Multibusiness Strategy

LECTURE 7

The Portfolio Approach

The portfolio approach is a historical starting

point for strategic analysis and choice in
multibusiness firms.
The portfolio approach helps allocate
resources in multibusiness companies.

9 -2

Portfolio Techniques

An approach pioneered by the Boston

Consulting Group that attempted to help
managers balance the flow of cash resources
among their various businesses while also
identifying their basic strategic purpose within
the overall portfolio.

9 -3

The BCG Growth-Share Matrix

Dimensions
Market Growth Rate

The projected rate of sales growth for the

market being served by a particular business
Relative Competitive Position
The market share of a business divided by the
market share of its largest competitor.

9 -4

Ex. 9.2

The BCG Growth-Share

Matrix

9 -5

The BCG Growth-Share Matrix

Types of Businesses
Stars
Businesses in rapidly growing markets with
large market shares.

Cash Cows
Businesses with a high market share in lowgrowth markets or industries.

9 -6

The BCG Growth-Share Matrix

Types of Businesses (contd.)
Dogs
Low market share and low growth businesses

Question Marks
Businesses whose high growth rate gives
them considerable appeal but whose low
market share makes their profit potential
uncertain.

9 -7

Ex. 9.3 Factors

Considered in Constructing an
Industry Attractiveness-Business Strength Matrix
(adapted)

Industry Attractiveness
Nature of competitive rivalry
Bargaining power of suppliers/customers
Threat of substitute products/new entrants
Economic factors
Financial norms
Sociopolitical considerations

9 -8

Factors Considered in Constructing an Industry

Attractiveness-Business Strength Matrix (adapted)

Ex. 9.3

Business Strength
Cost position
Level of differentiation
Response time
Financial strength
Human assets
Public approval

9 -9

The directional policy

(GEMcKinsey) matrix (2)

Figure 7.8

Strategy guidelines based on the directional policy matrix

9-10

Ex. 9.5

BCGs Strategic Environments

Matrix

9-11

BCGs Strategic Environments Matrix

Types of Businesses
Volume Businesses
Businesses that have few sources of
advantage, but the size is large typically the
result of scale economics
Stalemate Businesses
Businesses with few sources of advantage,
most of them small. Skills in operational
efficiency, low overhead, and cost
management are critical to profitability.

9-12

BCGs Strategic Environments Matrix

Types of Businesses (contd.)
y Fragmented Businesses
y Businesses with many sources of advantage,
but they are all small. They typically involve
differentiated products with low brand loyalty,
easily replicated technology, and minimal
scale economies.
y Specialization Businesses
y Businesses with many sources of advantage.
Skills in achieving differentiation (product
design, branding expertise, innovation, and
perhaps scale) characterize winning
specialization businesses.
9-13

Limitations of Portfolio Approach

y
y
y
y
y
y

It does not address how value is being created

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

9-14

The Synergy Approach: Leveraging Core

Competencies
y

Opportunities to build value via diversification,

integration, or joint venture strategies are usually found
in
market-related,
operations-related,
and
management activities
Strategic analysis is concerned with whether or not the
potential competitive advantages expected to arise
from each value opportunity have materialized
The most compelling reason companies should
diversify can be found in situations where core
competencieskey value-building skillscan be
leveraged with other products or into markets that are
not a part of where they were created
9-15

The Synergy Approach

Each core competency should provide a

relevant competitive advantage to the
intended businesses
Businesses in the portfolio should be related
in ways that make the companys core
competencies beneficial
Any combination of competencies must be
unique or difficult to recreate

9-16

Elements Critical in Meaningful Shared

Opportunities

The shared opportunities must be a significant

portion of the value chain of the businesses
involved.
The businesses involved must truly have shared
needs need for the same activity or there is
no basis for synergy in the first place.

9-17

Strategy Development Directions

Source: Adapted from H. Ansoff,

Ansoff, Corporate Strategy,
Strategy, Penguin, 1988, Chapter 6.

Exhibit 7.1
9-18

The Parenting Framework

The perspective that the role of corporate
headquarters (the parent) in multibusiness
(the children) companies is that of a parent
sharing wisdom, insight, and guidance to help
develop its various businesses to excel.

9-19

The Parenting Framework

(contd.)

The parenting framework perspective sees

multibusiness companies as creating value
by
influencingor parentingtheir businesses
The best parent companies create more
value than any of their rivals do or would if
they owned the same businesses
To add value, a parent must improve its
businesses
9-20

Figure 7.9

The Parenting Matrix: the Ashridge Portfolio Display

Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley, 1994

9-21

The parenting matrix (2)

1. Heartland business units - the parent understands these well
and can add value. The core of future strategy.
2. Ballast business units - the parent understands these well but
can do little for them. They could be just as successful as
independent companies.
If not divested, they should be spared corporate bureaucracy.
3. Value-trap business units are dangerous. There are attractive
opportunities to add value but the parents lack of feel will result
in more harm than good The parent needs new capabilities to
move value-trap businesses into the heartland. It is easier to
divest to another corporate parent which could add value.
4. Alien business units are misfits. They offer little opportunity to
add value and the parent does not understand them. Exit is the
best strategy.
9-22

The Corporate Parent Role: Can It Add Tangible

Value?

Realizing synergies from shared

capabilities and core competencies is
a key way value is added in
multibusiness companies.
1. Research suggests that figuring out if the
synergies are real and, if so, how to capture
those
synergies
is
most
effectively
accomplished by business unit managers, not
the corporate parent.
2. How can the corporate parent add value to
its businesses in a multibusiness company?
9-23

10 Sources of Parenting
Opportunities

Size & Age

Management
Business Definition
Predictable Errors
Linkages

Common
capabilities
Specialized
expertise
External relations
Major decisions
Major changes

9-24

Patching
The process by which corporate executives
routinely remap their businesses to match
rapidly changing market opportunities adding,
splitting, transferring, exiting, or combining
chunks of businesses.

9-25

The Patching Approach

It can take the form of adding, splitting,

transferring, exiting, or combining chunks of
businesses
Patching is not seen as critical in stable,
unchanging markets
When markets are turbulent and rapidly
changing, patching is seen as critical to the
creation of economic value in a
multibusiness company

9-26

Proponents of Patching
`

`
`

View traditional corporate strategy as creating

defensible strategic positions for business units by
acquiring or building valuable assets, wisely
allocating resources to them, and weaving
synergies among them
In volatile markets, they argue, this traditional
approach results in business units with strategies
that are quickly outdated and competitive
advantages rarely sustained beyond a few years
As a result, strategic analysis should center on
strategic processes more than strategic
positioning
In these volatile markets, patchers strategic analysis
focuses on making quick, small, frequent changes
in parts of businesses and organizational processes
9-27

Patching (contd.)
Strategic Processes
Decision making, operational activities, and
sales activities that are critical business
processes.
Strategic Positioning
The way a business is designed and
positioned to serve target markets.

9-28

Ex. 9.9

Three Approaches to Strategy

9-29

References
Pearce, J.A. & Robinson, R.B. 2013. Strategic
Management: Formulation, Implementation & Control,
13th Edition. McGraw-Hill International edition, Chapter
9.
Johnson, G., Scholes, K. & Whittington, R. 2011.
Exploring Corporate Strategy, 9th Edition, Prentice Hall.
Chapter 7.

930
-30