1、EVALUATING THE STRATEGIES OF DIVERSIFIED COMPANIES,Class 6,Chapter 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 All
2、ocation Priorities and General Strategic Direction Crafting a Corporate Strategy Guidelines for Managing the Corporate Strategy Process,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
3、is the firms overall performance outlook in the years ahead with these businesses? 3. If previous two answers arent satisfactory, what should the firm do to realign its business lineup? Divest unattractive businesses? Strengthen positions of remaining ones? Acquire new businesses?,How to Evaluate a
4、Diversified Companys Strategy,Step 1: Identify present corporate strategy Step 2: Evaluate long-term attractiveness of each industry firm is in Step 3: Evaluate competitive strength of firms business units Step 4: Apply strategic fit test Step 5: Apply resource fit test,Step 6: Rank business units b
5、ased on historical performance and future prospects Step 7: Rank business units in terms of priority for resource allocation and decide on general strategic posture Step 8: Craft new strategic moves to improve overall company performance,How to Evaluate a Diversified Companys Strategy,Figure 10.1: I
6、dentifying a Diversified Companys Strategy,Corporate Strategy,Approach to allocating investment capital and resources,Narrow or broad-based diversification,Scope of geographic operations,Moves to add new businesses,Moves to build positions in new industries,Efforts to capture cross-business strategi
7、c fits,Moves to divest weak business units,Is diversification related, unrelated or a mix?,Step 1: Identify Present Corporate 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
8、? Is scope of operations mostly domestic, increasingly multinational, or global? Recent moves to add new businesses,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
9、 to create competitive advantage Percentage of capital expenditures allocated to each business unit,Step 1: Identify Present Corporate Strategy (continued),Step 2: Evaluate Industry Attractiveness,Attractiveness of each industry in portfolio,Each industrys attractiveness relative to the others,Attra
10、ctiveness of all industries as a group,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 pro
11、fitability Social, political, regulatory, and environmental factors Degree of risk and uncertainty,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
12、each factor (use scale of 1 to 10) Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry,Example: Rating Industry Attractiveness,Rating Scale: 1 = Very unattractive; 5 = Average; 10 = Very attractive,Attractiveness of Mix of Industries as a Whole,
13、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?,Step 3: Ev
14、aluate Each Business Units 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,Factors to Use in Evaluating Competitive Strength,Relative market
15、 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 innovat
16、ion capabilities How well businesss competencies match industry KSFs Brand name recognition and reputation Profitability relative to competitors,Procedure: Rating the Competitive Strength of Each Business,Step 1: Select competitive strength factors Step 2: Assign weights to each factor (sum of weigh
17、ts = 1.0) Step 3: Rate each business on each factor (use scale of 1 to 10) Step 4: Calculate weighted ratings; sum to get an overall strength rating for each business,Example: Rating a Business Units 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.
18、15,Strength Rating,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 wel
19、l 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,Using a Matrix to Display Industry Attractiveness and Competitive Strength,Use quantitative measures of industry attractiveness and busine
20、ss 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 companys market share,Figure 10.2: I
21、ndustry Attractiveness-Competitive Strength Matrix,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 p
22、osition Businesses in lower right corner Candidates for harvesting or divestiture May, on occasion, be candidates for an overhaul and reposition strategy,Appeal of the Attractiveness/Strength Matrix,Incorporates a wide variety of strategically relevant variables Stresses concentrating corporate reso
23、urces 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,Step 4: Strategic Fit Analysis,Objective Determine competitive advantage potential o
24、f 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 firms long-term strategic direction,Evaluate Portfolio fo
25、r Competitively Valuable Cross-Business Strategic Fits,Identify businesses which have value chain matchups offering opportunities to Reduce costs Purchasing E-commerce systems Manufacturing Distribution Transfer skills / technology / intellectual capital Leverage use of a well-known and competitivel
26、y powerful brand name Create valuable new competitive capabilities or to leverage existing resources,Figure 10.3: Identify Cross-Business Strategic Fits,Business A,Value Chain Activities,Inbound Logistics,Technology,Operations,Sales and Marketing,Distribution,Service,Business B,Business C,Business D
27、,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 com
28、bine after-sale service,No strategic fit opportunities,Step 5: Assess Resource Fit,Objective Determine how well firms resources match business unit requirements Good resource fit exists when A business adds to a firms resource strengths, either financially or strategically Firm has resources to adeq
29、uately support requirements of its businesses as a group,Checking for Financial Resource 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 b
30、etween 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,Internal cash flows are inadequate to fully fund needs for working capital and new capita
31、l 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,Characteristics of Cash Cows,Generate cash surpluses over and above what is needed to sustain present market pos
32、ition 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,Good vs. Poor Financial Fit,Good financial fit exists when a
33、 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
34、Experiences a profit downturn that could jeopardize entire company,Checking for Competitive and 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 businesse
35、s 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,Notes of Caution: Why Diversification Efforts Can Fail,Transferring resource capabilities to new businesses can be far mor
36、e arduous and expensive than expected Trying to replicate a firms 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,Step 6: Rank Business Units
37、Based on 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,Step 7: Decide Resource Allocation Priorities and Strategic Direction,Objective “Get the
38、 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,Options: General Strategic Direction,Invest and grow Aggressive expansi
39、on 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,Options for Allocating Financial Resources,Strategic purposes Invest in ways to strengthen or expand exis
40、ting 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 companys stock,Step 8: Crafting a Corporate Strategy -Key Issues,Are enough businesses in attractive industries? Is
41、 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 companys business make-up? Is there ample strategic fit among the businesses?,Is there
42、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 Strat
43、egy -Key Issues (continued),The Performance Test,Can the companys 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,Options for Addressing a Performance Shortfall
44、,Alter strategic plans for some, or all, of businesses Add new businesses Divest weak-performing businesses Form cooperative alliances Upgrade firms resource base Lower corporate performance objectives,Identifying Additional Diversification Opportunities,Related Diversification Identify businesses w
45、hose value chains have fits with value chains of present businesses Identify businesses whose resource requirements are well-matched to firms corporate resource capabilities Unrelated Diversification Find firms offering attractive financial returns regardless of industry,How Do Corporate Strategies
46、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 Acquir
47、e a feel for strategically relevant factors and their importance and interrelationships Develop consensus of how to proceed,Our strategy will be . . .,Managing the Process of Crafting 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,
