Description
Apart from that compensation, market etc are analysed by eg of Pantaloons
Managing the Multibusiness Firm
Tasks of Corporate Management
?
? ?
?
? ?
Allocate resources across business units Manage portfolio of businesses Organize and manage relationships among businesses Centralize activities across businesses Develop top-down initiatives Develop corporate infrastructure
Resource Allocation
?
In efficient financial markets, diversified firms with unrelated businesses typically incur a diversification discount:
?
The firm’s stock price is lower than the combined value of its businesses.
?
How can the firm mitigate (but not overcome) this effect?
? ?
The development of corporate management expertise (e.g., Hanson Trust) The allocation of financial resources to financially constrained businesses in high growth markets.
Managing a Portfolio of Businesses
?
A portfolio consists of business units in the corporation.
?
Resources provided by strong firms in mature industries are used to fund development of new ventures in growing industries. When startups become dominant and survive the competitive shakeout, they become the new sources of funding for new businesses.
?
Boston Consulting Group Growth-Share Matrix
Figure 10.1
BCG Matrix Assumptions
?
Cash cows have lower costs than industry competitors, based on their superior size-based learning curve.
Cash cows generate higher cash flows but have fewer investment opportunities than other businesses in the portfolio. The excess funds of cash cows are allocated into investments in new businesses to promote their growth.
?
?
BCG Matrix Assumptions (cont’d)
?
The firm has the entrepreneurial capability to grow the startup to dominance in its market.
The firm has the general management talent to retain the value of the dominant startup as its industry matures. New cash cows are sufficiently successful to support a new round of new business development.
?
?
Problems with the BCG model
?
All of the assumptions must be valid for the model to be effective.
?
The model applies poorly to firms whose businesses are primarily value-driven. The model focuses on transfers of financial resources not operating resources or capabilities.
?
?
The problem of growing the multibusiness firm through managing its portfolio of businesses remains very important.
Alternatives to the BCG Model
?
Portfolio analysis tools typically consider two dimensions defined by multiple factors:
? ?
Industry factors Business unit factors
?
The dimensions must incorporate relevant industry and business unit characteristics
?
The metrics must map the competitive capabilities of the business units and reflect the long-run aspects of industries in which the units compete.
Industry Characteristics
?
? ? ?
?
? ?
?
? ? ?
Growth rate in revenues and units. Rate of change in the growth rate. Average profitability. Trend in average profitability. Key value and cost drivers across firms. Structure and dynamics of competition. Regulatory pressure. Entry barriers. Buyer and supplier power. Trend in viability of substitutes. Trend in viability of complements.
Unit Characteristics
?
? ?
?
Key value drivers. Key cost drivers, in addition to the learning curve. Defendability of unit resources and capabilities. Interdependence of the unit with other units in the firm.
Identifying a Diversified Company’s Strategy
How to Evaluate a Diversified Company’s Strategy
Step 1: Assess long-term attractiveness of each industry firm is in Step 2: Assess competitive strength of firm’s business units Step 3: Check competitive advantage potential of crossbusiness 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 overall company performance
Organize and Manage Relationships Among Businesses
?
?
Take the perspective of the internal unit on the receiving end of the transfer Focus on dimensions of control:
?
?
?
Pricing Internal supplier investments in resources and capabilities that influence technology, quality and value drivers Management of sensitive information
Transfer Pricing
?
?
Mandated market price
?
More appropriate when internal buyer competes on value More appropriate when internal buyer competes on cost Combination of market price (for internal supplier) and full cost (for internal buyer) Typically unstable No policy of vertical integration
Mandated full cost
?
?
Dual pricing
? ?
?
Exchange autonomy
?
Centralized Activities
?
Centralized activities are typically structured to support one type of business strategy:
? ?
Value-based Cost-based
?
As more activities are centralized, the firm moves from multiple businesses to a single business.
?
?
This shift may be muted if the centralized activities act as profit centers. Conflicts arise when centralized units’ positioning in external market is contrary to the needs of the other business units.
Centralizing Technology Development
?
Reasons for centralizing technology development in a multibusiness firm:
? ? ?
Scale economies in research and development Scope economies in research and development Shared process innovation
Top-down Initiatives
?
Jack Welch’s nine initiatives at GE:
? ? ? ? ? ?
?
? ?
Reduce bureaucratic behavior Define markets globally Develop managers as leaders Promote sharing across business units Set very aggressive goals Build service businesses Implement six sigma quality programs Identify and remove underperforming managers Force all businesses to implement e-commerce strategies
Corporate Infrastructure
?
Dimensions of strategy execution
?
Control and coordination
Business unit definition: strategic business units ? Global organization: worldwide product structure
?
?
Compensation and incentives
Promote sharing of innovation ? Reduce conflict in transfers ? Improve acceptance of centralized activities
?
?
Culture
?
Promote risk taking and openness to learning
Control and Coordination
?
Business unit definition: strategic business units
?
Manager’s responsibility consists of
Management of assets and decisions ? Development of strategies and plans
?
?
Global organization: worldwide product structure
? ?
Geographic customer needs for harboring development of varied product lines Greater integration supported by global units reporting to global product managers
Compensation and Incentives
?
Major objectives in choosing performance metric for divisional reporting:
? ?
Enable effective decision making by unit manager Allow effective management performance appraisal Communicate in simple yet flexible language Usable to compare units against competitors Applicable to any investment situation
?
Secondary objectives:
? ? ?
Compensation and Incentives (cont’d)
?
Return on investment (ROI)
?
Advantage:
Comprehensive since ratio shows factors affecting financial statements ? Easy to understand, calculate and applicable to any profit making unit ? Used to evaluate and compare the performance of competitors
?
?
Disadvantage:
?
Induces managers to make decisions contrary to the benefit of shareholders
Compensation and Incentives (cont’d)
?
Residual income
?
?
Allows investment in a project only if its residual income is positive Net income generated – capital charge (WACC) = % of capital invested
Culture
?
Essentials for the long-term competitive advantage of business units
? ?
Willingness to take risk Willingness to learn openly
The Multibusiness Company
Four key questions of corporate strategy
The multibusiness corporation: Value creating or value destroying?
Potential added value roles of corporate parent
Market Attractiveness – Business Strength Matrix
Strategy guidelines
The Parenting Matrix
The Pantaloon Retail Case:
Strategic Options for a Company That’s Already Diversified
Strategies to Broaden a Diversified Company’s Business Base
? Conditions
? ?
making this approach attractive
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 Base
? Strategic
options
? Retrenchment ? Divestiture
? Sell
it
? Spin
it off as independent company
it (close it down because no buyers can be
? Liquidate
found)
Retrenchment Strategies
? Objective
? Reduce
scope of diversification to smaller number of “core “ businesses
? Strategic
options involve divesting businesses
? Having ? Too
little strategic fit with core businesses
small to contribute to earnings
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” ? One or more businesses lack compatibility of values essential to cultural fit
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
A last resort because no buyer can be found
Strategies to Restructure a Company’s Business Lineup
? Objective
? Make
radical changes in mix of businesses in portfolio via both
? Divestitures
? New
and
acquisitions
in order to put on 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
? Ill-chosen ? New
debt load
acquisitions performing worse than expected
technologies threaten survival of one or more core businesses of new CEO who decides to redirect company opportunity” emerges and existing businesses must be sold to finance new acquisition
? Appointment ? “Unique
Multinational Diversification Strategies
? Distinguishing
characteristic
?
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
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 initiatives across businesses and countries ? Use cross-business or cross-country subsidization to outcompete rivals
doc_499719024.ppt
Apart from that compensation, market etc are analysed by eg of Pantaloons
Managing the Multibusiness Firm
Tasks of Corporate Management
?
? ?
?
? ?
Allocate resources across business units Manage portfolio of businesses Organize and manage relationships among businesses Centralize activities across businesses Develop top-down initiatives Develop corporate infrastructure
Resource Allocation
?
In efficient financial markets, diversified firms with unrelated businesses typically incur a diversification discount:
?
The firm’s stock price is lower than the combined value of its businesses.
?
How can the firm mitigate (but not overcome) this effect?
? ?
The development of corporate management expertise (e.g., Hanson Trust) The allocation of financial resources to financially constrained businesses in high growth markets.
Managing a Portfolio of Businesses
?
A portfolio consists of business units in the corporation.
?
Resources provided by strong firms in mature industries are used to fund development of new ventures in growing industries. When startups become dominant and survive the competitive shakeout, they become the new sources of funding for new businesses.
?
Boston Consulting Group Growth-Share Matrix
Figure 10.1
BCG Matrix Assumptions
?
Cash cows have lower costs than industry competitors, based on their superior size-based learning curve.
Cash cows generate higher cash flows but have fewer investment opportunities than other businesses in the portfolio. The excess funds of cash cows are allocated into investments in new businesses to promote their growth.
?
?
BCG Matrix Assumptions (cont’d)
?
The firm has the entrepreneurial capability to grow the startup to dominance in its market.
The firm has the general management talent to retain the value of the dominant startup as its industry matures. New cash cows are sufficiently successful to support a new round of new business development.
?
?
Problems with the BCG model
?
All of the assumptions must be valid for the model to be effective.
?
The model applies poorly to firms whose businesses are primarily value-driven. The model focuses on transfers of financial resources not operating resources or capabilities.
?
?
The problem of growing the multibusiness firm through managing its portfolio of businesses remains very important.
Alternatives to the BCG Model
?
Portfolio analysis tools typically consider two dimensions defined by multiple factors:
? ?
Industry factors Business unit factors
?
The dimensions must incorporate relevant industry and business unit characteristics
?
The metrics must map the competitive capabilities of the business units and reflect the long-run aspects of industries in which the units compete.
Industry Characteristics
?
? ? ?
?
? ?
?
? ? ?
Growth rate in revenues and units. Rate of change in the growth rate. Average profitability. Trend in average profitability. Key value and cost drivers across firms. Structure and dynamics of competition. Regulatory pressure. Entry barriers. Buyer and supplier power. Trend in viability of substitutes. Trend in viability of complements.
