Grand Strategies

 Grand strategies are also called

strategic thrusts. They provide
basic direction for specific strategic
actions and functional tactics. Some
grand strategies are used together
and reinforce each other and some
are usually employed singly.
Grand Strategy
 General plan of major action to achieve long-
term goals
 Falls into three general categories
1. Growth
2. Stability A separate grand
strategy can be
3. Retrenchment
defined for global
operations
Grand Strategy: Growth
 Growth can be promoted internally by
investing in expansion or externally by
acquiring additional business divisions
- Internal growth = can include development of new
or changed products
- External growth = typically involves diversification
– businesses related to current product lines or
into new areas
Grand Strategy: Stability

 Stability, sometimes called a pause strategy,

means that the organization wants
 to remain the same size or
 to grow slowly and in a controlled fashion
Grand Strategy:
Retrenchment
 Retrenchment = the organization goes through a
period of forced decline by either shrinking current
business units or selling off or liquidating entire
businesses

 Liquidation = selling off a business nit for the cash

value of the assets, thus terminating its existence

 Divestiture = involves selling off of businesses that

no longer seem central to the corporation
 Three Levels of Strategy in
Organizations
Corporate-Level Strategy:
What business are we in?
Corporation

Business-Level Strategy:
How do we compete?

Textiles Unit Chemicals Unit Auto Parts Unit

Functional-Level Strategy:
How do we support the business-level
strategy?

Finance R&D Manufacturing Marketing

 Global Corporate
HighStrategies Transnational
Globalization Strategy
Strategy • Seeks to balance global efficiencies
• Treats world as a single global
and local responsiveness
market
• Combines standardization and
• Standardizes global
Need for Global Integration

customization for product/advertising

products/advertising strategies
strategies

Export
Strategy Multi-domestic Strategy
•Domestically focused • Handles markets independently for each
country
•Exports a few domestically • Adapts product/advertising to local tastes
produced products to selected and needs
countries

Low
Low Need for National Responsiveness High
Global Strategy

 Globalization = product design and

advertising strategies are standardized
around the world
 Multi-domestic = adapt product and
promotion for each country
 Transnational = combine global
coordination with flexibility to meet
specific needs in various countries
 Purpose of Strategy
 The plan of action that prescribes
resource allocation and other
activities for dealing with the
environment, achieving a competitive
advantage, that help the organization
attain its goals
Strategies focus on:
● Core competencies

● Developing synergy

● Creating value for customers

long-term objectives?

 Profitability
 Productivity

 Competitive Position

 Employee Development

 Employee Relations

 Technological Leadership

 Public Responsibility
 The Grand Strategy Matrix
Rapid Market Growth
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
7. Concentric diversification
Weak Competitive I II Strong
Position Competitive
1. Retrenchment
IV III 1. Concentric diversification
Position

2. Concentric diversification 2. Horizontal diversification

3. Horizontal diversification `3. Conglomerate diversification
4. Conglomerate diversification 4. Joint ventures
5. Divestiture
6. Liquidation

Slow Market Growth

Ex. 7-9: Grand Strategy Selection Matrix

Overcome weaknesses

Turnaround or Vertical integration

retrenchment Conglomerate diversification
Internal Divestiture External
(redirected Liquidation
II I (acquisition
resources or merger
within the III IV for resource
firm) Concentrated growth Horizontal integration capability)
Mkt. Development Concentric diversification
Prod. Development Joint venture
Innovation

Maximize strengths
Diversification and
Corporate Strategy
 A company is diversified when it is in two or more
lines of business that operate in diverse market
environments
 Strategy-making in a diversified company is a
bigger picture exercise than crafting a strategy for
a single line-of-business
 A diversified company needs a multi-industry,
multi-business strategy
 A strategic action plan must be developed
for several different businesses competing
in diverse industry environments
Four Main Tasks in
Crafting Corporate Strategy
 Pick new industries to enter
and decide on means of entry
 Initiate actions to boost combined
performance of businesses
 Pursue opportunities to leverage cross-business
value chain relationships and strategic fits into
competitive advantage
 Establish investment priorities, steering resources
into most attractive business units
Competitive Strengths of a
Single-Business Strategy

