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C08a.PPT

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  • 1. 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
  • 2. Building Shareholder Value: The Questions to Ask
    • 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 in the way of realigning its business lineup?
      • Divest unattractive businesses?
      • Strengthen positions of remaining ones?
      • Acquire new businesses?
  • 3. 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
  • 4. 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
  • 5. Step 1: Identify the Present Corporate 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
  • 6. Step 1: Identify the Present Corporate 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
  • 7. 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
  • 8. Industry Attractiveness Factors
    • Market size and projected growth
    • Intensity of competition
    • Emerging opportunities and threats
    • Seasonal and cyclical factors
    • Resource requirements
    • Strategic fits and resource fits with present businesses
    • Industry profitability
    • Social, political, regulatory, and environmental factors
    • Degree of risk and uncertainty
  • 9. 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
  • 10. Example: Rating Industry Attractiveness Rating Scale: 1 = Unattractive; 10 = Very attractive Attractiveness Rating 5 8 2 6 4 7 4 5 Weighted Industry Rating 0.75 2.40 0.10 0.30 0.20 1.05 0.60 0.50 5.90 Weight 0.15 0.30 0.05 0.05 0.05 0.15 0.15 0.10 1.00 Industry Attractiveness Factor Market size and projected growth Intensity of competition Emerging industry opportunities and threats Social, political, regulatory, and environmental factors Seasonality and cyclical influences Resource requirements Industry profitability Degree of risk and uncertainty Sum of weights Industry attractiveness rating
  • 11. Factors to Use in Evaluating Competitive Strength
    • Relative market share
    • Ability to compete on cost
    • Ability to match rivals on quality and/or service
    • Ability to exercise bargaining leverage with key suppliers or customers
    • Technology and innovation capabilities
    • How well business unit’s competitive assets and competencies match industry KSFs
    • Brand name recognition and reputation
    • Profitability relative to competitors
  • 12. 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 attractiveness rating for each business
  • 13. Example: Rating a Business Unit’s Competitive Strength Rating Scale: 1 = Weak ; 10 = Strong Bargaining leverage Strength Rating 5 8 2 6 4 7 4 5 Weighted Strength Rating 1.00 2.00 0.10 0.60 0.20 1.05 0.40 0.50 5.85 Weight 0.20 0.25 0.05 0.10 0.05 0.15 0.10 0.10 1.00 Competitive Strength Measure Relative market share Ability to compete on cost Ability to match rivals on quality or service Technology/innovation capabilities How well resources match KSFs Brand name reputation/image Degree of profit relative to rivals Sum of weights Competitive strength rating
  • 14. Constructing an Attractiveness/Strength Matrix
    • 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)
  • 15. Representative Nine-Cell Industry Attractiveness-Business Strength Matrix Low High Medium Average Strong Weak
    • Market Size
    • Growth Rate
    • Profit Margin
    • Intensity of Competition
    • Seasonality
    • Cyclicality
    • Resource Requirements
    • Social Impact
    • Regulation
    • Environment
    • Opportunities & Threats
    • Relative Market Share
    • Reputation/ Image
    • Bargaining Leverage
    • Ability to Match Quality/Service
    • Relative Costs
    • Profit Margins
    • Fit with KSFs
    Industry Attractiveness Business Strength Rating Scale: 1 = Weak ; 10 = Strong 6.7 3.3 10.0 1.0 1.0 3.3 6.7
  • 16. The Attractiveness/Strength Matrix
    • Allows for intermediate rankings between high and low and between strong and weak
    • Incorporates a wide variety of strategically relevant variables
    • Stresses allocating corporate resources to businesses with greatest potential for
      • Competitive advantage and
      • Superior performance
  • 17. 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 firm’s long-term strategic direction
  • 18. Identifying Strategic Fits Among a Diversified Firm’s Business Units Business A Value Chain Activities Inbound Logistics Technology Operations Sales and Marketing Distribution Service Business B Business C Business D Business E Opportunity to combine purchasing activities & gain greater 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
  • 19. Step 5: Assess Resource Fit
    • Objective:
      • Determine how well firm’s resources match business unit requirements
    • Good resource fit exists when
      • Businesses add to a firm’s resource strengths, either financially or strategically
      • Firm has resources to adequately support requirements of its businesses as a group
  • 20. Checking for Financial Resource Fit
    • Determine cash flow and investment requirements of the business units
      • Are they cash hogs or cash cows ?
    • Assessing cash flow aspects 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
  • 21. Good versus Poor Financial Fit
    • A business has good financial fit when it
      • Contributes to achievement of corporate objectives
      • Enhances shareholder value
    • A business exhibits poor financial fit if it
      • Soaks up a 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
  • 22. Checking for Competitive and Managerial Resource Fits
    • Involves determining whether
      • Resource strengths are well matched to KSFs of industries firm is in
      • Adequate managerial expertise exists to cope with problems of current businesses
      • Ability exists to transfer competitive capabilities from one business to another
      • Company must invest in upgrading its resources to stay ahead of rivals’ efforts to upgrade their resources
  • 23. 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 the difficulty of overcoming the resource strengths of rivals being confronted in a new business
  • 24. Step 6: Rank the Financial Performance of Business Units
    • Yardsticks for comparing the performance of different businesses
      • Sales growth
      • Profit growth
      • Contribution to company earnings
      • Return on capital employed in business
      • Cash flow generation
  • 25. 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 (steer resources to high opportunity areas and limit support to low opportunity areas)
      • Develop a general strategic direction for each business
    2 3 5 6 4
  • 26. 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?
  • 27. 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?
  • 28. Identifying Additional Diversification Opportunities
    • Related Diversification
      • Identify industries/businesses whose value chains have fits with value chains of present businesses
      • Identify industries/businesses whose resource requirements are well-matched to firm’s corporate resource capabilities
    • Unrelated Diversification
      • Find firms offering attractive financial returns regardless of industry
  • 29. How Do Corporate Strategies Form?
    • Corporate strategy emerges incrementally as managers
      • Probe the future
      • Experiment
      • Gather more information
      • Sense problems
      • Build awareness of various options
      • Spot new opportunities
      • Develop ad hoc responses to unexpected crises
      • Acquire a feel for strategically relevant factors and their importance and interrelationships
    Our strategy will be . . .
  • 30. Guidelines: Managing the Corporate Strategy Process
    • Not done all at once in comprehensive fashion
    • Approached a step at a time, emerging gradually
    • Begin with broad, intuitive concepts and then are fine-tuned as
      • More information is gathered
      • Formal analysis confirms or modifies emerging judgments about situation
      • Confidence and consensus build for the proposed strategic moves

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