities
Manufacturing activities
Sales and marketing activities
Distribution activities
Managerial and administrative support activities
Types of Strategic Fits
R&D and Technology Fits
Offer potential for sharing common technologyor transferring technological know-how
Potential benefits
Cost-savings in technologydevelopment and new product R&D
Shorter times in gettingnew products to market
Interdependence between resultingproducts leads to increased sales
Supply Chain Fits
Offer potential opportunities for skills transferand/or lower costs
Procuring materials
Greater bargaining power innegotiating with common suppliers
Benefits of added collaboration withcommon supply chain partners
Added leverage with shippers in securingvolume discounts on incoming parts
Manufacturing Fits
Potential source of competitive advantagewhen a diversifier’s expertise can bebeneficially transferred to another business Quality manufacture
Cost-efficient production methods
Cost-saving opportunities arise from ability to perform manufacturing/assembly activities jointly in same facility, making it feasible to Consolidate production into fewer plants
Significantly reduce overall manufacturing costs
Offer potential cost-saving opportunities
Share same distribution facilities
Use many of same wholesaledistributors and retail dealersto access customers
Distribution Fits
Reduction in sales costs Single sales force for related products Advertising related products together Combined after-sale service and repair work Joint delivery, shipping, order processing
and billing Joint promotion tie-ins
Similar sales and marketing approaches provide opportunities to transfer selling, merchandising,and advertising/promotional skills
Transfer of a strong company’sbrand name and reputation
Sales and Marketing Fits:Types of Potential Benefits
Managerial and Administrative Support Fits Emerge when different business units
require comparable types of Entrepreneurial know-how Administrative know-how Operating know-how
Different businesses often entail same typesof administrative support facilities Customer data network Billing and customer accounting systems Customer service infrastructure
Core Concept: Economies of Scope Stem from cross-business opportunities to reduce
costs
Arise when costs can be cutby operating two or more businessesunder same corporate umbrella
Cost saving opportunities can stem from interrelationships anywhere along the value chains of differentbusinesses
Related Diversificationand Competitive Advantage Competitive advantage can result from related
diversification when a company captures cross-business opportunities to Transfer expertise/capabilities/technology
from one business to another Reduce costs by combining related
activities of different businesses into a single operation
Transfer use of firm’s brand name reputation from one business to another
Create valuable competitive capabilities via cross-business collaboration in performing related value chain activities
From Competitive Advantage toAdded Gains in Shareholder Value
Capturing cross-business strategic fits
Is possible only via a strategy of related diversification
Builds shareholder value in ways shareholders cannot achieve by owning a portfolio of stocks of companies in unrelated industries
Is not something that happens “automatically” when a company diversifies into related businesses
Strategic fit benefits materialize only after management has successfully pursued internal actions to capture them
Test Your Knowledge
Which of the following is the best example of related diversification?
A. A manufacturer of golf shoes diversifying into the production of fishing rods and fishing lures
B. A homebuilder acquiring a building materials retailer
C. A steel producer acquiring a manufacturer of farm equipment
D. A producer of snow skis and ski boots acquiring a maker of ski apparel and accessories (outerwear, goggles, gloves and mittens, helmets and toboggans)
E. A publisher of college textbooks acquiring a publisher of magazines
Involves diversifying into businesses with No strategic fit
No meaningful value chainrelationships
No unifying strategic theme
Basic approach – Diversify intoany industry where potential existsto realize good financial results
While industry attractiveness and cost-of-entry tests are important, better-off test is secondary
What Is Unrelated Diversification?
Fig. 9.3: Unrelated Businesses Have Unrelated Value Chains and No Strategic Fits
Fig. 9.3: Unrelated Businesses Have UnrelatedValue Chains and No Strategic Fits
Acquisition Criteria For Unrelated Diversification Strategies Can business meet corporate targets
for profitability and ROI? Is business in an industry with growth potential? Is business big enough to contribute
to parent firm’s bottom line? Will business require substantial
infusions of capital? Is there potential for union difficulties
or adverse government regulations? Is industry vulnerable to recession, inflation, high
interest rates, or shifts in government policy?