 Resources can be focused on

 Improving competitiveness
 Expanding into new geographic markets
 Responding to changing market conditions
 Responding to evolving customer preferences
Risks of a Single Business
Strategy
 Putting all the “eggs” in one industry basket
 If market becomes unattractive, a
firm’s prospects can quickly dim
 Unforeseen changes can undermine
a single business firm’s prospects
 Technological innovation
 New products
 Changing customer needs
 New substitutes
When Should a Firm
Diversify?
It is faced with diminishing growth prospects in
present business
 It has opportunities to expand into industries whose
technologies and products complement its present
business
 It can leverage existing competencies and
capabilities by expanding into businesses where these
resource strengths are key success factors
 It can reduce costs by diversifying
into closely related businesses
 It has a powerful brand name it can
transfer to products of other businesses to
increase sales and profits of these businesses
Related vs. Unrelated
Diversification
Related Diversification Unrelated
Involves diversifying Diversification
into businesses whose Involves diversifying
value chains possess into businesses with no
competitively valuable competitively valuable
“strategic fits” with value chain match-ups
value chain(s) of firm’s or strategic fits with
present business(es) firm’s present
business(es)
Fig. 9.1: Strategy Alternatives for a Company
Looking to Diversify
What Is Related
Diversification?
 Involves diversifying into businesses whose
value
chains possess competitively valuable
“strategic fits” with the value chain(s) of the
present business(es)
 Capturing the “strategic fits” makes related
diversification a 1 + 1 = 3 phenomenon
Core Concept: Strategic Fit

 Exists whenever one or more activities in

the value chains of different businesses
are sufficiently similar to present
opportunities for
 Transferring competitively valuable
expertise or technological know-how
from one business to another
 Combining performance of common
value chain activities to achieve lower costs
 Exploiting use of a well-known brand name
Why Diversify?
 To build shareholder value!

1+1=3
 Diversification is capable of building shareholder value if
it passes three tests
 Industry Attractiveness Test — the industry presents good
long-term profit opportunities
 Cost of Entry Test — the cost of entering is not so high as to
spoil the profit opportunities
 Better-Off Test — the company’s different businesses
should perform better together than as stand-alone
enterprises, such that company A’s diversification into business
B produces a 1 + 1 = 3 effect for shareholders
Strategies for Entering
New Businesses

Acquire existing company

Internal start-up

Joint ventures/strategic partnerships

Acquisition of an Existing
Company
 Most popular approach to diversification
 Advantages
 Quicker entry into target market
 Easier to hurdle certain entry barriers
 Acquiring technological know-how
 Establishing supplier relationships
 Becoming big enough to match rivals’
efficiency and costs
 Having to spend large sums on
introductory advertising and promotion
Joint Ventures and Strategic
Partnerships
 Good way to diversify when
 Uneconomical or risky to go it alone
 Pooling competencies of two partners provides
more competitive strength
 Only way to gain entry into a desirable foreign
market
 Foreign partners are needed to
 Surmount tariff barriers and import quotas
 Offer local knowledge about
 Market conditions
 Customs and cultural factors
Drawbacks of Joint Ventures

 Raises questions
 Which partner will do what

 Who has effective control

 Potential conflicts
 Conflicting objectives

 Disagreements over how to best operate the

venture
Fig. 9.2: Related Businesses Possess Related
Value
Chain Activities and Competitively Valuable
Strategic Fits
Strategic Appeal of Related
Diversification
 Reap competitive advantage benefits of
 Skills transfer
 Lower costs
 Common brand name usage
 Stronger competitive capabilities
 Spread investor risks over a broader base
 Preserve strategic unity across businesses
 Achieve consolidated performance greater
than the sum of what individual businesses
Types of Strategic Fits

 Cross-business strategic fits can exist

anywhere along the value chain
 R&D and technology activities
 Supply chain activities
 Manufacturing activities
 Sales and marketing activities
 Distribution activities
 Managerial and administrative support
R&D and Technology Fits

 Offer potential for sharing common

technology
or transferring technological know-how

 Potential benefits
 Cost-savings in technology
development and new product R&D

 Shorter times in getting

new products to market


Supply Chain Fits

 Offer potential opportunities for skills

transfer
and/or lower costs

 Procuring materials

 Greater bargaining power in

negotiating with common suppliers

 Benefits of added collaboration with

common supply chain partners
Manufacturing Fits

 Potential source of competitive advantage

when a diversifier’s expertise can be
beneficially transferred to another business
 Quality manufacture
 Cost-efficient production methods
 Cost-saving opportunities arise from ability
to perform manufacturing/assembly activities
jointly in same facility, making it feasible to
 Consolidate production into fewer plants

