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!