MODULE 8 STRATEGIC ANALYSIS OF DIVERSIFIED COMPANIES

MODULE OUTLINE Identifying Present Corporate Strategy Matrix Techniques for Evaluating Diversified Portfolios Comparing Industry Attractiveness Comparing

MODULE OUTLINE Identifying Present Corporate Strategy Matrix Techniques for Evaluating Diversified portfolio Comparing Industry Attractiveness Comparing Business Unit Strength Strategic Fit Analysis Ranking Business Units on Investment Priority Crafting a Corporate Strategy Guidelines for Managing Corporate Strategy Formation Process

BUILDING SHAR SHAREHOLDER VALUE How attractive is group of businesses firm is in? How good is overall performance outlook over next 5 years? If previous 2 answer are not satisfactory, what should firm do it? Get out of some businesses , Straighten positions of remaining ones , & Acquire new businesses to boost prospects for better performance?

HOW TO EVALUATE A DIVERSIFIED COMPANY’S STRATEGY STEP 1 Identify corporate strategy STEP 2 Use business portfolio matrixes to analyze firm’s business portfolio STEP 3 Compare long-term attractiveness of each industry firm has diversified into STEP 4 Compare competitive strength of firm’s business units STEP 5 Rate business units on basis of historical performance & future prospects

HOW TO EVALUATE A DIVERSIFIED COMPANY’S STRATEGY STEP 1 Assess each business unit’s compatibility with corporate strategy & determine value of strategic fit relationships STEP 2 Rank business units in terms of priority for new capital investment & decide on general strategic posture STEP 3 Decide if new strategic moves are needed to improve overall performance

STEP 1 : IDENTIFIYING PRESENT CORPORATE STRSTEGY Extent to which firm is diversified Whether portfolio is keyed to related or unrelated diversification or both Whether scope of operations is mostly domestic of recent moves to boost performance of key business units

STEP 1 : IDENTIFYING PRESENT CORPORATE STRATEGY Moves to add new businesses & build positions in new industries Moves to divest weak/unattractive businesses Moves to pursue strategic fit benefits & use diversification to create competitive advantage Capital expenditures for each different business unit

STEP 2 : DRWING BUSINESS PORTFOLIO MATRIXES Basic Concept A 2-dimensional graphical display of comparative strategic positions of different businesses Strategically relevant variables used in matrixes Industry growth rate Market share Long-term industry attractiveness Competitive strength Stage of product/market evolution

TYPE OF BUSINESS PORTFOLIO MATRIXES Four – Cell Growth-Share Matrix Industry Attractiveness- Business Strength Matrix Industry Life Cycle Matrix

The BCG Growth –Share Business Portfolio Matrix Relative Market Share Position Stars Question Marks High Low Dogs Cash Cow

BCG GROWTH-SHARE MATRIX Two Variable Used : INDUSTRY GROWTH RATE Plotted on vertical axis RELATIVE MARKET SHARE Plotted on horizontal axis

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

CONSTRAUCTION A BCG GROWTH-SHARE MATRIX RELATIVE MARKET SHARE Calculate by dividing firm’s market share by market share of firm’s largest rival “ Typical “ diving line between “ high” and “low” relative market share businesses placed at about businesses places 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

QUESTION MARKS/PROBLEM CHILDREN/CASH HOGS Basic Concept Internal cash flows are inadequate to fund needs for working Capital & new capital investment Operate in a high growth market but have low relative 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, marking them cash hogs

Basic Concept Star businesses STARS Basic Concept Star businesses Have strong competitive position in rapidly growing industries Are major contributors to corporate revenue & Profit growth May or may not be cash hogs

QUESTION MARKS/PROBLEM CHILDREN/CASH HOGS Strategy Prescriptions Aggressive invest-and-expand strategy Most attractive question marks Divestiture Weak question mark

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 Situated in low market but have high relative markets share—lower left cell of matrix Can generated cash surpluses over & growth in 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 your stars or problem children

CASH COWS Should not “ harvested” but maintained in healthy position for long-term cash flow Weak cash cows may become candidates for harvesting & eventual divestiture The goal is to FORTIFY and DEFEND a cash cow’s market position while efficiently generating dollars to Reallocate to business investments elsewhere!

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.

