Business Mix Selection
- Common Sense Point of View -
Investors in stocks recognize the dual aspects of analyzing an equity
investment opportunity. First, how attractive is the industry? Second, what are
the competitive advantages and disadvantages of the company under consideration
for investment?
These concepts need to be discussed inside the ranks of corporate
management. First, corporate management needs to select the best industries in
which to compete. Second, corporate management needs to facilitate the process
whereby each business develops a competitive strategy to build and sustain a
competitive advantage.
The process of developing a corporate strategy, including identification
of desired business mix, doesn't have to be long or complicated. The process of
developing business unit strategies doesn't have to be long or complicated
either. In practice, if necessary, the corporate plan can be on one page, and
each business unit plan can be on one page. A sample format for both of these
one-page plans is presented in the chapter on implementation (Chapter 5).
The important message, however, is that corporate management needs to
appreciate their vital, ongoing responsibility for business mix selection and
for allocating resources among the corporate businesses.
Business Mix Selection
- Financial Analyst Point of View -
Viewed in another way, imagine a graph that plotted the expected long-term
profitability of thousands of industries. The primary corporate goal is to enter
and grow businesses in those industries that will yield the highest returns
(represented by the shaded area).
Unfortunately, it is emotionally difficult for some corporate executives
to exit an industry. It is also difficult for some executives to (politically)
risk entering a new industry. The result is often continuing yesterday's
business mix in today's environment.
Next, for each industry selected, imagine a graph that plotted the
expected long-term profitability of a hundred different business unit
strategies. The goal is to select the strategy that will yield the highest
return (represented inside the shaded area).
An environment needs to be created where business managers can openly
discuss alternative strategies. A strategy may prescribe serving a particular
type of customer, or providing a particular product variety. Discontinuing a
product line also represents an alternative strategy that should be evaluated.
Business managers should not be confined to minor adjustments in strategy
assuming that the status quo is the safest alternative.
Business Mix Selection
- Industry Analyst Point of View -
As previously discussed, the decision to enter a new business should be
based upon industry attractiveness and the firm's ability to attain a
sustainable competitive advantage. The chart above graphically represents a
corporation with twelve SBUs. The arrows indicate the change in budget. The
absence of an arrow indicates a flat budget. The three thick circles represent
the corporation's largest businesses in terms of revenue.
The chart above is presented in Russian to highlight that this activity of
reviewing the company's mix of businesses is occurring everywhere. Since the end
of the cold war, even Russian companies are restructuring. Historically, Russian
companies in small towns have been engaged in many diverse businesses because
the town and the company were run by one party of individuals. For example, one
of the largest gold companies in the world, Yakutia, is also in silver,
diamonds, tin, timber, home construction, road building, agriculture, animal
farms and most everything else the town needs.
One shortcoming of the chart above is that it doesn't show linkages
between SBUs. An SBU should rarely be viewed as a stand-alone entity; and an SBU
competitive strategy should include how it is linked with other corporate SBUs.
An SBU with a poor competitive position in an unattractive industry should
likely be discarded unless it can show how it supports other corporate
businesses.
Business Mix Selection
- Strategic Planner Point of View -
It is also important that diversified corporations compare their list of
businesses in which they compete with other traditional and non-traditional
competitors.
AIG is an example of a broad-based financial services company which is in
many businesses, not all of which fit neatly within the umbrella of insurance.
Hartford Steam Boiler is an example of a company with a far more limited
portfolio of insurance-related businesses. Both companies have been successful.
There is clearly no magic number of businesses which will ensure success.
But a key goal for every corporation which competes in more than one business is
to maximize the value of the interrelationships among the corporate businesses.
More than just a slogan: working together makes good business sense.
The diagram above is useful for planning diversification strategies, for
anticipating competitor moves, and for maximizing your company's
interrelationships vis-à-vis each competitor.
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