Managing the Multi-Business Firm and Analyzing Strategic Edge: formula sheet

Key formulas

Corporate-level strategy question

Which businesses? + How much resource for each? + How to create group value?

Use this to define corporate-level strategy in one line and separate it from business-level strategy.

Synergy

Value of combined businesses > Sum of the values of separate businesses

The test of related diversification. If there is no gain from combining, the diversification is not creating value.

Related diversification

New business linked by shared technology, markets, skills, brand or channels

Core logic: economies of scope and transfer of capabilities.

Unrelated diversification

New business with no operating link; value from financial management and risk spreading

Core logic: portfolio of independent businesses managed by the corporate centre.

Relative market share

Relative market share = Unit's market share ÷ Market share of its largest competitor

A value above 1 means the unit is the market leader. The standard BCG chart often uses 1 as the dividing line (some texts use 1.0 on a log scale).

Market growth rate

Market growth rate = (Industry sales this year − Industry sales last year) ÷ Industry sales last year × 100

The cut-off between high and low growth is often taken as about 10%, but it is a judgement and the question may state its own.

Box classification rule

High growth + high share = Star; Low growth + high share = Cash cow; High growth + low share = Question mark; Low growth + low share = Dog

Use the cut-offs given in the question. If none are given, state your assumption.

Strategy for each box

Star: build/hold; Cash cow: hold/harvest; Question mark: build selectively or divest; Dog: divest/retrench/harvest

These are the usual textbook strategies, not fixed rules. Justify with cash needs.

Weighted score for an axis

Score = Σ (weight × rating) for all factors

Weights on one axis must add up to 1 (or 100%). Compute the score for industry attractiveness and for business strength separately.

Nine-cell layout

Industry attractiveness (High / Medium / Low) × Business strength (Strong / Average / Weak)

Top-left zone: invest and grow. Diagonal zone: selective investment, hold. Bottom-right zone: harvest or divest.

Ansoff matrix

Penetration = existing product, existing market; Market development = existing product, new market; Product development = new product, existing market; Diversification = new product, new market

Diversification carries the highest risk because both product and market are new.

Hofer and Shell model

Competitive position (Strong / Average / Weak) × Stage of product-market evolution

Stages: development, growth, shake-out, maturity, saturation, decline.

Synergy condition

Value of combined units > Sum of value of units standing alone

Positive synergy exists only when this holds after allowing for the cost of coordination.

Parenting value test (illustrative, not a standard formula)

Value added by parent − Cost of parent (head office cost and lost value) > 0

This is an illustrative test to organise your reasoning, not a formula from the textbook. If the result is negative, the parent is destroying value and the unit may be better placed elsewhere.

Parenting advantage rule

Parent adds more value to the unit than any rival parent would

Ownership is justified only when this is true. Adding some value is not enough.

Fit analysis

Parent's strengths matched to unit's needs (value creation) and parent's traps matched to unit's critical success factors (value destruction)

This is a conceptual matching, not a numerical formula. Use it to classify units on the Ashridge Portfolio Display as heartland, edge-of-heartland, ballast, alien territory or value trap.

Margin in the value chain

Margin = Total value (price customers pay) − Total cost of all value activities

Porter's idea: a firm is profitable when the value it creates exceeds the cost of performing its activities.

Primary activities (5)

Inbound logistics → Operations → Outbound logistics → Marketing and sales → Service

These are directly involved in creating, selling and supporting the product. Learn the order.

Support activities (4)

Firm infrastructure + Human resource management + Technology development + Procurement

They support all primary activities and the chain as a whole. Infrastructure covers general management, planning, finance, legal and quality systems.

Sources of advantage

Cost advantage = performing activities at lower cost; Differentiation advantage = performing them uniquely so buyers pay a premium

Link the two sources to Porter's generic strategies when writing your answer.

VRIO test

Valuable + Rare + Costly to imitate + Organised to exploit = sustained competitive advantage

Apply the questions in order. A 'no' at any stage decides the outcome at that stage.

VRIO outcomes

Not valuable → competitive disadvantage; Valuable only → competitive parity; Valuable + Rare → temporary advantage; Valuable + Rare + Costly to imitate → sustained advantage if the firm is organised to exploit it

If the firm is not organised, the advantage is only partly captured or unused.

