Evaluating the Strategies of Diversified Companies

1
Evaluating the Strategies of Diversified Companies

• Crafting and implementing action plans to improve
  the overall attractiveness and competitive
  strength of a companys business line-up is the
  central strategic task of corporate level
  managers.
• How attractive is the group of businesses?
• How good is the performance outlook?
• Are there changes to be made to present line-up?

2
Evaluating the Strategies of Diversified Companies

• Identifying the present corporate strategy
• Applying the industry attractiveness test
• Applying the competitive strength test
• Applying the strategic fit test
• Applying the resource fit test
• Ranking businesses on historic future
• Ranking businesses on priority for resource
  allocation
• Crafting new strategic moves

3
Identifying the Current Strategy

• Type of diversification
• Extent of diversification
• Scope
• Recent / Impending moves
• Efforts to capture fits
• Total Cap Ex per unit in prior yrs
• What is current corporate strategy rationale

4
Evaluating Industry Attractiveness

• Individual - Relative - Collective
• Individual
• Mkt size, projected growth, profitability
• Intensity of competition
• Threats / Opportunities
• Seasonal / Cyclical factors
• Capital requirements
• Fits with present businesses
• Social, political, regulatory, environmental
  factors
• Degree of risk / uncertainty

5
Evaluating Industry Attractiveness

• Relative Attractiveness
• Select industry measures
• Assign weightings (sum 1.0)
• Rate industries according to a scale eg. 1-10
• The sum of the weighted ratings provides a
  quantitative measure of the attractiveness
  relative to other industries
• Rank the industries

6
Relative Industry Attractiveness
Measures Weighting Ratings (1-10) Ind.
Attract. Co.A Co.B Co.C A B
C Mkt size .1 6 2 5 .6 .2
.5 Growth Rate .15 1 8 5 .15 1.2
.75 Intensity (comp) .3 2 9 5 .6 2.7
1.5 Resource reqs .1 3 5 5 .3 .5
.5 Strategic fit .15 6 8 5 .9 1.2
.75 Opps / threats .05 1 6 5 .05 .3
.25 Social, political .05 1 4 5 .05 .2
.25 Degree of risk .05 1 4 5 .05 .2
.25 Industry profitability .05 7 5 5 .35 .25
.25
3.05
6.75
5.0
1.0
7
Evaluating Industry Attractiveness

• Collective Attractiveness
• Attractiveness of mix of industries as a whole
• A substantial portion of revenues profit (
  principal businesses) should come from bus. units
  in attractive industries
• Businesses in least attractive industries are
  divestiture candidates

8
Evaluating Competitive Strength

• Measuring strength of position of business within
  
• their industries
• Choose measures - relative mkt share
• Assign weights - ability to compete on cost
• Use rating scale - ability to match quality
• Rank (gt 6.7 strong, - leverage
• lt 3.3 weak) - fits, skills, capabilities
• - brand recognition / reputation -
  profitability relative to competit.

9
Industry Attractiveness / Competitive Strength
Matrix
Business mkt share
3.3
6.7
High Med Low
Industry size
6.7
LT Industry Attractiveness
3.3
Strong Average Weak
Competitive Strength Position
Investment priority
General Strategic Prescription
Overhaul/Reposition/Divest
Low Priority
Selective Investment
Medium
Grow Build
High
10
Ind. Attractiveness/ Business Strength 9 Cell
Matrix (GE)

• Takes many strategic variables into account
• Allows for weighting range of rankings
• Use to prioritize investments channel funds
• No real guidance on specifics of business
  strategy
• Doesnt address strategic coordination issues
• Doesnt adequately deal with new business in
  emerging industry

11
BCG Growth Share Matrix
Relative to economy as a whole
Relative Market Share (volume)
1.0
Hi
Lo
Hi
QUESTION MARK/ PROBLEM CHILD
STAR
size of circle represents revenue
Industry Growth Rate
CASH COW
DOG
Lo
12
Growth Share Matrix

• Developed by Boston Consulting Group
• Relative market share better indicator of
  business strength than actual market share
• Eg. You have 10 share
• Market leader has 20 relative share is 0.5
• Market leader has 50 relative share is 0.2
• Based on volume - PIMS study market share is
  indicator of business strength

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Question Marks

• Low share in emerging industry
• Cash hogs/ need investment
• rapid growth
• high costs (low scale econ/ experience effect)
• Action
• Invest and produce a star
• Divest and use resources elsewhere

?
14
Stars

• High share in emerging industry
• Need investment/ working capital due to high
  growth
• may provide from internal funds
• but may be cash hogs
• Will sustain the diversified firm into the future

15
Cash Cows

• High share in mature industry
• Generates large amounts of cash
• Not all needs to be reinvested
• Funds other businesses (stars/ question marks)
• Important to maintain
• Market position
• Operating efficiencies

16
Dogs

• Low share in low growth industry
• many can still perform well
• esp. if low scale econonies/ experience effects
• eg. Crown Cork and Seal
• get rid of weak dog businesses

17
Growth Share matrix

• Cash cows fund cash hogs
• Success sequence
• Question mark - star -self funding star - cash cow

funds
18
Growth Share Matrix

• Disaster sequence
• 1) star-? -dog
• 2) cash cow - dog
• Dont
• Overinvest in cash cow
• Overinvest in ? with little potential
• Dilute resources by investing in too many ?

1a
1b
2
19
Growth Share Matrix

• Encourages strategist to view diversified firm as
  collection of cash flows requirements
• But has weaknesses
• Oversimplified 4 categories/ 2 dimensions
• Being a leader in a slow-growth industry doesnt
  guarantee cash cow status
• Doesnt analyse average business
• Doesnt indicate best investment opportunity
• Assessing attractiveness involves more than
  industry growth RMS
• Connection between RMS profitability not as
  tight as implied

20
Strategic Fit Analysis

• Identifying competitively valuable matches in
  value chains in portfolio
• Whether each unit fits well with firms LT
  strategic direction
• The greater the competitively valuable fits the
  greater the potential for economies of scope.

21
Strategic Fit Analysis
Logistics Technology Sales/Mkg Distribution
A
B
C
Logistics / Ops
FITS
Tech, skills
No fit opportunities
Sales, mkg, distribution
22
Resource Fit Analysis

• When businesses add to a companys strengths
  either financially or strategically
• A company must have the resources to support the
  resource requirements of its group of businesses
• Enough cash cows to finance the cash hogs with
  potential to be star performers

23
Deciding allocation priorities General
Direction for each Business Unit

• Concentrate resources on businesses with good to
  excellent prospects. Allocate minimal resources
  to those with sub-par prospects.
• Steering resources out of low opportunity areas
  into high opportunity areas.
• Strategic Options - Invest Grow
• - Fortify Defend
• - Overhaul Re-position
• - Harvest Divest

24
Crafting a Corporate Strategy

• Right mix of businesses?
• Ample fit?
• Unnecessary businesses?
• Enough cash cows to finance cash hogs with
  potential to be star performers?
• Can the principal business be counted on to
  generate dependable profits and cash flows?
• Does the make-up put the co. in a good position
  for the future?
• COMPOSITION COORDINATION

25
Crafting a Corporate Strategy

• Q. Can the company attain its performance
  objectives with the current line-up of businesses
  and resource capabilities?
• A. Yes - no major corporate strategy changes
  needed
• A. No - alter plans for some or all businesses
• - add new businesses
• - divest weaker businesses
• - form alliances to strengthen existing
  businesses
• - upgrade co. resource base
• - lower co. performance objectives
• Strategy analysis tends to emerge incrementally