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Module 8

Strategic Analysis of Diversified Companies

Module Outline
Identifying Present Corporate Strategy Matrix Techniques for Evaluating Diversified Portfolios Comparing Industry Attractiveness Comparing Business Unit Strength Comparing Business Unit Performance Strategic Fit Analysis Ranking Business Unit on Investment Priority Crafting a Corporate Strategy Guideline for Managing Corporate Strategy Formation Process

Building Shareholder Value


Three questions to be addressed: 1. How attractiveness is group of business firm is in? 2. How good is overall performance outlook over next 5 years? 3. If previous 2 answers are not satisfactory, what should firm do to
Get out of some businesses, Strengthen positions of remaining ones, and Acquire new businesses to boost prospects for better performance?

How to Evaluate a Diversified Companys Strategy


Step 1: Step 2: Step 3: Step 4: Step 5: Identify present corporate strategy Use business portfolio matrixes to analyze firms business portfolio Compare long-term attractiveness of each industry firm has diversified into Compare competitive strength of firms business unit Rate performance units on basis of historical performance and future prospects

How to Evaluate a Diversified Companys Strategy


Step 6: Assess each business units compatibility with corporate strategy and determine value of strategic fit relationships Rank business units in terms of priority for new capital investment and decide on general strategic posture Decide if new strategic moves are needed to improve overall performance

Step 7:

Step 8:

Step 1: Identifying Present Corporate Strategy


Extent to which fir is diversified Whether portfolio is keyed to related or unrelated diversification or both Whether scope of operations is mostly domestic or increasingly global Nature of recent moves to boost performance of key business units

Step 1: Identifying Present Corporate Strategy


Moves to add new businesses and build positions in new industries Moves to divest weak / unattractive businesses Moves to pursue strategic fit benefits and use diversification to create competitive advantage Capital expenditures for each different business unit

Step 2: Drawing Business Portfolio Matrixes


Basic Concept A 2-dimensional graphical display of comparative strategic positions of different businesses Strategically relevant variables used in matrixes
Industry growth rate Market share Long-term industry attractiveness Competitive strength Stage of product / market evolution

Types of Business Portfolio Matrixes


1. Four-Cell Growth-Share Matrix 2. Industry Attractiveness-Business Strength Matrix 3. Industry Life Cycle Matrix

The BCG Growth-Share Business Portfolio Matrix


Relative Market Share Position
HIGH
Stars

LOW
Question Marks

HIGH

LOW
Cash Cow Dog

BCG Growth-Share Matrix


Two variables used: 1. Industry Growth Rate
Plotted on vertical axis Plotted on horizontal axis

2. Relative Market Share

Constructing a BCG Growth-Share Matrix


Industry Growth Rate
High growth businesses are in industries growing faster than economic Low growth businesses are in industries growing slower than economy

Constructing a BCG Growth-Share Matrix


Relative Market Share
Calculated by dividing firms market share by market share of firms largest rival Typical dividing line between high and low relative market share businesses placed at .75 or .8 Businesses on left are market share leaders Businesses on right are in below-average relative market share positions

Each business is a bubble with size scaled to portions of total corporate revenues generated

Question Marks / Problem Children / Cash Hogs


Basic Concept Internal cash flows are inadequate to fund needs for working capital and new capital investment Operate in a high growth market but have low relative market share Upper right cell of matrix Rapid industry market growth makes businesses attractive, but low relative share positions raise questions about future potential Cash needs are high and internal cash generation is low, making them cash hogs

Question Marks / Problem Children / Cash Hogs


Strategy Prescriptions Aggressive invest-and-expand strategy
Most attractive question marks

Divestiture
Weak question marks

Stars
Basic Concept Star Businesses Have strong competitive positions in rapidly growing industries Are major contributors to corporate revenue and profit growth May or may not be cash hogs

Stars
Market leaders situated in high growth market with high relative market share Upper left cell of matrix Offer excellent growth opportunities Offer excellent profit opportunities Vary as to whether they are
Self-sustaining, or Require infusions of investment funds from corporate parent

Cash Cows
Situated in low growth market but have high relative market share Lower left cell of matrix Can generate cash surpluses over and above that needed for reinvestment and growth in business Valuable portfolio holding because they can be milked for cash to
Pay corporate dividends and overhead Finance new acquisition Invest in young stars or problem children

Cash Cows
Should not be harvested but maintained in healthy position for long-term cash flow Weak cash flow may become candidates for harvesting and eventual divestiture The goal is to fortify and defend a cash cows market position while efficiently generating dollars to reallocate to business investment elsewhere!

