Multibusiness Strategy Chapter 9 Mc GrawHillIrwin Copyright 2011

Learning Objectives 1. 2. 3. 4. 5. Understand the portfolio approach to strategic analysis and choice in multibusiness companies. Understand use three different portfolio approaches to conduct strategic analysis and choice in multibusiness companies Identify the limitations and weaknesses of the various portfolio approaches Understand the synergy approach to strategic analysis and choice in multibusiness companies Evaluate the parent company role in strategic analysis and choice to determine whether and how it adds tangible value in a multibusiness company 9 -3

The Portfolio Approach The portfolio approach is a historical starting point for strategic analysis and choice in multibusiness firms Boston Consulting Group (BCG) pioneered an approach called portfolio techniques that attempted to help managers “balance” the flow of cash resources among their various businesses while identifying their basic strategic purpose within the overall portfolio 9 -4

Ex. 9. 2 The BCG Growth-Share Matrix 9 -5

The Industry Attractiveness-Business Strength Matrix Ex. 9. 4 9 -6

Ex. 9. 5 BCG’s Strategic Environments Matrix 9 -7

BCG’s Strategic Environments Matrix Volume businesses are those that have few sources of advantage, but the size is large—typically the result of scale economies Stalemate businesses have few sources of advantage, with most of those small Fragmented businesses have many sources of advantage, but they are all small Specialization businesses have many sources of advantage and find those advantages potentially sizable 9 -8

Limitations of Portfolio Approach It does not address how value is being created across business units Truly accurate measurement for matrix classification was not as easy as the matrices portrayed The underlying assumption about the relationship between market share and profitability varied across industries and market segments The limited strategic options came to be seen more as basic strategic missions It ignored capital raised in capital markets It typically failed to compare the competitive advantage a business received from being owned by a particular company with the costs of owning it 9 -9

The Synergy Approach: Leveraging Core Competencies Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operations-related, and management activities Strategic analysis is concerned with whether or not the potential competitive advantages expected to arise from each value opportunity have materialized The most compelling reason companies should diversify can be found in situations where competencies—key value-building skills—can be leveraged with other products or into markets that are not a part of where they were created 9 -10

The Synergy Approach Each core competency should provide a relevant competitive advantage to the intended businesses Businesses in the portfolio should be related in ways that make the company’s core competencies beneficial Any combination of competencies must be unique or difficult to recreate 9 -11

The Corporate Parent Role: Can It Add Tangible Value? Realizing synergies from shared capabilities and core competencies is a key way value is added in multibusiness companies. 1. Research suggests that figuring out if the synergies are real and, if so, how to capture those synergies is most effectively accomplished by business unit managers, not the corporate parent. 2. How can the corporate parent add value to its businesses in a multibusiness company? 9 -12

The Parenting Framework The parenting framework perspective sees multibusiness companies as creating value by influencing—or parenting—their businesses The best parent companies create more value than any of their rivals do or would if they owned the same businesses To add value, a parent must improve its businesses 9 -13

10 Sources of Parenting Opportunities Size & Age Management Business Definition Predictable Errors Linkages Common capabilities Specialized expertise External relations Major decisions Major changes 9 -14

The Patching Approach Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities It can take the form of adding, splitting, transferring, exiting, or combining chunks of businesses Patching is not seen as critical in stable, unchanging markets When markets are turbulent and rapidly changing, patching is seen as critical to the creation of economic value in a multibusiness company 9 -15

Proponents of Patching View traditional corporate strategy as creating defensible strategic positions for business units by acquiring or building valuable assets, wisely allocating resources to them, and weaving synergies among them In volatile markets, they argue, this traditional approach results in business units with strategies that are quickly outdated and competitive advantages rarely sustained beyond a few years As a result, strategic analysis should center on strategic processes more than strategic positioning In these volatile markets, patchers strategic analysis focuses on making quick, small, frequent changes in parts of businesses and organizational processes 9 -16

Ex. 9. 9 Three Approaches to Strategy 9 -17