Distribution Fits
 Offer potential cost-saving opportunities

 Share same distribution facilities

 Use many of same wholesale

distributors and retail dealers
to access customers
Sales and Marketing Fits:
Types of Potential Benefits
 Reduction in sales costs
 Single sales force for related products
 Advertising related products together
 Combined after-sale service and repair work
 Joint delivery, shipping, order processing
and billing
 Joint promotion tie-ins
 Similar sales and marketing approaches provide
opportunities to transfer selling, merchandising,
and advertising/promotional skills
 Transfer of a strong company’s
brand name and reputation
Managerial and
Administrative Support Fits
 Emerge when different business units
require comparable types of
 Entrepreneurial know-how
 Administrative know-how
 Operating know-how
 Different businesses often entail same types
of administrative support facilities
 Customer data network
 Billing and customer accounting systems
 Customer service infrastructure
Core Concept: Economies of
Scope
 Stem from cross-business opportunities to reduce
costs

 Arise when costs can be cut

by operating two or more businesses
under same corporate umbrella

 Cost saving opportunities can stem

from interrelationships anywhere
along the value chains of different
businesses
Related Diversification
and Competitive Advantage
 Competitive advantage can result from related
diversification when a company captures cross-
business 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 firm’s brand name reputation
from one business to another
 Create valuable competitive capabilities via cross-
business collaboration in performing related value chain
activities
From Competitive
Advantage to
Added Gains in Shareholder
 Capturing cross-business strategic fits

Value
Is possible only via a strategy of related diversification
 Builds shareholder value in ways shareholders cannot
achieve by owning a portfolio of stocks of companies in
unrelated industries
 Is not something that happens “automatically” when a
company diversifies into related businesses
 Strategic fit benefits materialize only after management
has successfully pursued internal actions to capture
them
Test Your Knowledge

Which of the following is the best example of related

diversification?
A. A manufacturer of golf shoes diversifying into the production of
fishing rods and fishing lures
B. A homebuilder acquiring a building materials retailer
C. A steel producer acquiring a manufacturer of farm equipment
D. A producer of snow skis and ski boots acquiring a maker of ski
apparel and accessories (outerwear, goggles, gloves and
mittens, helmets and toboggans)
E. A publisher of college textbooks acquiring a publisher of
magazines
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
Fig.
Fig. 9.3:
9.3: Unrelated
Unrelated Businesses
Businesses Have
Have
Unrelated
Unrelated Value Chains and No Strategic Fits
Value Chains and No Strategic Fits
Acquisition Criteria For
Unrelated Diversification
Strategies
 Can business meet corporate targets

for profitability and ROI?

 Is business in an industry with growth
potential?
 Is business big enough to contribute
to parent firm’s bottom line?
 Will business require substantial
infusions of capital?
 Is there potential for union difficulties
or adverse government regulations?
Attractive Acquisition
Targets
 Companies with undervalued assets
 Capital gains may be realized

 Companies in financial distress

 May be purchased at bargain prices and turned
around

 Companies with bright growth prospects

but short on investment capital
 Cash-poor, opportunity-rich companies are
Appeal of Unrelated
Diversification
 Business risk scattered over different
industries

 Financial resources can be directed to

those industries offering best profit prospects

 If bargain-priced firms with big profit potential

are bought, shareholder wealth can be
enhanced
Building Shareholder Value
via Unrelated Diversification
 Corporate managers must
 Do a superior job of diversifying into new
businesses capable of producing good earnings
and returns on investments
 Do an excellent job of negotiating favorable
acquisition prices
 Do a good job overseeing businesses so they
perform at a higher level than otherwise possible
 Shift corporate financial resources from poorly-
performing businesses to those with potential for
above-average earnings growth
 Discern when it is the “right” time to sell a
Key Drawbacks of
Unrelated Diversification
Demanding
Managerial
Requirements

Limited
Competitive
Advantage
Potential
Unrelated Diversification
Has
Demanding Managerial
 The greater the number and diversity of

businesses, the harder it is for managers to

Requirements
 Discern good acquisitions from bad ones
 Select capable managers to manage
the diverse requirements of each business
 Judge soundness of strategic proposals
of business-unit managers
 Know what to do if a business subsidiary stumbles
Likely effect is 1 + 1 = 2, rather than 1 + 1 = 3!
Unrelated Diversification
Offers
Limited Competitive
 Lack of cross-business strategic fits means

unrelated diversification offers no competitive

Advantage Potential
advantage potential beyond what each
business can generate on its own

