1. THREE KEY ISSUES FACING THE CORPORATION…
THE FIRM’S ORIENTATION TOWARD GROWTH, STABILITY,
AND RETRENCHMENT (Directional Strategy)
THE INDUSTRIES OR MARKETS IN WHICH THE FIRM
COMPETES (Portfolio Strategy)
THE MANNER IN WHICH MANAGEMENT COORDINATES
ACTIVITIES AND TRANSFERS RESOURCES AND CULTIVATES
CAPABILITIES AMONG PRODUCT LINES AND BUSINESS
UNITS (Parenting Strategy)
Corporate headquarters must play the “parent” as it deals
with its various lines of business (children).
2. CONCENTRATION
1. HORIZONTAL INTEGRATION
GEOGRAPHIC EXPANSION
Local, Regional, National, Global
INCREASING THE RANGE OF PRODUCTS and/or SERVICES
1. VERTICAL INTEGRATION
• BACKWARD
Long-Term Contracts
Quasi-integration
Tapered Integration
Full Integration
• FORWARD
DIVERSIFICATION
1. CONCENTRIC
Related
1. CONGLOMERATE
Unrelated
3. DOMESTIC ENTRY
INTERNAL DEVELOPMENT & EXPANSION
EXTERNAL ACQUISITIONS & MERGERS
STRATEGIC ALLIANCES & PARTNERSHIPS
Licensing, Franchises, Joint Ventures
INTERNATIONAL ENTRY
EXPORTING
LICENSING
FRANCHISING
JOINT VENTURES
ACQUISITIONS
GREEN-FIELD DEVELOPMENT
PRODUCTION SHARING
TURNKEY OPERATIONS
MANAGEMENT CONTRACTS
5. DON’T DIVERSIFY UNLESS…
SYNERGY IS ACHIEVED
SHAREHOLDER VALUE IS BUILT
CONCENTRIC DIVERSIFICATION
FINDING A SYNERGISTIC “FIT”
Marketing
Operations
Management
MERGING THE FUNCTIONS
CONGLOMERATE DIVERSIFICATION
FIND FIRMS WHOSE ASSETS ARE UNDERVALUED
FIND FIRMS THAT ARE FINANCIALLY DISTRESSED
FIND FIRMS WITH BRIGHT PROSPECTS BUT ARE SHORT ON $$$
6. PROS…
1--BUSINESS RISK IS SCATTERED OVER MANY INDUSTRIES
2--CAN INVEST CAPITAL IN WHATEVER OFFERS THE BEST PROFIT PROSPECTS
3--PROFITABILITY IS MORE STABLE BECAUSE HARD TIMES IN ONE INDUSTRY CAN BE
PARTIALLY OFFSET BY GOOD TIMES IN ANOTHER
4--IF CORPORATE MANAGERS ARE GOOD AT SPOTTING BARGAIN-PRICED FIRMS WITH BIG
UPSIDE PROFIT POTENTIAL, SHAREHOLDER WEALTH WILL BE ENHANCED
CONS…
1--TOP MANAGEMENT COMPETENCE
Can they tell a good acquisition from a bad one?
Can they select good managers to run each business?
Do they know what to do if a business unit stumbles?
2--DIVERSIFICATION DOES NOTHING TO ENHANCE THE COMPETITIVE STRENGTH OF
INDIVIDUAL BUSINESS UNITS
Each business unit is on it own
No corporate synergy can be achieved
3--ARE THE FIRM’S PROFITS MORE STABLE?
Do the “up and down” cycles cancel out?
4--HOW MUCH DIVERSITY CAN THE FIRM MANAGE SUCCESSFULLY?
How broad should our portfolio be?
7. ONE MAJOR CORE BUSINESS
…With a modest diversified portfolio (1/3 or less)
NARROWLY DIVERSIFIED
…With a few (2-5) related core business units
…With a few (2-5) unrelated business units
BROADLY DIVERSIFIED
…With many related business units
…With many business units in mostly unrelated industries
A MULTI-BUSINESS FIRM
…With several unrelated groups of related businesses
8. MAKE NEW ACQUISITIONS
Related or Unrelated?
DIVEST SOME BUSINESS UNITS
Poor Performers?
Poor Strategic “Fit?”
