Strategy Formulation

1
Strategy Formulation

• Strategies for Growth and Diversification

2
Identifying Growth Strategies

• Define the industry
• Analyze options for growth

3
What Is Our Industry?

• Defining the industry in new ways can present new
  opportunities.
• Examples
• Disney
• IBM

4
Business-Level Strategies For Growth
Product/Service
Existing
New
Market Penetration Strategy
Product Development Strategy
Existing
Domain (i.e., Industry Market
Market Development Strategy
Diversification Strategy
New
5
Product/Market Expansion Scale Strategies
Market Penetration Goal increase market
share Low risk/marginal returns Every business
does this Market Development Goal find new
markets Marketing expertise Mature
products/services
6
Product/Market Expansion Scope Strategies
Product Development Goal develop introduce new
products/services Technical expertise Growth of
products/services (Could Entail Related
Diversification) Diversification Goal develop
introduce products/services to new or emerging
markets (Most likely Unrelated Diversification)
7
When Does Diversification Make Sense?
Single business strategies have a number of
advantages but also a number of risks -- all
ones eggs in one basket The logic to spread
corporate risk across multiple industries to
enhance shareholder value SYNERGY (i.e., 2 2
5)
8
Diversification -- Motives

• The risks of single business strategies are more
  severe for management than for shareholders of
  publicly traded firms.
• Diversification may be motivated by managements
  desire to reduce risk.
• Diversification only makes sense when it enhances
  shareholder value!

9
Tests For Judging Diversification
Attractiveness Better-off Cost of entry
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Attractiveness Test

• Is the target industry attractive? (Use 5-forces
  model to assess industry attractiveness)
• Does the diversification move fit with the grand
  strategy of the firm?

11
Better-off test

• Does the diversification move produce
  opportunities for synergies? Will the company be
  better off after the diversification than it was
  before? How and why?

12
Cost of Entry Test

• Is the cost of the diversification worth it?
• Will the diversified firm create enough
  additional value to justify the cost?

13
Methods for Diversification

• Acquisition of an existing business
• Creation of a new business from within, e.g. a
  start-up
• Joint venture with another firm or firms

