MANAGEMENT POLICY AND STRATEGY SESSION - VIII

1. MANAGEMENT POLICY AND STRATEGYSESSION - VIII Strategic Analysis and Choice in Multi-business Companies Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in

2. Questions Related to Diversification and Integration 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?

3. COMBINATION OF MEANS AND FORMS OF DIVERSIFICATION Forms Means

4. EVALUATING REASONS TO DIVERSIFY Most Power to Create Value Least Power to Create Value Capitalizing on Core Competencies Increasing Market Power Sharing Infrastructure Balancing Cash Flows Maintain Growth Reducing Risk Recommended as a Reason to Diversity Not Recommended as a Reason to Diversify

5. 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

6. 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? Evaluating the Role of Core Competencies

7. BCG Growth-Share Matrix Industry Attractiveness-Business Strength Matrix Life Cycle-Competitive Strength Matrix Balancing Financial Resources: Portfolio Techniques

8. Cash Generation (Market Share) Description of Dimensions High Low Market Share:Sales 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) Star Problem Child High Cash Use (Growth Rate) Dog Cash Cow Low BCG Growth-Share Matrix

9. Strategies • Question Marks - Build Market Share • Star - Hold Market Share • Cash Cows - Harvest • Dogs – Divest

10. Nature of Competitive Rivalry Bargaining Power of Suppliers/Customers Threat of Substitutes/ New Entrants • Number of competitors • Size of competitors • Strength of competitors’ corporate parents • Price wars • Competition on multiple dimensions • Relative size of typical players • Numbers of each • Importance of purchases from or dales to • Ability to vertically integrate • 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 Factors

11. Economic Factors Financial Norms Sociopolitical Considerations • Sales volatility • Cyclicality of demand • Market growth • Capital intensity • Average profitability • Typical leverage • Credit practices • Government regulation • Community support • Ethical standards Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Industry Attractiveness Factors

12. Cost Position Level of Differentiation Response Time • Economies of scale • Manufacturing costs • Overhead • Scrap/waste/rework • Experience effects • Labor rates • Proprietary processes • Promotion effectiveness • Product quality • Company image • Patented products • Brand awareness • Manufacturing flexibility • Time needed to introduce new products • Delivery times • Organizational flexibility Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Business Strength Factors

13. Financial Strength Human Assets Public Approval • Solvency • Liquidity • Break-even point • Cash flows • Profitability • Growth in revenues • Turnover • Skill level • Relative wage/salary • Morale • Managerial commitment • Unionization • Goodwill • Reputation • Image Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (concluded) Business Strength Factors

14. Industry Attractiveness Description of Dimensions High Medium Low Invest Grow or Let Go Selective Growth Industry Attractiveness: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 High Selective Growth Harvest Grow or Let Go Medium Business Strength Grow or Let Go Divest Harvest Low Industry Attractiveness-Business Strength Matrix

15. 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

16. Stage of Market Life Cycle Description of Dimensions Introduction Growth Maturity Decline 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 Push: Invest Aggressively High Caution: Invest Selectively Moderate Competitive Strength Danger: Harvest Low Market Life Cycle-Competitive Strength Matrix

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 be accomplished - a balanced portfolio of businesses

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

19. Role of current strategy Attitudes toward risk Degree of firm’s external dependence Competitive reaction Internal political considerations Managerial priorities different from stockholders Behavioral Considerations Affecting Strategic Choice

20. 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?

21. 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

22. 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

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.

24. Sears Toshiba Siemens Mitsubishi Borland IBM’s Partners 1988 1989 1990 1991 1991 Jointly own Prodigy, an interactive computer service for consumers Jointly built a US $200 million plant in Japan to manufacture high- resolution 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

25. Wang Novell Apple Motorola Intel IBM’s Partners 1991 1991 1991 1991 1991 1991 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

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

27. Major Elements in a 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

28. Alliance Types Collaborative advertising R&D partnerships Lease service agreements Shared distribution Technology transfer Cooperative bidding Different Types of Strategic Alliances Contd…. 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 non-US 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)

29. Different Types of Strategic Alliances Alliance Types Cross -manufacturing Resource venturing Government and industry partnering Internal spin-offs Cross-licensing Examples Ford and Mazda (design and build similar cards on the same manufacturing/assembly line) Swift Chemical Co., Texasgulf, RTZ and US Borax (Canadian-based mining natural resources venture) DuPont and National Cancer Institute (DuPont worked with NCI in the first phase of the clinical cancer trial on IL) Cummins engine and Toshiba Corporation (created 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)

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.

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.

32. British AirwaysContd... • 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.

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)

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

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.

36. ToshibaContd…. • 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 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.

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 Boehringer-Mannheim of Germany • Research cooperation between Hitachi Cambridge Laboratory and Cambridge University for developing a single electron memory device.