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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?

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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 companies2

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 attractiveness5

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 attractiveness7

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

Industry Attractiveness / Competitive Strength Matrix

Business mkt share

3.3

6.7

High

Med

Low

Industry

size

6.7

LT

Industry

Attractiveness

3.3

Strong Average Weak

Competitive Strength Position

Investment priority

General Strategic Prescription

Overhaul/Reposition/Divest

Low Priority

Selective Investment

Medium

Grow & Build

High

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

Relative to economy as a whole

Relative Market Share (volume)

Hi

1.0

Lo

Hi

QUESTION

MARK/

PROBLEM

CHILD

STAR

size of circle represents revenue

Industry Growth Rate

CASH COW

DOG

Lo

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
slide16
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 matrix17
Growth Share matrix
  • Cash cows fund cash hogs
  • Success sequence
    • Question mark - star -self funding star - cash cow

funds

growth share matrix18
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 matrix19
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 analysis21

Strategic Fit Analysis

Logistics Technology Sales/Mkg Distribution

A

B

C

Logistics / Ops

FITS

Tech, skills

No fit opportunities

Sales, mkg,

distribution

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 strategy25

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