9 Strategies for Multi-Business Corporations Strategic Review, Evaluation, and Restructuring

Levels of Strategy: important distinctions

Network

Ansoff

Corporate

Boston Matrix Alliances

Business

Mergers and Acquisitions

Functional

Four Different Organisational Approaches to Change / Growth Miles and Snow (1978)

Prospectors

Risk-takers, opportunity-seekers Almost continually search for market opportunities Keep existing products, protect market share Work with narrow product-market domains Build on strengths, look for add-on options Often operate in two types of product-market domains, one relatively stable, the other changing Respond, dont look for change Top mangers frequently perceive change and uncertainty occurring in their organizational environments but are unable to respond effectively

Defenders

Analyzers

Reactors

Ansoff Matrix choosing strategies

Motives for Diversification

Growth - Deploying existing capabilities in new product markets Risk Reduction - the returns of projects/assets must be independent of each other, i.e. the different corporate businesses must not be linked through the corporate value chain Profitability only achieved if diversification leads to value creation
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When Business Diversification Becomes a Consideration

It is faced with diminishing growth prospects in present business When an expansion opportunity exists in an industry whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into an industry that requires similar resource strengths It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses
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Building Shareholder Value Through Business Diversification

Diversification is capable of building shareholder value if it passes three tests:
1.

2.
3.

Industry Attractiveness Testthe industry presents good long-term profit opportunities Cost of Entry Testthe cost of entering is not so high as to spoil the profit opportunities Better-Off Testthe companys different businesses should perform better together than as stand-alone enterprises, thereby producing a 1 + 1 = 3 effect for shareholders

Corporate Configuration De Wit & Meyer (2004:Ch.6)

What should be the profile of the corporation?
Corporate Management

Corporate Composition

What organizational system is needed?

In what businesses should the corporation be active?

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What should be the relative weight of each business?

How should synergies between businesses be realized?

Who should ensure that synergies are realized?

Corporate Control Styles

Goold & Campbell (1987) in De Wit & Meyer (2004:301), Grant (2010:434-440)

Depending on the mix of control & cooperation :

Financial control (based on financial objectives - output)

o

highly autonomous SBUs, few activities centralized or standardized except for the financial reporting system

Strategic control (based on strategic objectives - input)

o

the SBUs are closely related to the corporate center, some systems & activities centralized & standardized, the HQ explicitly coordinates activities across SBUs

Strategic planning (input control)

o

direct supervision by the HQ, SBUs have little autonomy; many key activities are standardized & centralized

The Multidivisional Structure (M-Form) Grant (2010:424-430)

Multibusiness firms are typically organized into strategic business units (SBU) The M-form:
o o

business decisions are located at the SBU level the corporate centre exercises overall coordination & control
Adaptation to bounded rationality through dispersed decision making Allocation of decisions according to their frequency: high frequency (operating) decisions are made at the SBU level Minimization of coordination costs: decisions concerning a particular business area do not have to pass up to the top

Efficiency advantages of the M-form:

o

o
o

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Corporate Strategy Options: Related vs. Unrelated Diversification

Related diversification attempts to increase shareholder value by capturing cross-business strategic fits along value chain segments Unrelated diversification attempts to build shareholder value by doing a superior job of choosing businesses to diversify into and managing the whole collection of businesses

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Related Diversification and Competitive Advantage

Strategic fit exists when one or more activities included in the value chains of of a diversified companys businesses present 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 firms brand name from one business to another

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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

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Combination Related-Unrelated Diversification Strategies

Dominant-business 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 few (2 - 5) related or unrelated businesses

Narrowly diversified firms

Broadly diversified firms

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

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Four Main Tasks in Crafting Corporate Strategy

Picking new industries to enter and deciding on means of entry Pursuing opportunities to leverage crossbusiness value chain relationships into competitive advantage Steering resources into most attractive business units

Initiating actions to boost the combined performance of businesses

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Boston Consulting Group Matrix matching stage: BCG

(Corporate level strategy)
BCG assists multidivisional firms in formulating their strategies