RESTRUCTURE THE WHOLE PORTFOLIO
NARROW THE DIVERSIFICATION BASE
BECOME A DIVERSIFIED MULTINATIONAL, MULTI-INDUSTRY
COMPANY (DMNC)
9. PROFIT
“Keep milking the cow, but don’t feed it”
Artificially supporting profits by cutting costs
Keeping up appearances that everything is still OK
A temporary strategy for a worsening environment
PAUSE
Consolidate after recent rapid growth
A temporary strategy to “catch your breath”
PROCEED WITH CAUTION
Environment looks scary…wait to see what happens
NO-CHANGE
A very predictable environment…nothing uncertain ever
happens
Why tamper with success? What firms did before WalMart
came…
10. OFTEN TRIGGERED BY…
DISAPPOINTING PERFORMANCE
ECONOMIC DOWNTURN
EXCESSIVE DEBT
ILL-CHOSEN ACQUISITIONS
TURNAROUND
Help subsidiaries become profitable
Belt-tightening and consolidation
CAPTIVE COMPANY
Give up independence for security…sell mostly to one large customer
“angel”
Can scale back on some functions, like marketing
SELL-OUT/DIVEST
Sell the entire operation to someone as an ongoing business
Divest a healthy firm that doesn’t fit our portfolio…or a low-producing
business
LIQUIDATION
The last resort…no one wants to buy the entire business
The assets are worth more than the business…so they’re sold piece by
piece
11. THE BCG GROWTH-SHARE MATRIX (Boston Consulting Group)
DIMENSIONS
Industry Growth Rate
Compared to GDP
Relative Market Share
Uses ratios instead of absolute market shares
CLASSIFICATIONS
Question Marks (or Problem Children or Wildcats)
Stars
Cows
Dogs
ADVANTAGES & IMPLICATIONS
It is quantifiable and easy to use
Easy to remember terms and their meaning when referring to business
units
Assumes large market shares => economies of scale => cost leadership
Each business unit moves across the matrix in predictable ways over time
Focuses attention on cash flows and needs
12. TOO SIMPLISTIC—IT ONLY HAS A FOUR-CELL MATRIX
WHERE DO “AVERAGE” BUSINESSES BELONG?
PREJUDICIAL CLASSIFICATION SCHEME
DOGS & PROBLEM CHILDREN v. STARS & COWS…VERY BIASED TERMS
THE TRENDS & MOVEMENTS OF THESE UNITS SEEM MORE IMPORTANT
IS HIGH INDUSTRY GROWTH ALWAYS GOOD?
DOES HIGH MARKET SHARE ALWAYS MEAN HIGH PROFITABILITY?
FIRMS CAN LOSE MONEY WHILE HOLDING A LARGE MARKET SHARE
LOW-SHARE BUSINESSES CAN ALSO BE PROFITABLE
ONLY CONSIDERS RELATIONSHIP TO THE MARKET LEADER—WHILE OTHERS ARE
IGNORED
WHAT ABOUT SMALL COMPETITORS WITH FAST-GROWING MARKET SHARES?
GROWTH RATE IS ONLY ONE ASPECT OF INDUSTRY ATTRACTIVENESS
MARKET SHARE IS ONLY ONE ASPECT OF OVERALL COMPETITIVE POSITION
13. RELATIVE MARKET SHARE
HIGH 1.0 LOW
---------------------------------------------
HIGH STARS QUESTION
MARKS
INDUSTRY 1.0 ---------------------------------------------
GROWTH RATE
COWS DOGS
LOW ---------------------------------------------
RELATIVE MARKET SHARE
Your market share divided by largest rival’s share
INDUSTRY GROWTH RATE
Industry growth percentage compared to GDP
SIZE OF CIRCLES
The significance (revenues) of each SBU to the firm
14. TWO DIMENSIONS (McKinsey & Co)
Industry Attractiveness
MARKET SIZE & GROWTH RATE
INDUSTRY PROFITABILITY
INTENSITY OF COMPETITION
BARRIERS TO ENTRY / EXIT
SEASONALITY / CYCLICALITY
TECHNOLOGICAL & PRODUCT CONSIDERATIONS
CAPITAL REQUIREMENTS
EMERGING OPPORTUNITIES & THREATS
SOCIAL, ENVIRONMENTAL, & POLITICAL FACTORS
STRATEGIC FIT WITH OTHER CURRENT LINES OF BUSINESS
Business Strength / (Competitive Position)
RELATIVE MARKET SHARE
RELATIVE PRICE, QUALITY, & SERVICE v. RIVALS
PROFIT MARGINS and COST POSITION v. RIVALS
KNOWLEDGE OF CUSTOMERS & MARKETS