Dogs
Situated in low growth market and have low relative market share Lower right cell of matrix Have weak competitive position and low profit potential Unable to generate attractive cash flows on a long-term basis

Dogs
Strategy Prescriptions Harvest Divest or spin off Liquidate or close down

Strategy Implications of Growth-Share Matrix


Draws attention to cash flow and investment characteristics of various type of businesses Encourages strategist to view diversified firm as collection of cash flows and cash requirements Explain why priorities for corporate resource allocation can be different for each business Success sequence Question mark to young star to self-supporting star to cash cow Two disaster sequences
Stars position erodes to problem child and then falls to a dog Cash cow losses leadership and becomes a dog

Present Versus Future Positions in the Portfolio Matrix


Relative Market Share Position
HIGH
Stars A

LOW
Question Marks E

HIGH
B D

F C

LOW
G Cash Cow Dog

Weaknesses of Growth-Share Matrix


Four-cell matrix fact that many businesses
Are in average growth rate markets, and Have average relative market share positions

Misleading simplification to categorize businesses into just four types Matrix doesnt identify which businesses offer best investment opportunities Being a leader in a slow-growth industry does not guarantee cash flow status

Weaknesses of Growth-Share Matrix


Assessment of relative long-term attractiveness of business units requires examining more than
Industry growth, and Relative market share

Connection between relative market share and profitability is not as tight as experience curve effects implies
Many firms with small relative market shares are very profitable!

General Electrics Industry Attractiveness

Business Strength Matrix


Business Strength
Market Share Core Competencies Profit Margin vs. Competitors Ability to Match Price / Service Relative Costs Knowledge Technological Ability Management Caliber

Industry Attractiveness

Strong

Average

Weak

Market Size Growth Rate Profit Margin High Competitive Intensity Seasonality Cyclicality Technology & Capital Medium Social Impact Regulation Environment Opportunities & Threats Low Barriers to Exit / Entry

Industry Attractiveness Business Strength Matrix


Two variables used: 1. Long-Term Industry Attractiveness
Plotted on vertical axis

2. Business Strength Competitive Position


Plotted on vertical axis

Constructing Attractiveness Business Strength Matrix


Quantitative measures of industry attractiveness and business strength used to
Plot each business units location in matrix

Each business unit appears as a circle


Area of circle is proportional to size industry Pie slices within circle reflect businesss market share in industry

Procedure: Rating Industry Attractiveness


Step 1: Select factors to compare long-term attractiveness of each industry Step 2: Assign weighs to each attractiveness factor Step 3: Rate each industry on each attractiveness factor, using scale of 1 to 10 Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry

Procedure: Rating Business Position / Competitive Strength


Step 1: Select factors to compare competitive strength of each business unit Step 2: Assign weighs to each competitive strength factor Step 3: Rate each business on each competitive strength factor, using scale of 1 to 10 Step 4: Calculate weighted ratings; sum to get an overall business unit attractiveness rating for each business

Strategy Implication of Attractiveness / Strength Matrix


Businesses in three cells at upper left of matrix
Accorded top investment priority General strategic prescription is grow and build

Business in three diagonal cells


Given medium investment priority If a business has an attractive opportunity, it can win higher investment priority

Business in lower right of matrix


Strong candidate for harvesting or divestiture May be candidates for an overhaul and reposition strategy

Advantages of Attractiveness / Strength Matrix


Allows for intermediate rankings between high and low, and between strong and weak Incorporates wider variety of strategically relevant variables Stresses channeling of corporate resources to businesses with greatest potential for
Competitive advantage, and Superior performance

Weaknesses of Attractiveness / Strength Matrix


No real guidance on specific of business strategy Most to be concluded is general strategic posture Leaves issue of strategic coordination across businesses wide open, as well as
Issue of specific competitive approaches and actions to take at business-unit level

Tends to obscure businesses about to emerge as winners

The Life Cycle Portfolio Matrix


Weak
Early Development

Strong

Average

Industry Takeoff

Rapid Shake Maturity Growth Out

Market Saturation

Decline

Stage in Life Cycle

Life-Cycle Matrix
Two variables used: 1. Industrys Stage in Life Cycle
Plotted in vertical axis Development, takeoff / grown, competitive shakeout, maturity / saturation, decline

2. Business Units Competitive Position


Plotted on horizontal axis Strong, average, weak

Each business unit appear as a circle


Area of circle is proportional to size of industry Pie slices within circle reflect businesss market share in industry

Life-Cycle Matrix
The power of the life-cycle matrix is the story it tells about the distribution of the firms businesses across the stages of industry evolution!

