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Transcript of 1 DLSU - CSB © 2003 JESUS A. PANEM. EVALUATING THE STRATEGIES OF DIVERSIFIED COMPANIES BUSPOLI...
1DLSU - CSB © 2003 JESUS A. PANEM.
EVALUATING THE EVALUATING THE
STRATEGIES OF STRATEGIES OF
DIVERSIFIED COMPANIESDIVERSIFIED COMPANIES
BUSPOLIBUSPOLI
Screen graphics created by:Jana F. Kuzmicki, PhD, Mississippi University for Women
2DLSU - CSB © 2003 JESUS A. PANEM.
http://www.jgsummit.com.ph
3DLSU - CSB © 2003 JESUS A. PANEM.
“Achieving superior performance through diversification is largely based
on relatedness.
Philippe Very“Quote”
“The corporate strategies of most companies have dissipated instead of
created shareholder value.”
Michael Porter
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
2
5DLSU - CSB © 2003 JESUS A. PANEM.
6DLSU - CSB © 2003 JESUS A. PANEM.
Outline
Identify Present Corporate Strategy Evaluate Industry Attractiveness Evaluate Competitive Strength of Business Units Strategic Fit Analysis Resource Fit Analysis Rank Business Units Based on Performance Decide on Resource Allocation Priorities
and General Strategic Direction Crafting a Corporate Strategy Guidelines for Managing the Corporate
Strategy Process
7DLSU - CSB © 2003 JESUS A. PANEM.
Building Shareholder Value: Questions to Ask About a Diversified Company
1. How attractive is the group of businesses the company has diversified into?
2. How good is the firm’s overall performance outlook in the years ahead with these businesses?
3. If previous two answers aren’t satisfactory,what should the firm do to realign its business lineup? Divest unattractive businesses? Strengthen positions of remaining ones? Acquire new businesses?
8DLSU - CSB © 2003 JESUS A. PANEM.
How to Evaluate aDiversified Company’s Strategy
Step 1Step 1: Identify present corporate strategy
Step 2Step 2: Evaluate long-term attractiveness of each industry firm is in
Step 3Step 3: Evaluate competitive strength of firm’s business units
Step 4Step 4: Apply strategic fit test
Step 5Step 5: Apply resource fit test
9DLSU - CSB © 2003 JESUS A. PANEM.
Step 6Step 6:: Rank business units based on historical performance and future prospects
Step 7Step 7:: Rank business units in terms of priority for resource allocation and decide on general strategic posture
Step 8Step 8:: Craft new strategic moves to improve overall company performance
How to Evaluate aDiversified Company’s Strategy
10DLSU - CSB © 2003 JESUS A. PANEM.
Identifying a Diversified Company’s Strategy
CorporateStrategy
Approach toallocating investment capital and resources
Narrow or broad-based
diversification
Scope ofgeographicoperations
Moves to addnew businesses
Moves to build positionsin new industries
Efforts to capturecross-businessstrategic fits
Moves to divestweak business units
Is diversificationrelated, unrelatedor a mix?
11DLSU - CSB © 2003 JESUS A. PANEM.
Step 1: Identify PresentCorporate Strategy
Extent to which firm is diversified (broad versus narrow, % of sales contributed by each business)
Is portfolio keyed to related or unrelated diversification or both?
Is scope of operations mostly domestic, increasingly multinational, or global?
Recent moves to add new businesses
12DLSU - CSB © 2003 JESUS A. PANEM.
Recent moves to divest weak businesses
Actions to boost performance of key business units
Efforts to capture cross-business strategic fit benefits and exploit value chain relationships to create competitive advantage
Percentage of capital expenditures allocated to each business unit
Step 1: Identify PresentCorporate Strategy (continued)
13DLSU - CSB © 2003 JESUS A. PANEM.
Step 2: Evaluate Industry Attractiveness
Attractiveness of eachindustry in portfolio
Each industry’s attractiveness relative to the others
Attractiveness of allindustries as a group
14DLSU - CSB © 2003 JESUS A. PANEM.
Industry Attractiveness Factors
Market size and projected growth Intensity of competition Emerging opportunities and threats Seasonal and cyclical factors Resource requirements Cross-industry strategic fits and
resource fits with present businesses Industry profitability Social, political, regulatory, and environmental
factors Degree of risk and uncertainty
15DLSU - CSB © 2003 JESUS A. PANEM.