TECHNOLOGICAL CAPABILITY & LEADERSHIP
FINANCIAL & PHYSICAL RESOURCES
CALIBER OF MANAGEMENT & STAFF
COMPETENCIES MATCH KEY SUCCESS FACTORS
15. BUSINESS STRENGTH / COMPETITIVE POSITION
STRONG AVERAGE WEAK
----------------------------------------
HIGH WINNER WINNER QUESTION
MARK
LONG-TERM -----------------------------------
-----
INDUSTRY AVERAGE WINNER AVERAGE LOSER
ATTRACTIVENESS BUSINESS
-----------------------------------
-----
PROFIT LOSER LOSER
LOW PRODUCER
----------------------------------------
INDIVIDUAL PRODUCT LINES
Identified by letter
SIZE OF EACH CIRCLE
Represents the total revenues in the industry
PIE SLICES
Represents your share of that market
16. STRENGTHS
USES MORE COMPREHENSIVE MEASURES / VARIABLES IN ASSESSING INDUSTRY
ATTRACTIVENESS AND BUSINESS STRENGTH / COMPETITIVE POSITION
DOESN’T LEAD TO AS SIMPLISTIC CONCLUSIONS AS THE BCG GRID
NINE CELL APPROACH ALLOWS FOR INTERMEDIATE RANKINGS BETWEEN HIGH/LOW
AND STRONG/WEAK
STRESSES CHANNELING OF RESOURCES TO AREAS WITH THE GREATEST PROBABILITY OF
ACHIEVING COMPETITIVE ADVANTAGE AND SUPERIOR PERFORMANCE
WEAKNESSES
PROVIDES NO REAL GUIDANCE ON THE SPECIFICS OF WHAT STRATEGY TO FOLLOW …
IT’S TOO GENERAL
CAN’T SPOT UNITS THAT ARE ABOUT TO BECOME WINNERS BECAUSE THEIR INDUSTRIES
ARE ENTERING THE TAKEOFF STAGE
USE OF NUMERIC ESTIMATES SEEMS OBJECTIVE, BUT IS REALLY VERY SUBJECTIVE
SHOULD THE WEIGHTS & FACTORS USED TO ASSESS INDUSTRY ATTRACTIVENESS AND
BUSINESS POSITION BE USED GENERICALLY, OR ADJUSTED DEPENDING ON THE
INDUSTRY UNDER INVESTIGATION?
17. TWO DIMENSIONS (Charles Hofer & A. D. Little,
Co)
Stage of Industry / Market Evolution
EARLY DEVELOPMENT
RAPID GROWTH / TAKE-OFF
SHAKE-OUT
MATURITY / SATURATION
DECLINE / STAGNATION
Business Strength / (Competitive Position)
SAME DIMENSIONS AS USED IN THE GE BUSINESS SCREEN
ADVANTAGES
Can be used to identify and track developing winners
Illustrates how the firm’s businesses are distributed across the stages of
industry evolution
18. BUSINESS STRENGTH / COMPETITIVE POSITION
STRONG AVERAGE WEAK
EARLY ------------------------------
DEVELOPMENT
------------------------------
STAGE OF RAPID GROWTH /
TAKE-OFF
INDUSTRY / MARKET ------------------------------
SHAKE-OUT
EVOLUTION
------------------------------
MATURITY /
SATURATION
------------------------------
DECLINE /
STAGNATION
------------------------------
ONLY ONE DIMENSION IS DIFFERENT FROM THE GE BUSINESS SCREEN
Except for the Stage of Market Evolution, this model is identical to the GE Business
Screen
19. STRENGTHS
ENCOURAGES TOP MANAGEMENT TO EVALUATE EACH LINE OF BUSINESS SEPARATELY,
AND TO SET OBJECTIVES AND ALLOCATE RESOURCES TO EACH.
IT STIMULATES THE USE OF EXTERNALLY-ORIENTED DATA TO SUPPLEMENT MANAGEMENT’S
JUDGMENT
RAISES THE ISSUE OF CASH FLOW AVAILABILITY FOR USE IN EXPANSION AND GROWTH
GRAPHICALLY COMMUNICATES THE MIX OF BUSINESSES THE FIRM HAS INVESTED IN
WEAKNESSES
DEFINING PRODUCT / MARKET SEGMENTS IS DIFFICULT
IT SUGGESTS STANDARD STRATEGIES THAT CAN MISS OPPORTUNITIES OR BE
IMPRACTICAL
PROVIDES AN ILLUSION OF SCIENTIFIC RIGOR, WHEN POSITIONS ARE REALLY BASED ON
SUBJECTIVE JUDGMENTS
VALUE-LADEN TERMS (cow, dog) LEAD TO SIMPLISTIC STRATEGIES AND SELF-FULFILLING
PROPHESIES
ITS NOT ALWAYS CLEAR WHAT MAKES AN INDUSTRY ATTRACTIVE OR WHERE A PRODUCT
IS IN ITS LIFE CYCLE
NAIVELY FOLLOWING PORTFOLIO PRESCRIPTIONS MAY REDUCE PROFITS –DOGS CAN
MAKE MONEY!
20. COMPARING INDUSTRY ATTRACTIVENESS
ATTRACTIVENESS OF EACH INDUSTRY IN THE PORTFOLIO
Is this a good industry for our organization to be in?