Attractive Acquisition Targets Companies with undervalued assets
Capital gains may be realized
Companies in financial distress
May be purchased at bargain prices and turned around
Companies with bright growth prospects but short on investment capital
Cash-poor, opportunity-rich companies are coveted acquisition candidates
Business risk scattered over different industries
Financial resources can be directed tothose industries offering best profit prospects
If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced
Stability of profits – Hard times in one industrymay be offset by good times in another industry
Appeal of Unrelated Diversification
Building Shareholder Valuevia Unrelated Diversification Corporate managers must
Do a superior job of diversifying into new businesses capable of producing good earnings and returns on investments
Do an excellent job of negotiating favorable acquisition prices
Do a good job overseeing businesses so they perform at a higher level than otherwise possible
Shift corporate financial resources from poorly-performing businesses to those with potential for above-average earnings growth
Discern when it is the “right” time to sell a business at the “right” price
Key Drawbacks ofUnrelated Diversification
Demanding Demanding Managerial Managerial
RequirementsRequirements
LimitedLimitedCompetitive Competitive Advantage Advantage PotentialPotential
The greater the number and diversity of businesses, the harder it is for managers to
Discern good acquisitions from bad ones
Select capable managers to managethe diverse requirements of each business
Judge soundness of strategic proposalsof business-unit managers
Know what to do if a business subsidiary stumblesLikely effect is 1 + 1 = 2, rather than 1 + 1 = 3!
Unrelated Diversification HasDemanding Managerial Requirements
Lack of cross-business strategic fits means unrelated diversification offers no competitive advantage potential beyond what each business can generate on its own
Consolidated performance of unrelated businessestends to be no better than sum of individualbusinesses on their own (and it may be worse)
Promise of greater sales-profit stability over business cycles is seldom realized
Unrelated Diversification OffersLimited Competitive Advantage Potential
Test Your Knowledge
Which of the following is the best example of unrelated diversification?
A. PepsiCo acquiring Tropicana and Procter & Gamble acquiring Gillette
B. Honda diversifying into the production of lawnmowers
C. Smuckers acquiring Jif peanut butter and Crisco (from Procter & Gamble)
D. Verizon Wireless acquiring Amazon.com
E. Harley Davidson acquiring the motorcycle business of Honda
Diversification and Shareholder Value Related Diversification
A strategy-driven approachto creating shareholder value
Unrelated Diversification
A finance-driven approachto creating shareholder value
Dominant-business firms One major core business accounting for 50 - 80 percent of
revenues, with several small related or unrelated businesses accounting for remainder
Narrowly diversified firms Diversification includes a few (2 - 5) related or unrelated
businesses Broadly diversified firms
Diversification includes a wide collection of either related or unrelated businesses or a mixture
Multibusiness firms Diversification portfolio includes several unrelated groups of
related businesses
Combination Related-Unrelated Diversification Strategies
For Discussion: Your OpinionNewell Rubbermaid is in the following businesses:
Cleaning and Organizations Businesses: Rubbermaid storage, organization and cleaning products, Blue Ice ice substitute, Roughneck storage items, Stain Shield and TakeAlongs food storage containers, and Brute commercial-grade storage and cleaning products—25% of annual revenues.
Home and Family Businesses: Calphalon cookware and bakeware, Cookware Europe, Graco strollers, Little Tikes children's toys and furniture, and Goody hair accessories—20% of annual sales.
Home Fashions: Levolor and Kirsch window blinds, shades, and hardware in the U.S.; Swish, Gardinia and Harrison Drape home furnishings in Europe—15% of annual revenues.
Office Products Businesses: Sharpie markers, Sanford highlighters, Eberhard Faber and Berol ballpoint pens, Paper Mate pens and pencils, Waterman and Parker fine writing instruments, and Liquid Paper—25% of annual revenues.
Would you say that Newell Rubbermaid’s strategy is one of related diversification, unrelated diversification or a mixture of both? Explain.
For Discussion: Your OpinionMcGraw-Hill, the publisher of the textbook for this course, is in the following businesses:
Textbook publishing (for grades K-12 and higher education) Financial and information services (it owns Standard & Poors —a well-
known financial ratings agency and provider of financial data, Platts — a provider of energy information, and McGraw-Hill Construction — a provider of construction related information)
Magazine publishing — its flagship publication is Business Week and it is also the publisher of Aviation Week
TV broadcasting — it owns four ABC affiliate stations (in Indianapolis, Denver, San Diego, and Bakersfield)
J.D. Power & Associates — which provides a host of services relating to product quality and consumer satisfaction
Would you say that McGraw-Hill’s strategy is one of related diversification, unrelated diversification or a mixture of both? Explain.