Procedure: Rating the Relative Attractiveness of Each Industry
Step 1: Select industry attractiveness factors
Step 2: Assign weights to each factor (sum of weights = 1.0)
Step 3: Rate each industry on each factor (use scale of 1 to 10)
Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry
16DLSU - CSB © 2003 JESUS A. PANEM.
Example: Rating Industry Attractiveness
4
2
5
0.20
0.20
0.50
5.80
0.05
0.10
0.10
1.00
5
7
6
0.75
1.05
0.60
0.15
0.15
0.10
AttractivenessRating
5
8
Weighted Industry Rating
0.50
2.00
Weight
0.10
0.25
Industry Attractiveness Factor
Market size and projected growth
Intensity of competition
Strategic fits and resource fits with other industries in portfolio
Resource requirements
Emerging industry opportunities and threats
Seasonal and cyclical influences
Social, political, regulatory, and environmental factorsIndustry uncertainty and business risk
Sum of weights
Industry attractiveness rating
Rating Scale: 1 = Very unattractive; 5 = Average; 10 = Very attractive
17DLSU - CSB © 2003 JESUS A. PANEM.
Attractiveness of Mix ofIndustries as a Whole
How appealing is the whole group of industries in which the company is invested?
Is the company in too many relatively unattractive industries?
Does the portfolio of industries hold promise for attractive growth and profitability?
Should some form of portfolio restructuring be considered?
18DLSU - CSB © 2003 JESUS A. PANEM.
Step 3: Evaluate Each BusinessUnit’s Competitive Strength
Objectives
Determine how well each business is positioned in its industry relative to rivals
Evaluate whether it is or can be competitively strong enough to contend for market leadership
# 1 !
19DLSU - CSB © 2003 JESUS A. PANEM.
Factors to Use inEvaluating Competitive Strength
Relative market share Costs relative to competitors Ability to match/beat rivals on key product attributes Ability to exercise bargaining leverage with key suppliers
or customers Caliber of alliances and collaborative partnerships Ability to benefit from strategic fits with sister businesses Technology and innovation capabilities How well business’s competencies match industry KSFs Brand name recognition and reputation Profitability relative to competitors
20DLSU - CSB © 2003 JESUS A. PANEM.
Procedure: Rating the Competitive Strength of Each Business
Step 1: Select competitive strength factors
Step 2: Assign weights to each factor (sum of weights = 1.0)
Step 3: Rate each business on eachfactor (use scale of 1 to 10)
Step 4: Calculate weighted ratings; sum to get an overall strength rating for each business
21DLSU - CSB © 2003 JESUS A. PANEM.
Example: Rating a Business Unit’s Competitive Strength
4
7
5
0.40
0.70
0.50
6.30
0.10
0.10
0.10
1.00
7
6
7
0.70
0.60
1.05
0.10
0.10
0.15
StrengthRating
5
8
Weighted Strength Rating
0.75
1.60
Weight
0.15
0.20
Competitive Strength Measure
Relative market share
Costs relative to competitors
Ability to match rivals on key product attributes
Bargaining leverage
Strategic fit relationships
Technology and innovation capabilities
How well resources match KSFs
Degree of profit relative to rivals
Sum of weights
Competitive strength rating
Rating Scale: 1 = Very weak ; 5 = Average; 10 = Very strong
22DLSU - CSB © 2003 JESUS A. PANEM.
Using a Matrix to Display Industry Attractiveness and Competitive Strength
Use quantitative measures of industry attractiveness and business strength to plot location of each business in matrix
Each business unit appears as a circle
Area of circle is proportional to size of business as a percent of company revenues
Or area of circle can represent relative size of industry with pie slice showing the company’s market share
23DLSU - CSB © 2003 JESUS A. PANEM.
Industry Attractiveness-Competitive Strength Matrix
Low
High
Medium
AverageStrong Weak
6.7
3.3
10.0
1.0
1.03.36.7
High priority for investment Medium priority for investment
Low priority for investment
Business Unit Competitive Strength
Ind
us
try
Att
rac t
ive
ne
ss
24DLSU - CSB © 2003 JESUS A. PANEM.