Autonomous divisions = business portfolio. Eg, Adidas AG comprised, Adidas, Reebok & Taylormade competing in footware, sports apparel; sports related goods. Divisions may compete in different industries: Eg, Hewlett Packard comprised technology solutions services; commercial & consumer PCs; printing hardware & supplies, and financial services BCG focuses on market-share position & industry growth rate -16 helps CEOs make stay or go decisions Ch 6

The Boston Consulting Group (BCG) Matrix (Adapted from Johnson et al 2008)
High High Med Low

Stars

Question marks

Market Growth rate

Med

Cash Cows

Dogs

Low

Relative competitive position (market share)

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See David 2010:217 for elaboration

BCG Matrix
Question Marks
Low relative market share, competes in high-growth industry

Cash needs are high Cash generation is low STRATEGY: Decision to strengthen (intensive strategies: market penetration / market development / product development) or divest
Ch 6 -18

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BCG Matrix
Stars
High relative market share and high growth rate

Best long-run opportunities for growth & profitability

STRATEGY: Substantial investment to maintain or strengthen dominant position; Backward or forward Integration, market penetration, market development, product development, joint ventures

Ch 6 -19

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BCG Matrix
Cash Cows
High relative market share, competes in low-growth industry

Generates cash in excess of their needs Milked for other purposes

STRATEGY: Maintain strong position as long as possible

Product development, closely related diversification

If weakens retrenchment or divestiture
Ch 6 -20

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BCG Matrix
Dogs
Low relative market share, competes in slow or no market growth industry

Weak internal & external position

STRATEGY: Liquidation, divestiture, retrenchment

Note. Many businesses fall right in the middle of the BCG matrix and thus are not easily classified
Ch 6 -21

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How to Evaluate a Diversified Companys Strategy

Corporate-Level Decision Making Step 1: Assess the long-term attractiveness of each industry the company has diversified into Step 2: Assess competitive strength of each of the companys business units Step 3: Check potential for cross-business strategic fits among business units Step 4: Check whether the firms resources fit the requirements of its business units Step 5: Rank performance and determine priority for resource allocation Step 6: Craft new strategic moves to improve overall company performance
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Strategy Implications of 9 Cell Attractiveness/Strength Matrix

Businesses in upper left corner

Receive top investment priority Strategic prescription grow and build Given medium investment priority Some businesses in this category may have brighter or dimmer prospects than others Candidates for divestiture or managed to take cash out of the business

Businesses in three diagonal cells

Businesses in lower right corner

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Nine Cell Industry Attractiveness Matrix

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Evaluating Resource Fit and Sufficiency

Good resource fit exists when

A companys businesses, individually, add to its collective resource strengths, either financially or strategically Firm has resources to adequately support its businesses without spreading itself too thin

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Determining Financial Resource Fit

Determine cash flow and investment requirements of business units

Which are cash hogs and which are cash cows?

Aside from cash flow, financial resource fit also includes

Assessing the individual contributions to companywide performance targets by each business unit Determining if the company has the financial strength to provide proper funding to its business unit and maintain a healthy credit rating

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Examining a Companys Nonfinancial Resource Fits

Diversified companies must ensure a good fit between its collection of resources and the KSFs of each industry it has diversified into

Does the company have or can it develop specific resources and capabilities needed to be successful in each of its businesses? Do recent acquisitions strengthen the collection of resources or cause them to be stretched too thinly?

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Ranking Business Units for Resource Allocation

Factors to consider in judging SBU (strategic business-unit) performance

Sales growth Profit growth Contribution to company earnings Cash flow generation Return on capital employed in business

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Crafting New Strategic Moves

Stick closely with existing business lineup and pursue opportunities it presents Broaden companys business scope by making new acquisitions in new industries

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

Restructure companys business lineup, putting a whole new face on business makeup

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Business Responsiveness: Major Problems for Multi-business Firms

High governance costs

Coordinating activities

Slower decision-making

More layers of management

Strategy incongruence

Misfit with business demand Corporate center misses specific business know-how

Dysfunctional control

Dulled incentives
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Lack of autonomy has a negative impact on motivation