Fig. 9.4: Identifying a Diversified Company’s Strategy
How to Evaluate aDiversified Company’s Strategy
Step 1: Assess long-term attractiveness of each industry firm is in
Step 2: Assess competitive strength of firm’s business units
Step 3: Check competitive advantage potential of cross-business strategic fits among business units
Step 4: Check whether firm’s resources fit requirements of present businesses
Step 5: Rank performance prospects of businesses and determine priority for resource allocation
Step 6: Craft new strategic moves to improve overall company performance
Step 1: Evaluate Industry Attractiveness
Attractiveness of eachindustry in portfolio
Each industry’s attractivenessrelative to the others
Attractiveness of allindustries as a group
Industry Attractiveness Factors Market size and projected growth Intensity of competition Emerging opportunities and threats Presence of cross-industry strategic fits Resource requirements Seasonal and cyclical factors Social, political, regulatory, and
environmental factors Industry profitability Degree of uncertainty and business risk
Procedure: Calculating Attractiveness Scores for Each IndustryStep 1: Select industry attractiveness factors
Step 2: Assign weights to each factor (sum of weights = 1.0)
Step 3: Rate each industry on each factor, using a scale of 1 to 10
Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry
Industries with a score much below 5.0 do not pass the attractiveness test
If a company’s industry attractiveness scores are all above 5.0, the group of industries the firm operates in is attractive as a whole
To be a strong performer, a diversified firm’s principal businesses should be in attractive industries—that is, industries with
A good outlook for growth and
Above-average profitability
Interpreting Industry Attractiveness Scores
Difficulties in CalculatingIndustry Attractiveness Scores Deciding on appropriate weights for industry attractiveness
factors Different analysts may have different views about which weights
are appropriate for the industry attractiveness factors
Different weights may be appropriate for different companies
Gaining sufficient command of an industry to assign accurate and objective ratings Gathering statistical data to assign objective ratings is
straightforward for some factors – market size, growth rate, industry profitability
Assessing the intensity of competition factor is more difficult due to the different types of competitive influences
Objectives
Appraise how well eachbusiness is positioned inits industry relative to rivals
Evaluate whether it is or can becompetitively strong enough tocontend for market leadership
Step 2: Evaluate Each Business-Unit’s Competitive Strength
Relative market share Costs relative to competitors Ability to match/beat rivals on key product attributes Ability to benefit from strategic fits with sister businesses Ability to exercise bargaining leverage with key suppliers
or customers Caliber of alliances and collaborative partnerships Brand image and reputation Competitively valuable capabilities Profitability relative to competitors
Factors to Use inEvaluating Competitive Strength
Procedure: Calculating Competitive Strength Scores for Each BusinessStep 1: Select competitive strength factors
Step 2: Assign weights to each factor (sum of weights = 1.0)
Step 3: Rate each business on each factor, using a scale of 1 to 10
Step 4: Calculate weighted ratings; sum to get an overall strength rating for each business
Interpreting Competitive Strength Scores Business units with ratings above 6.7 are strong
market contenders
Businesses with ratings in the 3.3 to 6.7 range have moderate competitive strength vis-à-vis rivals
Business units with ratings below 3.3 are in competitively weak market positions
If a diversified firm’s businesses all have scores above 5.0, its business units are all fairly strong market contenders
Use industry attractiveness (see Table 9.1) and competitive strength scores (see Table 9.2) to plot location of each business in matrix
Industry attractiveness plotted on vertical axis
Competitive strength plotted on horizontal axis
Each business unit appears as a “bubble”
Size of each bubble is scaled to percentage of revenues the business generates relative to total corporate revenues
Plotting Industry Attractiveness and Competitive Strength in a Nine-Cell Matrix
Fig. 9.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix
Businesses in upper left corner Accorded top investment priority Strategic prescription – grow and build
Businesses in three diagonal cells Given medium investment priority Invest to maintain position
Businesses in lower right corner Candidates for harvesting or divestiture May, based on potential for good earnings and ROI, be
candidates for an overhaul and reposition strategy
Strategy Implications of Attractiveness/Strength Matrix
Appeal of Attractiveness/Strength Matrix Incorporates a wide variety of
strategically relevant variables
Strategy implications
Concentrate corporate resourcesin businesses that enjoy high degree of industry attractiveness and high degree of competitive strength
Make selective investments in businesses with intermediate positions on grid
Withdraw resources from businesses low in attractiveness and strength unless they offer exceptional potential
