STRATEGIC ANALYSIS OF DEVERSIFIED COMPANIES

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CHAPTER 10

EVALUATING THE STRATEGIES OF DIVERSIFIED
COMPANIES
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How to Evaluate a 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

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How to Evaluate a Diversified Companys
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

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Step 1 Identify the PresentCorporate
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

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Step 1 Identify the PresentCorporate
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

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Step 2 EvaluateIndustry Attractiveness
Attractiveness of each industry in portfolio
Each industrys attractiveness relative to
the others
Attractiveness of all industries as a group
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Example Rating IndustryAttractiveness
Rating Scale 1 Unattractive 10 Very
attractive
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Step 3 Evaluate Each BusinessUnits
Competitive Strength
1 !

• 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

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Example Rating a Business Units
Competitive Strength
Bargaining leverage
Rating Scale 1 Weak 10 Strong
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Representative Nine-Cell Industry
Attractiveness-Business Strength Matrix
Business Strength

• Relative Market Share
• Reputation/ Image
• Bargaining Leverage
• Ability to Match Quality/Service

• Relative Costs
• Profit Margins
• Fit with KSFs

Industry Attractiveness
Average
Strong
Weak
10.0
1.0
3.3
6.7

• Market Size
• Growth Rate
• Profit Margin
• Intensity of Competition
• Seasonality
• Cyclicality
• Resource Requirements
• Social Impact
• Regulation
• Environment
• Opportunities Threats

High



6.7
Medium



3.3
Low
1.0
Rating Scale 1 Weak 10 Strong
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Strategy Implications of Attractiveness/Strength
Matrix

• Businesses in upper left corner
• Accorded top investment priority
• Strategic advice
• Businesses in three diagonal cells
• Given medium investment priority
• Strategic advice
• Businesses in lower right corner
• Options
• Strategic advice

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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 firms
  long-term strategic direction

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Step 5 Assess Resource Fit

• Objective
• Determine how well firms resources match
  business unit requirements
• Good resource fit exists when
• Businesses add to a firms resource strengths,
  either financially or strategically
• Firm has resources to adequately support
  requirements of its businesses as a group

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Step 6 Rank the Financial Performance of
Business Units

• Yardsticks for comparing the performance of
  different businesses
• .
• .
• .
• .
• .

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Step 7 Decide Resource Allocation
Priorities and Strategic Direction

• Objective
• Get the biggest bang for the buckin 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

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Options General Strategic Direction

• Invest-and-grow
• .
• Fortify-and-defend
• .
• Overhaul-and-reposition
• .
• Harvest-divest
• .
• .

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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 companys business make-up?
• Is there ample strategic fit among the businesses?

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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?

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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 firms 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