Strategy issues in Multi-Business firms

Question 1

Directions for growth:“Ansoff Matrix”

Answer 1

• Market Penetration
• Market development
• New products and services
• Conglomerate Diversification

Question 2

Related Diversification

Answer 2

All the businesses are strategically related
The value of the whole is greater than that of the parts
In practice:
Found to be only marginally more profitable than unrelated

Question 3

Synergy logic

Answer 3

Tangible (shared resources/capabilities, one-stop service)

Intangible (new opportunities, new culture)

Question 4

BUT synergy can be elusive

Answer 4

Intangible resources are sensitive to context
Integrating activities across business units is challenging
Negative synergy often results

Question 5

Conglomerate Diversification

Answer 5

-Spread risk; balance portfolio; achieve scale
Little synergy logic
Businesses form own strategies
Corporation typically manages only the financials
Currently out of favour, mostly:
Corporate office adds cost but little value
Can one head office manage diverse businesses?
Investors can build ‘balanced’ portfolios

Question 6

Boston Consulting Group: Growth-Share Matrix

Answer 6

High Market growth, High market share =Stars (growth stage)
High market growth, Low market share=Question mark (Launch stage)
Low market growth, High market share= Cash cows( maturity stage)
Low market growth, low market share=Dogs (decline stage)

Question 7

limitations of Growth-Share Matrix

Answer 7

Simplistic:
Assumes that market growth rate represents market attractiveness
Assumes that market share represents business unit strength
In fact:
Market share is a poor predictor of profitability, competitiveness, and cost savings

Question 8

Multifactor models (e.g., the McKinsey matrix) address these concerns but don’t address:

Answer 8

• The self-fulfilling recipe for decline
• Relatedness between businesses
• Value from the corporate parent

Question 9

Corporate Parenting Matrix

Answer 9

Considers fit of each business with the ‘dominant logic’ of the parent company

Question 10

Corporate parenting

Answer 10

Heartland businesses
Ballast businesses
Value trap businesses
Alien businesses

Question 11

Heartland businesses

Answer 11

-Core of the corporation’s activity

Question 12

Ballast businesses

Answer 12

• Parent not able to add value

- Manage with a light touch

Question 13

Value trap businesses

Answer 13

• Parent has value-creation insights but misfit of characteristics may lead to value destruction
• Divest them or move them to Heartland by changing corporate characteristics

Question 14

Alien businesses

Answer 14

• Danger of destroying value

- Divest SBU to another corporate parent, even if profitable

Question 15

Corporate Acquisitions: Likely to be considered to:

Answer 15

• Speed entry
• Acquire needed capabilities
• Overcome barriers to entry
• Obtain market access

Question 16

Corporate Acquisitions:Overcomes problems and risks of internal venturing

Answer 16

But introduces others

Question 17

Other reasons for acquisition:

Answer 17

Removing competitors and increasing market power
Diversification
Unbundling or asset stripping

Question 18

Pitfalls of acquisitions

Answer 18

-Difficulty of post-acquisition integration
Negative synergy
Poor strategic or organisational fit
-Overestimating economic benefits
Synergy arguments are frequently not turned into reality
-Screening of candidates for acquisition
Traditional due diligence: financial position
‘Strategic due diligence’ also recommended …

Question 19

Acquisition premium

Answer 19

= Additional value that must be generated byacquiring firm ?

Question 20

Market capitalisationof the target firm

Answer 20

= Present value

Question 21

Often the acquisition is financed by debt. Due to the acquisition premium this is only partially offset by tangible asset gains.

Answer 21

= Increased financial risk