 Consolidated performance of unrelated

businesses
tends to be no better than sum of individual
businesses on their own (and it may be worse)

 Promise of greater sales-profit

stability over business cycles
Test Your Knowledge

Which of the following is the best example of

unrelated diversification?
A. PepsiCo acquiring Tropicana and Procter &
Gamble acquiring Gillette
B. Honda diversifying into the production of
lawnmowers
C. Smuckers acquiring Jif peanut butter and Crisco
(from Procter & Gamble)
D. Verizon Wireless acquiring Amazon.com
E. Harley Davidson acquiring the motorcycle
Diversification and
Shareholder Value
 Related Diversification

 A strategy-driven approach
to creating shareholder value

 Unrelated Diversification

 A finance-driven approach
to creating shareholder value
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
 Narrowly diversified firms
 Diversification includes a few (2 - 5) related or
unrelated businesses
 Broadly diversified firms
 Diversification includes a wide collection of either
related or unrelated businesses or a mixture
 Multibusiness firms
 Diversification portfolio includes several unrelated
For Discussion: Your
Opinion
Newell Rubbermaid is in the following businesses:
 Cleaning and Organizations Businesses: Rubbermaid storage, organization
and cleaning products, Blue Ice ice substitute, Roughneck storage items,
Stain Shield and TakeAlongs food storage containers, and Brute commercial-
grade storage and cleaning products—25% of annual revenues.
 Home and Family Businesses: Calphalon cookware and bakeware, Cookware
Europe, Graco strollers, Little Tikes children's toys and furniture, and Goody
hair accessories—20% of annual sales.
 Home Fashions: Levolor and Kirsch window blinds, shades, and hardware in
the U.S.; Swish, Gardinia and Harrison Drape home furnishings in Europe—
15% of annual revenues.
 Office Products Businesses: Sharpie markers, Sanford highlighters,
Eberhard Faber and Berol ballpoint pens, Paper Mate pens and pencils,
Waterman and Parker fine writing instruments, and Liquid Paper—25% of
annual revenues.
Would you say that Newell Rubbermaid’s strategy is one of related
diversification, unrelated diversification or a mixture of both? Explain.
For Discussion: Your
Opinion
McGraw-Hill, the publisher of the textbook for this
course, is in the following businesses:
 Textbook publishing (for grades K-12 and higher
education)
 Financial and information services (it owns Standard &
Poors —a well-known financial ratings agency and
provider of financial data, Platts — a provider of energy
information, and McGraw-Hill Construction — a
provider of construction related information)
 Magazine publishing — its flagship publication is
Business Week and it is also the publisher of Aviation
Week
 TV broadcasting — it owns four ABC affiliate stations
(in Indianapolis, Denver, San Diego, and Bakersfield)
 J.D. Power & Associates — which provides a host of
Fig. 9.4: Identifying a Diversified Company’s
Strategy
How to Evaluate a
Step 1: Assess long-term attractiveness of each
Diversified
industry firmCompany’s
is in

Strategy
Step 2: Assess competitive strength of firm’s
business units
Step 3: Check competitive advantage potential of
cross-business strategic fits among
business units
Step 4: Check whether firm’s resources fit
requirements of present businesses
Step 5: Rank performance prospects of
businesses and determine priority for
resource allocation
Step 6: Craft new strategic moves to improve
Step 1: Evaluate Industry
Attractiveness
Attractiveness of each
industry in portfolio

Each industry’s attractiveness

relative to the others

Attractiveness of all
industries as a group
Industry Attractiveness
Factors
 Market size and projected growth
 Intensity of competition
 Emerging opportunities and threats
 Presence of cross-industry strategic fits
 Resource requirements
 Seasonal and cyclical factors
 Social, political, regulatory, and
environmental factors
 Industry profitability
Procedure: Calculating
Attractiveness
Step 1: Select industry Scores for
attractiveness factors
Each Industry
Step 2: Assign weights to each factor
(sum of weights = 1.0)

