McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Multibusiness Strategy
Chapter 9
Learning Objectives
1.
2.
3.
4.
5.
Understand the portfolio approach to strategic analysis
and choice in multibusiness companies.
Understand and use three different portfolio
approaches to conduct strategic analysis and choice in
multibusiness companies
Identify the limitations and weaknesses of the various
portfolio approaches
Understand the synergy approach to strategic analysis
and choice in multibusiness companies
Evaluate the parent company role in strategic analysis
and choice to determine whether and how it adds
tangible value in a multibusiness company
9-3
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.
9-4
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.
9-5
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.
9-6
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 low-growth markets
or industries.
9-7
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.
9-8
Ex. 9.2
The BCG Growth-Share Matrix
9-9
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
9-10
Ex. 9.3 Factors
Considered in Constructing an Industry
Attractiveness-Business Strength Matrix (adapted)
 Business Strength
 Cost position
 Level of differentiation
 Response time
 Financial strength
 Human assets
 Public approval
9-11
Ex. 9.4 The Industry Attractiveness-Business Strength
Matrix
9-12
Ex. 9.5
BCG’s Strategic Environments Matrix
9-13
BCG’s 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.
9-14
BCG’s Strategic Environments Matrix
Types of Businesses (contd.)
 Fragmented Businesses
 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.
 Specialization Businesses
 Businesses with many sources of advantage. Skills in
achieving differentiation (product design, branding
expertise, innovation, and perhaps scale) characterize
winning specialization businesses.
9-15
Limitations of Portfolio Approach



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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
9-16
The Synergy Approach: Leveraging Core
Competencies



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 competencies—key valuebuilding skills—can be leveraged with other products or into
markets that are not a part of where they were created
9-17
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 company’s core competencies
beneficial

Any combination of competencies must be
unique or difficult to recreate
9-18
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.
9-19
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.
9-20
The Parenting Framework (contd.)

The parenting framework perspective sees
multibusiness companies as creating value by
influencing—or parenting—their 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
9-21
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?
9-22
10 Sources of Parenting Opportunities
 Size & Age
 Management
 Business Definition
 Predictable Errors
 Linkages
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Common capabilities
Specialized expertise
External relations
Major decisions
 Major changes
9-23
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.
9-24
The Patching Approach


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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
9-25
Proponents of Patching
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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
9-26
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.
9-27
Ex. 9.9
Three Approaches to Strategy
9-28
Key Terms
 Businesses
 Market growth rate
 Cash cows
 Parenting framework
 Dogs
 Patching
 Fragmented businesses
 Portfolio techniques
9-29
Key Terms (contd.)
 Position
 Strategic positioning
 Question marks
 Strategic processes
 Stalemate businesses
 Volume businesses
 Stars
9-30