STRATEGIC ANALYSIS AND CHOICE IN THE MULTIBUSINESS COMPANY:RATIONALIZING DIVERSIFICATION AND BUILDING SHAREHOLDERS VALUE

PREPARED BY:GEORGE LUGEMBE MALYETA. REG: No. 2010-06-01774

Rationalizing Diversification and Building Shareholder Value

This is a situation where a company have numerous businesses or want to conduct multibusiness. In a such situation Managers have to examine and choose which business the company have to own and which one has to forgo or divest. There two major concern here. How do we plan to capture and exploit competitive advantage in each business How to allocate resources across those business In making strategic decisions in multibusiness companies we are going to discuss and look at different approaches which managers should use to analyse and choose what business to be carried in and how to allocate recourses across those businesses.

Rationalizing Diversification and Building Shareholder Value (Contd.)

Nowadays it is has become normal to see that businesses seek to acquire other businesses in order to grow and to diversify. There several reasons behind that causes the companies or businesses to come at this decision.
1. 2. 3. 4. 5. To enter businesses with greater growth potential To diversify inherent risks To increase vertical integration To instantly have a market presence rather than slower internal growth To capture value added

There big challenge in managing the resource needs of diverse businesses and their respective strategic missions, particularly in times of limited resources. The following approaches or techniques are used to help managers to balance the flow of cash resources among their various businesses while also identifying their basic strategic purpose within the overall portfolio.

Approaches
The Portfolio Approach The Synergy Approach: Leveraging Capabilities and Core Competencies Parenting Framework Approach Patching Approach

The portfolio Approach or Techniques

The approach looks at the company as a portfolio of businesses. This portfolio is then examined and evaluated based on each business growth potential, market position and need for and ability to generate cash. Corporate strategists then allocate resources, divest and acquire businesses based on the balance across this portfolio of businesses or possible businesses. The approach or techniques analyse multibusiness using four matrixes

The Portfolio Approach

BCG Growth-Share

Industry AttractivenessBusiness Strength Matrix

BCGs Strategic Environments Matrix

Life Cycle-Competitive Strength Matrix

The BCG Growth Share Matrix

BCG matrix analyse each of the companys businesses according to market growth rate and relative competitive position.

Market growth rate

This is projected rate of sales growth for the market being served by a particular business. Usually measured as the percentage increase in a markets sales or volume per unit over two most recent years, this rate used as an indicator of the relative attractiveness of the markets served by each business in the firms portfolio of businesses.

Relative competitive position

It is expressed as the market share of a business divided by the market share of its largest competitor. Thus, relative competitive position provides a basis for comparing the relative strengths of the businesses in the firms portfolio in terms of their positions in their respective markets.

The BCG Growth-Share Matrix

Cash generation (market share)
High Low

High
Cash use ( Growth

Star

Problem child

Low

Cash Cow

Dog

Description of dimensions Market share: sales relative to those of other competitors in the market (dividing point is usually selected to have only the two-three largest competitors in any market fall into the high market share region)

Rate)

Description of Dimensions Growth Rate: Industry growth rate in constant dollars (diving point is typically the GNPs growth rate)

Factors Considered in Constructing an Industry Attractiveness-Business strength Matrix

(Industry attractiveness)
Nature of Competitive Rivalry Number of competitors Size of competitors Strength of competitors corporate parents Price war Competition on multiple dimensions Bargaining Power of Suppliers / Customers Relative size of typical players Number of each Importance of purchases from sales to Ability to vertically integrate Threat of Substitute Products/New Technological maturity/stability Diversity of the market Barriers to entry Flexibility of distribution system

Factors Considered in Constructing an Industry Attractiveness-Business strength Matrix (Industry attractiveness) Contd.
Economic Factors Sales volatility Cyclicality of demand Market growth Capital intensity Financial Norms Average profitability Typical leverage Credit practices Socio-political Considerations Government regulation Community support Ethical standards

(Business Strength)
Level of Differentiation Promotion effectiveness Product quality Company image Patented products Brand awareness

Cost Position Economies of scale Manufacturing costs Overhead Scrap/waste/rework Experience effects Labour rate Proprietary processes

Response Time Manufacturing flexibility Time needed to introduce new products Delivery time Organizational flexibility

(Business Strength) Contd.

Financial Strength Solvency Liquidity Break-even point Cash flows Profitability Growth in revenue Human Assets Turnover Skill level Relative wage/salary Morale Managerial commitment Unionization Public Approval Goodwill Reputation Image

The Industry Attractiveness-Business Strength Matrix

Industry attractiveness
Description of Dimensions
High Medium Low Industry attractiveness: subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of management Business strength: subjective assessment of how strong a competitive advantage is created by a broad range of the firms internal strengths and weaknesses
Depending on the location of a business within the matrix as shown above, one of the following strategic approaches is suggested: Invest to grow Invest selectively and manage for earnings Harvest or divest for resources

