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MANAGEMENT POLICY AND STRATEGY

SESSION - VIII

Strategic Analysis and Choice in

Multi-business Companies
Prof. Sushil
Department of Management Studies
Indian Institute of Technology, Delhi
INDIA
Email: [email protected]

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Questions Related to Diversification and

Integration

1. Are opportunities for sharing infrastructure and

capabilities forthcoming?

2. Are we capitalizing on our core competencies?

3. Does the company’s business portfolio balance

financial resources?

4. Does our business portfolio achieve appropriate

levels of risk and growth?
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COMBINATION OF MEANS AND FORMS OF

DIVERSIFICATION
Forms
Vertical Horizontal Global
Acquisitions Time Inc. acquires Warner Phillip Morris buys Kraft BASF, a German
Communications, creating and General Foods in an chemical producer, buys
a vertically integrated effort to diversify out of Inmont, a US chemicals
entertainment business the cigarette business company, to overcome
limited grow th
opportunities at home
Strategic Cetus, a leading firm in the Dow Chemical and Fuji Photo Films and
Alliances biotechnology field, teams Corning Glass join forces Xerox, Inc. form a single
up w ith larger corporations to create a joint venture import sales operation
w hich provide the capital more profitable than that later grow s to
and marketing needed to either of its parents. become one of the
introduce new Cetus w orld’ s leading producers
technology of photocopiers
Internal Humana develops a full line 3M consistently gets Anheuser-Busch attempts
Development of health care services, more than 25% of its to open up new markets
vertically integrating across revenues from products it by taking Budw eiser, its
insurance, hospitals, and has developed w ithin the flagship product into
follow -up treatment last five years Britain
services

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EVALUATING REASONS TO DIVERSIFY

Least Power to Most Power to

Create Value Create Value

Capitalizing
Reducing Maintain Balancing Sharing Increasing on Core
Risk Growth Cash Flows Infrastructure Market Power
Competencies

Not Recommended
Recommended as a Reason
as a Reason to Diversity
to Diversify

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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

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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?

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Balancing Financial Resources: Portfolio

Techniques

BCG Growth-Share
Matrix

Industry
Life Cycle-
Attractiveness-
Competitive
Business Strength
Strength Matrix
Matrix

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BCG Growth-Share Matrix

Cash Generation (Market Share) Description of
High Low Dimensions
Market Share: Sales
relative to those of
Cash Use (Growth Rate)

Problem other competitors in

High Star market (dividing point is
Child usually selected to have
only 2-3 largest
competitors in any
market fall into high
market share region)
Growth Rate: Industry
Low Cash Cow Dog growth rate in constant
dollars (dividing point is
typically GNP’s growth
rate)

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Strategies

 Question Marks - Build Market Share

 Star - Hold Market Share

 Cash Cows - Harvest

 Dogs – Divest

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Factors Considered in Constructing an Industry

Attractiveness-Business Strength Matrix
Industry Attractiveness Factors
Threat of
Nature of Competitive Bargaining Power of
Substitutes/ New
Rivalry Suppliers/Customers
Entrants
• Number of • Relative size of • Technological
competitors typical players maturity/stability
• Size of competitors • Numbers of each • Diversity of the
market
• Strength of • Importance of
competitors’ purchases from or • Barriers to entry
corporate parents dales to
• Flexibility of
• Price wars • Ability to vertically distribution system
integrate
• Competition on
multiple dimensions

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 Factors Considered in Constructing an Industry 11

Attractiveness-Business Strength Matrix

(continued)
Industry Attractiveness Factors
Sociopolitical
Economic Factors Financial Norms
Considerations
• Sales volatility • Average • Government
profitability regulation
• Cyclicality of
demand • Typical leverage • Community
support
• Market growth • Credit practices
• Ethical standards
• Capital intensity

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 Factors Considered in Constructing an Industry 12

Attractiveness-Business Strength Matrix

(continued)
Business Strength Factors
Level of
Cost Position Response Time
Differentiation
• Economies of scale • Promotion • Manufacturing
effectiveness flexibility
• Manufacturing costs
• Overhead • Product quality • Time needed to
introduce new
• Scrap/waste/rework • Company image products
• Experience effects • Patented products • Delivery times
• Labor rates • Brand awareness • Organizational
• Proprietary flexibility
processes

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 Factors Considered in Constructing an Industry 13

Attractiveness-Business Strength Matrix

(concluded)
Business Strength Factors

Financial Strength Human Assets Public Approval

• Solvency • Turnover • Goodwill

• Liquidity • Skill level • Reputation
• Break-even point • Relative • Image
wage/salary
• Cash flows
• Morale
• Profitability • Managerial
• Growth in commitment
revenues • Unionization
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Industry Attractiveness-Business Strength Matrix

