Evaluating the Strategies of Diversified Companies

Crafting and implementing action plans to improve the overall attractiveness and

competitive strength of a company’s 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?

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

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

Evaluating Industry Attractiveness*** Individual - Relative - Collective ***

IndividualMkt size, projected growth, profitability

Intensity of competitionThreats / Opportunities

Seasonal / Cyclical factorsCapital requirements

Fits with present businessesSocial, political, regulatory, environmental factors

Degree of risk / uncertainty

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

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 .5Growth Rate .15 1 8 5 .15 1.2 .75Intensity (comp) .3 2 9 5 .6 2.7 1.5Resource reqs .1 3 5 5 .3 .5 .5Strategic fit .15 6 8 5 .9 1.2 .75Opps / threats .05 1 6 5 .05 .3 .25Social, political… .05 1 4 5 .05 .2 .25Degree of risk .05 1 4 5 .05 .2 .25Industry profitability .05 7 5 5 .35 .25 .25

3.05 6.75 5.01.0

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

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 (> 6.7 strong, - leverage

< 3.3 weak) - fits, skills, capabilities

- brand recognition / reputation- profitability relative to competit.

Competitive Strength Position

LTIndustry

Attractiveness

High

Med

Low

Strong Average Weak

Industry Attractiveness / Competitive Strength Matrix

Low Priority

Medium

High

3.3

6.7

3.36.7Business mkt share

Industry size

Investment priority General Strategic PrescriptionOverhaul/Reposition/Divest

Selective Investment

Grow & Build

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

• Doesn’t address strategic coordination issues

• Doesn’t adequately deal with new business in emerging industry

BCG Growth Share Matrix

STARQUESTIONMARK/PROBLEMCHILD

CASH COWDOG

Relative Market Share (volume)1.0Hi Lo

Indu

stry

Gro

wth

Rat

e

Hi

Lo

Relative to economy as a whole

size of circle represents revenue

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

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

?

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

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

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

Growth Share matrix

• Cash cows fund cash hogs

• Success sequence

– Question mark - star -self funding star - cash cow

fund

s

Growth Share Matrix

• Disaster sequence– 1) star-? -dog– 2) cash cow - dog

• Don’t– Overinvest in cash cow– Overinvest in ? with little potential– Dilute resources by investing in too

many ?

1a

1b

2

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 doesn’t guarantee cash cow

status– Doesn’t analyse ‘average’ business– Doesn’t indicate best investment opportunity– Assessing attractiveness involves more than industry growth & RMS– Connection between RMS & profitability not as tight as implied

Strategic Fit Analysis

Identifying competitively valuable matches in value chains in portfolio

Whether each unit fits well with firm’s LT strategic direction

The greater the competitively valuable fits the greater the potential for economies of scope.

Strategic Fit Analysis

Logistics Technology Sales/Mkg Distribution

A

B

C

FITSNo fit opportunitiesLogistics / Ops

Sales, mkg,distribution

Tech, skills

Resource Fit Analysis

When businesses add to a company’s 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

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

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

Crafting a Corporate StrategyQ. 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