Transcript Document 7295458

1
MANAGEMENT POLICY AND STRATEGY
SESSION - VIII
Strategic Analysis and Choice in
Multi-business Companies
Prof. Sushil
Department of Management Studies
Indian Institute of Technology, Delhi
INDIA
Email: [email protected]
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Questions Related to Diversification and
Integration
2
1. Are opportunities for sharing infrastructure and
capabilities forthcoming?
2. Are we capitalizing on our core competencies?
3. Does the company’s business portfolio balance
financial resources?
4. Does our business portfolio achieve appropriate
levels of risk and growth?
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
COMBINATION OF MEANS AND FORMS OF
DIVERSIFICATION
3
Forms
Vertical
Horizontal
Global
Acquisitions
Time Inc. acquires Warner
Communications, creating
a
vertically
integrated
entertainment business
Phillip Morris buys Kraft
and General Foods in an
effort to diversify out of
the cigarette business
Strategic
Alliances
Cetus, a leading firm in the
biotechnology field, teams
up w ith larger corporations
w hich provide the capital
and marketing needed to
introduce
new
Cetus
technology
Humana develops a full line
of health care services,
vertically integrating across
insurance, hospitals, and
follow -up
treatment
services
Dow
Chemical
and
Corning Glass join forces
to create a joint venture
more
profitable
than
either of its parents.
a
German
BASF,
chemical producer, buys
Inmont, a US chemicals
company, to overcome
limited
grow th
opportunities at home
Fuji Photo Films and
Xerox, Inc. form a single
import sales operation
that
later grow s to
become one of
the
w orld’ s leading producers
of photocopiers
Anheuser-Busch attempts
to open up new markets
by taking Budw eiser, its
flagship
product
into
Britain
Internal
Development
Irwin/McGraw-Hill
consistently
gets
3M
more than 25% of its
revenues from products it
has developed w ithin the
last five years
© 2000 The McGraw-Hill Companies, Inc.
4
EVALUATING REASONS TO DIVERSIFY
Most Power to
Create Value
Least Power to
Create Value
Reducing
Risk
Maintain
Growth
Not
Recommended
as a Reason
to Diversify
Irwin/McGraw-Hill
Balancing
Cash Flows
Sharing
Infrastructure
Increasing
Market Power
Capitalizing
on Core
Competencies
Recommended
as a Reason
to Diversity
© 2000 The McGraw-Hill Companies, Inc.
Critical Elements for Shared Opportunities
to be Meaningful
5
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
6
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?
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Balancing Financial Resources: Portfolio
Techniques
7
BCG Growth-Share
Matrix
Industry
AttractivenessBusiness Strength
Matrix
Irwin/McGraw-Hill
Life CycleCompetitive
Strength Matrix
© 2000 The McGraw-Hill Companies, Inc.
8
BCG Growth-Share Matrix
Cash Generation (Market Share)
High
Low
Description of
Dimensions
Cash Use (Growth Rate)
Market Share: Sales
High
Low
Irwin/McGraw-Hill
Star
Cash Cow
Problem
Child
Dog
relative to 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)
© 2000 The McGraw-Hill Companies, Inc.
9
Strategies