Strategy Implications of Attractiveness/Strength Matrix
Businesses in upper left corner Accorded top investment priority Strategic prescription - grow and build
Businesses in three diagonal cells Given medium investment priority Invest to maintain position
Businesses in lower right corner Candidates for harvesting or divestiture May, on occasion, be candidates for an
overhaul and reposition strategy
25DLSU - CSB © 2003 JESUS A. PANEM.
Appeal of theAttractiveness/Strength Matrix
Incorporates a wide variety of strategically relevant variables
Stresses concentrating corporate resources in businesses that enjoy High degree of industry attractiveness and High degree of competitive
strength The lesson here is emphasize
businesses that are market leaders or that can contend for market leadership
26DLSU - CSB © 2003 JESUS A. PANEM.
Step 4: Strategic Fit Analysis
Objective Determine competitive advantage
potential of value chain relationships and strategic fits among sister businesses
Examine strategic fit from two angles Whether one or more businesses
have valuable strategic fits with other businesses in portfolio
Whether each business meshes well with firm’s long-term strategic direction
27DLSU - CSB © 2003 JESUS A. PANEM.
Evaluate Portfolio for Competitively Valuable Cross-Business Strategic Fits
Identify businesses which have value chain matchups offering opportunities to Reduce costs
PurchasingE-commerce systemsManufacturingDistribution
Transfer skills / technology / intellectual capital Leverage use of a well-known and competitively
powerful brand name Create valuable new competitive capabilities or
to leverage existing resources
28DLSU - CSB © 2003 JESUS A. PANEM.
Identify Cross-Business Strategic Fits
Business A
Value Chain ActivitiesInbound Logistics
Technology OperationsSales and Marketing
Distribution Service
Business B
Business C
Business D
Business E
Opportunity to combine purchasing activities to gain more leverage with suppliers
Opportunity to share technology, transfer technical skills, combine R&D
Opportunity to combine sales & marketing activities, use common distribution channels, leverage use of a common brand name, and/or combine after-sale service
No strategic fit opportunities
29DLSU - CSB © 2003 JESUS A. PANEM.
Step 5: Assess Resource Fit
Objective
Determine how well firm’s resources match business unit requirements
Good resource fit exists when
A business adds to a firm’s resource strengths, either financially or strategically
Firm has resources to adequately support requirements of its businesses as a group
30DLSU - CSB © 2003 JESUS A. PANEM.
Checking for FinancialResource Fit
Determine cash flow and investment requirements of the business units Which are cash hogs and which are
cash cows? Assessing cash flow of each business
Highlights opportunities to shift financial resources between businesses
Explains why priorities for resource allocation can differ from business to business
Provides rationalization for both invest-and-expand strategies and divestiture
31DLSU - CSB © 2003 JESUS A. PANEM.
Characteristics of Cash Hogs
Internal cash flows are inadequate to fully fund needs for working capital and new capital investment Parent company has to continually pump in
capital to “feed the hog”
Strategic options Aggressively invest in
attractive cash hogs
Divest cash hogs lacking long-term potential
32DLSU - CSB © 2003 JESUS A. PANEM.
Characteristics of Cash Cows
Generate cash surpluses over and above what is needed to sustain present market position
Such businesses are valuable because surplus cash can be used to Pay corporate dividends Finance new acquisitions Invest in promising cash hogs
Strategic objectives Fortify and defend present market position Keep the business healthy
33DLSU - CSB © 2003 JESUS A. PANEM.
Good vs. Poor Financial Fit
Good financial fit exists when a business Contributes to achievement of
corporate objectives Enhances shareholder value
Poor financial fit exists when a business Soaks up disproportionate share of financial
resources Is an inconsistent bottom-line contributor Is too small to make a sizable
contribution to total corporate earnings Experiences a profit downturn
that could jeopardize entire company
34DLSU - CSB © 2003 JESUS A. PANEM.
Checking for Competitiveand Managerial Resource Fits
Involves determining whether Resource strengths are well matched to
KSFs of industries firm is in Ample resource depth exists to support
resource requirements of all the businesses Ability exists to transfer competitive
capabilities from one business to another Company must invest in upgrading its
resources/capabilities to stay ahead of efforts of rivals
35DLSU - CSB © 2003 JESUS A. PANEM.
