chap08 ppt10thedition

Slide1: 

CHAPTER 8 Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast EVALUATING THE STRATEGIES OF DIVERSIFIED COMPANIES

Slide2: 

“Achieving superior value through diversification is largely based on relatedness.” Phillippe Very “The corporate strategies of most companies have dissipated instead of created value.” Michael Porter

Chapter Outline: 

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 Allocation Priorities and General Strategic Direction Crafting a Corporate Strategy Guidelines for Managing the Corporate Strategy Process

Building Shareholder Value: The Questions to Ask: 

Building Shareholder Value: The Questions to Ask 1. How attractive is the group of businesses the company has diversified into? 2. How good is the firm’s overall performance outlook in the years ahead with these businesses? 3. If previous two answers aren’t satisfactory, what should the firm do in the way of realigning its business lineup? Divest unattractive businesses? Strengthen positions of remaining ones? Acquire new businesses?

How to Evaluate a Diversified Company’s Strategy: 

How to Evaluate a Diversified Company’s 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 firm’s business units Step 4: Apply strategic fit test Step 5: Apply resource fit test

How to Evaluate a Diversified Company’s Strategy: 

How to Evaluate a Diversified Company’s Strategy Step 6: Rank business units based 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

Step 1: Identify the PresentCorporate Strategy: 

Step 1: Identify the Present Corporate Strategy Things to consider: 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? Is scope of operations mostly domestic, increasingly multinational, or global? Recent moves to add new businesses

Step 1: Identify the PresentCorporate Strategy (cont.): 

Step 1: Identify the Present Corporate Strategy (cont.) Recent moves to divest weak businesses Actions to boost performance of key business units Efforts to capture strategic fit benefits and use value chain relationships to create competitive advantage Percentage of capital expenditures allocated to each business unit

Step 2: EvaluateIndustry Attractiveness: 

Step 2: Evaluate Industry Attractiveness Attractiveness of each industry in portfolio Each industry’s attractiveness relative to the others Attractiveness of all industries as a group

Industry Attractiveness Factors: 

Industry Attractiveness Factors Market size and projected growth Intensity of competition Emerging opportunities and threats Seasonal and cyclical factors Resource requirements Strategic fits and resource fits with present businesses Industry profitability Social, political, regulatory, and environmental factors Degree of risk and uncertainty

Procedure: Rating the Relative Attractiveness of Each Industry: 

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 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 IndustryAttractiveness: 

Example: Rating Industry Attractiveness Rating Scale: 1 = Unattractive; 10 = Very attractive

Step 3: Evaluate Each BusinessUnit’s Competitive Strength: 

Step 3: Evaluate Each Business Unit’s 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 # 1 !

Factors to Use in Evaluating Competitive Strength: 

Factors to Use in Evaluating Competitive Strength Relative market share Ability to compete on cost Ability to match rivals on quality and/or service Ability to exercise bargaining leverage with key suppliers or customers Technology and innovation capabilities How well business unit’s competitive assets and competencies match industry KSFs Brand name recognition and reputation Profitability relative to competitors

Procedure: Rating the Competitive Strength of Each Business: 

Procedure: Rating the Competitive Strength of Each Business Step 1: Select competitive strength factors Step 2: Assign weights to each factor (sum of weights = 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 attractiveness rating for each business

Example: Rating a Business Unit’s Competitive Strength: 

Example: Rating a Business Unit’s Competitive Strength Rating Scale: 1 = Weak ; 10 = Strong Bargaining leverage

Constructing anAttractiveness/Strength Matrix: 

Constructing an Attractiveness/Strength Matrix Use quantitative measures of industry attractiveness and business 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 company’s market share)

Representative Nine-Cell Industry Attractiveness-Business Strength Matrix: 

Representative Nine-Cell Industry Attractiveness-Business Strength Matrix Low High Medium Average Strong Weak Market Size Growth Rate Profit Margin Intensity of Competition Seasonality Cyclicality Resource Requirements Social Impact Regulation Environment Opportunities & Threats Relative Market Share Reputation/ Image Bargaining Leverage Ability to Match Quality/Service Relative Costs Profit Margins Fit with KSFs Industry Attractiveness Business Strength Rating Scale: 1 = Weak ; 10 = Strong 6.7 3.3 10.0 1.0 1.0 3.3 6.7

Strategy Implications of Attractiveness/Strength Matrix: 

Strategy Implications of Attractiveness/Strength Matrix Businesses in upper left corner Accorded top investment priority Strategic prescription is grow and build Businesses in three diagonal cells Given medium investment priority Invest to maintain position Businesses in lower right corner Candidates for harvesting or divestiture May be candidates for an overhaul and reposition strategy

The Attractiveness/Strength Matrix: 