Strategy Prescriptions DOGS Strategy Prescriptions Harvest Divest or spin off Liquidate or close down

STRATEGY IMPLICATION 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 Success sequence – Question mark to young star to self-supporting star to cash cow Two disaster sequences Star’s disaster erodes to problem child & then falls to a dog Cash cow loses leadership & becomes a dog

PRESENT VERSUS FUTURE POSITIONS IN THE PORTFOLIO MATRIX Relative Market share position Star Question Mark Divest A E High B D F C Low G Divest Cash Cow Dog

WEAKNESSES OF GROWTH-SHARE MATRIX Four-cell matrix hides fact that many businesses Are in “ average “ growth rate markets and have “ average” relative market share positions Misleading implication to categories businesses into just four types Matrix doesn’t identify which businesses offer best investment opportunities Being a leader in a slow- growth industry does not guarantee cash cow status

WEAKNESSES OF GROWTH-SHARE MATRIX Assessment of relative long-term attractiveness of business units requires examining more than Industry growth and Relative market share Connection between relative market share & profitability is not as tight as experiences curve effect implies Many firms with small relative market shares are very profitable !

INDUSTRY ATTRACTIVENESS BUSINESS STRENGTH MATRIX two variable used : long-term industry attractiveness Plotted on vertical axis Business strength- Competitive position Plotted on horizontal axis

CONSTRUCTING ATTRACTIVENESS BUSINESS STRENGTH MATRIX Quantitative measures of industry attractiveness & business unit’s location in matrix 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

CONSTRUCTING ATTRACTIVENESS BUSINESS STRENGTH MATRIX Quantitative measures of industry attractiveness & business strength used to Plot each business unit’s location in matrix Each business unit appears as a “ circle” 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.

PROCEDURE : RATING INDUSTRY ATTRACTIVENESS Select factors to compare long-term attractiveness of each industry Assign weights to each attractiveness factor Rate each industry on each attractiveness factor , using scale of 1 to 10 Calculate weighted rating; sum to get an overall industry attractiveness rating for each industry

PROCEDURE : RATING BUSINESS POSITION/COMPETITIVE STRENGTH Select factors to compare competitive strength of each business unit Assign weights to each competitive strength factor Rate each business on each competitive strength factor, using scale of 1 to 10 Calculate weighted ratings; sum to get overall business unit attractiveness rating for each business

STRATEGY IMPLICATIONS OF ATTRACTIVENESS/STRENGTH MATRIX Businesses in three at upper left of matrix Accorded top investment priority General strategic prescription is “ grow&build” Businesses in three diagonal cells Given medium investment priority If a business has an attractive opportunity, it can win a higher investment priority Businesses in lower right of matrix Strong candidates for harvesting or divestiture May be candidates for an “ overhaul & reposition” strategy

ADVANTAGES OF ATTRACTIVENESS/STRENGTH MATRIX Allows for intermediate rankings between high & low and between strong & weak incorporates wider variety of strategically relevant variables Stresses channeling of corporate resources to businesses with greatest potential for Competitive advantage and Superior performance

WEAKNESSES OF ATTRACTIVENESS/STRENGTH MATRIX No real guidance on specifics of business strategy Most to be concluded general strategic posture Leaves issues of strategic coordination across businesses wide open, as well as Issue of specific competitive approaches & actions to take at business-unit level Tend to take at business-unit level Tend to obscure businesses about to emerge as winners

The Life-Cycle Portfolio Matrix Weak Average Strong Early Industry Rapid Shake Maturity Market Decline Development Take off Growth Out Saturation Stage Life Cycle

The Life-Cycle Portfolio Matrix INDUSTRY’S STAGE IN LIFE-CYCLE-Plotted on vertical axis Development,take off/growth, competitive shakeout, maturity/saturation, decline BUSINESS UNIT’S COMPETITIVE POSITION – Plotted on horizontal axis Strong,average,axis 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 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!

STEP 3 : COMPARING LI\ONG-TERM INDUSTRY ATTRACTIVENESS JUDGED FROM THREE PERSPECTIVES Attractiveness of each industry in portfolio Each industry’s attractiveness relative to others Attractiveness of all industries as a group

STRATEGIC MANAGEMENT PRINCIPLE The more attractive the industries That a company has diversified into, the better its performance prospects are likely to do !

STEP 4 : COMPARING BUSINESS UNIT COMPETITIVE STRENGTH Involves comparing specific criteria Relative market share Ability to compete on price and/or quality Technology & innovation capabilities How well business unit’s skill & competencies match industry KSFs Profitability relative to competitors Other pertinent measures of competitive strength

STARATEGIC MANAGEMENT PRINCIPLE Shareholder interests are generally Best served by concentrating Corporate resources on businesses That can contend for market Leadership in their industry!

