1. MODULE 8
STRATEGIC ANALYSIS
OF DIVERSIFIED
COMPANIES

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

3. 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

4. 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?

5. 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

6. 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

7. 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

8. 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

9. 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

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

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

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

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. 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

20. 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!

21. 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.

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

23. 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

24. 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

25. 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

26. 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 !

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

28. 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

29. 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.

30. 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

31. 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

32. 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

33. 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

34. 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

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

36. 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

37. 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!

38. 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

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

40. 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

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

42. 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

43. 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

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

45. 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

46. 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!

47. 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”

48. 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

49. 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?

50. 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?

51. 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

52. 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

53. 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

54. 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

55. 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

56. 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

57. 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!