Mod 6 Grand Strategies

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 

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General plan of major action to achieve longterm goals Falls into three general categories 1. Growth 2. Stability A separate grand strategy can be 3. Retrenchment 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

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Liquidation = selling off a business nit for the cash value of the assets, thus terminating its existence

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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 HighStrategies Need for Global Integration

Globalization Strategy

Low

• Treats world as a single global market • Standardizes global products/advertising strategies

Export Strategy •Domestically focused •Exports a few domestically produced products to selected countries

Low

Transnational Strategy

• Seeks to balance global efficiencies and local responsiveness • Combines standardization and customization for product/advertising strategies

Multi-domestic Strategy • Handles markets independently for each country • Adapts product/advertising to local tastes and needs

Need for National Responsiveness

High

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 Matrix Rapid Market Growth

1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation Weak Competitive Position

1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Divestiture 6. Liquidation

I II IV III

1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification

Strong Competitive Position

1. Concentric diversification 2. Horizontal diversification `3. Conglomerate diversification 4. Joint ventures

Slow Market Growth

Ex. 7-9: Grand Strategy Selection Matrix

Overcome weaknesses

Internal (redirected resources within the firm)

Turnaround or retrenchment Divestiture Liquidation

Vertical integration Conglomerate diversification

II I III IV

Concentrated growth Mkt. Development Prod. Development Innovation

Horizontal integration Concentric diversification Joint venture

Maximize strengths

External (acquisition or merger for resource capability)

Diversification and Corporate Strategy 

A company is diversified when it is in two or more lines of business that operate in diverse market environments

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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 developed for several different businesses competing in diverse industry environments

Four Main Tasks in Crafting Corporate Strategy 

Pick new industries to enter and decide on means of entry



Initiate actions to boost combined performance of businesses

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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

Competitive Strengths of a Single-Business Strategy



Resources can be focused on 

Improving competitiveness



Expanding into new geographic markets



Responding to changing market conditions



Responding to evolving customer preferences

Risks of a Single Business Strategy 

Putting all the “eggs” in one industry basket



If market becomes unattractive, a firm’s prospects can quickly dim

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Unforeseen changes can undermine a single business firm’s prospects 

Technological innovation



New products



Changing customer needs



New substitutes

When Should a Firm It is faced with diminishing growth prospects in Diversify? present business 







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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 diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses

Related vs. Unrelated Diversification Unrelated Related Diversification Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with value chain(s) of firm’s present business(es)

Diversification Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm’s present business(es)

Fig. 9.1: Strategy Alternatives for a Company Looking to Diversify

What Is Related Diversification? 

Involves diversifying into businesses whose value chains 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

Core Concept: Strategic Fit 

Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for 

Transferring competitively valuable expertise or technological know-how from one business to another



Combining performance of common value chain activities to achieve lower costs



Exploiting use of a well-known brand name

Why Diversify? 

To build shareholder value!

1+1=3



Diversification is capable of building shareholder value if it passes three tests 

Industry Attractiveness Test — the industry presents good long-term profit opportunities



Cost of Entry Test — the cost of entering is not so high as to spoil the profit opportunities



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

Strategies for Entering New 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

Joint Ventures and Strategic Partnerships 

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

Drawbacks of Joint Ventures 



Raises questions 

Which partner will do what



Who has effective control

Potential conflicts 

Conflicting objectives



Disagreements over how to best operate the venture

Fig. 9.2: Related Businesses Possess Related Value Chain 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

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Achieve consolidated performance greater than the sum of what individual businesses

Types of Strategic Fits 

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

R&D and Technology Fits 

Offer potential for sharing common technology or transferring technological know-how



Potential benefits 

Cost-savings in technology development and new product R&D



Shorter times in getting new products to market



Supply Chain Fits 

Offer potential opportunities for skills transfer and/or lower costs 

Procuring materials



Greater bargaining power in negotiating with common suppliers



Benefits of added collaboration with common supply chain partners

Manufacturing Fits 



Potential source of competitive advantage when a diversifier’s expertise can be beneficially 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

Distribution Fits 

Offer potential cost-saving opportunities



Share same distribution facilities



Use many of same wholesale distributors and retail dealers to access customers

Sales and Marketing Fits: Types of Potential Benefits 

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’s brand name and reputation

Managerial and Administrative Support Fits 

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Emerge when different business units require comparable types of 

Entrepreneurial know-how



Administrative know-how



Operating know-how

Different businesses often entail same types of 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 cut by operating two or more businesses under same corporate umbrella



Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses

Related Diversification and Competitive Advantage 

Competitive advantage can result from related diversification when a company captures crossbusiness 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 crossbusiness collaboration in performing related value chain activities

From Competitive Advantage to  Capturing cross-business strategic fits Added Gains in Shareholder Is possible only via a strategy of related diversification Value 



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

What Is Unrelated Diversification? 

