Module- Six

Formulating Long-Term
Objectives and Grand
Strategies
 Grand Strategies

 Grand strategies are also called

strategic thrusts.
 They provide basic direction for specific

strategic actions and functional tactics.

 Some grand strategies are used
together and reinforce each other and
some are usually employed singly.
Grand Strategy
 General plan of major action to achieve long-
term goals
 Falls into three general categories
1. Growth
2. Stability A separate grand
strategy can be
3. Retrenchment
defined for global
operations
 The Grand Strategy Matrix
Rapid Market Growth
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
7. Concentric diversification
Weak Competitive I II Strong
Position Competitive
1. Retrenchment
IV III 1. Concentric diversification
Position

2. Concentric diversification 2. Horizontal diversification

3. Horizontal diversification `3. Conglomerate diversification
4. Conglomerate diversification 4. Joint ventures
5. Divestiture
6. Liquidation

Slow Market Growth

 Grand Strategy Selection Matrix
Overcome weaknesses

Turnaround or Vertical integration

retrenchment Conglomerate diversification
Divestiture
Internal Liquidation External
(redirected (acquisition
resources within II I or merger for
the firm) resource
III IV capability)
Concentrated growth
Horizontal integration
Mkt. Development
Concentric diversification
Prod. Development
Joint venture
Innovation

Maximize strengths
Diversification and
Corporate Strategy
 A company is diversified when it is in two or more lines of
business that operate in diverse market environments
 Strategy-making in a diversified company is a bigger
picture exercise than crafting a strategy for a single line-of-
business
 A diversified company needs a multi-industry,
multi-business strategy
 A strategic action plan must be developed
for several different businesses competing
in diverse industry environments
Four Main Tasks in
Crafting Corporate Strategy
 Pick new industries to enter
and decide on means of entry
 Initiate actions to boost combined
performance of businesses

 Pursue opportunities to leverage cross-business

value chain relationships and strategic fits into
competitive advantage

 Establish investment priorities, steering resources

into most attractive business units
Types of Long-Term Objectives

 Profitability
 Productivity
 Competitive position
 Employee development
 Employee relations
 Technological leadership
 Public responsibility
 Qualities of Long-Term Objectives

Achievable
Acceptable
Criteria used
Understandable in preparing Flexible
objectives

Suitable Measurable
Motivating
Types of Strategies

Forward
Integration

Vertical Backward
Integration Integration
Strategies

Horizontal
Integration
Types of Strategies

Market
Penetration

Intensive Market
Strategies Development

Product
Development
Types of Strategies

Concentric
Diversification

Diversification Conglomerate
Strategies Diversification

Horizontal
Diversification
Types of Strategies

Retrenchment

Defensive Divestiture
Strategies

Liquidation
 Types of Grand Strategies

 Concentrated growth Vertical integration

 Market development
 Concentric
diversification
 Product
development
 Conglomerate
diversification
 Innovation
 Turnaround
 Horizontal
integration
 Divestiture
 Liquidation
 Characteristics of a Concentrated
Growth Strategy
 Involves focusing resources on the profitable
growth of a single product, in a single market, with a
single dominant technology
 Rationale – Firm develops and exploits its expertise
in a delimited competitive arena
 Determinants of competitive market success
• Ability to assess market needs
• Knowledge of buyer behavior
• Customer price sensitivity
• Effectiveness of promotion
 Specific Options for Selected Grand
Strategies
Concentration (Increasing use of present products in
present markets)
1. Increasing present customers’ rate of use
a. Increasing size of purchase
b. Increasing the rate of product obsolescence
c. Advertising other uses
d. Giving price incentives for increased use
2. Attracting competitors’ customers
a. Establishing sharper brand recognition
b. Increasing promotional effort
c. Initiating price cuts
3. Attracting nonusers to buy the product
a. Introducing trial use thru’ sampling, price incentives, etc.
b. Pricing up or down
c. Advertising new uses
 Strategies of Market and
Product Development
 Market development
• Consists of marketing present products, often with

only cosmetic modifications to customers in

related market areas by
 Adding channels of distribution or
 Changing content of advertising or promotion
 Product development
• Involves substantial modification of existing
products or creation of new but related products
• Based on penetrating existing market by

