Unit 5: Business and Multi-Business Strategy

Improvement on the portfolio approach focused on ways to broaden the rationale behind pursuit of diversification strategies. 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. This notion of leveraging core competencies as a basis for strategic choice in multibusiness companies has been a popular one for the past 20 years.

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. 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.

THE PORTFOLIO APPROACH: A HISTORICAL STARTING POINT

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. There are many reasons for this emergence of multibusiness companies: Companies can enter businesses with greater growth potential; enter businesses with different cyclical considerations; diversify inherent risks; increase vertical integration, and thereby reduce costs; capture value added; and instantly have a market presence rather than slower internal growth. As businesses jumped on the diversification bandwagon, their managers soon found a challenge in managing the resource needs of diverse businesses and their respective strategic missions, particularly in times of limited resources. 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. Three of these techniques are reviewed here. Once reviewed, we will identify some of the problems with the portfolio approach that you should keep in mind when considering its use.

portfolio techniques

An approach pioneered by the Boston Consulting Group 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.

The BCG Growth-Share Matrix

Managers using the BCG matrix plotted each of the company’s businesses according to market growth rate and relative competitive position. Market growth rate is the projected rate of sales growth for the market being served by a particular business. 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. Relative competitive position usually is expressed as the market share of a business divided by the market share of its largest competitor. 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. Exhibit 9.2 illustrates the growth-share matrix.

market growth rate

The projected rate of sales growth for the market being served by a particular business.

relative competitive position

The market share of a business divided by the market share of its largest competitor.

EXHIBIT 9.2: The BCG Growth-Share Matrix

Source: The growth-share matrix was originally developed by the Boston Consulting Group.

The stars are businesses in rapidly growing markets with large market shares. These businesses represent the best long-run opportunities (growth and profitability) in the firm’s portfolio. They require substantial investment to maintain (and expand) their dominant position in a growing market. This investment requirement is often in excess of the funds that they can generate internally. Therefore, these businesses are often short-term, priority consumers of corporate resources.

stars

Businesses in rapidly growing markets with large market shares.

Cash cows are businesses with a high market share in low-growth markets or industries. Because of their strong competitive positions and their minimal reinvestment requirements, these businesses often generate cash in excess of their needs. Therefore, they are selectively “milked” as a source of corporate resources for deployment elsewhere (to stars and question marks). Cash cows are yesterday’s stars and the current foundation of corporate portfolios. They provide the cash needed to pay corporate overhead and dividends and provide debt capacity. They are managed to maintain their strong market share while generating excess resources for corporatewide use.

cash cows

Businesses with a high market share in low-growth markets or industries.

Low market share and low market growth businesses are the dogs in the firm’s portfolio. Facing mature markets with intense competition and low profit margins, they are managed for short-term cash flow (e.g., through ruthless cost cutting) to supplement corporate-level resource needs. According to the original BCG prescription, they are divested or liquidated once this short-term harvesting has been maximized.

dogs

Low market share and low market growth businesses.

Question marks are businesses whose high growth rate gives them considerable appeal but whose low market share makes their profit potential uncertain. Question marks are cash guzzlers because their rapid growth results in high cash needs, while their small market share results in low cash generation. 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. 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.

question marks

Businesses whose high growth rate gives them considerable appeal but whose low market share makes their profit potential uncertain.

The Industry Attractiveness–Business Strength Matrix

Corporate strategists found the growth-share matrix’s singular axes limiting in their ability to reflect the complexity of a business’s situation. Therefore, some companies adopted a matrix with a much broader focus. This matrix, developed by McKinsey & Company at General Electric, is called the industry attractiveness–business strength matrix. This matrix uses multiple factors to assess industry attractiveness and business strength rather than the single measures (market share and market growth, respectively) employed in the BCG matrix. It also has nine cells as opposed to four—replacing the high/low axes with high/medium/low axes to make finer distinctions among business portfolio positions.

The company’s businesses are rated on multiple strategic factors within each axis, such as the factors described in Exhibit 9.3. The position of a business is then calculated by “subjectively” quantifying its rating along the two dimensions of the matrix. Depending on the location of a business within the matrix as shown in Exhibit 9.4, one of the following strategic approaches is suggested: (1) invest to grow, (2) invest selectively and manage for earnings, or (3) harvest or divest for resources. The resource allocation decisions remain quite similar to those of the BCG approach.

(Pearce 260-263)

Pearce, John, Richard Robinson. Strategic Management, 13th Edition. McGraw-Hill Learning Solutions, 2016-01-02. VitalBook file.

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