Involves diversifying into businesses with 

No strategic fit



No meaningful value chain relationships



No unifying strategic theme



Basic approach – Diversify into any industry where potential exists to realize good financial results



While industry attractiveness and cost-of-entry tests are important, better-off test is secondary

Fig. Fig. 9.3: 9.3: Unrelated Unrelated Businesses Businesses Have Have Unrelated Unrelated Value Chains and No Strategic Fits Value Chains and No Strategic Fits

Acquisition Criteria For Unrelated Diversification  Can business meet corporate targets Strategies 





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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?

Attractive Acquisition Targets 

Companies with undervalued assets 



Companies in financial distress 



Capital gains may be realized

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

Appeal of Unrelated Diversification 

Business risk scattered over different industries



Financial resources can be directed to those industries offering best profit prospects



If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced

Building Shareholder Value via 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 poorlyperforming businesses to those with potential for above-average earnings growth Discern when it is the “right” time to sell a

Key Drawbacks of Unrelated Diversification Demanding Managerial Requirements Limited Competitive Advantage Potential

Unrelated Diversification Has  The greater the number and diversity of Demanding Managerial businesses, the harder it is for managers to Requirements 

Discern good acquisitions from bad ones



Select capable managers to manage the diverse requirements of each business



Judge soundness of strategic proposals of business-unit managers



Know what to do if a business subsidiary stumbles

Likely effect is 1 + 1 = 2, rather than 1 + 1 = 3!

Unrelated Diversification Offers  Lack of cross-business strategic fits means Limited Competitive unrelated diversification offers no competitive Advantage Potential advantage potential beyond what each business can generate on its own 

Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)



Promise of greater sales-profit stability over business cycles

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

Diversification and Shareholder Value 

Related Diversification 



A strategy-driven approach to creating shareholder value

Unrelated Diversification 

A finance-driven approach to creating shareholder value

Combination RelatedUnrelated Diversification  Dominant-business firms Strategies 



Narrowly diversified firms 



Diversification includes a few (2 - 5) related or unrelated businesses

Broadly diversified firms 



One major core business accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder

Diversification includes a wide collection of either related or unrelated businesses or a mixture

Multibusiness firms 

Diversification portfolio includes several unrelated

For Discussion: Your Opinion Newell 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 commercialgrade 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 Opinion McGraw-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

Fig. 9.4: Identifying a Diversified Company’s Strategy

How to Evaluate a Step 1: Assess long-term attractiveness of each industry firmCompany’s is in Diversified Step 2: Assess competitive strength of firm’s Strategy 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

Step 1: Evaluate Industry Attractiveness Attractiveness of each industry in portfolio Each industry’s attractiveness relative to the others Attractiveness of all industries as a group

Industry Attractiveness Factors 

Market size and projected growth



Intensity of competition

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Emerging opportunities and threats

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Presence of cross-industry strategic fits

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Resource requirements



Seasonal and cyclical factors



Social, political, regulatory, and environmental factors



Industry profitability

Procedure: Calculating Attractiveness for Step 1: Select industry Scores attractiveness factors Each Industry 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

Interpreting Industry Attractiveness  Industries with a scoreScores 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

Difficulties in Calculating Industry Attractiveness  Deciding on appropriate weights for industry Scores 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

Step 2: Evaluate Each Business Unit’s Competitive Strength Objectives 

Appraise how well each business is positioned in its industry relative to rivals



Evaluate whether it is or can be competitively strong enough to contend for market leadership

Factors to Use in Evaluating Competitive  Relative market share Strength  

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



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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

Procedure: Calculating Step 1: Select competitive strengthScores factors Competitive Strength for Each Business 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  Business units with ratings above 6.7 are Strength Scores 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

Plotting Industry  Use industry attractiveness Attractiveness and (see Table 9.1) and competitive strength scores (see Competitive Strength in a Table 9.2) to plot location of each business in Nine-Cell Matrix 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

Fig. 9.5: A Nine-Cell Industry AttractivenessCompetitive Strength Matrix

Strategy Implications of Attractiveness/Strength  Businesses in upper left corner Matrix 





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

Appeal of Attractiveness/Strength  Incorporates a wide variety of Matrix strategically relevant variables



Strategy implications 

Concentrate corporate resources in 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

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.