Test of a core competence (Prahalad and Hamel)

Provides access to many markets + Contributes to customer-perceived benefit + Difficult for competitors to imitate

Use these three tests to decide whether a skill is truly core.

Resource and capability

Resources = inputs owned (tangible and intangible); Capabilities = ability to deploy and combine resources

Core competence is a capability, built by collective learning, that is central to the firm's strategy.

Performance gap

Gap = Benchmark performance − Own performance

Measure on the same basis and period. For cost measures, a positive own-minus-benchmark figure shows you are worse.

Benchmarking process

Select area → Choose partners → Collect data → Analyse gap → Set targets → Implement → Monitor → Repeat

Wording of the stages differs by source. Keep the logical order.

Benchmarking types

By subject: Strategic, Process, Performance. By partner: Internal, Competitive, Functional, Generic

Name the basis of classification before listing types.

Porter's generic strategies

Cost leadership | Differentiation | Focus (cost focus or differentiation focus)

Two ways to win (lower cost or uniqueness) across two scopes (broad or narrow).

Experience curve effect

Unit cost falls as cumulative output rises

Stated as a general tendency, not a fixed percentage. Any fixed rate is given only in the question.

Quick revision

• Corporate level strategy decides which businesses the firm should be in and how to manage them together.
• Diversification can be related or unrelated; related diversification aims to share skills or resources.
• BCG matrix classifies businesses as stars, cash cows, question marks and dogs, using market growth and relative market share.
• Cash cows fund the firm; question marks need a choice to invest heavily or exit.
• GE nine-cell model uses industry attractiveness and business strength, so it is broader than the BCG matrix.
• Portfolio models are aids to judgement and have limits; do not treat them as final answers.
• Corporate parenting asks whether the parent adds more value than it costs.
• Synergy means the combined businesses create more value than they would apart.
• Value chain analysis splits activities into primary and support activities to find where value is created.
• A core competence is a collective strength that is valuable, rare and hard to imitate.
• Benchmarking compares your processes and results with the best performers to close gaps.
• Always end an answer with a clear recommendation based on the facts.

Common mistakes

• Treating corporate-level and business-level strategy as the same thing. Fix: Link corporate level to the choice of businesses and resource allocation, and business level to competing in one market.
• Calling any new product diversification. Fix: Check whether the product is truly new to the firm's business scope. A minor variant in the same market is usually just product development.
• Using absolute market share instead of relative market share. Fix: Always divide by the largest competitor's share. A 30% share against a rival with 45% gives 0.67, which is low.
• Mixing up cash cows and stars. Fix: Check growth. High growth means star, low growth means cash cow. Remember that stars absorb cash while cows release it.
• Treating the GE matrix as a simple 2×2 like BCG Fix: Remember it has nine cells, three levels on each axis, and each axis is a composite of many weighted factors.
• Using market share and growth as the two axes Fix: GE uses industry attractiveness and business strength. Market share and growth are only some of the factors inside them.
• Treating synergy as always positive. Fix: State that synergy must be tested against coordination cost. Mention negative synergy where the facts hint at it.
• Confusing corporate parenting with business-level strategy. Fix: Corporate parenting is about the head office and the portfolio. Business-level strategy is about how one unit competes.
• Putting procurement or HR in the primary activities. Fix: Remember that procurement, technology, HR and infrastructure are the four support activities. Only the five logistics-to-service activities are primary.
• Listing the activities without applying them to the case. Fix: Tie every activity to a fact from the case and state its effect on cost or value.

Exam tips

• Open with a one-line definition of corporate-level strategy. It earns easy marks and frames the answer.
• For 'distinguish' questions, use clear points such as meaning, basis of value, example, risk and management demand.
• In case questions, name the shared link or its absence before you label the diversification.
• Always give both benefits and risks, then a short conclusion tied to the facts.
• Use Indian examples with company types, not only famous names, so you do not state facts you are unsure of.
• Draw the 2 × 2 grid with axes labelled. A neat diagram earns presentation marks and makes your answer easy to read.
• If the question gives numbers, show the relative share calculation. Marks are given for the working, not just the label.
• Write the strategy and the cash flow reason for each box, not just the box name.