Test Your Knowledge
The 9-cell industry attractiveness-competitive strength matrix
A. is a valuable tool for ranking a company’s different businesses from most profitable to least profitable.
B. shows which of a diversified company’s businesses have good/poor strategic fit.
C. indicates which businesses have the highest/lowest economies of scope.
D. is a helpful tool for allocating a diversified company’s resources—the basic idea is to give top investment priority to those businesses in the upper left portion of the matrix and to give low priority or perhaps even divest businesses in the lower right portion of the matrix.
E. pinpoints which of a diversified company’s businesses are resource-rich and which are resource-poor.
Objective
Determine competitive advantage potential of cross-business strategic fits among portfolio businesses
Examine strategic fit based on
Whether one or more businesseshave valuable strategic fits withother businesses in portfolio
Whether each business meshes wellwith firm’s long-term strategic direction
Step 3: Check Competitive Advantage Potential of Cross-Business Strategic Fits
Identify businesses which have valuechain match-ups offering opportunities to Reduce costs
Purchasing
Manufacturing
Distribution
Transfer skills / technology / intellectual capital from one business to another
Share use of a well-known, competitively powerful brand name
Create valuable new competitive capabilities
Evaluate Portfolio for Competitively Valuable Cross-Business Strategic Fits
Fig. 9.6: Identifying Competitive AdvantagePotential of Cross-Business Strategic Fits
Objective
Determine how well firm’s resourcesmatch business unit requirements
Good resource fit exists when
A business adds to a firm’s resource strengths,either financially or strategically
Firm has resources to adequately support requirementsof its businesses as a group
Step 4: Check Resource Fit
Determine cash flow and investmentrequirements of business units Which are cash hogs and which are
cash cows? Assess cash flow of each business
Highlights opportunities to shift financial resources between businesses
Explains why priorities for resource allocationcan differ from business to business
Provides rationalization for both invest-and-expand and divestiturestrategies
Check for Financial Resource Fits
Internal cash flows are inadequate to fully fund needs for working capital and new capital investment
Parent company has to continually pump in capitalto “feed the hog”
Strategic options
Aggressively invest in attractive cash hogs
Divest cash hogs lacking long-term potential
Characteristics of Cash Hog Businesses
Generate cash surpluses over what is needed to sustain present market position
Such businesses are valuable because surplus cash can be used to Pay corporate dividends Finance new acquisitions Invest in promising cash hogs
Strategic objectives Fortify and defend present market position Keep the business healthy
Characteristics of Cash Cow Businesses
Other Tests of Resource Fits Does the business adequately contribute to achieving
companywide performance targets?
Does the company have adequate financial strength to fund its different businesses and maintain a healthy credit rating?
Does the company have or can it develop the specific resource strengths and competitive capabilities needed to be successful in each of its businesses?
Are recently acquired businesses acting to strengthen a company’s resource base and competitive capabilities or are they causing its competitive and managerial resources to be stretched too thin?
Good financial fit exists when a business Contributes to achievement of corporate objectives
Enhances shareholder value
Poor financial fit exists when a business Soaks up disproportionate share of financial resources
Is an inconsistent bottom-line contributor
Experiences a profit downturnthat could jeopardize entire company
Is too small to make a sizable contribution to total corporate earnings
Good vs. Poor Financial Resource Fit
Trying to replicate a firm’s success in one business and hitting a second home run in a new business is easier said than done
Transferring resource capabilities to new businesses can be far more arduous and expensive than expected
Management can misjudge difficultyof overcoming resource strengths ofrivals it will face in a new business
A Note of Caution: WhyDiversification Efforts Can Fail
Step 5: Rank Business Units Based onPerformance and Priority for Resource Allocation
Factors to consider in judgingbusiness-unit performance
Sales growth
Profit growth
Contribution to company earnings
Return on capital employed in business
Economic value added
Cash flow generation
Industry attractiveness and business strength ratings
Objective
“Get the biggest bang for the buck”in allocating corporate resources
Approach
Rank each business from highest to lowest priority for corporate resource support and new capital investment
Steer resources from low- to high-opportunity areas
When funds are lacking, strategic uses of resources should take precedence
2 3 56
4
Determine Prioritiesfor Resource Allocation
Fig. 9.7: The Chief Strategic and Financial Options forAllocating a Diversified Company’s Financial Resources
Stick closely with existing business lineupand pursue opportunities it presents
Broaden company’s business scope bymaking new acquisitions in new industries
Divest certain businesses and retrenchto a narrower base of business operations
Restructure company’s business lineup, putting a whole new face on business makeup
Pursue multinational diversification, striving to globalize operations of several business units
Step 6: Craft New StrategicMoves – Strategic Options
Fig. 9.8: A Company’s Four Main Strategic Alternatives After It Diversifies
Conditions making this approach attractive
Slow grow in current businesses
Vulnerability to seasonal or recessionary influences or to threats from emerging new technologies
Potential to transfer resources and capabilities to other related businesses
Rapidly-changing conditions in one or more core industries alter buyer requirements
Complement and strengthen market position of one or more current businesses
Strategies to Broaden aDiversified Company’s Business Base
Strategic options
Retrench to a smaller but more appealing group of businesses
Divest unattractive businesses
Sell it
Spin it off asindependent company
Liquidate it (close it downbecause no buyers can be found)
Retrench ?