Industry Attractiveness Description of

High Medium Low Dimensions
Industry Attractiveness:
High Selective Grow or Subjective assessment
Invest based on broadest
Growth Let Go
Business Strength

possible range of
external opportunities
and threats beyond
Medium Selective Grow or control of management
Harvest
Growth Let Go Business Strength:
Subject assessment of
how strong a competitive
Grow or advantage is created by
Low Harvest Divest a broad range of a firm’s
Let Go internal strengths and
weaknesses

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Advantages of the Industry Attractiveness-

Business Strength Matrix over the BCG Matrix

 Terminology is less offensive and more understandable

 Multiple measures associated with each dimension tap

many factors relevant to business strength and market
attractiveness

 Allows for broader assessment during both strategy

formulation and implementation for a multibusiness
company

Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc.

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Market Life Cycle-Competitive Strength Matrix

Stage of Market Life Cycle

Introduction Growth Maturity Decline Description of
Dimensions
Stage of Market Life
Cycle: See page 184
Competitive Strength

High

Competitive
Moderate Strength: Overall
subjective rating,
based on wide range
of factors regarding
Low likelihood of gaining
and maintaining a
competitive
advantage
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Contributions of Portfolio Approaches

Convey large amounts of information about diverse

businesses and corporate plans in a simplified format

Illuminate similarities and differences among businesses,

conveying the logic behind corporate strategies for each
business

Simplify priorities for sharing corporate resources across

diverse businesses

Provide a simple prescription of what should be

accomplished - a balanced portfolio of businesses
Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc.
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Limitations of Portfolio Approaches

Does not address how value is created across business units

Accurate measurement for matrix classification not as easy as

matrices implied

Underlying assumption about relationship between market share

and profits varies across different industries and market
segments

Limited strategic options viewed as basic strategic missions

Portrays notion that firms need to be self-sufficient in capital

Fails to compare competitive advantage a business receives from

being owned by a particular company with costs of owning it
Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc.
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Behavioral Considerations Affecting Strategic

Choice

Role of current
strategy

Degree of
firm’s Attitudes
external toward risk
dependence

Managerial Internal Competitive

priorities political reaction
different from considerations
stockholders
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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?

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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

Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc.

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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

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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.
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IBM’s Partners

Sears 1988 Jointly own Prodigy, an interactive

computer service for consumers
Toshiba 1989 Jointly built a US $200 million plant in
Japan to manufacture high-
resolution colour flat screens for laptops
Siemens 1990 Jointly developing future chips and jointly
built
Mitsubishi 1991 16-Mb DRAM memory chips in France
Borland 1991 Mitsubishi Electric sells IBM mainframes in
Japan under its own name

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IBM’s Partners

Wang 1991 Developing tools to make it easier to create

software for the OS/2 system
Novell 1991 Sells IBM’s PCs and RS/6000 workstations
under its own name
1991 IBM sells Novell networking software
Apple 1991 Two joint ventures: Taligent and Kaleida
Motorola1991 Jointly developing the RISC microprocessor
Intel 1991 Jointly developing a new generation of
integrated microprocessor chips

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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

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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

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Different Types of Strategic Alliances

Contd….
Alliance Types Examples
 Collaborative  American Express and Toys R Us
advertising (cooperative efforts for television
advertising and promotion)
 R&D partnerships  Cytel and Sumitomo chemicals (alliance to
develop the next generation of
 Lease service biotechnology drugs)
agreements  Cigna and United Motor Works
(arrangement to provide financing for non-
 Shared distribution US firms and governments)
 Nissan and Volkswagen (Nissan sells
Volkswagens in Europe and Volkswagen
 Technology distributes Nissan’s cards also in Europe)
transfer  IBM and Apple Computers (arrangement
to develop the next generation of
 Cooperative bidding operating system software)
 Boeing, General Dynamics and Lockheed
(cooperated together in winning the
contract for an advanced tactical fighter)
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Different Types of Strategic Alliances

Alliance Types Examples

Cross -manufacturing Ford and Mazda (design and build similar cards on the
same manufacturing/assembly line)
Resource venturing Swift Chemical Co., Texasgulf, RTZ and US Borax
(Canadian-based mining natural resources venture)
Government and industry DuPont and National Cancer Institute (DuPont worked
partnering with NCI in the first phase of the clinical cancer trial on
Internal spin-offs IL)
Cummins engine and Toshiba Corporation (created a
Cross-licensing 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)

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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.

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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.

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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.

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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)

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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
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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.

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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.

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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.

Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc.