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Strategic MGMT ch09
Strategic MGMT ch09
Multi-business Strategy
0Chapter Summary
Recent evolution of strategic analysis and choice has expanded on the core competency
notion to focus on a series of fundamental questions that multibusiness companies should
address in order to make diversification work. With both the accelerated rates of change in
most global markets and trying economic conditions, multibusiness companies have adapted
the fundamental questions into an approach called “patching” to map and remap their
business units swiftly against changing market opportunities. Finally, as companies have
embraced lean organizational structures, strategic analysis in multibusiness companies has
included careful assessment of the corporate parent, its role, and value or lack thereof in
contributing to the stand-alone performance of their business units. This chapter will examine
each of these approaches to shaping multibusiness corporate strategy.
0Learning Objectives
0Lecture Outline
I0. Introduction
A0. Strategic analysis and choice is complicated for corporate-level managers because
they must create a strategy to guide a company that contains numerous businesses.
10. They must examine and choose which businesses to own and which ones to
forgo or divest.
B. The portfolio approach was one of the early approaches for charting strategy and
allocating resources in multibusiness companies.
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1. It was particularly popular in the 1960s and 1970s, after which corporate
managers, concerned with some shortcomings in this type of approach,
welcomed new options.
2. Yet while many companies have moved on to use other approaches, the
portfolio approach remains a useful technique for some. See Exhibit 9.1,
Strategy in Action.
1. This approach centered on the idea that at the heart of effective diversification
is the identification of core competencies in a business or set of businesses to
then leverage as the basis for competitive advantage in the growth of those
businesses and the entry in or divestiture of other businesses.
D. Recent evolution of strategic analysis and choice in this setting has expanded on the
core competency notion to focus on a series of fundamental questions that
multibusiness companies should address in order to make diversification work.
1. With both the accelerated rates of change in most global markets and trying
economic conditions, multibusiness companies have adapted the fundamental
questions into an approach called “patching” to map and remap their business
units swiftly against changing market opportunities.
A. The past 30 years we have seen a virtual explosion in the extent to which single-
business companies seek to acquire other businesses to grow and to diversify.
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3. Responding to this challenge, the Boston Consulting Group (BCG) pioneered
an approach called portfolio techniques 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.
1. Managers using the BCG matrix plotted each of the company’s businesses
according to market growth rate and relative competitive position.
a) Market growth rate is the projected rate of sales growth for the market
being served by a particular business.
b) Usually measured as the percentage increase in a market’s sales or unit
volume over the two most recent years, this rate serves as an indicator of
the relative attractiveness of the markets served by each business in the
firm’s portfolio of businesses.
c) Relative competitive position usually is expressed as the market share
of a business divided by the market share of its largest competitor.
d) Thus, relative competitive position provides a basis for comparing the
relative strengths of the businesses in the firm’s portfolio in terms of
their positions in their respective markets.
e) Exhibit 9.2, The BCG Growth-Share Matrix, illustrate the growth-
share matrix.
2. The stars are businesses in rapidly growing markets with large market shares.
3. Cash cows are businesses with a high market share in low-growth markets or
industries.
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4. Low market share an low market growth businesses are the dogs in the firm’s
portfolio.
a) Facing mature markets with intense competition and low profit margins,
they are managed for short-term cash flow to supplement corporate-level
resource needs.
b) According to the original BCG prescription, they are divested or
liquidated once this short-term harvesting has been maximized.
5. Question marks are businesses whose high growth rate gives them
considerable appeal but whose low market share makes their profit potential
uncertain.
a) Question marks are cash guzzlers because their rapid growth results in
high cash needs, while their small market share results in low cash
generation.
b) At the corporate level, the concern is to identify the question marks that
would increase their market share and move into the star group if extra
corporate resources were devoted to them.
c) Where this long-run shift from question mark to star is unlikely, the
BCG matrix suggests divesting the question mark and repositioning its
resources more effectively in the remainder of the corporate portfolio.
2. The company’s businesses are rating on multiple strategic factors within each
axis, such as the factors described in Exhibit 9.3.
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c) The resource allocation decisions remain quite similar to those of the
BCG approach.
4. Exhibit 9.1, Strategy in Action, shows GE chairman and CEO Jeff Immelt’s
surprising return to the use of a portfolio approach in 2006 as he charts GE’s
future.
a) Their idea was that such a framework could help ensure that individual
businesses’ strategies were consistent with strategies appropriate to their
strategic environment.
b) Furthermore, for corporate managers in multiple-business companies,
this matrix offered one way to rationalize which businesses they are in—
businesses that share core competencies and associated competitive
advantages because of similar strategic environments.
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a) Volume businesses are those that have few sources of advantage, but
the size is large—typically the result of scale economies. Advantages
may be transferable.
b) Stalemate businesses have few sources of advantage, with most of
those small.
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(1) A key problem with the portfolio matrix was that it did not address
how value was being created across business units—the only
relationship between them was cash.
(5) The portfolio approach portrayed the notion that firms needed to be
self-sufficient in capital.
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2. Constructing business portfolio matrices must be undertaken with these
limitations in mind.
a) Perhaps it is best to say that they provide one form of input to corporate
managers seeking to balance financial resources.
b) While limitations have meant portfolio approaches are seen as more
historical concepts, seldom recommended, it is interesting that the new
chairman of the company that pioneered and subsequently abandoned
the portfolio has come full circle in 2006, embracing the concept as a
key basis for helping the post-Welch GE rationalize a dramatically new
approach to the twenty-first century of GE.
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a) The shared opportunities must be a significant portion of the value chain
of the businesses involved.
b) The businesses involved must truly have shared needs—need for the
same activity—or there is no basis for synergy in the first place.
1. The core competency must assist the intended business in creating strength
relative to key competition.
C. Businesses in the Portfolio Should Be Related in Ways That Make the Company’s
Core Competencies Beneficial
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b) Recent research indicates that the most profitable firms are those that
have diversified around a set of resources and capabilities that are
specialized enough to confer a meaningful competitive advantage in an
attractive industry, yet adaptable enough to be advantageously applied
across several others.
c) The least profitable are broadly diversified firms whose strategies are
built around very general resources that are applied in a wide variety of
industries, but that are seldom instrumental to competitive advantage in
those settings.
A. 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?
3. Consider the following two perspectives to use in attempting to answer this
question: the parenting framework and the patching approach.
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a) The best parent companies create more value than any of their rivals do
or would if they owned the same businesses.
b) To add value, a parent must improve its businesses.
c) Obviously there must be room for improvement.
d) Advocates of this perspective call the potential for improvement within a
business “a parenting opportunity.”
e) They identify 10 places to look for parenting opportunities, which then
become the focus of strategic analysis and choice across multiple
businesses and their interface with the parent organization.
3. Management
4. Business Definition
5. Predictable Errors
a) The nature of a business and its unique situation can lead managers to
make predictable mistakes.
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b) Managers responsible for previous strategic decisions are vested in the
success of those decisions, which may prevent openness to new
alternatives.
c) Older, mature businesses often accumulate a variety of products and
markets, which becomes excessive diversification within a particular
business.
d) Cyclical markets can lead to underinvestment during downtimes and
overinvestment during the upswing.
e) Lengthy product life cycles can lead to over reliance on old products.
f) All of these are predictable errors a parent company can monitor and
attempt to avoid, creating, in turn, added value.
6. Linkages
7. Common Capabilities
8. Specialized Expertise
9. External Relations
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b) Obtaining capital externally to fund a major investment may be much
more difficult than doing so through the parent company.
1. Another approach that focuses on the role and ability of corporate managers
to create value in the management of multibusiness companies is called
“patching.”
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executives can add value beyond the sum of the businesses within the
company.
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a) The fundamental argument of this approach is that no one can predict
how long a competitive advantage will last, particularly in turbulent,
rapidly changing markets.
b) While managers in stable markets may be able to rely on complex
strategies built on detailed predictions of future trends, managers in
complex, fast-moving markets—where significant growth and wealth
creation may occur—face constant unpredictability; hence, strategy must
be simple, responsive, and dynamic to encourage success.
c) Exhibit 9.9, Top Strategist, illustrated how PepsiCo is using a patching
approach to shape a multibusiness strategy in the twenty-first century.
1. How does strategic analysis at the corporate level differ from strategic analysis at the
business unit level? How are they related?
Strategic analysis at the corporate level centers on domain choice. The key question
addressed is: What businesses should we be in that would maximize value to our
stockholders? Related to this question is the issue of resource allocation among the
businesses owned. In contrast, business unit strategy focuses on creating competitive
advantage in the industry. The two levels of strategy are related because decisions about
resource allocation at the corporate level will affect the choices at the business unit
level.
2. When would multi-industry companies find the portfolio approach to strategic analysis
and choice useful?
3. What are three types of opportunities for sharing that form a sound basis for
diversification or vertical integration? Give an example of each from companies you
have read about.
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An example of market-related sharing is Philip Morris’ acquisition of Miller Brewing.
Both tobacco products and beer are brand driven, where marketing support is critical. In
addition, both groups of products are sold through the same channels.
Honda’s diversification into off-road vehicles from their base of motor cycles and
automobiles is an example of operating-related opportunity. The products share similar
type of operations that Honda could exploit.
4. Describe three types of opportunities through which a corporate parent could add value
beyond the sum of its separate businesses.
Pages 276-279 describe the parenting framework and identify ten places to look for
parenting opportunities.
Size and age provide one parenting opportunity. Old, large successful businesses
frequently engender entrenched bureaucracies and overhead structures that are hard to
dismantle from inside the business. Here the parent acts as an external catalyst getting
this done.
Management is the second area to look for a parenting opportunity. The parent can
ensure that the business attracts and retains talented managers.
Business definition provides yet another avenue for parenting. Business unit managers
may have a myopic or erroneous vision of what their business should be which in turn
has them targeting a market that is too narrow or too broad. A parent can help in
redefining the business unit.
5. What does “patching” refer to? Describe and illustrate two rules that might guide
managers to build value in their businesses.
Pages 279-283 describe the patching approach. Patching is the process by which
corporate executives routinely remap businesses to match rapidly changing market
opportunities. It can take the form of adding, splitting, transferring, exiting, or
combining chunks of businesses. Patching is critical in turbulent and rapidly changing
markets, and less so in stable environments.
Exhibit 9.11 on page 281 summarizes the simple rules that form the core of the patching
approach. One simple rule focuses on how a key process is executed. For example, Dell
Computer has simple rules for order taking and order processing that minimizes delays
and emphasizes accuracy. A second rule focuses on identifying the firm’s boundaries
and helps in evaluating opportunities. Otis Elevator is very clear in their business
definition. They stick to moving people and machinery up, down, or sideways over
small distances efficiently. Thus, they are unlikely to get into the airline business.
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Discussion Case – “Beyond Blue”
Case Summary
This case is about IBM and its CEO, Samuel J. Palmisano, who is trying to free IBM from
the confines of the $1.2 trillion computer industry, which is growing at just 6% a year.
Instead of merely selling and servicing technology, IBM is putting to use the immense
resources it has in-house, from its software programmers to its 3,300 research scientists, to
help companies like P&G rethink, remake, and even run their businesses—everything from
accounting and customer service to human resources and procurement. Palmisano expects
that within 10 years IBM could build an annual revenue stream of as much as $50 billion in
business consulting and outsourcing services. If so, Palmisano will have created a second
services miracle and hitched IBM to a crucial growth market. In the process, his company
will be fixing or running big chunks of the world’s businesses.
Palmisano is out to transform the very nature and image of Big Blue, a nickname derived a
half-century ago from the company’s muscular blue mainframe computers. His goal is to
carry IBM beyond that 20th century legacy, beyond computing and beyond blue—while
making IBM as indispensable to clients today as it was during the heyday of mainframes.
Entire divisions are now in play. With the sale of the money-losing PC division to China’s
Lenovo Group Ltd., Palmisano cuts loose a big piece of the company’s computer legacy.
Meanwhile, he snapped up more than a dozen business-service outfits in the past year,
including Daksh, a 6,000-employee Indian customer-relations shop. The initial challenge for
Palmisano is to make a grand vision that can sound threatening or full of hype into a must-
have. IBM faces strong competition as it forges into alien territory, including Accenture Ltd.
While the firm can’t match IBM’s tech skills or research staff, it outguns IBM in business
expertise. Other challenges include aggressive Indian outsourcers.
Still, if Palmisano and his crew fend off rivals and prove the skeptics wrong, the
opportunities are enormous. He has gotten glimpses from early IBM deals of the magic that
business outsourcing can work. One strong relationship that IBM has forged is with Mayo
Clinic that goes back to 2000. Now, the two organizations are working on genomics research
and IBM is trying to progress in bioinformatics, privacy, and regulation compliance. While
the business payoff is still unclear, IBM is making new markets. Now, IBM is off and
running into a new world of business, beyond computers.
• Identify and explain the use of various matrices for assessing markets, anticipated growth,
and the relative competitive position of a firm. Please refer to the section titled “The
Portfolio Approach” on pages 264-268.
• Explain some of the limitations of portfolio approaches relative to the IBM situation. Please
refer to the section titled “Limitations of Portfolio Approaches” on pages 265-266.
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• Classify IBM as a parent company, and explain the parenting framework. Please refer to the
section titled “The Parenting Framework” on pages 276-279.
1. What is IBM’s corporate or multibusiness strategy for the twenty first century, and how
is it different from its long-standing strategy?
Student responses to this question will vary, but should include support for the
framework chosen.
There is support throughout the case for each of these frameworks. For instance, IBM is
using the portfolio approach in that it is analyzing the markets, the level of growth in
each of the markets in which it is involved, and making key decisions about which
businesses to pursue and grow and which ones to divest. The firm’s relative competitive
position is also analyzed in light of various market realities. More on the portfolio
approaches is found starting on page 264 in the text under “The BCG Growth-Share
Matrix.”
The company is leveraging its core competencies by using its technology resources,
software programmers, and research scientists to rethink, remake, and run the businesses
of its clients. The firm is providing everything from accounting and customer service to
HR and procurement. It is doing so not only by hiring new visionaries who can help the
firm achieve its mission, but also by using the resources it already has in its people, its
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technologies, and its innovative culture. For more, refer to the case, page 284, paragraph
3.
Lastly, the firm is also using a version of patching. The company recognized the
changing market, is seeking to capitalize on the new opportunities presented by those
changes, and is making strategic decisions that add value beyond the sum of the
businesses within the company. Palmisano’s new approach is to avoid outdated
advantages in pursuit of quick changes that allow the firm’s business units to be
repositioned before it is too late to establish an advantage in the first place. For more on
patching, refer to pages 279-283 in the text.
4. What appears to be the major advantage of this new IBM strategy and the major
disadvantage or risk?
The major advantage of this new strategy for IBM seems to be that they are pursuing
huge new markets with its immense resources in-house. It is leveraging its competences
and trimming itself of those businesses in markets that are not growing at a particular
rate or that seem to “drain” on resources.
The major disadvantage or risk is that it is an unproven strategy for this firm. The
business payoff for the company is unclear, even though right now it appears viable and
—so far—successful. The biggest risk or challenge is to convince the companies
(clients) who could use IBM’s business solutions and services that they should hand
control of the various functions over to IBM. Clients will be reluctant, and may not
simply give away the control with the responsibilities that come with outsourcing.
The old image of IBM is Big Blue, a nickname derived a half-century ago from the
company’s muscular blue mainframe computers. Palmisano’s goal is to carry IBM
beyond its 20th century legacy, beyond computing, and beyond “blue.” (Refer to the
case, page 284, paragraph 5.) In many ways, Big Blue refers to the way things used to
be run at IBM—it conjures an image of the company that was the leader during the
computer mainframe heyday. Today, the firm is trying to disassociate itself from that
image, because that is not the main focus of the firm. The company sold its PC division
to Lenovo, and is focusing (in increasing numbers) on the consulting and services side
of its businesses. The firm is trying to sell total business solutions, not just computer
services, and not just computer hardware.
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