 Incorporating product modifications into existing items or

 Developing new products connected to existing products
 Market Development
(Selling present products in new markets.)
1. Opening additional geographic markets
a. Regional expansion
b. National expansion
c. International expansion
2. Attracting other market segments
a. Developing product versions to appeal to other
segments
b. Entering other channels of distribution
c. Advertising in other media
 Product Development (Developing new products for
present markets)
1. Developing new product features
a. Adapt (to other ideas, developments)
b. Modify (change color, motion, sound, odor, form, shape)
c. Magnify (stronger, longer, thicker, extra value)
d. Minify (smaller, shorter, lighter)
e. Substitute (other ingredients, process, power)
f. Rearrange (other patterns, layout, sequence, components)
g. Reverse (inside out)
h. Combine (blend, alloy, assortment, ensemble, combine units,
etc.)
2. Developing quality variations
3. Developing additional models and sizes (product proliferation)
 Innovation Strategy

Involves creating a new product life

cycle, thereby making similar existing
products obsolete
Horizontal and Vertical Integration Strategies

Horizontal Integration
 Based on growth via acquisition of one or more similar
firms operating at the same stage of the production-
marketing chain

Vertical Integration
 Involves acquiring firms
• That supply acquiring firm with inputs (backward
integration) or
• Are customers for firm’s outputs (forward
integration)
 The term horizontal integration describes a
type of ownership and control.
Horizontal integration
 Horizontal integration in marketing is much more
common than vertical integration is in production.
 Horizontal integration occurs when a firm is being
taken over by, or merged with, another
firm which is in the same industry and in
the same stage of production as the
merged firm, e.g. a car manufacturer merging
with another car manufacturer. In this case both the
companies are in the same stage of production and
also in the same industry.
Vertical integration
 Vertical integration is the degree to which a
firm owns its upstream suppliers and its
downstream buyers.
 However to horizontal integration, which is a
consolidation of many firms that handle the
same part of the production process,
vertical integration is typified by one firm
engaged in different parts of production (e.g.
growing raw materials, manufacturing,
transporting, marketing, and/or retailing).
 There are three varieties: backward
(upstream) vertical integration, forward
(downstream) vertical integration, and
balanced (horizontal) vertical integration.
vertical integration
 A company exhibits backward vertical integration
when it controls subsidiaries that produce some of
the inputs used in the production of its products.
 For example, an automobile company may own a
tire company, a glass company, and a metal
company. Control of these three subsidiaries is
intended to create a stable supply of inputs and
ensure a consistent quality in their final product.
 It was the main business approach of Ford and
other car companies in the 1920s, who sought to
minimize costs by centralizing the production of cars
and car parts.
 A company tends toward forward vertical
integration when it controls distribution
centers and retailers where its products are
sold.
 Balanced vertical integration means a firm
controls all of these components, from raw
materials to final delivery.
Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration

Acquisitions or mergers of competing businesses are horizontal integrations
 Motivations for Diversification
 Increase firm’s stock value
 Increase growth rate of firm
 Investment is better use of funds than using
them for internal growth
 Improves stability of earnings and sales
 Balance or fill out product line
 Diversify product line
 Acquire a needed resource quickly
 Achieve tax savings
 Increase efficiency and profitability
 Diversification Strategies
Concentric Diversification
 Involves acquisition of businesses related to
acquiring firm in terms of technology, markets, or
products
Conglomerate Diversification
 Involves acquisition of a business because it
represents a promising investment opportunity
• Primary motivation is profit pattern of venture

 Difference between the approaches

• Concentric diversification emphasizes commonality

whereas conglomerate diversification emphasizes

profits for each individual unit
What Is Unrelated
Diversification?
 Involves diversifying into businesses with

 No strategic fit
 No meaningful value chain
relationships
 No unifying strategic theme
 Basic approach – Diversify into any industry
where potential exists
to realize good financial results
 While industry attractiveness and cost-of-entry tests
are important, better-off test is secondary
 Turnaround Strategy