Unit Characteristics
?
? ?
?
Key value drivers. Key cost drivers, in addition to the learning curve. Defendability of unit resources and capabilities. Interdependence of the unit with other units in the firm.
Identifying a Diversified Company’s Strategy
How to Evaluate a Diversified Company’s Strategy
Step 1: Assess long-term attractiveness of each industry firm is in Step 2: Assess competitive strength of firm’s business units Step 3: Check competitive advantage potential of crossbusiness 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 overall company performance
Organize and Manage Relationships Among Businesses
?
?
Take the perspective of the internal unit on the receiving end of the transfer Focus on dimensions of control:
?
?
?
Pricing Internal supplier investments in resources and capabilities that influence technology, quality and value drivers Management of sensitive information
Transfer Pricing
?
?
Mandated market price
?
More appropriate when internal buyer competes on value More appropriate when internal buyer competes on cost Combination of market price (for internal supplier) and full cost (for internal buyer) Typically unstable No policy of vertical integration
Mandated full cost
?
?
Dual pricing
? ?
?
Exchange autonomy
?
Centralized Activities
?
Centralized activities are typically structured to support one type of business strategy:
? ?
Value-based Cost-based
?
As more activities are centralized, the firm moves from multiple businesses to a single business.
?
?
This shift may be muted if the centralized activities act as profit centers. Conflicts arise when centralized units’ positioning in external market is contrary to the needs of the other business units.
Centralizing Technology Development
?
Reasons for centralizing technology development in a multibusiness firm:
? ? ?
Scale economies in research and development Scope economies in research and development Shared process innovation
Top-down Initiatives
?
Jack Welch’s nine initiatives at GE:
? ? ? ? ? ?
?
? ?
Reduce bureaucratic behavior Define markets globally Develop managers as leaders Promote sharing across business units Set very aggressive goals Build service businesses Implement six sigma quality programs Identify and remove underperforming managers Force all businesses to implement e-commerce strategies
Corporate Infrastructure
?
Dimensions of strategy execution
?
Control and coordination
Business unit definition: strategic business units ? Global organization: worldwide product structure
?
?
Compensation and incentives
Promote sharing of innovation ? Reduce conflict in transfers ? Improve acceptance of centralized activities
?
?
Culture
?
Promote risk taking and openness to learning
Control and Coordination
?
Business unit definition: strategic business units
?
Manager’s responsibility consists of
Management of assets and decisions ? Development of strategies and plans
?
?
Global organization: worldwide product structure
? ?
Geographic customer needs for harboring development of varied product lines Greater integration supported by global units reporting to global product managers
Compensation and Incentives
?
Major objectives in choosing performance metric for divisional reporting:
? ?
Enable effective decision making by unit manager Allow effective management performance appraisal Communicate in simple yet flexible language Usable to compare units against competitors Applicable to any investment situation
?
Secondary objectives:
? ? ?
Compensation and Incentives (cont’d)
?
Return on investment (ROI)
?
Advantage:
Comprehensive since ratio shows factors affecting financial statements ? Easy to understand, calculate and applicable to any profit making unit ? Used to evaluate and compare the performance of competitors
?
?
Disadvantage:
?
Induces managers to make decisions contrary to the benefit of shareholders
Compensation and Incentives (cont’d)
?
Residual income
?
?
Allows investment in a project only if its residual income is positive Net income generated – capital charge (WACC) = % of capital invested
Culture
?
Essentials for the long-term competitive advantage of business units
? ?
Willingness to take risk Willingness to learn openly
The Multibusiness Company
Four key questions of corporate strategy
The multibusiness corporation: Value creating or value destroying?
Potential added value roles of corporate parent
Market Attractiveness – Business Strength Matrix
Strategy guidelines
The Parenting Matrix
The Pantaloon Retail Case:
Strategic Options for a Company That’s Already Diversified
Strategies to Broaden a Diversified Company’s Business Base
? Conditions
? ?
making this approach attractive
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 Base
? Strategic
options
? Retrenchment ? Divestiture
? Sell
it
? Spin
it off as independent company
it (close it down because no buyers can be
? Liquidate
found)
Retrenchment Strategies
? Objective
? Reduce
scope of diversification to smaller number of “core “ businesses
? Strategic
options involve divesting businesses
? Having ? Too
little strategic fit with core businesses
small to contribute to earnings
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” ? One or more businesses lack compatibility of values essential to cultural fit
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
A last resort because no buyer can be found
Strategies to Restructure a Company’s Business Lineup
? Objective
? Make
radical changes in mix of businesses in portfolio via both
? Divestitures
? New
and
acquisitions
in order to put on 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
? Ill-chosen ? New
debt load
acquisitions performing worse than expected
technologies threaten survival of one or more core businesses of new CEO who decides to redirect company opportunity” emerges and existing businesses must be sold to finance new acquisition
? Appointment ? “Unique
Multinational Diversification Strategies
? Distinguishing
characteristic
?
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
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 initiatives across businesses and countries ? Use cross-business or cross-country subsidization to outcompete rivals
doc_499719024.ppt