Module 8 - Strategic Analysis of Diversified Companies
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Transcript of Module 8 - Strategic Analysis of Diversified Companies
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
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:
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
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
Stars Question Marks
Cash Cow Dog
HIGH LOW
HIGH
LOW
Relative Market Share Position
BCG Growth-Share Matrix
Two variables used:
1. Industry Growth Rate
• Plotted on vertical axis
2. Relative Market Share
• Plotted on horizontal axis
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 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
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
cow’s 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– Star’s 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
A
B
E
D
C
F
G
Stars Question Marks
Cash Cow Dog
HIGH LOW
HIGH
LOW
Relative Market Share Position
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
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 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
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 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
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:
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:
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
Early
Development
Industry
Takeoff
Rapid
Growth
Shake
Out
Maturity Market
Saturation
Decline
Stage in Life Cycle
Weak
Average
Strong
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
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!
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
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
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
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
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 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
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 firm’s 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 company’s 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 doesn’t result from a big
brainstorming session – Except in a crisis!
End of Module 8