Business Strength

High

Invest

Selective Growth

Grow or Let go

Medium

Selective Growth

Grow or let go

Harvest

Low

Grow or Let go

Harvest

Divest

Improvement of The Industry AttractivenessBusiness Strength Matrix Over the BCG Matrix
The resources allocation decisions remain quite similar to those of the BCG approach.
1. The industry attractiveness- business strength matrix is preferred because it is less offensive and more understandable. 2. The multiple measures associated with each dimension of the business strength matrix tap many factors relevant to business strength and market attractiveness. 3. Besides market share and market growth. Allows for broader assessment during both strategy formulation and implementation for a multibusiness company

The Market Life Cycle-Competitive Strength Matrix

Stage Market Life Cycle
Introduction Growth Maturity Decline

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

Competitive Strength

High

Moderate

Low

BCGS Strategic Environments Matrix

Fragmented Apparel, house building, jewellery retailing, sawmill Specialization Pharmaceuticals, luxury cars, chocolate confectionery

Sources of Advantage

Many
Stalemate
Basic chemicals, volume-grade paper, ship owning (VLCCs), wholesale banking

Volume
Jet engines, supermarkets, motorcycles, standard microprocessors

Few

Small
Size of Advantage

Big

Description of Dimensions
The matrix has two dimensions. The number of sources of competitive advantage could be many with complex products and services (e.g. automobiles, financial services)and few with commodities(chemicals, microprocessors). Complex products offer multiple opportunities for differentiation as well as cost advantages to survive.

Description of Dimension
The second dimension is size of competitive advantage. How big is the advantage available to the industry leader? The two dimensions then define four industry environments as follows: Volume businesses are those that have few source of advantage, but the size is large typically the result of scale economies. Advantage established in one such business may be transferable to another as Honda has done with its scale and expertise with small gasoline engines. Stalemate businesses have few sources of advantage, with most of those small. This result in very competitive situations. Skills in operational efficiency, low overhead and cost management are critical to profitability.

Description of Dimensions
Fragmented businesses have many source of advantage, but they are all small. This typically involves differentiated products with low brand loyalty, easily replicated technology, and minimal scale economies. Skills in focused market segments, typically geographic, the ability to respond quickly to changes and low costs are critical in this environment. Specialization businesses have many sources of advantage, and find those advantages potentially sizable. Skills in achieving differentiation product design, branding expertise, innovation, first-mover, and perhaps scale characterize winners here.

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

Limitations of Portfolio Approaches

Does not address how value is created across business units True accurate measurement for matrix classification not as easy as matrices implied The underlying assumption about relationship between market share and profits varies across different industries and market segments The limited strategic options viewed as basic strategic missions The portfolio approach portrays notion that firms need to be self-sufficient in capital markets The portfolio approach typically fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it.

The synergy Approach: leveraging capabilities and core competencies

Opportunities to build value via diversification, integration, or joint venture strategies are usually found In market- related operating-related Management activities. Each businesss basic value chain activities or infrastructure becomes a source of potential synergy and competitive advantage for another business in the corporate portfolio.

Value Building in Multibusiness Companies (Market-Related Opportunities)

Opportunities to Build Value or Sharing Potential Competitive Advantage
Lower selling costs

Impediments to Achieving Enhanced Value

Buyers have different purchasing habits toward the products

Better market coverage

Shared sales force activities or shared sales office, or both

Different salespersons are more effective in representing the product

Stronger technical advice to buyers Enhanced convenience for buyers(can buy from single source) Improved access to buyers( have more product to sell) Some products get more attention than others

Buyers prefer to multiple-source rather than single-source their purchases

Value Building in Multibusiness Companies (Market-Related Opportunities) Contd.

Opportunities to Build Value or Sharing
Shared after-sales service and repair work

Potential Competitive Advantage

Low servicing costs
Better utilization of service personnel Faster servicing of customer calls

Stronger brand image and company reputation

Different equipment or different labor skills, or both, are needed to handle repairs Buyers may do some in-house repairs Company reputation is hurt if quality of one product is lower
Appropriate forms of messages are different Appropriate timing of promotions is different

Shared brand name

Stronger brand image and company reputation

Increased buyer confidence in the brand

Shared advertising and promotional activities

Lower costs
Greater clout in purchasing ads

Value Building in Multibusiness Companies

(Market-Related Opportunities) Contd.
Opportunities to Build Value or Sharing
Common distribution channels

Potential Competitive Advantage

Lower distribution costs
Enhanced bargaining power with distributors and retailers to gain shelf space, shelf positioning, stronger push and more dealer attention, and better profit margins

Impediments to Achieving Enhanced Value

Dealers resist being dominated by a single supplier and turn to multiple sources and lines

Lower order processing costs

Heavy use of the shared channel erodes willingness of other channels to carry or push the firms products

Shared order processing

One-stop shopping for buyer enhances service and, thus, differentiation

Differences in ordering cycles disrupt order processing economies

Value Building in Multibusiness Companies (Market-Related Opportunities) Contd.