The Attractiveness/Strength Matrix Allows for intermediate rankings between high and low and between strong and weak Incorporates a wide variety of strategically relevant variables Stresses allocating corporate resources to businesses with greatest potential for Competitive advantage and Superior performance

Step 4: Strategic Fit Analysis: 

Step 4: Strategic Fit Analysis Objective Determine competitive advantage potential of value chain relationships and strategic fits among current businesses Examine fit needs from two angles Whether one or more businesses have valuable strategic fit with other businesses in portfolio Whether each business meshes well with firm’s long-term strategic direction

Identifying Strategic Fits Among a Diversified Firm’s Business Units: 

Identifying Strategic Fits Among a Diversified Firm’s Business Units Business A Value Chain Activities Inbound Logistics Technology Operations Sales and Marketing Distribution Service Business B Business C Business D Business E

Step 5: Assess Resource Fit: 

Step 5: Assess Resource Fit Objective: Determine how well firm’s resources match business unit requirements Good resource fit exists when Businesses add to a firm’s resource strengths, either financially or strategically Firm has resources to adequately support requirements of its businesses as a group

Checking for FinancialResource 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!!!

Good versus Poor Financial Fit: 

Good versus Poor Financial Fit A business has good financial fit when it Contributes to achievement of corporate objectives Enhances shareholder value A business exhibits poor financial fit if it Soaks up a disproportionate share of financial resources Is an inconsistent bottom-line contributor Is too small to make a sizable contribution to total corporate earnings experiences a profit downturn that could jeopardize entire company

Checking for Competitive and Managerial Resource Fits: 

Checking for Competitive and Managerial Resource Fits Involves determining whether Resource strengths are well matched to KSFs of industries firm is in Adequate managerial expertise exists to cope with problems of current businesses Ability exists to transfer competitive capabilities from one business to another Company must invest in upgrading its resources to stay ahead of rivals’ efforts to upgrade their resources

Notes of Caution: Why Diversification Efforts Can Fail: 

Notes of Caution: Why Diversification Efforts Can Fail Transferring resource capabilities to new businesses can be far more arduous and expensive than expected Trying to replicate a firm’s success in one business and hitting a second home run in a new business is easier said than done Management can misjudge the difficulty of overcoming the resource strengths of rivals being confronted in a new business

Step 6: Rank the Financial Performance of Business Units: 

Step 6: Rank the Financial Performance of Business Units Yardsticks for comparing the 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: 

Step 7: Decide Resource Allocation Priorities and Strategic Direction Objective: “Get the 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 (steer resources to high opportunity areas and limit support to low opportunity areas) Develop a general strategic direction for each business

Options: General Strategic Direction: 

Options: General Strategic Direction Invest-and-grow Aggressive expansion Fortify-and-defend Protect current position Overhaul-and-reposition Make major strategy changes Harvest-divest Spin off business as independent company Sell business

Options: AllocatingFinancial Resources: 

Options: Allocating Financial Resources 1. Invest in ways to strengthen or expand existing businesses 2. Make acquisitions to establish positions in new industries 3. Fund long-range R&D ventures 4. Pay off existing long-term debt 5. Increase dividends 6. Repurchase company’s stock

Step 8: Crafting a Corporate Strategy--Key Issues: 

Step 8: Crafting a Corporate Strategy--Key Issues Are enough businesses in attractive industries? Is 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 company’s business make-up? Is there ample strategic fit among the businesses?

Step 8: Crafting a Corporate Strategy--Key Issues (cont.): 

Step 8: Crafting a Corporate Strategy--Key Issues (cont.) Is there ample resource fit among the businesses? Are there enough cash cows to finance 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?

The Performance Test: 

The Performance Test Can the company’s 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 aPerformance Shortfall: 

Options for Addressing a Performance Shortfall Alter strategic plans for some, or all, of businesses Add new businesses Divest weak-performing businesses Form alliances Upgrade firm’s resource base Lower corporate performance objectives

Identifying AdditionalDiversification Opportunities: 

Identifying Additional Diversification Opportunities Related Diversification Identify industries/businesses whose value chains have fits with value chains of present businesses Identify industries/businesses whose resource requirements are well-matched to firm’s corporate resource capabilities Unrelated Diversification Find firms offering attractive financial returns regardless of industry

How Do Corporate Strategies Form?: 

How Do Corporate Strategies Form? Corporate strategy emerges incrementally as managers Probe the future Experiment Gather more information Sense problems Build awareness of various options Spot new opportunities Develop ad hoc responses to unexpected crises Acquire a feel for strategically relevant factors and their importance and interrelationships

Guidelines: Managing theCorporate Strategy Process: 

Guidelines: Managing the Corporate Strategy Process Not done all at once in comprehensive fashion Approached a step at a time, emerging gradually Begin with broad, intuitive concepts and then are fine-tuned as More information is gathered Formal analysis confirms or modifies emerging judgments about situation Confidence and consensus build for the proposed strategic moves