Involves a concerted effort over a period

of time to fortify a firm’s distinctive
competencies, returning it to profitability
 Terms Used in Turnaround Strategy
 A turnaround situation represents absolute and
relative-to-industry declining performance of a
sufficient magnitude to warrant explicit turnaround
actions
 The immediacy of the resulting threat to company
survival posed by the turnaround situation is
known as situation severity
 Turnaround responses typically include two
stages of strategic activities
 Retrenchment

 Recovery response
Divestiture and Liquidation Strategies

Divestiture Strategy
• Involves selling a firm or a major component

of a firm
• Reasons for divestiture

 Partial mismatches between acquired firm and

parent firm
 Corporate financial needs

 Government antitrust action

Liquidation Strategy
• Involves selling parts of a firm, usually for its

tangible asset value and not as a going

concern
 The Strategy of Bankruptcy
 Two approaches
• Liquidation – Involves complete distribution of a

firm’s assets to creditors, most of whom receive a

small fraction of amount owed
• Reorganization – Involves creditors temporarily

freezing their claims while a firm reorganizes and

rebuilds its operations more profitably
 Advantage of a reorganization bankruptcy
• Proactive option offering maximum repayment

of a firm’s debt in the future if a recovery strategy

is successful
Corporate Combination Strategies

Joint Ventures
 Involves establishing a third company (child), operated
for the benefit of the co-owners (parents)
Strategic Alliance
 Involves creating a partnership between two or more
companies that contribute skills and expertise to a
cooperative project
• Exists for a defined period
• Does not involve the exchange of equity
Corporate Combination Strategies
(contd.)

 Consortia are defined as large interlocking

relationships between businesses of an industry. In
Japan such consortia are known as keiretsus, in
South Korea as chaebols
 A Japanese keiretsu is an undertaking involving up to
50 different firms that are joined around a large
trading company or bank and are coordinated through
interlocking directories and stock exchanges
 Chaebols are typically financed through government
banking groups and largely are run by professional
managers trained by participating firms expressly for
the job
The Top Five Strategic Reasons for
Outsourcing

1. Improve business focus

2. Access to world-class capabilities
3. Accelerated reengineering benefits
4. Shared risks
5. Free resources for other purposes
 Basic Issues: Strategic Analysis
and Choice

1. What strategies are most effective at building

sustainable competitive advantages for single business
units?

2. Should dominant-product/service businesses

diversify to build value and competitive advantage?
What grand strategies are most appropriate?
 Prominent Sources of Competitive
Advantage

Cost leadership

Speed Market focus

Differentiation
 Characteristics of Global Industries

 Differences in prices and costs among countries due

to
 Currency exchange fluctuations

 Differences in wage and inflation rates

 Other economic factors

 Differences in buyer needs across countries

 Differences in competitors and ways of competing
among countries
 Differences in trade rules and governmental
regulations across countries
 Strategic Options: Choosing a
Generic Competitive Strategy

1. Broad-line global competition

2. Global focus strategy
3. National focus strategy
4. Protected niche strategy
 Grand Strategy Selection Matrix
Overcome weaknesses

Turnaround or Vertical integration

retrenchment Conglomerate diversification
Divestiture
Internal Liquidation External
(redirected (acquisition or
resources within II I merger for
the firm) resource
III IV capability)
Concentrated growth
Horizontal integration
Mkt. Development
Concentric diversification
Prod. Development
Joint venture
Innovation

Maximize strengths
 Model of Grand Strategy Clusters

Rapid market growth

1. Concentrated 1. Reformulation of
growth concentrated growth
2. Vertical 2. Horizontal integration
Integration 3. Divestiture
3. Concentric 4. Liquidation
diversification
Strong competitive I II Weak competitive
position position
IV III
1. Concentric 1. Turnaround or retrenchment
diversification 2. Concentric diversification
2. Conglomerate 3. Conglomerate diversification
diversification 4. Divestiture
3. Joint venture 5. Liquidation

Slow market growth

 The Portfolio Approach

BCG Growth-
Share Matrix

Industry
Attractiveness- BCG’s Strategic
Business Strength Environments
Matrix Matrix
Life Cycle-
Competitive
Strength Matrix
 The BCG Growth-Share Matrix

