Strategy issues in Multi-Business firms Flashcards
Directions for growth:“Ansoff Matrix”
- Market Penetration
- Market development
- New products and services
- Conglomerate Diversification
Related Diversification
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
Synergy logic
Tangible (shared resources/capabilities, one-stop service)
Intangible (new opportunities, new culture)
BUT synergy can be elusive
Intangible resources are sensitive to context
Integrating activities across business units is challenging
Negative synergy often results
Conglomerate Diversification
-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
Boston Consulting Group: Growth-Share Matrix
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)
limitations of Growth-Share Matrix
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
Multifactor models (e.g., the McKinsey matrix) address these concerns but don’t address:
- The self-fulfilling recipe for decline
- Relatedness between businesses
- Value from the corporate parent
Corporate Parenting Matrix
Considers fit of each business with the ‘dominant logic’ of the parent company
Corporate parenting
Heartland businesses
Ballast businesses
Value trap businesses
Alien businesses
Heartland businesses
-Core of the corporation’s activity
Ballast businesses
- Parent not able to add value
- Manage with a light touch
Value trap businesses
- 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
Alien businesses
- Danger of destroying value
- Divest SBU to another corporate parent, even if profitable
Corporate Acquisitions: Likely to be considered to:
- Speed entry
- Acquire needed capabilities
- Overcome barriers to entry
- Obtain market access
Corporate Acquisitions:Overcomes problems and risks of internal venturing
But introduces others
Other reasons for acquisition:
Removing competitors and increasing market power
Diversification
Unbundling or asset stripping
Pitfalls of acquisitions
-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 …
Acquisition premium
= Additional value that must be generated byacquiring firm ?
Market capitalisationof the target firm
= Present value
Often the acquisition is financed by debt. Due to the acquisition premium this is only partially offset by tangible asset gains.
= Increased financial risk