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Acquisition
Most popular approach to diversification Quick
market entry Avoids entry barriers Technology
Access to suppliers Efficiency / economies of
scale Promotion Distribution channels
15
Major Acquisition Issue
Acquire a successful company at a high
price or Acquire a struggling company at a
bargain price
16
Start-Up
Appropriate when You have time to
launch Market moves slowly Internal entry costs
lower than acquisition costs You already
possess necessary skills Target industry is
fragmented
17
Joint Ventures
Pooling resources to spread risk Achieving
synergy from respective capabilities Leveraging
one anothers experience Complicated potential
for conflicts if responsibilities, liabilities,
rewards not clearly delineated
18
Related Diversification
Businesses are distinct but their value chains
possess strategic fit in operations, marketing,
management, RD. distribution, labor,
etc. Therefore, they tend to exploit economies of
scope Tend to (historically) outperform unrelated
diversifications
19
Unrelated Diversification
No common linkage or element of strategic fit
among SBUs -- i.e., no meaningful value chain
interrelationships Strategic approach venture
opportunistically into attractive industries that
have solid potential for financial returns
Conglomerates Dominant logic spreads
businesses risk over multiple industries,
stabilizing corporate profitability (in theory)
20
Attractive Acquisition Targets for Unrelated
Diversification
Companies whose assets are undervalued (buyem
sellem to realize capital gains) Companies that
are financially distressed (purchase at bargain
price turnem around through injections of
financial resources managerial
expertise) Companies with bright prospects, but
limited capital Dominant logic any company that
can be acquired on good financial terms offers
good prospects for profitability is a good
business for diversification
21
Drawbacks of Unrelated Diversification
Places enormous demands on corporate management
-- shifting resources making moves into unknown
areas, etc. Cannot capture synergies -- no
strategic fit between SBUs Few businesses have
offsetting up-down cycles, so sales- profit
stability is more mythical than real ( when
EVERYTHING IS in a downturn, assets spread thin
are sometimes consumed )
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Strategic Analysis of Diversified Companies
The essence of strategic management is to
allocate resources to those areas that possess
the greatest potential for future success
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Corporate Strategy for Diversified Firms -- Key
Strategic Issues
(1) How attractive are our current
businesses? (2) With these businesses, what is
our performance outlook for X years in the
future? (3) If answers to (1) (2) above arent
satisfactory, what should we do to get out of
some businesses, strengthen those remaining,
get into new businesses to boost our prospects
for better performance?
24
BCG Growth-Share Matrix
Dimensions Industry growth rate Relative
market share position of the businesses SBUs
plotted as circles with area proportional to
their contribution to overall corporate sales
25
BCG Business Portfolio Matrix
Relative Market Share Position
High
Low
Stars
Question Marks
High
Industry Growth Rate
Cash Cows
Dogs
Low
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BCG Matrix -- Strengths
Encourages strategists to view a diversified firm
as a collection of cash flows cash requirements
( its major strategic implication ) Explains
why priorities for corporate resource allocation
differ from SBU to SBU Demonstrates the
progression of an SBU -- from Q-mark gtStar
gtCash Cow
27
BCG Matrix -- Weaknesses
Over-simplifies market growth market share
issues 4 simple categories are neat, but trends
are more valuable Doesnt directly identify
which SBUs offer the best investment
opportunities Considers only 2 variables
28
G.E. 9-Cell Matrix
Dimensions Long-term industry attractiveness
Business strength/Competitive position SBUs
plotted as circles with area proportional to the
size of the industry, a sector within each
circle representing the SBUs market share in its
industry
29
GE 9-Cell Matrix
Business Strength/Competitive Position
Strong Average Weak
H
Long-Term Industry Attractiveness
M
L
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Strategic Implications of the G.E. 9-Cell Matrix
SBUs in 3 upper left cells get top investment
priority SBUs in 3 middle diagonal cells merit
steady investment to maintain protect their
industry positions SBUs in 3 lower right cells
are candidates for harvesting or divestiture
31
Advantages of G.E. 9-Cell Matrix
Allows for intermediate rankings between high
low and between strong weak Incorporates a
wider variety of strategically relevant variables
than the BCG matrix Stresses the channeling of
corporate resources to SBUs with the greatest
potential for competitive advantage superior
performance
32
Weaknesses of G.E. 9-Cell Matrix
Provides no guidance on specifics of SBU
strategy Only suggests general strategic posture
-- aggressive expansion, fortify--defend, or
harvest/divest Doesnt address the issue of
strategic coordination across related SBUs Tends
to obscure SBUs about to take off or crash
burn -- static, not dynamic
33
Life-Cycle Portfolio Matrix
Dimensions Industry stage in the life cycle
SBUs competitive position Area of each SBU
circle is proportional to size of the industry
sectors denote SBUs market share in
its industry This matrix displays the
distribution of the firms businesses across the
various stages of industry evolution
34
Life-Cycle Portfolio Matrix
SBUs Competitive Position
Strong Average Weak
Introduction
Growth
Life-Cycle Stages
Early Maturity
Late Maturity
Decline
35
Common Problems Associated With Diversified Firms

• Overemphasis on ROI
• Under-emphasis on future earnings streams
• Short-term focus
• Growth more valued than quality value
• Over-decentralized top managers become isolated
  out-of-touch
• Avoidance of manageable (strategic) risk for the
  sake of short-run profit

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Performance Effectiveness Efficiency

• Effectiveness external criteria
• Efficiency internal criteria
• Not mutually exclusive
• Both important

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Effectiveness

• Doing the right thing goal attainment
• Determine by the market
• Establishes what price you can command
• Measures sales, market share, etc.

38
Efficiency

• Doing the thing right
• Ratio of output to input
• Determines price you must charge
• Measures operating profit, unit cost structure,
  etc.

39
Market Criteria

• Future projection
• Reflects anticipated results
• Indicates investor confidence
• Measures trend in stock price or cash value

40
Operational Criteria

• Past present
• Reflects actual results
• Indicates managerial competence
• Measures ROE, ROI, ROA, market share, revenue,
  operating margin (profit), time-to-market,
  inventory turns, quality, etc.

41
Performance The Bottom Line

• No simple bottom line
• No single criterion of performance is inherently
  most important
• Multidimensional
• Situational -- different measures are more
  appropriate at different times
• Difficult to be successful on all measures at the
  same time