Step 3: Rate each industry on each

factor, using a scale of 1 to 10

Step 4: Calculate weighted ratings; sum to get

an overall industry attractiveness
rating for each industry
Interpreting Industry
Attractiveness
 Industries with a scoreScores
much below 5.0 do
not pass the attractiveness test
 If a company’s industry attractiveness scores
are all above 5.0, the group of industries the
firm operates in is attractive as a whole
 To be a strong performer, a diversified
firm’s principal businesses should be in
attractive industries—that is, industries with
 A good outlook for growth and
 Above-average profitability
Difficulties in Calculating
Industry Attractiveness
Scores
 Deciding on appropriate weights for industry

attractiveness factors
 Different analysts may have different views about
which weights are appropriate for the industry
attractiveness factors
 Different weights may be appropriate for different
companies
 Gaining sufficient command of an industry to
assign accurate and objective ratings
 Gathering statistical data to assign objective ratings is
straightforward for some factors – market size, growth
Step 2: Evaluate Each
Business-
Unit’s
 Competitive Strength
Objectives

 Appraise how well each

business is positioned in
its industry relative to rivals

 Evaluate whether it is or can be

competitively strong enough to
contend for market leadership
Factors to Use in
Evaluating Competitive
Strength
 Relative market share

 Costs relative to competitors

 Ability to match/beat rivals on key product
attributes
 Ability to benefit from strategic fits with sister
businesses
 Ability to exercise bargaining leverage with key
suppliers or customers
 Caliber of alliances and collaborative
partnerships
 Brand image and reputation
Procedure: Calculating
Competitive Strength
Step 1: Select competitive strengthScores
factors
for Each Business
Step 2: Assign weights to each factor
(sum of weights = 1.0)

Step 3: Rate each business on each

factor, using a scale of 1 to 10

Step 4: Calculate weighted ratings; sum to get

an overall strength rating for each
business
Interpreting Competitive
Strength
 Scores
Business units with ratings above 6.7 are
strong market contenders
 Businesses with ratings in the 3.3 to 6.7
range have moderate competitive strength
vis-à-vis rivals
 Business units with ratings below 3.3 are in
competitively weak market positions
 If a diversified firm’s businesses all have
scores above 5.0, its business units are all
fairly strong market contenders
Plotting Industry
Attractiveness
 and (see Table 9.1)
Use industry attractiveness
and competitive strength
Competitive Strength in a scores (see
Table 9.2) to plot location of each business in
Nine-Cell
matrix Matrix
 Industry attractiveness plotted on vertical axis
 Competitive strength plotted on horizontal axis

 Each business unit appears as a “bubble”

 Size of each bubble is scaled to percentage of
revenues the business generates relative to
total corporate revenues
Fig. 9.5: A Nine-Cell Industry Attractiveness-
Competitive Strength Matrix
Strategy Implications of
Attractiveness/Strength
Matrix
 Businesses in upper left corner

 Accorded top investment priority

 Strategic prescription – grow and build
 Businesses in three diagonal cells
 Given medium investment priority
 Invest to maintain position
 Businesses in lower right corner
 Candidates for harvesting or divestiture
 May, based on potential for good earnings and
 Appeal of
Attractiveness/Strength
Matrix
 Incorporates a wide variety of

strategically relevant variables

 Strategy implications
 Concentrate corporate resources
in businesses that enjoy high degree of industry
attractiveness and high degree of competitive
strength
 Make selective investments in businesses with
intermediate positions on grid
 Withdraw resources from businesses low in
Test Your Knowledge

The 9-cell industry attractiveness-competitive strength

matrix
A. is a valuable tool for ranking a company’s different
businesses from most profitable to least profitable.
B. shows which of a diversified company’s businesses have
good/poor strategic fit.
C. indicates which businesses have the highest/lowest
economies of scope.
D. is a helpful tool for allocating a diversified company’s
resources—the basic idea is to give top investment priority
to those businesses in the upper left portion of the matrix
and to give low priority or perhaps even divest businesses
in the lower right portion of the matrix.
Step 3: Check Competitive
Advantage Potential of
Cross-Business Strategic Fits
 Objective

 Determine competitive advantage potential of

cross-business strategic fits among portfolio
businesses

 Examine strategic fit based on

 Whether one or more businesses
have valuable strategic fits with
other businesses in portfolio

 Whether each business meshes well

Evaluate Portfolio for
Competitively Valuable
Cross-Business Strategic Fits
 Identify businesses which have value

chain match-ups offering opportunities to

 Reduce costs
 Purchasing
 Manufacturing
 Distribution
 Transfer skills / technology / intellectual capital
from one business to another
 Share use of a well-known, competitively
powerful brand name
Fig. 9.6: Identifying Competitive
Advantage
Potential of Cross-Business Strategic Fits
Step 4: Check Resource Fit

