Transcript Evaluating Industry Attractiveness

Evaluating the Strategies of Diversified
Companies
Crafting and implementing action plans to
improve the overall attractiveness and
competitive strength of a company’s business
line-up is the central strategic task of corporate
level managers.
How attractive is the group of businesses?
How good is the performance outlook?
Are there changes to be made to present line-up?
Evaluating the Strategies of Diversified
Companies
•Identifying the present corporate strategy
•Applying the industry attractiveness test
•Applying the competitive strength test
•Applying the strategic fit test
•Applying the resource fit test
•Ranking businesses on historic & future
•Ranking businesses on priority for resource allocation
•Crafting new strategic moves
Identifying the Current Strategy
•Type of diversification
•Extent of diversification
•Scope
•Recent / Impending moves
•Efforts to capture fits
•% Total Cap Ex per unit in prior yrs
What is current corporate strategy & rationale
Evaluating Industry Attractiveness
*** Individual - Relative - Collective ***
Individual
Mkt size, projected growth, profitability
Intensity of competition
Threats / Opportunities
Seasonal / Cyclical factors
Capital requirements
Fits with present businesses
Social, political, regulatory, environmental factors
Degree of risk / uncertainty
Evaluating Industry Attractiveness
Relative Attractiveness
Select industry measures
Assign weightings (sum = 1.0)
Rate industries according to a scale eg. 1-10
The sum of the weighted ratings provides a
quantitative measure of the attractiveness
relative to other industries
Rank the industries
Relative Industry Attractiveness
Measures
Weighting
Mkt size
Growth Rate
Intensity (comp)
Resource reqs
Strategic fit
Opps / threats
Social, political…
Degree of risk
Industry profitability
.1
.15
.3
.1
.15
.05
.05
.05
.05
1.0
Ratings (1-10)
Co.A Co.B Co.C
Ind. Attract.
A B
C
6
1
2
3
6
1
1
1
7
.6
.15
.6
.3
.9
.05
.05
.05
.35
3.05
2
8
9
5
8
6
4
4
5
5
5
5
5
5
5
5
5
5
.2
1.2
2.7
.5
1.2
.3
.2
.2
.25
6.75
.5
.75
1.5
.5
.75
.25
.25
.25
.25
5.0
Evaluating Industry Attractiveness
Collective Attractiveness
Attractiveness of mix of industries as a whole
A substantial portion of revenues & profit (&
principal businesses) should come from bus.
units in attractive industries
Businesses in least attractive industries are
divestiture candidates
Evaluating Competitive Strength
Measuring strength of position of business within
their industries
•Choose measures
•Assign weights
•Use rating scale
•Rank (> 6.7 strong,
< 3.3 weak)
- relative mkt share
- ability to compete on cost
- ability to match quality
- leverage
- fits, skills, capabilities
- brand recognition / reputation
- profitability relative to competit.
Industry Attractiveness / Competitive Strength Matrix
Business mkt share
6.7
3.3
High
Industry
size 6.7
LT
Med Industry
Attractiveness
3.3
Low
Strong
Average
Weak
Competitive Strength Position
Investment priority
Low Priority
Medium
High
General Strategic Prescription
Overhaul/Reposition/Divest
Selective Investment
Grow & Build
Ind. Attractiveness/ Business
Strength 9 Cell Matrix (GE)
•
•
•
•
•
•
Takes many strategic variables into account
Allows for weighting & range of rankings
Use to prioritize investments & channel funds
No real guidance on specifics of business strategy
Doesn’t address strategic coordination issues
Doesn’t adequately deal with new business in
emerging industry
BCG Growth Share Matrix
Relative to
economy
Hi
as a whole
Hi
Relative Market Share (volume)
1.0
Lo
STAR
CASH COW
Lo
QUESTION
MARK/
PROBLEM
CHILD
DOG
size of circle
represents
revenue
Growth Share Matrix
• Developed by Boston Consulting Group
• Relative market share better indicator of
business strength than actual market share
– Eg. You have 10% share
– Market leader has 20% : relative share is 0.5
– Market leader has 50%: relative share is 0.2
• Based on volume - PIMS study: market share
is indicator of business strength
Question Marks
• Low share in emerging industry
• Cash hogs/ need investment
– rapid growth
– high costs (low scale econ/
experience effect)
• Action
– Invest and produce a star
– Divest and use resources elsewhere
?
Stars
• High share in emerging industry
• Need investment/ working capital
due to high growth
– may provide from internal funds
– but may be cash hogs
• Will sustain the diversified firm
into the future
Cash Cows
• High share in mature industry
• Generates large amounts of
cash
• Not all needs to be reinvested
• Funds other businesses (stars/
question marks)
• Important to maintain
– Market position
– Operating efficiencies
Dogs
• Low share in low growth
industry
• many can still perform well
– esp. if low scale econonies/
experience effects
– eg. Crown Cork and Seal
• get rid of weak dog businesses
Growth Share matrix
• Cash cows fund cash hogs
• Success sequence
– Question mark - star -self
funding star - cash cow
Growth Share Matrix
• Disaster sequence
– 1) star-? -dog
– 2) cash cow - dog
• Don’t
– Overinvest in cash cow
– Overinvest in ? with little
potential
– Dilute resources by investing in
too many ?
1a
1b
2
Growth Share Matrix
• Encourages strategist to view diversified firm as
collection of cash flows & requirements
• But has weaknesses
– Oversimplified : 4 categories/ 2 dimensions
– Being a leader in a slow-growth industry doesn’t
guarantee cash cow status
– Doesn’t analyse ‘average’ business
– Doesn’t indicate best investment opportunity
– Assessing attractiveness involves more than industry
growth & RMS
– Connection between RMS & profitability not as tight
as implied
Strategic Fit Analysis
Identifying competitively valuable matches in
value chains in portfolio
Whether each unit fits well with firm’s LT
strategic direction
The greater the competitively valuable fits the
greater the potential for economies of scope.
Strategic Fit Analysis
Logistics
Technology
Sales/Mkg
Distribution
A
B
C
FITS
Tech, skills
Sales, mkg,
distribution
Logistics / Ops
No fit opportunities
Resource Fit Analysis
When businesses add to a company’s
strengths either financially or strategically
A company must have the resources to
support the resource requirements of its group
of businesses
Enough cash cows to finance the cash hogs
with potential to be star performers
Deciding allocation priorities & General
Direction for each Business Unit
Concentrate resources on businesses with good to
excellent prospects. Allocate minimal resources to
those with sub-par prospects.
Steering resources out of low opportunity areas into
high opportunity areas.
Strategic Options - Invest & Grow
- Fortify & Defend
- Overhaul & Re-position
- Harvest & Divest
Crafting a Corporate Strategy
•Right mix of businesses?
•Ample fit?
•Unnecessary businesses?
•Enough cash cows to finance cash hogs with potential
to be star performers?
•Can the principal business be counted on to generate
dependable profits and cash flows?
•Does the make-up put the co. in a good position for the
future?
COMPOSITION & COORDINATION
Crafting a Corporate Strategy
Q. Can the company attain its performance objectives
with the current line-up of businesses and resource
capabilities?
A. Yes - no major corporate strategy changes needed
A. No - alter plans for some or all businesses
- add new businesses
- divest weaker businesses
- form alliances to strengthen existing businesses
- upgrade co. resource base
- lower co. performance objectives
Strategy & analysis tends to emerge incrementally