Corporate-Level Strategy

1
Corporate-Level Strategy
Chapter 8

• Robert E. Hoskisson
• Michael A. Hitt
• R. Duane Ireland

2
Diversification and Corporate Performance A
Disappointing History

• A study conducted by Business Week and Mercer
  Management Consulting, Inc., analyzed 150
  acquisitions that took place between July 2000
  and July 2005. Based on total stock returns from
  three months before, and up to three years after,
  the announcement
• 30 percent substantially eroded shareholder
  returns.
• 20 percent eroded some returns.
• 33 percent created only marginal returns.
• 17 percent created substantial returns.
• A study by Salomon Smith Barney of U.S. companies
  acquired since 2005 in deals for 15 billion or
  more, the stocks of the acquiring firms have, on
  average, under-performed the SP stock index by
  14 percentage points and under-performed their
  peer group by four percentage points after the
  deals were announced.

Sources Lipin, S. Deogun, N. 2000. Big merges
of the 90s prove disappointing to shareholders.
Wall Street Journal, October 30 C1 A study by
Dr. G. William Schwert, University of Rochester,
cited in Pare, T. P. 1994. The new merger boom.
Fortune, November 2896 and Porter, M.E. 1987.
From competitive advantage to corporate strategy.
Harvard Business Review, 65(3)43.
3
Reviewing the Corporate Portfolio

• Portfolio Planning under the Boston Consulting
  Group (BCG) matrix
• Identifying the Strategic Business Units (SBUs)
  by business area or product market
• Assessing each SBUs prospects (using relative
  market share and industry growth rate) relative
  to other SBUs in the portfolio.
• Developing strategic objectives for each SBU.

4
The BCG Matrix
Source Perspectives, No. 66, The Product
Portfolio. Adapted by permission from The Boston
Consulting Group, Inc., 1970.
5
The BCG Matrix

• Stars
• High relative market shares in fast growing
  industries.
• Question marks
• Low relative market shares in fast growing
  industries.
• Cash cows
• High relative market shares in low-growth
  industries.
• Dogs
• Low relative market shares in low-growth
  industries.

6
The Strategic Implications of the BCG Matrix

• Stars
• Aggressive investments to support continued
  growth and consolidate competitive position of
  firms.
• Question marks
• Selective investments divestiture for weak firms
  or those with uncertain prospects and lack of
  strategic fit.
• Cash cows
• Investments sufficient to maintain competitive
  position. Cash surpluses used in developing and
  nurturing stars and selected question mark firms.
• Dogs
• Divestiture, harvesting, or liquidation and
  industry exit.

7
Limitations on Portfolio Planning

• Flaws in portfolio planning
• The BCG model is simplistic considers only two
  competitive environment factors relative market
  share and industry growth rate.
• High relative market share is no guarantee of a
  cost savings or competitive advantage.
• Low relative market share is not always an
  indicator of competitive failure or lack of
  profitability.
• Multifactor models (e.g., the McKinsey matrix)
  are better though imperfect.

8
The McKinsey Matrix
9
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