Divest ?
Sell ?Close ?
Divestiture Strategies Aimed at Retrenchingto a Narrower Diversification Base
Retrenchment Strategies
Objective Reduce scope of diversification to smaller number of “core “
businesses
Strategic options involvedivesting businesses that Are losing money Have little growth potential Have little strategic fit
with core businesses Are too small to contribute
meaningfully to earnings
Diversification efforts have become too broad, resulting in difficulties in profitably managing all the businesses
Deteriorating market conditions in a once-attractive industry
Lack of strategic or resource fit of a business A business is a cash hog with questionable long-term
potential A business is weakly positioned in its industry Businesses that turn out to be “misfits” One or more businesses lack compatibility of values
essential to cultural fit
Conditions That MakeRetrenchment Attractive
Options for Accomplishing Divestiture Sell it
Involves finding a company which views the business as a good deal and good fit
Spin it off as independent company
Involves deciding whether or not to retain partial ownership
Liquidation
Involves closing down operations and selling remaining assets
A last resort because no buyer can be found
Strategies to Restructure a
Company’s Business Lineup Objective
Make radical changes in mixof businesses in portfolio via both
Divestitures and
New acquisitions
to put a whole new face on the company’s business makeup
Too many businesses in unattractive industries
Too many competitively weak businesses
Ongoing declines in market shares of oneor more major business units
Excessive debt load
Ill-chosen acquisitions performing worse than expected
New technologies threaten survival of one or more core businesses
Appointment of new CEO who decides to redirect company
“Unique opportunity” emerges and existing businesses must be sold to finance new acquisition
Conditions That Make Portfolio Restructuring Attractive
Multinational Diversification Strategies Distinguishing characteristics
Diversity of businesses and
Diversity of national markets
Presents a big strategy-making challenge
Strategies must be conceived and executedfor each business, with as manymultinational variations as appropriate
Cross-business and cross-country collaboration opportunities must be pursued and managed
Appeal of MultinationalDiversification Strategies Offer two avenues for long-term
growth in revenues and profits
Enter additional businesses
Extend operations ofexisting businesses intoadditional country markets
Opportunities to Build Competitive Advantage via Multinational Diversification Full capture of economies of scale and experience curve
effects
Capitalize on cross-business economies of scope
Transfer competitively valuable resources from one business to another and from one country to another
Leverage use of a competitively powerful brand name
Coordinate strategic activities andinitiatives across businesses and countries
Use cross-business or cross-countrysubsidization to out-compete rivals
Competitive advantage potential is based on
Using a related diversification strategy based on
Resource-sharing and resource-transferopportunities among businesses
Economies of scope and brand name benefits
Managing related businesses to capture important cross-business strategic fits
Using cross-market or cross-business subsidization sparingly to secure footholds in attractive country markets
Competitive Strength ofa DMNC in Global Markets
A DMNC has a strategic arsenal capable of defeating both a domestic-only rival or a single-business rival by competing in
Multiple businesses and
Multiple country markets
Can use its multiple profit sanctuaries and can employ cross-subsidization tactics if need be
Competitive Power ofa DMNC in Global Markets
Critical Elements for Shared Opportunities to be Meaningful
1. 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
Evaluating the Role of Core Competencies
Is each core competency providing a relevant competitive advantage to the
intended businesses?
