SESSION 13: CORPORATE LEVEL STRATEGY: Analysis and Choice in The Multi-Business Company

1. SESSION 13: CORPORATE LEVEL STRATEGY: Analysis and Choice in The Multi-Business Company Rationalizing Diversification and Building Shareholder Value

2. The Concept of Corporate-Level Strategy Primary Question - Where to Compete? Are there other business opportunities? Entering or exiting Industries

3. CL Strategy – Whether to Diversify? • Synergies • Growth Opportunities • Agency Issues – “Empire Building”

4. Diversification • Corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that market

5. When? Expand into a business activity that doesn’t negatively react to the same economic downturns as your current business activity (cyclicality) • Growth potential in present business • Attractiveness of opportunities to transfer • Potential cost-savings opportunities • Availability of adequate resources • Managerial expertise to cope with complexity

6. Questions to Ask • What can our company do better than any of its potential rivals in a new market? • What strategic assets do we need in order to succeed in the new market? • Can we catch up to or leapfrog competitors at their own game? • Will diversification break up strategic assets that need to be kept together? • Will we be simply a player in the new market or will we emerge a winner? • What can our company learn by diversifying, and are we sufficiently organized to learn it?

7. Motives for Diversification • To grow • To more fully utilize existing resources and capabilities • To escape from undesirable or unattractive industry environments • To make use of surplus cash flows

8. Risks & Rewards • Increased Sales and Revenue • Dependency Reduction • Operational Stress • Brand Damage

9. Failed • BP and Exxon: tried to use their knowledge of exploration, extraction, and large-scale management capabilities in the mineral business. • What they didn’t have? Access to deposits • Coca-Cola: tried to use their intimate knowledge of consumers, marketing and branding expertise, and distribution capabilities in the wine business. • So, what was the problem? They knew nothing about wine!

10. Concentric Diversification Primary Industry • Expanding into market or products that are related to current business • Related diversification • Opportunities to expand product offerings or expand into new geographical areas • Very complex and difficult to coordinate different but related businesses A B C

11. Examples • Pepsi Co. • Bought Taco Bell, KFC, Pizza Hut, and Frito Lay • Canon • Cameras to Photocopiers • Johnson & Johnson • Baby shampoo and Neutrogena skin care products

12. Conglomerate Diversification Primary Industry • Expanding into industries unrelated to its current business • Unrelated diversification • Helps the company to continue to grow after a core business has matured or started to decline • Company can’t lack expertise about their new business A B

13. Examples • General Electric • Radios, fridges, and wind turbines • TV networks • Financial service firms • Oil drilling • Jet Aircraft Engines • Samsung • Phones, TVs, and tablets • Military hardware • Apartments • Korean amusement parks • Virgin Group Limited • Travel and entertainment • Financial services • Wineries • Mobile phones • Space Tourism

14. Multibusiness Corporations Corporations comprised of multiple businesses are often referred to as having a portfolio of businesses

15. By Definition a change in Corporate Level Strategy should be reflected in a change in Mission Statement

25. SONY PICTURES STUDIOS

29. CADBURY SCHWEPPES, PLC. DR. PEPPER/SEVEN UP, INC . SNAPPLE LA CASERA ORANGINA CANADA DRY  MOTT’S HAWAIIAN PUNCH TRINA CLAMATO SOLO A & W GINI SUNKIST CANADA DRY SQUIRT ENERGADE CRUNCHIE FRUIT & NUT MINIHEROES

30. The Portfolio Approach to Corporate Level Strategy • Research Allocation Decisions • How does Corporate Affiliation Provide Value?

31. GE and McKinsey • The Concept of The SBU • Corporate Review Capability • Matrices to Facilitate/Illuminate the Resource Allocation Decision

32. To Be Designated an SBU, Businesses had to: • Have a unique mission independent of other SBUs • Have a clearly definable set of competitors • Compete in external markets • Be able to carry out integrative planning relatively independent of other SBUs • Be able to manage resources in key areas • Be large enough to justify senior management attention

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

34. 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

35. 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

36. 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 Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Industry Attractiveness Factors

37. 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 Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Business Strength Factors

38. 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 Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (concluded) Business Strength Factors

39. 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 Fig. 9-4: Industry Attractiveness-Business Strength Matrix

40. 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

41. Stage of Market Life Cycle Description of Dimensions Introduction Growth Maturity Decline Stage of Market Life Cycle:See page 182 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 Fig. 9-5: Market Life Cycle-Competitive Strength Matrix

42. 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

43. 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