Step 3: Check Competitive Advantage Potential of  Objective Cross-Business Strategic Fits 



Determine competitive advantage potential of cross-business strategic fits among portfolio businesses

Examine strategic fit based on 

Whether one or more businesses have valuable strategic fits with other businesses in portfolio



Whether each business meshes well

Evaluate Portfolio for Competitively Valuable  Identify businesses which have value Cross-Business Strategic Fits chain 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

Fig. 9.6: Identifying Competitive

Advantage Potential of Cross-Business Strategic Fits

Step 4: Check Resource Fit 

Objective 



Determine how well firm’s resources match 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

Check for Financial Resource Fits 

Determine cash flow and investment requirements 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 allocation can differ from business to business Provides rationalization for both invest-and-expand and divestiture

Characteristics of Cash Hog Businesses 

Internal cash flows are inadequate to fully fund needs for working capital and new capital investment 



Parent company has to continually pump in capital to “feed the hog”

Strategic options 



Aggressively invest in attractive cash hogs

Characteristics of Cash Cow 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

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

Good vs. Poor Financial Resource Fit 



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 downturn that could jeopardize entire company

A Note of Caution: Why Diversification Efforts Can  Trying to replicate a firm’s success in one Fail

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 difficulty of overcoming resource strengths of

Step 5: Rank Business Units Based on  Factors to consider in judging Performance and Priority for business-unit performance Resource Allocation 

Sales growth

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Profit growth



Contribution to company earnings



Return on capital employed in business



Economic value added



Cash flow generation

Determine Priorities for Resource Allocation 

Objective 



“Get the biggest bang for the buck” in allocating corporate resources 2

Approach

3 4 5

6



Rank each business from highest to lowest priority for corporate resource support and new capital investment



Steer resources from low- to high-opportunity areas

Fig. 9.7: The Chief Strategic and Financial Options for Allocating a Diversified Company’s Financial Resources

Step 6: Craft New Strategic Moves – Strategic Options 

Stick closely with existing business lineup and pursue opportunities it presents



Broaden company’s business scope by making new acquisitions in new industries



Divest certain businesses and retrench to a narrower base of business operations

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Restructure company’s business lineup, putting a whole new face on business makeup



Pursue multinational diversification, striving to

Fig. 9.8: A Company’s Four Main Strategic Alternatives After It Diversifies

Strategies to Broaden a Diversified Company’s  Conditions making this approach attractive Business Base 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

Divestiture Strategies Aimed at Retrenching  Strategic options to a Narrower Diversification Retrench ? Base Retrench to a smaller but more 

appealing group of businesses 

Divest unattractive businesses 

Sell it



Spin it off as independent company



Liquidate it (close it down

Divest ? Close ? Sell ?

Retrenchment Strategies 

Objective 



Reduce scope of diversification to smaller number of “core “ businesses

Strategic options involve divesting businesses that 

Are losing money



Have little growth potential



Have little strategic fit with core businesses



Are too small to contribute

Conditions That Make Retrenchment Attractive 

Diversification efforts have become too broad, resulting in difficulties in profitably managing all the businesses

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Deteriorating market conditions in a onceattractive industry

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Lack of strategic or resource fit of a business

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A business is a cash hog with questionable longterm potential



A business is weakly positioned in its industry

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Businesses that turn out to be “misfits”

Options for Accomplishing Divestiture 

Sell it 



Spin it off as independent company 



Involves finding a company which views the business as a good deal and good fit

Involves deciding whether or not to retain partial ownership

Liquidation 



Involves closing down operations and selling remaining assets

Strategies to Restructure a Company’s Business Lineup 

Objective 

Make radical changes in mix of businesses in portfolio via both 

Divestitures and



New acquisitions

to put a whole new face on the company’s business makeup

Conditions That Make Portfolio Restructuring  Too many businesses in unattractive industries Attractive 

Too many competitively weak businesses



Ongoing declines in market shares of one or more major business units

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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

Multinational Diversification Strategies 



Distinguishing characteristics 

Diversity of businesses and



Diversity of national markets

Presents a big strategy-making challenge 

Strategies must be conceived and executed for each business, with as many multinational variations as appropriate



Cross-business and cross-country collaboration

Appeal of Multinational Diversification Strategies 

Offer two avenues for long-term growth in revenues and profits



Enter additional businesses



Extend operations of existing businesses into additional country markets

Opportunities to Build Competitive Advantage via  Full capture of economies of scale and Multinational Diversification 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 and

