Evaluating Diversified Companies

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Published on February 24, 2008

Author: Estelle

Source: authorstream.com

Evaluating the Strategies of Diversified Companies:  Evaluating the Strategies of Diversified Companies Identify and Evaluate Present Strategy:  Identify and Evaluate Present Strategy No one right strategy Any internally consistent set of elements that results in a corporate advantage Five tests of Effective of Corporate Strategy:  Five tests of Effective of Corporate Strategy Vision Internal Consistency External Fit Corporate Advantage Feasibility Does the strategy contain an appropriate vision?:  Does the strategy contain an appropriate vision? Stretch and challenge the organization Suggest a sense of values Provide employees with a sense of belonging Convey how, in some small way, the company will change the world for the better Are the elements of the corporate strategy internally consistent?:  Are the elements of the corporate strategy internally consistent? Each element of strategy moves the company in the same direction Corporate advantage contributes to competitive advantage in the business units Structure, systems and procedures fit with the tasks that headquarters performs Goals and objectives lead to fulfilling the vision Does the strategy fit with the external environment?:  Does the strategy fit with the external environment? Will it stand up to competitive challenges? Does it anticipate changes in the environment? Does it have an understanding of evolving technology and customer needs? Does it have an understanding of competitior’s strategic moves, strategy etc.? Does the corporate strategy build and fully exploit a corporate advantage?:  Does the corporate strategy build and fully exploit a corporate advantage? Resources are unique and valuable Strategy to invest in the resource base Leverage resources to the max Create, renew and upgrade resources Is the overall Corporate Strategy Feasible?:  Is the overall Corporate Strategy Feasible? Is it achievable? Is it achievable at an acceptable risk? Identify Present Business and Industry Strategy:  Identify Present Business and Industry Strategy Related or Unrelated Diversification Scope of Operations National or International Recent Moves to add or divest businesses Recent moves to boost performance Allocation of Capital Resources How do you do that and Where do you Start?:  How do you do that and Where do you Start? Matrix Analysis:  Matrix Analysis Diversification began in earnest in the 60’s Until the 70’s, businesses run as collection of stand alone independent businesses Oil crisis and inflation resulted in downturn in performance Matrix analysis:  Matrix analysis Provides a framework to perform a quantitative analysis Relative strengths of each business compared to the other businesses in the portfolio the industry in which each functions Relative strengths of the industries in which the company competes. Treated companies as collection of cash flows Types of Matrix Analysis:  Types of Matrix Analysis Industry Attractiveness--Competitive Strength Matrix Boston Consulting Group General Electric Matrix Life Cycle Matrix BCG GROWTH-SHARE MATRIX:  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:  CONSTRUCTING A BCG GROWTH-SHARE MATRIX INDUSTRY GROWTH RATE “High growth” businesses are in industries growing faster than economy “Low growth” businesses are in industries growing slower than economy CONSTRUCTING A BCG GROWTH-SHARE MATRIX:  CONSTRUCTING A BCG GROWTH-SHARE MATRIX RELATIVE MARKET SHARE Calculated by dividing firm’s sales volume by sales volumes of sum of the firm’s larger rivals or by market challenger “Typical” dividing line between “high” and “low” relative market share businesses placed at about .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 portion of total corporate revenues generated Checking for Financial Resource Fit:  Checking for Financial Resource Fit Determine cash flow and investment requirements of the business units Are they cash hogs or cash cows? Assessing cash flow aspects 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 Characteristics of Cash Hogs:  Characteristics of Cash Hogs A business is a cash hog when its internal cash flows are inadequate to fully fund its need for working capital and new capital investment the 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 Characteristics of Cash Cows:  Characteristics of Cash Cows A cash cow business generates cash surpluses over and above what is needed to sustain its 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 objective: Fortify and defend present market position--keep the business healthy!!! Slide20:  Stars Question Marks Cash Cow Dogs Relative Market Share Position Industry Growth Rate High High Low Low QUESTION MARKS / PROBLEM CHILDREN / CASH HOGS:  QUESTION MARKS / PROBLEM CHILDREN / CASH HOGS Internal cash flows are inadequate to fund needs for working capital & 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 & internal cash generation is low, making them cash hogs Basic Concept QUESTION MARKS / PROBLEM CHILDREN / CASH HOGS:  QUESTION MARKS / PROBLEM CHILDREN / CASH HOGS Aggressive invest-and-expand strategy Most attractive question marks Divestiture Weak question marks Strategy Prescriptions STARS:  STARS Star businesses Have strong competitive positions in rapidly growing industries Are major contributors to corporate revenue & profit growth May or may not be cash hogs Basic Concept STARS:  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:  CASH COWS Situated in low growth market but have high relative market share -- Lower left cell of matrix Can generate cash surpluses over & above that needed for reinvestment & growth in business Valuable portfolio holding because they can be “milked” for cash to Pay corporate dividends & overhead Finance new acquisitions Invest in young stars or problem children CASH COWS:  CASH COWS Should not be “harvested” but maintained in healthy position for long-term cash flow Weak cash cows may become candidates for harvesting & eventual divestiture CASH COWS :  CASH COWS The goal is to FORTIFY and DEFEND a cash cow’s market position while efficiently generating dollars to reallocate to business investments elsewhere! DOGS:  DOGS Situated in low growth market & have low relative market share -- Lower right cell of matrix Have weak competitive position & low profit potential Unable to generate attractive cash flows on a long-term basis DOGS:  DOGS Harvest Divest or spin off Liquidate or close down Strategy Prescriptions STRATEGY IMPLICATIONS OF GROWTH-SHARE MATRIX:  STRATEGY IMPLICATIONS OF GROWTH-SHARE MATRIX Draws attention to cash flow & investment characteristics of various types of businesses Encourages strategists to view diversified firm as collection of cash flows & cash requirements Explains why priorities for corporate resource allocation can be different for each business Victory and Defeat:  Victory and Defeat Success sequence -- Question mark to young star to self-supporting star to cash cow Two disaster sequences Star’s position erodes to problem child & then falls to a dog Cash cow loses leadership & becomes a dog Present Versus Future Positions in the Portfolio Matrix:  Present Versus Future Positions in the Portfolio Matrix Star Question Mark Cash Cow Dog C B F D E Relative Market Share Position Industry Growth Rate High High Low Low G A Divest Divest The Life-Cycle Portfolio Matrix:  The Life-Cycle Portfolio Matrix Strong Average Weak Competitive Position Early Development Industry Takeoff Rapid Growth Shake Out Maturity Market Saturation Decline Stage in Life Cycle LIFE-CYCLE MATRIX:  LIFE-CYCLE MATRIX Two variables used: INDUSTRY’S STAGE IN LIFE-CYCLE -- Plotted on horizontal axis Development, takeoff/growth, competitive shakeout, maturity/saturation, decline BUSINESS UNIT’S COMPETITIVE POSITION --Plotted on Vertical axis Strong, average, weak Each business unit appears 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:  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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