Strategic Analysis and Choices in a Multi-Business Company

Strategic Analysis and Choices in a Multi-Business CompanyChapter -3. BBA 8th Semester 2014

Strategic analysis and choice in multi-business companyConcept and nature of multi-business company, rationalizing diversification andintegration, behavioural consideration affecting strategic choices, building shareholders value, analysis of external dependence, internal politicalconsideration.

Concept and nature of multi-business companyMany large company have various business units, various product and operate in more than one location.Known as portfolio of the business.Various reasons for doing so.Products may be at different stages of the product life cycle- inception, growth, maturity, declining and so on

Strategic Business Unit (SBU)Each SBU has separate market segment, competitors, managers and planFocuses on strengthen the market strength and gain competitive advantages .

Multi-business strategic choice and analysis normally consists of the Portfolio approachSynergy approachParenting approachPatching approach

Portfolio approachTools to evaluate corporate strategic options in MBCsPopularized by Boston Consulting Group (BCG) matrix and McKinsey & Co.Portfolio means collection of company shares and investment decisions in various sectors which are owned by a single corporate headquarters.

BCG MatrixDogsIVCash CowsIIIQuestion MarksIStarsII

Relative Market Share PositionHigh1.0Medium.50Low0.0Industry Sales Growth RateHigh+20Low-20Medium0

BCG MatrixQuestion Marks

Low relative market share position yet compete in high-growth industry.Cash needs are highCash generation is low

Decision to strengthen (intensive strategies) or divest

BCG MatrixStars

High relative market share and high industry growth rate.Best long-run opportunities for growth and profitability

Substantial investment to maintain or strengthen dominant positionIntegration strategies, intensive strategies, joint ventures

BCG MatrixCash Cows

High relative market share position, but compete in low-growth industryGenerate cash in excess of their needsMilked for other purposes

Maintain strong position as long as possibleProduct development, concentric diversificationIf becomes weakretrenchment or divestiture

BCG MatrixDogs

Low relative market share position and compete in slow or no market growth Weak internal and external position

Decision to liquidate, divest, retrenchment

The Industry Attractiveness-Business Strength MatrixDeveloped by Mckinsey & Co at General Electric.Also known as 9 cell matrixThe position of business is calculated by subjectively quantifying its rating along the two dimensions of matrix.

StrongAverage weakhighPremium- invest for growth* Maximize investment, diversify n seem dominateSelective- invest for growthInvest heavily and seek attractive new segment to apply strengthProtect- selectively invest for earningDefend strength and refocus to attractive segmentAnd monitor for harvest or divesturemediumChallenge invest for growth* Build selectively on strengthPrime-selectively invest for earningRestructure- divest* Shift to more attractive segmentlowOpportunistic-selectively invest for earningsOpportunistic- preserve for harvest.* Minimize investmentHarvest or divest* Exit from the market or product line

business strengthsIndustry attractiveness

Both BCG and Industry attractiveness- business strength matrix generates similar strategic recommendations, it improves BCG is followings ways:Terminologies are less offensive and understandableThe multiple measures of various dimensions of business covers many relevant factors besides the market share and growth.9 cells matrix makes more broad assessment during the planning process, considering importance in both strategy formulation and implementation .

The BCG Strategic-Environments MatrixMBC adopts strategies according to the type of the environment a particular business is facing.Strategies varies on the feature 0f the industry.This matrix helps to MBCs to share the core competencies and associated competitive advantages due to similar strategic environments.

FragmentedSpecializationStalematevolume

Size of the competitive advantagesmallbigmanyfewSources of advantages

This matrix has two dimensionsSources of competitive advantagesSize of competitive advantages

Volume business are those that have few sources of advantages but the size is large.Honda is the example of volume business as it has expertise with small gasoline engines.

Stalemate business have few sources of advantage, with most of those small which creates very competitive situations. Operational efficiency, low overhead and cost management are critical to profiatablity.

Fragmented business have many sources of advantages, they are all small.Involves differentiated products with low brand loyalty, easily replicated technology etc. Skills in focused market segments, ability to respond quickly to changes, low costs are critical in this environment.