Cash Generation (Market Share)

Description of Dimensions
High Low Market share: sales relative
to those of other
Cash Use (Growth Rate)

Star Problem competitors in the market

High (dividing point is usually
Child
selected to have only the
two-three largest
Low Cash Cow Dog competitors in any market
fall into the high market
share region)

Description of Dimensions
Growth Rate: Industry growth rate in constant dollars (diving
point is usually the GNP’s growth rate)
 Factors Considered in Constructing an Industry
Attractiveness-Business Strength Matrix
(Industry Attractiveness)

Nature of Competitive Bargaining Power of Threat of

Rivalry Suppliers/Customers Substitutes/New
Entrants
Number of Relative size of Technological
competitors typical players maturity/stability
Size of competitors Numbers of each Diversity of the

Strength of Importance of market

competitors’ corporate purchases from or Barriers to entry
parents sales to Flexibility of
Price wars Ability to vertically distribution system
Competition on integrate
multiple dimensions
(contd.)

Economic Factors Financial Norms Sociopolitical

Considerations
Sales volatility Average profitability Government regulation
Cyclicality of demand Typical leverage Community support

Market growth Credit practices Ethical standards

Capital intensity
(contd.)

(Business Strength)

Cost Position Level of Response Time

Differentiation
Economies of scale Promotion Manufacturing

Manufacturing costs effectiveness flexibility

Overhead Product quality Time needed to

Scrap/waste/rework Company image introduce new products

Patented products Delivery times
Experience effects
Brand awareness Organizational
Labor rates
flexibility
Proprietary processes
(contd.)

Financial Strength Human Assets Public Approval

Solvency Turnover Goodwill

Liquidity Skill
level Reputation

Break-even point Relative wage/salary Image

Cash flows Morale

Profitability Managerial

Growth in revenues commitment

Unionization
 GE Nine 9 cell Matrix (Grid)

 In a group Co, the GE chart is used to

find the position of each SBU to decide
whether any strategic decisions are to
be taken. Similarly the GE Matrix can
be used for different
production/business line to see the
worthiness of the portfolio and take
correcting actions.
 The Industry Attractiveness-Business
Strength Matrix
Description of
Dimensions
Industry Attractiveness Industry
Medium Low Attractiveness:
High
Subjective assessment
based on broadest
Selective Grow or possible range of
High
Invest Growth Let Go external opportunities
and threats beyond the
strict control of
management
Business Strength:
Business Strength

Selective Grow Harvest Subjective assessment

Medium Growth or of how strong a
Let Go competitive advantage
is created by a broad
range of the firm’s
Low
Grow Harvest Divest
internal strengths and
or weaknesses
Let Go
 The chart divides 3 categories like strong,
average and weak on Business Strength
 And 3 on strategic market growth rate.
There are 9 cells. Each industry weight age
and rating product is taken and plotted on the
matrix. One can visualize the place of the
SBU in order to take appropriate strategy like
restructuring, turnaround, divestment etc
based on data collected.
 Description of Dimensions
 Industry Attractiveness: Subjective
assessment based on broadest possible
range of external opportunities and threats
beyond the strict control of management
 Business Strength: Subjective assessment
of how strong a competitive advantage is
created by a broad range of the firm’s internal
strengths and weaknesses
 The factors of attractiveness are
generally, Market share, Market share
growth, Brand image, After sales
service, Distribution capacity, Capacity
utilization, Product quality, Technology.
Advantages of the Industry Attractiveness-Business
Strength Matrix Over the BCG Matrix

 Terminology is less offensive and more

understandable
 Multiple measures associated with each
dimension tap many factors relevant to
business strength and market attractiveness
 Allows for broader assessment during both
strategy formulation and implementation for
a multi business company
 The Market Life Cycle-Competitive
Strength Matrix
Stage of Market Life Cycle

Description of
Dimensions
y
: ivel Stage of Market Life
Competitive Strength

High sh s
Pu gre Cycle: See p. 146
t Ag Competitive
s
ve Strength: Overall
In
subjective rating,
ion: vely
ut ecti based on a wide
a
C el
S range of factors
e st regarding the
Inv
Low g er: likelihood of gaining
n st
Da arve and maintaining a
H competitive
advantage

