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Diversification2

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Published on February 24, 2008

Author: Chloe

Source: authorstream.com

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Evaluating the Strategies of Diversified Companies:  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:  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:  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:  Evaluating Industry Attractiveness *** Individual - Relative - Collective *** Individual Mkt size, projected growth, profitability Intensity of competition Threats / Opportunities Seasonal / Cyclical factors Capital requirements Fits with present businesses Social, political, regulatory, environmental factors Degree of risk / uncertainty Evaluating Industry Attractiveness:  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:  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 .5 Growth Rate .15 1 8 5 .15 1.2 .75 Intensity (comp) .3 2 9 5 .6 2.7 1.5 Resource reqs .1 3 5 5 .3 .5 .5 Strategic fit .15 6 8 5 .9 1.2 .75 Opps / threats .05 1 6 5 .05 .3 .25 Social, political… .05 1 4 5 .05 .2 .25 Degree of risk .05 1 4 5 .05 .2 .25 Industry profitability .05 7 5 5 .35 .25 .25 3.05 6.75 5.0 1.0 Evaluating Industry Attractiveness:  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:  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. Slide9:  Competitive Strength Position LT Industry Attractiveness High Med Low Strong Average Weak Industry Attractiveness / Competitive Strength Matrix Low Priority Medium High 3.3 6.7 3.3 6.7 Business mkt share Industry size Investment priority General Strategic Prescription Overhaul/Reposition/Divest Selective Investment Grow & Build Ind. Attractiveness/ Business Strength 9 Cell Matrix (GE) :  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:  BCG Growth Share Matrix STAR QUESTION MARK/ PROBLEM CHILD CASH COW DOG Relative Market Share (volume) 1.0 Hi Lo Industry Growth Rate Hi Lo Relative to economy as a whole size of circle represents revenue Growth Share Matrix:  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:  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:  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:  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:  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:  Growth Share matrix Cash cows fund cash hogs Success sequence Question mark - star -self funding star - cash cow funds Growth Share Matrix:  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 :  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:  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:  Strategic Fit Analysis Logistics Technology Sales/Mkg Distribution A B C FITS No fit opportunities Logistics / Ops Sales, mkg, distribution Tech, skills Resource Fit Analysis:  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:  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:  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 Strategy:  Crafting a Corporate Strategy Q. 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

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