STEP 5 : COMPARING BUSINESS UNIT PERFORMANCE Involves comparing historical performance With future performance prospects of each business unit Most important performance yardsticks Sales growth Profit growth Contribution to company earnings Return on assets employed in business Cash flow generation

STEP 6 : STRATEGIC FIT ANALYSIS A business is more valuable strategically when It presents cost-sharing or skills transfer opportunities that translate into stronger competitive advantages and/or added profitability A business is more valuable financially when it is capable of contributing heavy to corporate performance objectives Enhances firm’s overall worth

STRATEGIC MANAGEMENT PRINCIPLE Business subsidiaries that don’t fit Strategically should be considered For divestiture unless they produce Above-average profits!

STRATEGIC FIT ANALYSIS Analyze value chains of each business to identify opportunities for cost sharing, skills transfer, and/or differentiation enhancement Identify important interrelationship between firm’s present businesses & other industries not in portfolio Decide if existing & potential strategic fit relationships can lead to attractive competitive advantage

TRANSLATING STRATEGIC FIT INTO COMPETITIVE ADVANTAGE Key Point It is very difficult to build shareholder value in a diversified enterprise unless diversification involves a deliberate effort to pursue the COMPETITIVE ADVANTAGE OPPORTUNITIES OF OF STRATEGIC FIT!

TRANSLATING STRATEGIC FIT INTO COMPETITIVE ADVANTAGE Absent meaningful strategic fit opportunities, strategists must to build shareholder value by Doing an exceptionally good job of portfolio management Doing such a good of helping to manage various businesses they perform at a higher level Providing such inspirational leadership that all employees are motivated to perform “ over their heads”

STEP 7 : RANKING BUSINESS UNITS ON INVESTMENT PRIORITY Objective To draw conclusions about where the corporation should be investing its financial resources consists of Ranking business units in terms of priority for new capital investment Developing a general strategic direction for each business unit Determine how resources can be used to enhance competitive standing & financial performance of business units

STEP 8 : CRAFTING A CORPORATE STRATEGY Key Strategy-Making Considerations Does portfolio contain enough businesses in very attractive industries ? Does portfolio contain too many marginal businesses ? Is proportion of mature or declining businesses so great corporate growth will be sluggish? Does firm have enough “ cash cows “ to finance star & emerging winners? Do core businesses generate dependable profits and/or cash flow?

STEP 8: CRAFTING A CORPORATE STRATEGY Key Strategy- making Considerations Is portfolio overly vulnerable to seasonal or recessionary influences? Does firm have too many businesses it really does not need to be in or needs to divest? Does firm have some businesses that are industry leaders or is it burdened with too many average to weak businesses? Does makeup of business portfolio put firm in good future position?

THE PERFORMANCE TEST The best test of the overall attractiveness of a company’s Business portfolio is whether the firm can attain its Performance objectives with its current lineup of businesses! If answer is YES, no major corporate strategy changes are Indicated If a PERFORMANCE SHORTFALL is likely, actions can be Taken to close gap

THE PERFORMANCE TEST Actions to be taken if PERFORMANCE SHORTFALL IS Indicate Alter strategic plans for one, or all, of businesses Add new businesses to portfolio Divest weak-performing or money-losing businesses from portfolio Form alliances Lower corporate performance objectives

FINDING ADDITIONAL DIVERSIFICATION OPPORTUNITIES Unrelated Diversification Strategies Find companies offering attractive financial returns irrespective of industry they are in Related Diversification Strategies Locate an attractive industry having good strategic fit with one or more of firm’s present businesses look for industries whose VALUE CHAINS relate to present businesses in portfolio

FINDING ADDITIONAL DIVERSIFICATION OPPORTUNITIES Unrelated Diversification Strategies Find companies offering attractive financial returns irrespective of industry they are in Related Diversification Strategies Locate an attractive industry having good strategic fit with one or Firm’s present businesses Look for industries whose VALUE CHAINS relate to present businesses in portfolio

DEPLOYING CORPORATE RESOURCES Principle Achieving ever-higher levels of performance from a diversified Business portfolio depends on doing an effective job of corporate Resource allocation Key to Success Steering resources out of low opportunity areas into high opportunity areas

DEPLOYING CORPORATE RESOURCES Option for Allocating Funds Invest in maintenance & expansion of existing businesses, Starting with those having highest ROL potential Make new acquisitions Fund long-rang R&D ventures Pay off Existing long-term debt Increase dividends Repurchase company’s stock

HOW CORPORATE STRATEGIES FORM Managers approach major strategic decisions a step at a time, starting from broad concepts & then fine-turning & modifying them as More information is gathered Formal analysis judgments about situation Confidence & consensus build for strategic moves to be made Strategy usually doesn’t result from a big brainstorming – Except in a crisis!