Introduction Growth Maturity Decline

 Ex. 8-6: BCG’s Strategic
Environments Matrix

Fragmented Specialization
apparel, house building, pharmaceuticals, luxury cars,
Sources of Advantage

Many
jewelry retailing, sawmills chocolate confectionery

Stalemate Volume
basic chemicals, volume-grade jet engines, supermarkets,
Few
paper, ship owning, wholesale motorcycles, standard
banking microprocessors

Small Big
Size of Advantage
Contributions of Portfolio Approaches

 Convey large amounts of information

about diverse businesses and corporate
plans in a simplified format
 Illuminate similarities and differences
among businesses, conveying the logic
behind corporate strategies for each
business
 Simplify priorities for sharing corporate
resources across diverse businesses
 Provide a simple prescription of what
should be accomplished – a balanced
portfolio of businesses
 Limitations of Portfolio Approaches

 Does not address how value is created across business units

 Accurate measurement for matrix classification not as easy as
matrices implied
 Underlying assumption about relationship between market
share and profits varies across different industries and
market segments
 Limited strategic options viewed as basic strategic missions
 Portrays notion that firms need to be self-sufficient in capital
 Fails to compare competitive advantage a business receives
from being owned by a particular company with costs of
owning it
 Balancing Financial
Resources: Portfolio
Techniques
BCG Growth-Share
Matrix

Industry
Life Cycle-
Attractiveness-
Competitive
Business Strength
Strength Matrix
Matrix
 BCG Growth-Share Matrix
Cash Generation (Market Share) Description of
Market Share:
High Low Dimensions
Sales relative to
those of other
Cash Use (Growth Rate)

competitors in
Question market (dividing
High Star point is usually
mark selected to have
only 2-3 largest
competitors in any
market fall into
high market share
region)
Low Cash Cow Dog Growth Rate:
Industry growth
rate in constant
dollars (dividing
point is typically
GNP’s growth rate)
 Strategies

• Question Marks - Build Market Share

• Star - Hold Market Share

• Cash Cows - Harvest

• Dogs – Divest
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix
Industry Attractiveness Factors
Bargaining
Nature of Threat of
Power of
Competitive Substitutes/ New
Suppliers/Custo
Rivalry Entrants
mers
•Number of •Relative size of •Technological
competitors typical players maturity/stabili
ty
•Size of •Numbers of
competitors each •Diversity of the
market
•Strength of •Importance of
competitors’ purchases from •Barriers to
corporate or dales to entry
parents
•Ability to •Flexibility of
•Price wars vertically distribution
integrate system
•Competition on
multiple
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix (continued)
Industry Attractiveness Factors
Economic Sociopolitical
Financial Norms
Factors Considerations
•Sales •Average •Government
volatility profitability regulation
•Cyclicality of •Typical •Community
demand leverage support
•Market •Credit •Ethical
growth practices standards
•Capital
intensity
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix (continued)
Business Strength Factors
Level of
Cost Position Response Time
Differentiation
•Economies of •Promotion •Manufacturing
scale effectiveness flexibility
•Manufacturing •Product quality •Time needed to
costs introduce new
•Company products
•Overhead image
•Scrap/waste/rew •Patented •Delivery times
ork products •Organizational
•Experience flexibility
•Brand
effects awareness
•Labor rates
 Factors Considered in Constructing an
Industry Attractiveness-Business Strength
Matrix (concluded)
Business Strength Factors
Financial
Human Assets Public Approval
Strength
•Solvency •Turnover •Goodwill
•Liquidity •Skill level •Reputation
•Break-even •Relative •Image
point wage/salary

•Cash flows •Morale

•Managerial
•Profitability commitment
•Growth in •Unionization
revenues
 Industry Attractiveness-Business
Strength Matrix
Industry Attractiveness Description of
Industry
High Medium Low Dimensions
Attractiveness:
Subjective
assessment based
High Selecti Grow or on broadest possible
Business Strength