Competitive Strength of a DMNC in Global Markets 

Competitive advantage potential is based on 



Using a related diversification strategy based on 

Resource-sharing and resource-transfer opportunities among businesses



Economies of scope and brand name benefits

Managing related businesses to capture important cross-business strategic fits

Competitive Power of a 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

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 BCG Growth-Share Matrix

Industry AttractivenessBusiness Strength Matrix

Life CycleCompetitive Strength Matrix

BCG Growth-Share Matrix

Cash Use (Growth Rate)

Cash Generation (Market Share) Description of Market Share: High Low Dimensions Sales relative to

High

Star

Problem Child

Low

Cash Cow

Dog

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)

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 Industry Attractiveness Factors

Nature of Competitive Rivalry •Number of competitors

Bargaining Power of Suppliers/Custo mers •Relative size of typical players

•Size of

•Numbers of

competitors

•Strength of competitors’ corporate parents

•Price wars •Competition on multiple

each

•Importance of purchases from or dales to

•Ability to vertically integrate

Threat of Substitutes/ New Entrants •Technological maturity/stabili ty

•Diversity of the market

•Barriers to entry

•Flexibility of distribution system

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Industry Attractiveness Factors

Economic Factors

•Sales volatility

•Cyclicality of demand

•Market growth

•Capital intensity

Financial Norms

Sociopolitical Considerations

•Average

•Government

profitability

•Typical leverage

•Credit practices

regulation

•Community support

•Ethical standards

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Business Strength Factors

Cost Position

•Economies of scale

•Manufacturing costs

•Overhead

Level of Differentiation

Response Time

•Promotion

•Manufacturing

effectiveness

•Product quality •Company image

•Scrap/waste/rew •Patented ork

•Experience effects

•Labor rates

products

•Brand awareness

flexibility

•Time needed to introduce new products

•Delivery times •Organizational flexibility

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (concluded) Business Strength Factors

Financial Strength

Human Assets

Public Approval

•Solvency

•Turnover

•Goodwill

•Liquidity

•Skill level

•Reputation

•Break-even

•Relative

•Image

point

•Cash flows •Profitability •Growth in revenues

wage/salary

•Morale •Managerial commitment

•Unionization

Industry Attractiveness-Business Strength Matrix Industry Attractiveness

Business Strength

High

High

Medium

Low

Invest

Medium

Low

Selecti Grow or ve Let Growth Go

Selectiv Grow or e Harvest Let Go Growth Grow or Harvest Divest Let Go

Description of Industry Attractiveness: Dimensions

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

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

Competitive Strength

Introduction Growth

Maturity

Decline

Life Cycle: See

y el

iv : s sh es u P gr Ag st

High

Moderate

Low

e v n

I

In

Description of Stage of Market Dimensions page 184

y

l : e on tiv i t ec u l Ca Se t s ve

r: e g st n e a D arv H

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

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 resources across diverse businesses

corporate

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 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

Behavioral Considerations Affecting Strategic Choice Role of current strategy Degree of firm’s external dependenc e Managerial priorities different from stockholder s

Attitudes toward risk Internal political consideratio ns

Competitiv e 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 Strategic Choice  Affecting 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 Mitsubish i Borland

1988 1989 1990 1991 1991

Jointly own Prodigy, an interactive computer service for consumers Jointly built a US $200 million plant in Japan to manufacture highresolution colour flat screens for laptops Jointly developing future chips and jointly built 16-Mb DRAM memory chips in France Mitsubishi Electric sells IBM mainframes in Japan under its own name

IBM’s Partners

Wang

1991 1991

Novell

1991 1991 Apple 1991 Motorola 1991 Intel

Developing tools to make it easier to create software for the OS/2 system Sells IBM’s PCs and RS/6000 workstations under its own name IBM sells Novell networking software Two joint ventures: Taligent and Kaleida Jointly developing the RISC microprocessor Jointly developing a new generation of integrated microprocessor chips

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

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 nonUS 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)

Different Types of Strategic Alliances Alliance Types Cross -manufacturing Resource venturing Government and industry partnering Internal spin-offs Cross-licensing

Examples Ford 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)

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 coproduction 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 largesize 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 

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.

Contd….

Hitachi 





 





An R&D agreement with Texas Instruments to develop a nextgeneration 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 BoehringerMannheim of Germany Research cooperation between Hitachi Cambridge Laboratory and Cambridge University for developing a single electron memory device.