 Objective

 Determine how well firm’s resources

match business unit requirements

 Good resource fit exists when

 A business adds to a firm’s resource strengths,

either financially or strategically

 Firm has resources to adequately support

Check for Financial
Resource Fits
 Determine cash flow and investment
requirements of business units
 Which are cash hogs and which are
cash cows?
 Assess cash flow of each business
 Highlights opportunities to shift financial resources
between businesses
 Explains why priorities for resource allocation
can differ from business to business
 Provides rationalization for both
invest-and-expand and divestiture
Characteristics of Cash Hog
Businesses
 Internal cash flows are inadequate to fully
fund needs for working capital and new
capital investment
 Parent company has to continually pump in
capital
to “feed the hog”
 Strategic options
 Aggressively invest in
attractive cash hogs

Characteristics of Cash Cow
Businesses
 Generate cash surpluses over what is
needed to sustain present market position
 Such businesses are valuable because
surplus cash can be used to
 Pay corporate dividends
 Finance new acquisitions
 Invest in promising cash hogs
 Strategic objectives
 Fortify and defend present market position

 Other Tests of Resource
Fits
 Does the business adequately contribute to
achieving companywide performance targets?

 Does the company have adequate financial strength

to fund its different businesses and maintain a
healthy credit rating?

 Does the company have or can it develop the

specific resource strengths and competitive
capabilities needed to be successful in each of its
businesses?

 Are recently acquired businesses acting to

Good vs. Poor Financial
Resource Fit
 Good financial fit exists when a business
 Contributes to achievement of corporate
objectives
 Enhances shareholder value
 Poor financial fit exists when a business
 Soaks up disproportionate share of financial
resources
 Is an inconsistent bottom-line contributor
 Experiences a profit downturn
that could jeopardize entire company
A Note of Caution: Why
Diversification Efforts Can
Fail
 Trying to replicate a firm’s success in one

business and hitting a second home run in a

new business is easier said than done

 Transferring resource capabilities to new

businesses can be far more arduous and
expensive than expected

 Management can misjudge difficulty

of overcoming resource strengths of
Step 5: Rank Business Units
Based on
Performance
 and
Factors to consider Priority for
in judging
business-unit performance
Resource Allocation
 Sales growth
 Profit growth
 Contribution to company earnings
 Return on capital employed in business
 Economic value added
 Cash flow generation
Determine Priorities
for Resource Allocation
 Objective
 “Get the biggest bang for the buck”
in allocating corporate resources 2 6
3 4 5
 Approach
 Rank each business from highest to lowest priority
for corporate resource support and new capital
investment
 Steer resources from low- to high-opportunity
areas
Fig. 9.7: The Chief Strategic and Financial
Options for
Allocating a Diversified Company’s Financial
Resources
Step 6: Craft New Strategic
Moves – Strategic Options
 Stick closely with existing business lineup
and pursue opportunities it presents
 Broaden company’s business scope by
making new acquisitions in new industries
 Divest certain businesses and retrench
to a narrower base of business operations
 Restructure company’s business lineup, putting
a whole new face on business makeup
 Pursue multinational diversification, striving to
Fig. 9.8: A Company’s Four Main Strategic
Alternatives After It Diversifies
Strategies to Broaden a
Diversified
 Conditions making Company’s
this approach attractive
Business
 Base
Slow grow in current businesses
 Vulnerability to seasonal or recessionary influences
or to threats from emerging new technologies
 Potential to transfer resources and capabilities to
other related businesses
 Rapidly-changing conditions in one or more core
industries alter buyer requirements
 Complement and strengthen market position of one
or more current businesses
Divestiture Strategies Aimed
at Retrenching
to a Narrower Diversification
 Strategic options

Retrench ?
Base
 Retrench to a smaller but more Divest ? Close ?
appealing group of businesses
Sell ?
 Divest unattractive businesses

 Sell it

 Spin it off as
independent company

 Liquidate it (close it down

Retrenchment Strategies

 Objective
 Reduce scope of diversification to smaller number
of “core “ businesses
 Strategic options involve
divesting businesses that
 Are losing money
 Have little growth potential
 Have little strategic fit
with core businesses
 Are too small to contribute
Conditions That Make
Retrenchment Attractive
 Diversification efforts have become too broad,
resulting in difficulties in profitably managing all
the businesses
 Deteriorating market conditions in a once-
attractive industry
 Lack of strategic or resource fit of a business
 A business is a cash hog with questionable long-
term potential
 A business is weakly positioned in its industry
 Businesses that turn out to be “misfits”
Options for Accomplishing
Divestiture
 Sell it
 Involves finding a company which views the business
as a good deal and good fit
 Spin it off as independent company
 Involves deciding whether or not to retain partial
ownership
 Liquidation
 Involves closing down operations and
selling remaining assets