Are businesses in portfolio related in ways making the company’s core competence(s)
beneficial?
Is the combination of competencies unique or difficult to recreate?
Balancing Financial Resources: Portfolio
Techniques
Industry Attractiveness-
Business Strength Matrix
BCG Growth-Share Matrix
Life Cycle-Competitive
Strength Matrix
BCG Growth-Share Matrix
High
Low
Cash
Use (
Gro
wth
Rate
)
Star Problem Child
Cash Cow Dog
Cash Generation (Market Share)High Low Market Share:
Sales relative to those of other competitors in market (dividing point is usually selected to have only 2-3 largest competitors in any market fall into high market share region)
Growth Rate: Industry growth rate in constant dollars (dividing point is typically GNP’s growth rate)
Description of Dimensions
Strategies
Question Marks - Build Market Share
Star - Hold Market Share
Cash Cows - Harvest
Dogs – Divest
Factors Considered in Constructing an Industry Attractiveness-Business Strength
Matrix
Nature of Competitive
Rivalry•Number of competitors
•Size of competitors
•Strength of competitors’ corporate parents
•Price wars
•Competition on multiple dimensions
Bargaining Power of
Suppliers/Customers
•Relative size of typical players
•Numbers of each
•Importance of purchases from or dales to
•Ability to vertically integrate
Threat of Substitutes/ New
Entrants•Technological maturity/stability
•Diversity of the market
•Barriers to entry
•Flexibility of distribution system
Industry Attractiveness FactorsIndustry Attractiveness Factors
Factors Considered in Constructing an Industry Attractiveness-Business Strength
Matrix (continued)
Economic Factors
•Sales volatility
•Cyclicality of demand
•Market growth
•Capital intensity
Financial Norms
•Average profitability
•Typical leverage
•Credit practices
Sociopolitical Considerations
•Government regulation
•Community support
•Ethical standards
Industry Attractiveness FactorsIndustry Attractiveness Factors
Factors Considered in Constructing an Industry Attractiveness-Business Strength
Matrix (continued)
Cost Position
•Economies of scale
•Manufacturing costs
•Overhead
•Scrap/waste/rework
•Experience effects
•Labor rates
•Proprietary processes
Level of Differentiation
•Promotion effectiveness
•Product quality
•Company image
•Patented products
•Brand awareness
Response Time
•Manufacturing flexibility
•Time needed to introduce new products
•Delivery times
•Organizational flexibility
Business Strength FactorsBusiness Strength Factors
Factors Considered in Constructing an Industry Attractiveness-Business Strength
Matrix (concluded)
Financial Strength
•Solvency
•Liquidity
•Break-even point
•Cash flows
•Profitability
•Growth in revenues
Human Assets
•Turnover
•Skill level
•Relative wage/salary
•Morale
•Managerial commitment
•Unionization
Public Approval
•Goodwill
•Reputation
•Image
Business Strength FactorsBusiness Strength Factors
Industry Attractiveness-Business Strength Matrix
InvestSelecti
ve Growth
Grow or
Let Go
Selective
Growth
Grow or
Let Go
Harvest
Grow or
Let Go
Harvest
DivestLow
High
Medium
Bu
sin
ess S
tren
gth
MediumHigh Low
Industry Attractiveness Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond control of management
Business Strength: Subject assessment of how strong a competitive advantage is created by a broad range of a firm’s internal strengths and weaknesses
Description of Dimensions
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
Market Life Cycle-Competitive Strength Matrix
Stage of Market Life Cycle: See page 184
Competitive
Strength: Overall subjective rating, based on wide range of factors regarding likelihood of gaining and maintaining a competitive advantage
Description of Dimensions
Low
High
Moderate
Com
peti
tive S
tren
gth
GrowthIntroduction Maturity
Stage of Market Life Cycle
Decline
Push:
Inve
st A
ggress
ively
Caution:
Inve
st S
elect
ively
Danger:
Harvest
Contributions of Portfolio Approaches
Convey large amounts of information about diverse businesses and corporate plans in a simplified format
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
Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business
Simplify priorities for sharing corporate resources across diverse businesses
Simplify priorities for sharing corporate resources across diverse businesses
Provide a simple prescription of what should be accomplished - a balanced portfolio of businesses
Provide a simple prescription of what should be accomplished - a balanced portfolio of businesses
Limitations of Portfolio Approaches
Does not address how value is created across business units
Does not address how value is created across business units
Accurate measurement for matrix classification not as easy as matrices implied
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
Underlying assumption about relationship between market share and profits varies across different industries and market segments
Limited strategic options viewed as basic strategic missions
Limited strategic options viewed as basic strategic missions
Portrays notion that firms need to be self-sufficient in capital
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
Fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it
Behavioral Considerations Affecting Strategic Choice
Role of current strategy
Attitudes toward risk
Degree of firm’s
external dependenc
eManagerial priorities different
from stockholder
s
Internal political
considerations
Competitive reaction
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?