Invest ve Let range of external

Growth Go opportunities and
threats beyond
control of
Medium Selectiv Grow or management
e Harvest
Let Go Business Strength:
Growth
Subject assessment
of how strong a
Low competitive
Grow or
Harvest Divest advantage is
Let Go created by a broad
range of a firm’s
internal strengths
and weaknesses
 Advantages of the Industry
Attractiveness-Business Strength
Matrix over the BCG Matrix

 Terminology is less offensive and more understandable

 Multiple measures associated with each dimension tap many

factors relevant to business strength and market attractiveness

 Allows for broader assessment during both strategy formulation

and implementation for a multibusiness company
 Market Life Cycle-Competitive
Strength Matrix
Stage of Market Life Cycle
Introduction Growth Maturity Decline Description of
Stage of Market
Dimensions
Life Cycle: See
ly
Competitive Strength

e page 184
: siv
High
u sh es
P gr
Ag Competitive
st : e ly
ve on iv Strength: Overall
In t i c t
Moderate u le
a subjective rating,
C Se
st based on wide
v e
e r: range of factors
In n g st
a e regarding
Low D arv likelihood of
H
gaining and
maintaining a
competitive
advantage
 Contributions of Portfolio
Approaches
Convey
Convey large
large amounts
amounts of
of information
information about
about
diverse
diverse businesses
businesses and
and corporate
corporate plans
plans in
in a
a
simplified
simplified format
format

Illuminate
Illuminate similarities
similarities and
and differences
differences among
among
businesses,
businesses, conveying
conveying the
the logic
logic behind
behind
corporate
corporate strategies
strategies for
for each
each business
business

Simplify
Simplify priorities
priorities for
for sharing
sharing corporate
corporate
resources
resources across
across diverse
diverse businesses
businesses

Provide
Provide a
a simple
simple prescription
prescription of
of what
what should
should be
be
accomplished
accomplished -- a a balanced
balanced portfolio
portfolio of
of
businesses
businesses
 Limitations of Portfolio
Approaches
Does
Does not
not address
address how
how value
value is
is created
created across
across
business
business units
units

Accurate
Accurate measurement
measurement for
for matrix
matrix classification
classification not
not
as
as easy
easy as
as matrices
matrices implied
implied
Underlying
Underlying assumption
assumption about
about relationship
relationship between
between
market
market share
share and
and profits
profits varies
varies across
across different
different
industries
industries and
and market
market segments
segments
Limited
Limited strategic
strategic options
options viewed
viewed as
as basic
basic strategic
strategic
missions
missions
Portrays
Portrays notion
notion that
that firms
firms need
need to
to be
be self-sufficient
self-sufficient
in
in capital
capital
Fails
Fails to
to compare
compare competitive
competitive advantage
advantage a a business
business
receives
receives from
from being
being owned
owned by
by a
a particular
particular company
company
with
with costs
costs of
of owning
owning it
it
 Behavioral Considerations
Affecting Strategic Choice
Role of
current
strategy
Degree of
firm’s
Attitudes
external
toward risk
dependenc
e
Managerial
priorities Internal
political Competitiv
different
consideratio e reaction
from
stockholder ns
s
 Behavioral Considerations
Affecting Strategic Choice
 Role of current strategy
 What is the amount of time and resources invested in
previous strategies?
 How close are new strategies to the old?
 How successful were previous strategies?
 Degree of firm’s external dependence
 How powerful are firm’s owners, customers, competitors,
unions, and its government?
 How flexible is firm with its environment?
 Behavioral Considerations
 Affecting Strategic Choice
Attitudes toward risk
 Industry volatility and industry evolution affect managerial
attitudes
 Risk-oriented managers prefer offensive, opportunistic
strategies
 Risk-averse managers prefer defensive, conservative
strategies
 Managerial priorities different from stockholder
interests
 Agency theory suggests managers frequently place their own
interests above those of their shareholders
 Behavioral Considerations
Affecting Strategic Choice
 Internal political considerations
 Major sources of company power are CEO, key subunits, and
key departments
 Power can affect corporate decisions over analytical
considerations
 See Fig. 9-6
 Competitive reaction
 Probable impact of competitor response must be considered
during strategy design process
 Competitor response can alter strategy success
 GE: Strategic Circles