Strategies to Restructure a
Company’s Business Lineup
 Objective

 Make radical changes in mix

of businesses in portfolio via both

 Divestitures and

 New acquisitions

to put a whole new

face on the company’s
business makeup
Conditions That Make
Portfolio Restructuring
Attractive
 Too many businesses in unattractive industries

 Too many competitively weak businesses

 Ongoing declines in market shares of one
or more major business units
 Excessive debt load
 Ill-chosen acquisitions performing worse than
expected
 New technologies threaten survival of one or more
core businesses
 Appointment of new CEO who decides to redirect
Multinational Diversification
Strategies
 Distinguishing characteristics
 Diversity of businesses and
 Diversity of national markets

 Presents a big strategy-making challenge

 Strategies must be conceived and executed
for each business, with as many
multinational variations as appropriate
 Cross-business and cross-country collaboration
Appeal of Multinational
Diversification Strategies
 Offer two avenues for long-term
growth in revenues and profits

 Enter additional businesses

 Extend operations of
existing businesses into
additional country markets
Opportunities to Build
Competitive Advantage via
Multinational Diversification
 Full capture of economies of scale and

experience curve effects

 Capitalize on cross-business economies of
scope
 Transfer competitively valuable resources from
one business to another and from one country to
another
 Leverage use of a competitively powerful brand
name
 Coordinate strategic activities and
Competitive Strength of
a DMNC in Global Markets
 Competitive advantage potential is based
on
 Using a related diversification strategy based
on
 Resource-sharing and resource-transfer
opportunities among businesses
 Economies of scope and brand name
benefits
 Managing related businesses to capture
important cross-business strategic fits
Competitive Power of
a DMNC in Global Markets
 A DMNC has a strategic arsenal capable of

defeating both a domestic-only rival or a

single-business rival by competing in
 Multiple businesses and
 Multiple country markets

 Can use its multiple profit

sanctuaries and can employ
cross-subsidization
tactics if need be
Critical Elements for Shared Opportunities
to be Meaningful

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
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?
 Balancing Financial
Resources: Portfolio
Techniques
BCG Growth-Share
Matrix

Industry
Life Cycle-
Attractiveness-
Competitive
Business Strength
Strength Matrix
Matrix
 BCG Growth-Share Matrix
Cash Generation (Market Share) Description of
Market Share:
High Low Dimensions
Sales relative to
those of other
Cash Use (Growth Rate)

competitors in
Problem market (dividing
High Star point is usually
Child selected to have
only 2-3 largest
competitors in any
market fall into
high market share
region)
Low Cash Cow Dog Growth Rate:
Industry growth
rate in constant
dollars (dividing
point is typically
GNP’s growth rate)
 Strategies

• Question Marks - Build Market Share

• Star - Hold Market Share

• Cash Cows - Harvest

• Dogs – Divest
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix
Industry Attractiveness Factors
Bargaining
Nature of Threat of
Power of
Competitive Substitutes/ New
Suppliers/Custo
Rivalry Entrants
mers
•Number of •Relative size of •Technological
competitors typical players maturity/stabili
ty
•Size of •Numbers of
competitors each •Diversity of the
market
•Strength of •Importance of
competitors’ purchases from •Barriers to
corporate or dales to entry
parents
•Ability to •Flexibility of
•Price wars vertically distribution
integrate system
•Competition on
multiple
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix (continued)
Industry Attractiveness Factors
Economic Sociopolitical
Financial Norms
Factors Considerations
•Sales •Average •Government
volatility profitability regulation
•Cyclicality of •Typical •Community
demand leverage support
•Market •Credit •Ethical
growth practices standards
•Capital
intensity
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix (continued)
Business Strength Factors
Level of
Cost Position Response Time
Differentiation
•Economies of •Promotion •Manufacturing
scale effectiveness flexibility
•Manufacturing •Product quality •Time needed to
costs introduce new
•Company products
•Overhead image
•Scrap/waste/rew •Patented •Delivery times
ork products •Organizational
•Experience flexibility
•Brand
effects awareness
•Labor rates
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix (concluded)
Business Strength Factors
Financial
Human Assets Public Approval
Strength
•Solvency •Turnover •Goodwill
•Liquidity •Skill level •Reputation
•Break-even •Relative •Image
point wage/salary

