module 8 - strategic analysis of diversified companies
DESCRIPTION
Strategic ManagementTRANSCRIPT
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Module 8
Strategic Analysis of
Diversified Companies
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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
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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?
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How to Evaluate a Diversified
Company’s Strategy
Rate performance units on basis of
historical performance and future
prospects
Step 5:
Compare competitive strength of firm’s
business unit
Step 4:
Compare long-term attractiveness of
each industry firm has diversified into
Step 3:
Use business portfolio matrixes to
analyze firm’s business portfolio
Step 2:
Identify present corporate strategyStep 1:
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Decide if new strategic moves are
needed to improve overall performance
Step 8:
Rank business units in terms of priority
for new capital investment and decide on
general strategic posture
Step 7:
Assess each business unit’s compatibility
with corporate strategy and determine
value of strategic fit relationships
Step 6:
How to Evaluate a Diversified
Company’s Strategy
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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
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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
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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
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Types of Business Portfolio Matrixes
1. Four-Cell Growth-Share Matrix
2. Industry Attractiveness-Business Strength
Matrix
3. Industry Life Cycle Matrix
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The BCG Growth-Share Business
Portfolio Matrix
Stars Question Marks
Cash Cow Dog
HIGH LOW
HIGH
LOW
Relative Market Share Position
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BCG Growth-Share Matrix
Two variables used:
1. Industry Growth Rate
• Plotted on vertical axis
2. Relative Market Share
• Plotted on horizontal axis
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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
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Constructing a BCG Growth-Share
Matrix
• Relative Market Share
– Calculated by dividing firm’s market share by market share of firm’s 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
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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
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Question Marks / Problem Children /
Cash Hogs
Strategy Prescriptions
• Aggressive invest-and-expand strategy
– Most attractive question marks
• Divestiture
– Weak question marks
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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
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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
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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
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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
cow’s market position while efficiently
generating dollars to reallocate to business
investment elsewhere!
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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
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Dogs
Strategy Prescriptions
• Harvest
• Divest or spin off
• Liquidate or close down
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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– Star’s position erodes to problem child and then falls to a dog
– Cash cow losses leadership and becomes a dog
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Present Versus Future Positions in the
Portfolio Matrix
A
B
E
D
C
F
G
Stars Question Marks
Cash Cow Dog
HIGH LOW
HIGH
LOW
Relative Market Share Position
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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 doesn’t identify which businesses offer
best investment opportunities
• Being a leader in a slow-growth industry
does not guarantee cash flow status
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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!
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General Electric’s Industry Attractiveness –
Business Strength Matrix
• Market Share
• Core Competencies
• Profit Margin vs. Competitors
• Ability to Match Price / Service
• Relative Costs
• Knowledge
• Technological Ability
• Management Caliber
• Market Size
• Growth Rate
• Profit Margin
• Competitive Intensity
• Seasonality
• Cyclicality
• Technology & Capital
• Social Impact
• Regulation
• Environment
• Opportunities & Threats
• Barriers to Exit / Entry
Industry
Attractiveness
Business Strength
High
Medium
Low
Strong Average Weak
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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
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Constructing Attractiveness – Business
Strength Matrix
• Quantitative measures of industry
attractiveness and business strength used to
– Plot each business unit’s location in matrix
• Each business unit appears as a “circle”
– Area of circle is proportional to size industry
– Pie slices within circle reflect business’s market
share in industry
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Procedure: Rating Industry
Attractiveness
Calculate weighted ratings; sum to get an
overall industry attractiveness rating for
each industry
Step 4:
Rate each industry on each attractiveness
factor, using scale of 1 to 10
Step 3:
Assign weighs to each attractiveness
factor
Step 2:
Select factors to compare long-term
attractiveness of each industry
Step 1:
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Procedure: Rating Business Position /
Competitive Strength
Calculate weighted ratings; sum to get an
overall business unit attractiveness rating
for each business
Step 4:
Rate each business on each competitive
strength factor, using scale of 1 to 10
Step 3:
Assign weighs to each competitive
strength factor
Step 2:
Select factors to compare competitive
strength of each business unit
Step 1:
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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
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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
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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
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The Life Cycle Portfolio Matrix
Early
Development
Industry
Takeoff
Rapid
Growth
Shake
Out
Maturity Market
Saturation
Decline
Stage in Life Cycle
Weak
Average
Strong
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Life-Cycle Matrix
Two variables used:
1. Industry’s Stage in Life Cycle
– Plotted in vertical axis
– Development, takeoff / grown, competitive shakeout,
maturity / saturation, decline
2. Business Unit’s 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 business’s market share in
industry
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Life-Cycle Matrix
The power of the life-cycle matrix is the story
it tells about the distribution of the firm’s
businesses across the stages of industry
evolution!
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Step 3: Comparing Long-Term Industry
Attractiveness
• Judged from three perspectives
1. Attractiveness of each industry in portfolio
2. Each industry’s attractiveness relative to others
3. Attractiveness of all industries as a group
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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 unit’s skills and competencies
match industry KSFs
– Profitability relative to competitors
– Other pertinent measures of competitive strength
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Strategic Management Principle
Shareholder interests are generally best
served by concentrating corporate resources
on businesses that can contend for market
leadership in their industry!
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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
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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
firm’s present businesses and other industries
not in portfolio
Third
– Decide if existing and potential strategic fit
relationships can lead to an attractive advantage
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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!
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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”
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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
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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?
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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?
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The Performance Test
The best test of the overall attractiveness of
a company’s 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
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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
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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 firm’s present
businesses
– Look for industries whose value chains relate to
present businesses in portfolio
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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
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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 company’s stock
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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 doesn’t result from a big
brainstorming session – Except in a crisis!
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End of Module 8