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
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
See Fig. 9-6 Competitive reaction
Probable impact of competitor response must be considered during strategy design process
Competitor response can alter strategy success
GE: Strategic Circles
In 1981, John E. Welch Jr., Chairman and CEO of General Electric designed the company’s operations on the basis of three `strategic circles’:
Core manufacturing units such as lighting and locomotives
Technology -intensive businesses services
To achieve the first or second position in the global market for each of its businesses: By 1986, this strategic orientation had taken shape with 14 distinct businesses, including aircraft engines, medical systems, engineering plastics, major appliances, television and financial services.
IBM’s Partners
Sears
Toshiba
Siemens
Mitsubishi
Borland
1988
1989
1990
19911991
Jointly own Prodigy, an interactive computer service for consumersJointly built a US $200 million plant in Japan to manufacture high-resolution colour flat screens for laptopsJointly developing future chips and jointly built 16-Mb DRAM memory chips in France Mitsubishi Electric sells IBM mainframes in Japan under its own name
Wang
Novell
Apple
Motorola
Intel
1991
1991
1991199119911991
Developing tools to make it easier to create software for the OS/2 systemSells IBM’s PCs and RS/6000 workstations under its own nameIBM sells Novell networking softwareTwo joint ventures: Taligent and KaleidaJointly developing the RISC microprocessorJointly developing a new generation of integrated microprocessor chips
IBM’s Partners
Reebok’s Outsourcing
Its main function is marketing with a current staff strength of 35 in India. The other activities are outsourced as given below:
Apparel design National Institute of Fashion Technology Warehouse management Bakshi Associates Logistics Nexus Logistics Retailing Phoenix Advertising Hindustan Thompson Store design and execution Aakar Sports management 21st Century Gymnasium A private firm Manufacturing Shoes: Phoenix, Aero, Lakhani Apparel Viniyoga and six others Selection Prospects
Major Elements in a Successful International
Strategic Alliances
Complementary skills: which can contribute to the strength of the venture.
Cooperative cultures: cognizant of the important of cooperation
Compatible goals: based on their particular firm’s goals and not just convenience
Commensurate levels of risk: consider the risks involved
Different Types of Strategic Alliances
Contd….Alliance Types
Collaborative advertising
R&D partnerships
Lease service agreements
Shared distribution
Technology transfer
Cooperative bidding
Examples American Express and Toys R Us (cooperative
efforts for television advertising and promotion) Cytel and Sumitomo chemicals (alliance to develop
the next generation of biotechnology drugs) Cigna and United Motor Works (arrangement to
provide financing for non-US firms and governments)
Nissan and Volkswagen (Nissan sells Volkswagens in Europe and Volkswagen distributes Nissan’s cards also in Europe)
IBM and Apple Computers (arrangement to develop the next generation of operating system software)
Boeing, General Dynamics and Lockheed (cooperated together in winning the contract for an advanced tactical fighter)
Alliance TypesCross -manufacturing
Resource venturing
Government and industry partneringInternal spin-offs
Cross-licensing
ExamplesFord and Mazda (design and build similar cards on the same manufacturing/assembly line)Swift Chemical Co., Texasgulf, RTZ and US Borax (Canadian-based mining natural resources venture)DuPont and National Cancer Institute (DuPont worked with NCI in the first phase of the clinical cancer trial on IL)Cummins engine and Toshiba Corporation (created a new company to develop/market silicon nitride products)Hoffman-LaRoche and Glaxo (HL and Glaxo agreed for BHL to sell Zantac, an anti-ulcer drug in the United States)
Different Types of Strategic Alliances
Stages of an Alliance
Strategy development The focus is on development of resource strategies for production, technology and manpower. This has to be aligned to the objectives of corporate strategy alliances.