•Cash flows •Morale

•Managerial
•Profitability commitment
•Growth in •Unionization
revenues
 Industry Attractiveness-Business
Strength Matrix
Industry Attractiveness Description of
Industry
High Medium Low Dimensions
Attractiveness:
Subjective
assessment based
High Selecti Grow or on broadest possible
Business Strength

Invest ve Let range of external

Growth Go opportunities and
threats beyond
control of
Medium Selectiv
Grow or management
e Harvest
Let Go Business Strength:
Growth
Subject assessment
of how strong a
Low competitive
Grow or
Harvest Divest advantage is
Let Go created by a broad
range of a firm’s
internal strengths
and weaknesses
 Advantages of the Industry
Attractiveness-Business Strength
Matrix over the BCG Matrix

 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
 Market Life Cycle-Competitive
Strength Matrix
Stage of Market Life Cycle
Introduction Growth Maturity Decline Description of
Stage of Market
Dimensions
Life Cycle: See
y
Competitive Strength

el page 184
: s iv
High
u sh es
P gr
Ag y Competitive
est : e l
n v ion tiv Strength: Overall
Moderate I u t ec
l subjective rating,
Ca Se
st based on wide
ve e r: range of factors
In n g st
a e regarding
Low D arv likelihood of
H
gaining and
maintaining a
competitive
advantage
 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

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
 Behavioral Considerations
Affecting Strategic Choice
Role of
current
strategy
Degree of
firm’s
Attitudes
external
toward risk
dependenc
e
Managerial
priorities Internal
political Competitiv
different
consideratio e reaction
from
stockholder ns
s
 Behavioral Considerations
Affecting Strategic Choice
 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 firm’s external dependence
 How powerful are firm’s owners, customers, competitors,
unions, and its government?
 How flexible is firm with its environment?
 Behavioral Considerations
 Affecting Strategic Choice
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
 Behavioral Considerations
Affecting Strategic Choice
 Internal political considerations

 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
 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.
 IBM’s Partners

1988 Jointly own Prodigy, an interactive

Sears computer service for consumers
1989 Jointly built a US $200 million plant in
Toshiba
Japan to manufacture high-
resolution colour flat screens for laptops
1990 Jointly developing future chips and jointly
Siemens
built
Mitsubish 1991 16-Mb DRAM memory chips in France
i 1991 Mitsubishi Electric sells IBM mainframes
Borland in Japan under its own name
 IBM’s Partners

1991 Developing tools to make it easier to

Wang create software for the OS/2 system
1991 Sells IBM’s PCs and RS/6000 workstations
Novell under its own name
1991 IBM sells Novell networking software
Apple 1991 Two joint ventures: Taligent and Kaleida
1991 Jointly developing the RISC microprocessor
Motorola
1991 Jointly developing a new generation of
Intel
integrated microprocessor chips
 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
 Successful International
Strategic Alliances

 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

 Different Types of
Strategic Alliances
Contd….
Alliance Types Examples
 Collaborative  American Express and Toys R Us
advertising (cooperative efforts for television advertising
and promotion)
 R&D partnerships  Cytel and Sumitomo chemicals (alliance to
develop the next generation of
 Lease service biotechnology drugs)
agreements  Cigna and United Motor Works
(arrangement to provide financing for non-
 Shared distribution US firms and governments)
 Nissan and Volkswagen (Nissan sells
Volkswagens in Europe and Volkswagen
 Technology transfer distributes Nissan’s cards also in Europe)
 IBM and Apple Computers (arrangement to
 Cooperative bidding develop the next generation of operating
system software)
 Boeing, General Dynamics and Lockheed
(cooperated together in winning the contract
for an advanced tactical fighter)
 Different Types of
Strategic Alliances
Alliance Types Examples
Cross -manufacturing 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 DuPont and National Cancer Institute (DuPont
industry partnering worked with NCI in the first phase of the clinical
Internal spin-offs cancer trial on IL)
Cummins engine and Toshiba Corporation (created
Cross-licensing a 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)
 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.
 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.
 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.
 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)
 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
 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.
 Toshiba
An alliance with Sun Microsystems Inc. of the US in the areas of
Contd….


rightsizing, Internet and interactive technology. They will share product

development, marketing and distribution in these fast-growth 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.
 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 Boehringer-
Mannheim of Germany
 Research cooperation between Hitachi Cambridge Laboratory
and Cambridge University for developing a single electron
memory device.