 In 1981, John E. Welch Jr., Chairman and CEO of General Electric designed the
company’s operations on the basis of three `strategic circles’:

 Core manufacturing units such as lighting and locomotives

 Technology -intensive businesses services

 To achieve the first or second position in the global market for each of its
businesses: By 1986, this strategic orientation had taken shape with 14 distinct
businesses, including aircraft engines, medical systems, engineering plastics, major
appliances, television and financial services.
 IBM’s Partners

1988 Jointly own Prodigy, an interactive

Sears computer service for consumers
1989 Jointly built a US $200 million plant in
Toshiba
Japan to manufacture high-
resolution colour flat screens for laptops
1990 Jointly developing future chips and jointly
Siemens
built
Mitsubish 1991 16-Mb DRAM memory chips in France
i 1991 Mitsubishi Electric sells IBM mainframes
Borland in Japan under its own name
 IBM’s Partners

1991 Developing tools to make it easier to

Wang create software for the OS/2 system
1991 Sells IBM’s PCs and RS/6000 workstations
Novell under its own name
1991 IBM sells Novell networking software
Apple 1991 Two joint ventures: Taligent and Kaleida
1991 Jointly developing the RISC microprocessor
Motorola
1991 Jointly developing a new generation of
Intel
integrated microprocessor chips
 Reebok’s Outsourcing
Its main function is marketing with a current staff strength of 35 in India. The
other activities are outsourced as given below:
 Apparel design National Institute of Fashion Technology
 Warehouse management Bakshi Associates
 Logistics Nexus Logistics
 Retailing Phoenix
 Advertising Hindustan Thompson
 Store design and execution Aakar
 Sports management 21st Century
 Gymnasium A private firm
 Manufacturing Shoes: Phoenix, Aero, Lakhani
 Apparel Viniyoga and six others
 Selection Prospects
 Ex. 8-7: Value Building in
Multibusiness Companies
(Market-Related Opportunities)

Opportunities to Build Potential Competitive Impediments to Achieving

Value or Sharing Advantage Enhanced Value

Shared sales force activities or Lower selling costs Buyers have different
shared sales office, or both Better market coverage purchasing habits toward the
Stronger technical advice to products
Different salespersons are
buyers
more effective in representing
Enhanced convenience for
the product
buyers
Some products get more
Improved access to buyers
attention than others
Buyers prefer to multiple-
source rather than single-
source their purchases
Ex. 8-7 (contd.)

Opportunities to Build Potential Competitive Impediments to Achieving

Value or Sharing Advantage Enhanced Value

Shared after-sales service and Low servicing costs Different equipment or different
repair work Better utilization of service labor skills, or both, are needed to
personnel handle repairs
Faster servicing of customer calls Buyers may do some in-house
repairs

Shared brand name Stronger brand image and Company reputation is hurt if
company reputation quality of one product is lower
Increased buyer confidence in the
brand

Shared advertising and Lower costs Appropriate forms of messages

promotional activities Greater clout in purchasing ads are different
Appropriate timing of promotions
is different
 Ex. 8-7 (contd.)

Opportunities to Build Value Potential Competitive Impediments to Achieving

or Sharing Advantage Enhanced Value

Common distribution channels Lower distribution costs Dealers resist being dominated by a
Enhanced bargaining power with single supplier and turn to multiple
distributors and retailers to gain shelf sources and lines
space, shelf positioning, stronger Heavy use of the shared channel
push and more dealer attention, and erodes willingness of other channels
better profit margins to carry or push the firm’s products

Shared order processing Lower order processing costs Differences in ordering cycles
One-stop shopping for buyer disrupt order processing economies
enhances service and, thus,
differentiation
Ex. 8-7 (contd.)

(Operating Opportunities)

Opportunities to Build Potential Competitive Impediments to Achieving

Value or Sharing Advantage Enhanced Value

Joint procurements of purchased Lower input costs Input needs are different in terms
inputs Improved input quality of quality or other specifications
Inputs are needed at different
Improved service from suppliers
plant locations, and centralized
purchasing is not responsive to
separate needs of each plant

Shared inbound or outbound Lower freight and handling costs Input sources or plant locations,
shipping and materials handling Better delivery reliability or both, are in different geographic
More frequent deliveries, such that areas
Needs for frequency and reliability
inventory costs are reduced
of inbound/outbound delivery differ
among the business units
Ex. 8-7 (contd.)