Opportunities to Build Value or Sharing

Joint procurements of purchased inputs

Potential Competitive Advantage

Lower input costs
Improved input quality
Improved service from suppliers

Impediments to Achieving Enhanced Value

Input needs are different in terms of quality or other specifications
Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plant
Input sources or plant locations, or both, are in different geographic areas

Shared inbound or outbound shipping and materials handling

Lower freight and handling costs Better delivery reliability

More frequent deliveries, such that inventory costs are reduced

Needs for frequency and reliability of inbound/outbound delivery differ among the business units

Value Building in Multibusiness Companies (Market-Related Opportunities) Contd.

Opportunities to Build Value or Sharing Potential Competitive Advantage
Lower manufacturing/assembly costs Better capacity utilization, because peak demand for one product correlates with valley demand for other Bigger scale of operation improves access to better technology and results in better quality

Impediments to Achieving Enhanced Value

Buyers have different purchasing habits toward the products Higher changeover costs in shifting from one product to another

Shared manufacturing and assembly facilities

High-cost special tooling or equipment is required to accommodate quality differences or design differences

Value Building in Multibusiness Companies (Market-Related Opportunities) Contd.

Opportunities to Build Value or Sharing
Shared product and process technologies or technology development or both

Potential Competitive Advantage

Lower product or process design costs, or both, because of shorter design times and transfers of knowledge from area to area.

Impediments to Achieving Enhanced Value

Technologies are the same, but the applications in different business units are different enough to prevent much sharing of value Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)

More innovative ability, owing to scale of effort and attraction of better R&D personnel Shared administrative support activities Lower administrative and operating overhead costs

Value Building in Multibusiness Companies (Market-Related Opportunities)Contd.

Opportunities to Build Value or Sharing Potential Competitive Advantage
Efficient transfer of a distinctive competence can create cost savings or enhance differentiation. Shared management know-how, operating skills, and proprietary information

Impediments to Achieving Enhanced Value

Actual transfer of knowhow is costly or stretches the key skill personnel too thinly, or both.

More effective management as concerns strategy formulation, strategy implementation, and understanding of key success factors

Increased risks that proprietary information will leak out

Six Critical Questions for Diversification Success

What can our company do better than any of its competitors in its current market(s)? What core competencies do we need in order to succeed in the new market? Can we catch up to or leapfrog competitors at their own game? Will diversification break up our core competencies that need to be kept together? Will we be simply a player in the new market or will we emerge a winner? What can our company learn by diversifying, and are we sufficiently organized to learn it?

Parenting Framework
How corporate parent add value to its business in a multibusiness company? The parenting framework focuses on ten areas of opportunity managers should carefully examine to find ways the parent organization might add value to one or more businesses and overall company. This perspective sees multibusiness companies as creating value by influencing or parenting the businesses they own. 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. Advocates of this perspective call the potential for improvement within a business a parenting opportunity.

Ten Areas to look for parenting opportunities

Size and age Management Business definition Predictable errors Linkages

Common capabilities Specialized expertise External relations Major decisions Major changes

The Patching Perspective

Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities. Patching can take form of
Adding Splitting Transferring Exiting combining chunk of businesses

Patching is more critical in turbulent and rapidly changing markets, than in stable, unchanging markets. The patching approach concentrates on multibusiness companies in turbulent markets of twenty first century where managers need to make quick, small shifts and adjustments in processes, markets and offers five types of simple rules which manager use as guide lines to structure quick decisions throughout a multibusiness company on a continuous basis. Manager competing in business can choose among three distinct ways to fight. They can build a fortress and defend it; they can nurture and leverage unique resources; or they can flexibly pursue fleeting opportunities within simple rules, Each approach requires different skill sets and works best under different circumstances.

Three Approaches to Strategy

Position
Strategic logic
Identify an attractive market Locate a defensible position Fortify and defend
be?

Resources
Establish a vision Build resources Leverage across markets

Simple Rules
Jump into the confusion Keep moving Seize opportunities Finish strong

Strategic question Where should we Source of advantage

What should we be? How should we proceed?

Unique, valuable Unique, valuable, Key processes and position with tightly inimitable resources unique simple rules integrated activity system

Three Approaches to Strategy (Contd.)

Position
Works best in
Slowly changing, well-structured markets
Sustained

Resources
Moderately changing, wellstructured markets
Sustained

Simple Rules
Rapidly changing, ambiguous markets
Unpredictable Managers will be too tentative in executing on promising opportunities Growth

Duration of advantage Risk

It will be difficult to Company will be alter position as too slow to build conditions change new resources as conditions change Profitability Long-term dominance

Performance goal

Simple Rules, Summarized

Type
How-to rules Boundary rules Priority rules Timing rules Exit rules

Purpose
They spell out key features of how a process is executed What makes our process unique? They focus managers on which opportunities can be pursued and which are outside the pale. They help managers rank the accepted opportunities. They synchronize managers with the pace of emerging opportunities and other parts of the company. They help managers decide when to pull out of yesterdays opportunities.

In turbulent markets, Managers should flexibly seize opportunities-but flexibility must be disciplined. Smart companies focus on key processes and simple rules. Different types of rules help executives manage different aspects of seizing opportunities.

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