Notes of Caution: WhyDiversification Efforts Can Fail
Transferring resource capabilities to new businesses can be far more arduous and expensive than expected
Trying to replicate a firm’s success in one business and hitting a second home run in a new business is easier said than done
Management can misjudge difficulty of overcoming resource strengths of rivals it will face in a new business
36DLSU - CSB © 2003 JESUS A. PANEM.
Step 6: Rank Business Units Basedon Financial Performance
Yardsticks for comparing performance of different businesses
Sales growth
Profit growth
Contribution to company earnings
Return on capital employed in business
Cash flow generation
37DLSU - CSB © 2003 JESUS A. PANEM.
Step 7: Decide Resource Allocation Priorities and Strategic Direction
Objective
“Get the biggest bang for the buck”in allocating corporate resources
Procedure
Rank each business from highest to lowest priority for corporate resource support and new investment
Decide on general strategic direction for each business
23 56
4
38DLSU - CSB © 2003 JESUS A. PANEM.
Options: General Strategic Direction
Invest and grow Aggressive expansion
Fortify and defend Protect current position
Overhaul and reposition Make major strategy changes
Harvest or divest Gradual market retreat Spin off business as independent company Sell business
Our direction will be. .
39DLSU - CSB © 2003 JESUS A. PANEM.
Options for Allocating Financial Resources
Strategic purposes Invest in ways to strengthen or
expand existing businesses Make acquisitions to establish
positions in new industries Fund long-range R&D ventures
Financial purposes Pay off existing long-term debt Increase dividends Repurchase company’s stock
Stockcertificate
40DLSU - CSB © 2003 JESUS A. PANEM.
Step 8: Crafting a Corporate Strategy -Key Issues
Are enough businesses in attractive industries? Is the number of mature or declining businesses
so great corporate growth will be sluggish? Are businesses overly vulnerable to seasonal
influences or recession? Are there too many average-to-weak businesses
in the company’s business make-up?
Is there ample strategic fit among the businesses?
41DLSU - CSB © 2003 JESUS A. PANEM.
Is there ample resource fit among the businesses?
Are there enough cash cows to finance those cash hogs with potential to be star performers?
Do core businesses generate dependable profits and/or cash flow?
Does makeup of business portfolio put firm in good future position?
Step 8: Crafting a Corporate Strategy -Key Issues (continued)
42DLSU - CSB © 2003 JESUS A. PANEM.
The Performance Test
Can the company’s performance targets be reached with the current businesses?
If yes, no major corporate strategy changes are indicated
If a performance gap is likely, actions can be taken to close the gap
43DLSU - CSB © 2003 JESUS A. PANEM.
Options for Addressing aPerformance Shortfall
Alter strategic plans for some, or all, of businesses
Add new businesses
Divest weak-performing businesses
Form cooperative alliances
Upgrade firm’s resource base
Lower corporate performance objectives
44DLSU - CSB © 2003 JESUS A. PANEM.
Identifying AdditionalDiversification Opportunities
Related Diversification Identify businesses whose value chains
have fits with value chains of present businesses
Identify businesses whose resource requirements are well-matched to firm’s corporate resource capabilities
Unrelated Diversification Find firms offering attractive financial
returns regardless of industry
45DLSU - CSB © 2003 JESUS A. PANEM.
How Do Corporate Strategies Form?
In diversified companies corporate strategy tends to emerge incrementally As internal and external events unfold As managers
Probe the future Experiment Gather more information Sense problems Build awareness of options Spot new opportunities Develop ad hoc responses to unexpected crises Acquire a feel for strategically relevant factors and
their importance and interrelationships Develop consensus of how to proceed
Our strategy
will be . . .
46DLSU - CSB © 2003 JESUS A. PANEM.
Managing the Process ofCrafting Corporate Strategy
Not done all at once in comprehensive fashion Approached a step at a time, emerging
gradually Begin with broad, intuitive concepts and then
fine-tune and embellish them as More information is gathered Formal analysis confirms or modifies
emerging judgments about situation Confidence and consensus build
for the proposed strategic moves