1. EVALUATING THE STRATEGIES OF DIVERSIFIED COMPANIES
CHAPTER 10
EVALUATING THE STRATEGIES OF DIVERSIFIED COMPANIES
Screen graphics created by:
Jana F. Kuzmicki, PhD, Mississippi University for Women

2. “The corporate strategies of most companies have dissipated instead of created shareholder value.”
Michael Porter
“Achieving superior performance through diversification is largely based on relatedness.
Philippe Very
“Quote”
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2

3. 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

4. Building Shareholder Value: Questions to Ask About a Diversified Company
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 to realign its business lineup?
Divest unattractive businesses?
Strengthen positions of remaining ones?
Acquire new businesses?

5. 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

6. 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

7. Figure 10.1: Identifying a Diversified Company’s Strategy
Narrow or broad-based diversification
Approach to
allocating investment capital
and resources
Is diversification
related, unrelated
or a mix?
Corporate
Strategy
Scope of
geographic
operations
Efforts to capture
cross-business
strategic fits
Moves to divest
weak business units
Moves to add
new businesses
Moves to build positions
in new industries

8. Step 1: Identify Present Corporate Strategy
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

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

10. 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

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

12. 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

13. Example: Rating Industry Attractiveness4 2 5
0.20
0.50
5.80
0.05
0.10
1.00 7 6
0.75
1.05
0.60
0.15
Attractiveness
Rating 8
Weighted Industry Rating
2.00
Weight
0.25
Industry Attractiveness Factor
Market size and projected growth
Intensity of competition
Strategic fits and resource fits with other industries in portfolio
Resource requirements
Emerging industry opportunities and threats
Seasonal and cyclical influences
Social, political, regulatory, and environmental factors
Industry uncertainty and business risk
Sum of weights
Industry attractiveness rating
Rating Scale: 1 = Very unattractive; 5 = Average; 10 = Very attractive

14. Attractiveness of Mix of Industries as a Whole
How appealing is the whole group of industries in which the company is invested?
Is the company in too many relatively unattractive industries?
Does the portfolio of industries hold promise for attractive growth and profitability?
Should some form of portfolio restructuring be considered?

15. Step 3: Evaluate Each Business Unit’s 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

16. Factors to Use in Evaluating Competitive Strength
Relative market share
Costs relative to competitors
Ability to match/beat rivals on key product attributes
Ability to exercise bargaining leverage with key suppliers or customers
Caliber of alliances and collaborative partnerships
Ability to benefit from strategic fits with sister businesses
Technology and innovation capabilities
How well business’s competencies match industry KSFs
Brand name recognition and reputation
Profitability relative to competitors

17. 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 strength rating for each business

18. Example: Rating a Business Unit’s Competitive Strength
Competitive Strength Measure
Weight
Strength
Rating
Weighted Strength Rating
Relative market share
0.15 5
0.75
Costs relative to competitors
0.20 8
1.60
Ability to match rivals on key product attributes
0.10 7
0.70
Bargaining leverage
0.10 6
0.60
Strategic fit relationships
0.15 7
1.05
Technology and innovation capabilities
0.10 4
0.40
How well resources match KSFs
0.10 7
0.70
Degree of profit relative to rivals
0.10 5
0.50
Sum of weights
1.00
Competitive strength rating
6.30
Rating Scale: 1 = Very weak ; 5 = Average; 10 = Very strong

19. Using a Matrix to Display Industry Attractiveness and Competitive Strength
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

20. Figure 10.2: Industry Attractiveness-Competitive Strength Matrix
Low
High
Medium
Average
Strong
Weak
6.7
3.3
10.0
1.0
High priority for investment
Medium priority for investment
Low priority for investment
Business Unit Competitive Strength
Industry Attractiveness

21. Strategy Implications of Attractiveness/Strength Matrix
Businesses in upper left corner
Accorded top investment priority
Strategic prescription - 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, on occasion, be candidates for an overhaul and reposition strategy

22. Appeal of the Attractiveness/Strength Matrix
Incorporates a wide variety of strategically relevant variables
Stresses concentrating corporate resources in businesses that enjoy
High degree of industry attractiveness and
High degree of competitive strength
The lesson here is emphasize businesses that are market leaders or that can contend for market leadership

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

24. Evaluate Portfolio for Competitively Valuable Cross-Business Strategic Fits
Identify businesses which have value chain matchups offering opportunities to
Reduce costs
Purchasing
E-commerce systems
Manufacturing
Distribution
Transfer skills / technology / intellectual capital
Leverage use of a well-known and competitively powerful brand name
Create valuable new competitive capabilities or to leverage existing resources

25. Figure 10.3: Identify Cross-Business Strategic Fits
Value Chain Activities
Inbound Logistics
Technology
Operations
Sales and Marketing
Distribution
Service
Business A
Business B
Business C
Business D
Business E
Opportunity to combine purchasing activities to gain more leverage with suppliers
Opportunity to share technology, transfer technical skills, combine R&D
Opportunity to combine sales & marketing activities, use common distribution channels, leverage use of a common brand name, and/or combine after-sale service
No strategic fit opportunities

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

27. Checking for Financial Resource Fit
Determine cash flow and investment requirements of the business units
Which are cash hogs and which are cash cows?
Assessing cash flow 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

28. Characteristics of Cash Hogs
Internal cash flows are inadequate to fully fund needs for working capital and new capital investment
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

29. Characteristics of Cash Cows
Generate cash surpluses over and above what is needed to sustain 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 objectives
Fortify and defend present market position
Keep the business healthy

30. Good vs. Poor Financial Fit
Good financial fit exists when a business
Contributes to achievement of corporate objectives
Enhances shareholder value
Poor financial fit exists when a business
Soaks up 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

31. Checking for Competitive and Managerial Resource Fits
Involves determining whether
Resource strengths are well matched to KSFs of industries firm is in
Ample resource depth exists to support resource requirements of all the businesses
Ability exists to transfer competitive capabilities from one business to another
Company must invest in upgrading its resources/capabilities to stay ahead of efforts of rivals

32. 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 difficulty of overcoming resource strengths of rivals it will face in a new business

33. Step 6: Rank Business Units Based on Financial Performance
Yardsticks for comparing performance of different businesses
Sales growth
Profit growth
Contribution to company earnings
Return on capital employed in business
Cash flow generation

34. 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
Decide on general strategic direction for each business 2 3 5 6 4

35. Options: General Strategic Direction
Invest and grow
Aggressive expansion
Fortify and defend
Protect current position
Overhaul and reposition
Make major strategy changes
Harvest or divest
Gradual market retreat
Spin off business as independent company
Sell business
Our direction will be. .

36. Options for Allocating Financial Resources
Strategic purposes
Invest in ways to strengthen or expand existing businesses
Make acquisitions to establish positions in new industries
Fund long-range R&D ventures
Financial purposes
Pay off existing long-term debt
Increase dividends
Repurchase company’s stock
Stock
certificate

37. 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?

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

39. 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

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

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

42. How Do Corporate Strategies Form?
In diversified companies corporate strategy tends to emerge incrementally
As internal and external events unfold
As managers
Probe the future
Experiment
Gather more information
Sense problems
Build awareness of options
Spot new opportunities
Develop ad hoc responses to unexpected crises
Acquire a feel for strategically relevant factors and their importance and interrelationships
Develop consensus of how to proceed
Our strategy will be . . .

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