Step 3: Comparing Long-Term Industry Attractiveness


Judged from three perspectives
1. Attractiveness of each industry in portfolio 2. Each industrys attractiveness relative to others 3. Attractiveness of all industries as a group

Step 4: Comparing Business Unit Competitive Strength


Involves comparing specific criteria
Relative market share Ability to compete on price and / or quality Technology and innovation capabilities How well business units skills and competencies match industry KSFs Profitability relative to competitors Other pertinent measures of competitive strength

Strategic Management Principle


Shareholder interests are generally best served by concentrating corporate resources on businesses that can contend for market leadership in their industry!

Step 5: Comparing Business Unit Performance


Involves comparing historical performance with future performance prospects of each business unit Most important performance yardsticks
Sales growth Profit growth Contribution to company earnings Return on assets employed in business Cash flow generation

Strategic Fit Analysis


First
Analyze value chains of each business to identify opportunities for cost sharing, skills transfer, and / or differentiation enhancement

Second
Identify important interrelationships between firms present businesses and other industries not in portfolio

Third
Decide if existing and potential strategic fit relationships can lead to an attractive advantage

Translating Strategic Fit Into Competitive Advantage


Key Point It is very difficult to build shareholder value in a diversified enterprise unless diversification involves a deliberate effort to pursue the competitive advantage opportunities of strategic fit!

Translating Strategic Fit Into Competitive Advantage


Absent meaningful strategic fit opportunities, strategists must try to build shareholder value by
Doing an exceptionally good job of portfolio management Doing such a good job of helping to manage various businesses they perform at a higher level Providing such inspirational leadership that all employees are motivated to perform over their heads

Step 7: Ranking Business Units on Investment Priority


Objective To draw conclusions about where the corporation should be investing its financial resources Consists of
Ranking business units in terms of priority for new capital investment Developing a general strategic direction for each business unit

Determine how resources can be used to enhance competitive standing and financial performance of business units

Step 8: Crafting a Corporate Strategy


Key Strategy-Making Considerations Does portfolio contain enough business in every attractive industries? Does portfolio contain too many marginal businesses? Is proportion of mature or declining businesses so great corporate growth will be sluggish? Does firm have enough cash cows to finance stars and emerging winners? Do core businesses generate dependable profits and / or cash flow?

Step 8: Crafting a Corporate Strategy


Key Strategy-Making Considerations Is portfolio overly vulnerable to seasonal or recessionary influences? Does firm have too many businesses it really does not need to be in or needs to divest? Does firm have some businesses that are industry leaders or is it burdened with too many average-to-weak businesses? Does makeup of business portfolio put firm in good future position?

The Performance Test


The best test of the overall attractiveness of a companys business portfolio is whether the firm can attain its performance objectives with its current lineup of businesses! If answer is yes, no major corporate strategy change are indicated If a performance shortfall is likely, actions can be taken to close gap

The Performance Test


Actions to be taken if performance shortfall is indicated
Alter strategic plans for one, or all, of businesses Add new businesses to portfolio Divest weak-performing or money-losing businesses from portfolio Form alliances Lower corporate performance objectives

Finding Additional Diversification Opportunities


Unrelated Diversification Strategies
Find companies offering attractive financial returns irrespective of industry they are in

Related Diversification Strategies


Locate an attractive industry having good strategic fit with one or more of firms present businesses Look for industries whose value chains relate to present businesses in portfolio

Deploying Corporate Resources


Principle
Achieving ever-higher levels of performance from a diversified business portfolio depends on doing an effective job of corporate resource allocation

Key to Success
Steering resources out of low opportunity areas into high opportunity areas

Deploying Corporate Resources


Options for Allocating Funds
1. Invest in maintenance and expansion of existing businesses, starting with those having highest ROI potential 2. Make new acquisitions 3. Fund long-range R&D ventures 4. Pay off existing long-term debt 5. Increase dividends 6. Repurchase companys stock

How Corporate Strategies Form?


Managers approach major strategic decisions a step at a time, starting from broad concepts and then fine-tuning, and modifying them as
More information is gathered Formal analysis confirms or modifies Confidence and consensus build for strategic moves to be made

Strategy usually doesnt result from a big brainstorming session Except in a crisis!

End of Module 8