Question Marks - Build Market Share

Star - Hold Market Share

Cash Cows - Harvest

Dogs – Divest
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Factors Considered in Constructing an Industry
Attractiveness-Business Strength Matrix
10
Industry Attractiveness Factors
Nature of Competitive Bargaining Power of
Rivalry
Suppliers/Customers
• Number of
competitors
• Relative size of
typical players
• Size of competitors
• Numbers of each
• Strength of
• Importance of
competitors’
corporate parents
• Price wars
• Competition on
purchases from or
dales to
• Ability to vertically
Threat of
Substitutes/ New
Entrants
• Technological
maturity/stability
• Diversity of the
market
• Barriers to entry
• Flexibility of
distribution system
integrate
multiple dimensions
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Factors Considered in Constructing an Industry
Attractiveness-Business Strength Matrix
(continued)
11
Industry Attractiveness Factors
Economic Factors
• Sales volatility
• Cyclicality of
demand
• Market growth
• Capital intensity
Irwin/McGraw-Hill
Financial Norms
• Average
profitability
• Typical leverage
• Credit practices
Sociopolitical
Considerations
• Government
regulation
• Community
support
• Ethical standards
© 2000 The McGraw-Hill Companies, Inc.
Factors Considered in Constructing an Industry
Attractiveness-Business Strength Matrix
(continued)
12
Business Strength Factors
Cost Position
• Economies of scale
• Manufacturing costs
• Overhead
Level of
Differentiation
• Promotion
effectiveness
• Product quality
• Scrap/waste/rework • Company image
• Patented products
• Experience effects
• Labor rates
• Proprietary
• Brand awareness
Response Time
• Manufacturing
flexibility
• Time needed to
introduce new
products
• Delivery times
• Organizational
flexibility
processes
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Factors Considered in Constructing an Industry
Attractiveness-Business Strength Matrix
(concluded)
13
Business Strength Factors
Financial Strength
Human Assets
Public Approval
• Solvency
• Turnover
• Goodwill
• Liquidity
• Skill level
• Reputation
• Break-even point
• Relative
• Image
• Cash flows
• Profitability
• Growth in
revenues
Irwin/McGraw-Hill
wage/salary
• Morale
• Managerial
commitment
• Unionization
© 2000 The McGraw-Hill Companies, Inc.
14
Industry Attractiveness-Business Strength Matrix
Industry Attractiveness
High
Medium
Low
Description of
Dimensions
Industry Attractiveness:
Business Strength
High
Medium
Low
Irwin/McGraw-Hill
Invest
Selective Grow or
Growth
Let Go
Selective Grow or
Growth
Let Go
Grow or
Let Go
Harvest
Harvest
Divest
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
© 2000 The McGraw-Hill Companies, Inc.
Advantages of the Industry AttractivenessBusiness Strength Matrix over the BCG Matrix



15
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
16
Market Life Cycle-Competitive Strength Matrix
Stage of Market Life Cycle
Competitive Strength
Introduction
High
Moderate
Low
Irwin/McGraw-Hill
Growth
Maturity
Decline
Description of
Dimensions
Stage of Market Life
Cycle: See page 184
Competitive
Strength: Overall
subjective rating,
based on wide range
of factors regarding
likelihood of gaining
and maintaining a
competitive
advantage
© 2000 The McGraw-Hill Companies, Inc.
17
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
accomplished - a balanced portfolio of businesses
Irwin/McGraw-Hill
be
© 2000 The McGraw-Hill Companies, Inc.
18
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Behavioral Considerations Affecting Strategic
Choice
19
Role of current
strategy
Degree of
firm’s
external
dependence
Managerial
priorities
different from
stockholders
Irwin/McGraw-Hill
Attitudes
toward risk
Internal
political
considerations
Competitive
reaction
© 2000 The McGraw-Hill Companies, Inc.
Behavioral Considerations Affecting Strategic
Choice

Role of current strategy


20
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?
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Behavioral Considerations Affecting
Strategic Choice

Attitudes toward risk




21
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Behavioral Considerations Affecting
Strategic Choice

Internal political considerations




22
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
23
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.
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
24
IBM’s Partners
Sears
1988
Toshiba
1989
Siemens
1990
Mitsubishi 1991
Borland
1991
Irwin/McGraw-Hill
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
© 2000 The McGraw-Hill Companies, Inc.
25
IBM’s Partners
Wang
1991
Novell
1991
1991
Apple 1991
Motorola1991
1991
Intel
Irwin/McGraw-Hill
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
© 2000 The McGraw-Hill Companies, Inc.
26
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
Major Elements in a Successful International
Strategic Alliances




27
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
28
Different Types of Strategic Alliances
Contd….

Alliance Types
Collaborative
advertising


R&D partnerships

Lease service
agreements



Shared distribution



Technology
transfer

Cooperative bidding

Irwin/McGraw-Hill
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)
© 2000 The McGraw-Hill Companies, Inc.
29
Different Types of Strategic Alliances
Alliance Types
Cross -manufacturing
Examples
Ford and Mazda (design and build similar cards on the
same manufacturing/assembly line)
Resource venturing
Swift Chemical Co., Texasgulf, RTZ and US Borax
(Canadian-based mining natural resources venture)
Government and industry DuPont and National Cancer Institute (DuPont worked
partnering
with NCI in the first phase of the clinical cancer trial on
Internal spin-offs
IL)
Cummins engine and Toshiba Corporation (created a
Cross-licensing
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)
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
30
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.
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
31
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.
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
32
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.
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
33
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
co-production contracts, co-marketing relationships, and research
contracts.
Unilateral technology flows Second-sourcing and licensing
agreements (Hagedoorn and Schakenraad, 1994)
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
34
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
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
35
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
large-size 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.
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
36
Toshiba
Contd….

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 fastgrowth 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.
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.
37
Hitachi







An R&D agreement with Texas Instruments to develop a
next-generation 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.
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.