Specialization business have many sources of advantages and find those advantages potentially sizable. Skills in achieving differentiation- product design, branding expertise, innovation.Characterized as WINNER

Limitations of Portfolio approachMerely cash focused ignores building value chain in each separate business units.Offers limited strategic options and ignores the common competencies and internal synergies among operating units.Unwarranted assumptions to the capital self-sufficiency thus overlooking the possibility of raising capital from capital market.

2.Synergy ApproachLeveraging the core competencies to create added value.Assumptions:Value building opportunities are found in market-related, operations-related and management-related activitiesDiversification, integration or joint venture is used to build greater value.Value chain activities of one business creates synergyCore competencies are leveraged to diversify into multiple businesses.Common opportunities are sought in the value chain activitesBusiness has common need.

Concerned with weather or not the potential, competitive advantages expected to arise from each value opportunity is realised.

Value building opportunitiesCompetitive advantageImpediments (difficulties )-market related oppor.. -common activities, office n sales - common brand name- Common promotion n distributionLower selling cost, better market coverage stronger brand image, brand loyaltyCheaper promotion and higher bargaining powerDifferent buying habits, sales person ineffectivenessDown with company reputation if quality is lowered.Operations related oppo..Joint procurement of purchased unitsCommon manufacturing and assembling processCommon admin supportLower input costs, improved input qualityCapacity utilizationReduced cost of productDecrease in the admin and operating overheadsDifferent input needsIncrease in changeover costsDifferent locations for different plants Differentiation requires different plants or technologyManagement- related opportunities-common management, know-how, operating skills and proprietary information- Effective transfer can create distinctive capabilityMisuse of technology transfer , possibility of information leakage

3.Parenting ApproachParent is known as guardian, responsible for leading to the intended direction by sharing wisdom, insight and suggestions.This approach has identified 10 places to look for parenting opportunities

Size and ageManagementBusiness definitionPredictable errorsLinkagesCommon capabilitiesSpecialized expertiseExternal relationsMajor decisionsMajor changes

4.Patching approachCorporate executives routinely remap business to match rapidly changing market opportunitiesAssumes that the role and ability of the parent company is necessary to create value in MBCsThis approach believes that traditional corporate strategy merely creates defensive strategic positions for business units by acquiring or building valuable assets.This approach proves effective in volatile market because it focuses on the strategic processes which make quick, small, frequent changes in parts of business and organizational process.

Rationalizing Diversification and IntegrationWhile moving toward growth comes along two basic issues to be considered.Whether to Integrate or Diversify.Integrate within its current industry or diversify into other industries.

Diversification and Integration

1.Are opportunities for sharing infrastructure and capabilities forthcoming? 2.Are we capitalizing on our core competencies? Does the companys business portfolio balance financial resources? Does our business portfolio achieve appropriate levels of risk and growth?

Integration is the growth internally by expanding its operations both globally and domestically.Horizontal and vertical growth are the two wings of integration.Done to reduce cost and build value chain relationshipIncreasing the company`s scale of operations and market share,Expanding the company`s geographic coverage,Reducing the market rivarly and enhancing the company`s flexibility and dynamic capabilities

Diversification is producing new products for new markets involving quite different skills, processes and technologies from those associated with the present products, services and processes.Views business in two waysBusiness Related Business Unrelated

The concept of related business assumes that there is close relationship between value chain activities of different businesses, resources and capabilities that each business needs to perform.Unrelated businesses means that it is almost impossible to establish cross business relationship.

Behavioral Considerations Affecting Strategic ChoiceRole of current strategy Degree of firms external dependence Attitudes toward risk Managerial priorities different from stockholder interests Internal political considerations Competitive reaction

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 firms external dependence How powerful are firms owners, customers, competitors, unions, and its government?

How flexible is firm with its environment? 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 Internal political considerations Major sources of company power are CEO, key subunits, and key departments Power can affect corporate decisions over analytical considerations The content of strategic decisions and the process of arriving at such decisions are politically charged Competitive reaction Probable impact of competitor response must be considered during strategy design process

Competitor response can alter the success of strategy

Value analysis of external dependence Owners, suppliers, customers, government, competitors and unions.Strategic choice is the power of the external environmental element supporting the decision.Higher the dependency lower will be the competitive advantages.

Internal Political ConsiderationsStrategy formulation as a political process where strategic aspirations are disputed, conflict exists managers compete for scarce resources the internal political dynamic the dynamic between the organization and its stake holders conflict and consensus co-exist Process of negotiating action is central.