Partner assessment The attempt to assess the strengths and weaknesses of a partner and understand a partner’s motives for alliance formation.
Contract negotiations It is necessary to have realistic objectives, defining each partner’s contributions and rewards. It is also necessary to incorporation termination clauses, penalties for poor performance and arbitration procedures.
Alliance operations This is concerned with the management’s commitment, and linking of budgets and resources with priorities.
British Airways
The alliance between British Airways and American Airlines was announced in June 1996. BA and American together control 60 per cent of the flights between the UK and the US, 70 per cent of the traffic between London and New York, 90 per cent between London and Chicago, and all flights between London and Dallas.
Bermuda II, the UK-US aviation agreement, was concluded in 1977 which gives details of which airlines can fly between specified US and UK cities, and the number of flights they can operate. BA was against the scrapping of the agreement till recently.
British Airways
Contd... American Airlines was against the trend towards code-sharing agreements which allows airlines to sell tickets on routes they do not serve. This was considered to be anti-competitive. Now both BA and American have to retreat from their respective positions.
BA has a partnership with US Air in which it has a 24.6 per cent stake. The US government has not granted anti-trust immunity to the alliance to coordinate their operations more closely. Therefore, BA and American are asking for anti-trust immunity and requesting their governments to negotiate a new, liberalized aviation agreement.
Modes of Cooperation Joint ventures and research corporations Combinations of at least two
firms into a `distinct’ firm with shared equity investments. Profits and losses accrue on the basis of investment.
Joint R&D Joint research agreements to establish joint undertaking of R&D projects with shared resources.
Technology exchange agreement Technology sharing agreements, cross-licensing and mutual second-souring of existing technologies.
Equity investment Large firms partnering with a smaller high tech company with a minority sharing coupled with research contracts.
Customer-supplier relationships There can be many forms such as co-production contracts, co-marketing relationships, and research contracts.
Unilateral technology flows Second-sourcing and licensing agreements (Hagedoorn and Schakenraad, 1994)
Samsung Group A joint venture with Texas Instruments to manufacture semiconductors - they are
building a semiconductor plant in Portugal. Cooperation with General Instrument in developing high definition televisions (HDTV). The sharing of technology for flash memory devices with Toshiba. Co-developing computer workstations with Hewlett Packard-they have a joint venture,
Samsung -Hewlett Packard-which markets the American company’s products in Korea.
Supply of memory chip technology to Oki Electric. Partnership with General Electric in high-tech medical equipment. Lockheed for F-16 jet fighters (local assembly) Pratt and Whitney for jet engines (supplies components) Amoco for textile raw materials Corning for TV glass and building plants in China and Malaysia Mitsui Petrochemical for petrochemicals
Toshiba
An agreement with Apple Computers for new technology creation for multimedia.
A technology -sharing agreement with IBM to develop new data storage devices using `NAND-flash’ memory chips semiconductor devices; it has developed the world’s smallest 256-Mb D-Ram.
Through an alliance with IBM, Japan, it opened a second large-size thin-film transistor (TFT) LCD plant in 1995.
Alliances with National Semiconductor and Samsung Electronics of Korea to jointly develop and market flash memory chips.
Toshiba
Contd…. An alliance with Sun Microsystems Inc. of the US in the areas of
rightsizing, Internet and interactive technology. They will share product development, marketing and distribution in these fast-growth areas. Toshiba plans to develop and build systems based on Sun’s 64-bit UltraSPARC microprocessor. The rightsizing or integration of in-house information systems is aimed at enhancing the efficiency of the company’s white-collar workers. Toshiba will invest about US $303 million to rightsize its computer systems between 1995 and 1999. Sun Microsystems will bring in the technology for the projects, while Toshiba will provide the hardware to enhance efficiency of information technology.
Hitachi
An R&D agreement with Texas Instruments to develop a next-generation computer memory chip.
Providing chip manufacturing technology to Goldstar Electron of Korea. Supplying mainframe computers to Germany’s Comparex and Italy’s
Olivetti. A joint venture with GE to sell lighting products in Japan. Joint development of a new RISC computer chip with Hewlett Packard. Joint development of medical equipment with Boehringer-Mannheim of
Germany Research cooperation between Hitachi Cambridge Laboratory and
Cambridge University for developing a single electron memory device.