Opportunities to Build Potential Competitive Impediments to Achieving

Value or Sharing Advantage Enhanced Value

Shared manufacturing and Lower Higher changeover costs in

assembly facilities manufacturing/assembly costs shifting from one product to
Better capacity utilization, another
because peak demand for High-cost special tooling or
one product correlates with equipment is required to
valley demand for other accommodate quality
Bigger scale of operation differences or design
improves access to better differences
technology and results in
better quality
 Ex. 8-7 (contd.)

Opportunities to Build Value Potential Competitive Impediments to Achieving

or Sharing Advantage Enhanced Value

Shared product and process Lower product or process design Technologies are the same, but the
technologies or technology costs, or both, because of shorter applications in different business
development or both design times and transfers of units are different enough to prevent
knowledge from area to area. much sharing of value
More innovative ability, owing to
scale of effort and attraction of better
R&D personnel

Shared administrative support Lower administrative and operating Support activities are not a large
activities overhead costs proportion of cost, and sharing has
little cost impact (and virtually no
differentiation impact)
 Ex. 8-7 (contd.)

(Management Opportunities)

Opportunities to Build Potential Competitive Impediments to Achieving

Value or Sharing Advantage Enhanced Value

Shared management know- Efficient transfer of a Actual transfer of know-how

how, operating skills, and distinctive competence – can is costly or stretches the key
proprietary information create cost savings or skill personnel too thinly, or
enhance differentiation. both.
More effective management Increased risks that
as concerns strategy proprietary information will
formulation, strategy leak out
implementation, and
understanding of key success
factors
Six Critical Questions for Diversification
Success
 What can our company do better than any of its
competitors in its current market(s)?
 What core competencies do we need in order to
succeed in the new market?
 Can we catch up to or leapfrog competitors at their
own game?
 Will diversification break up our core competencies
that need to be kept together?
 Will we be simply a player in the new market or will
we emerge a winner?
 What can our company learn by diversifying, and are
we sufficiently organized to learn it?
Places to Look for Parenting Opportunities

 Size and age  Common capabilities

 Management  Specialized expertise
 Business  External relations
definition  Major decisions
 Predictable  Major changes
errors
 Linkages
The Patching Perspective

 Patching is the process by which corporate

executives routinely remap businesses to
match rapidly changing market opportunities.
 Patching can be
 Adding
 Splitting
 Transferring
 Exiting, or combining businesses
 Patching is more critical in turbulent and
rapidly changing markets, than in stable,
unchanging markets
Ex. 8-10: Three Approaches to Strategy

Position Resources Simple Rules

Strategic logic Identify an attractive Establish a vision Jump into the
market Build resources confusion
Locate a defensible Leverage across Keep moving
position markets Seize opportunities
Fortify and defend Finish strong

Strategic Where should we What should we How should we

question be? be? proceed?

Source of Unique, valuable Unique, valuable, Key processes and

advantage position with tightly inimitable resources unique simple rules
integrated activity
system
Ex. 8-10 (contd.)

Works best in Slowly changing, Moderately Rapidly changing,

well-structured changing, well- ambiguous markets
markets structured markets

Duration of Sustained Sustained Unpredictable

advantage

Risk It will be difficult to Company will be too Managers will be too

alter position as slow to build new tentative in executing
conditions change resources as on promising
conditions change opportunities

Performance goal Profitability Long-term Growth

dominance
 Ex. 8-11: Simple Rules, Summarized
(Adapted)

Type Purpose
How-to rules They spell out key features of how a process is executed – “What
makes our process unique?”

Boundary rules They focus managers on which opportunities can be pursued and
which are outside the pale.

Priority rules They help managers rank the accepted opportunities.

Timing rules They synchronize managers with the pace of emerging

opportunities and other parts of the company.

Exit rules They help managers decide when to pull out of yesterday’s
opportunities.