EACH INDUSTRY’S ATTRACTIVENESS RELATIVE TO THE OTHERS
Which industries are the most / least attractive?
ATTRACTIVENRSS OF ALL THE INDUSTRIES AS A GROUP
How appealing is the mix of industries? Is the portfolio a “good” one?
TO DETERMINE INDUSTRY ATTRACTIVENESS
1--USE GE BUSINESS SCREEN METHODOLOGY
2--SUBJECTIVELY CLASSIFY EACH INDUSTRY FACTOR INTO ONE OF THREE
CATEGORIES…
HIGHLY ATTRACTIVE
AVERAGE
NOT ATTRACTIVE
21. INDUSTRY FACTOR CLASSIFIED AS
MARKET SIZE & GROWTH RATE AVERAGE
INDUSTRY PROFITABILITY ATTRACTIVE
INTENSITY OF COMPETITION UNATTRACTIVE
BARRIERS TO ENTRY/EXIT UNATTRACTIVE
SEASONALITY/CYCLICALITY AVERAGE
TECHNOLOGY & PRODUCT CONSIDERATIONS AVERAGE
CAPITAL REQUIREMENTS UNATTRACTIVE
EMERGING OPPORTUNITIES & THREATS AVERAGE
SOCIAL, REGULATORY, & POLITICAL FACTORS AVERAGE
STRATEGIC FIT WITH OTHER CURRENT LINES OF BUSINESS ATTRACTIVE
OVERALL EVALUATION = AVERAGE
22. ASSIGN A NUMBER TO EACH INDUSTRY FACTOR USING THE FOLLOWING SCHEME…
UNATTRACTIVE = 0, 1, 2, 3 AVERAGE = 4, 5, 6 ATTRACTIVE = 7, 8, 9, 10
---------------------------------------------------------
------
INDUSTRY FACTOR ASSIGNED NUMBER
MARKET SIZE & GROWTH RATE 6
INDUSTRY PROFITABILITY 9
INTENSITY OF COMPETITION 2
BARRIERS TO ENTRY/EXIT 3
SEASONALITY/CYCLICALITY 6
TECHNOLOGY & PRODUCT CONSIDERATIONS 5
CAPITAL REQUIREMENTS 1
EMERGING OPPORTUNITIES & THREATS 5
SOCIAL, REGULATORY, & POLITICAL FACTORS 4
STRATEGIC FIT WITH OTHER LINES OF BUSINESS 8
OVERALL EVALUATION = 49/10 = 4.9 = AVERAGE
23. 1--ASSIGN WEIGHTS TO EACH INDUSTRY FACTOR (Must add up to 100%)
2--THEN ASSIGN NUMBERS TO EACH FACTOR USING THE FOLLOWING SCHEME…
UNATTRACTIVE = 0 - 3 AVERAGE = 4 - 6 ATTRACTIVE = 7 - 10
3--MULTIPLY WEIGHTS BY NUMBERS TO DETERMINE THE WEIGHTED SCORE
---------------------------------------------------------
---
WEIGHT INDUSTRY FACTOR ASSIGNED NUMBER
.10 MARKET SIZE & GROWTH RATE 6
.10 INDUSTRY PROFITABILITY 9
.15 INTENSITY OF COMPETITION 2
.05 BARRIERS TO ENTRY/EXIT 3
.05 SEASONALITY/CYCLICALITY 6
.08 TECHNOLOGY & PRODUCT CONSIDERATIONS 5
.12 CAPITAL REQUIREMENTS 1
.10 EMERGING OPPORTUNITIES & THREATS 5
.10 SOCIAL, REGULATORY, & POLITICAL FACTORS 4
.15 STRATEGIC FIT WITH OTHER LINES OF BUSINESS 8
OVERALL EVALUATION = 4.87 = AVERAGE
24. USE THE FOLLOWING SCHEME TO CLASSIFY EACH BUSINESS STRENGTH FACTOR…
STRONG
AVERAGE
WEAK
---------------------------------------------------------
------
BUSINESS STRENGTH FACTOR CLASSIFIED AS
OUR RELATIVE MARKET SHARE STRONG
OUR RELATIVE PRICE v. RIVALS AVERAGE
OUR QUALITY & SERVICE v. RIVALS AVERAGE
OUR RELATIVE COST POSITION v. RIVALS STRONG
OUR PROFIT MARGINS v. RIVALS STRONG
KNOWLEDGE OF CUSTOMERS & MARKETS AVERAGE
TECHNOLOGICAL CAPABILITY / LEADERSHIP WEAK
FINANCIAL & PHYSICAL RESOURCES AVERAGE
CALIBER OF MANAGEMENT & STAFF STRONG
COMPETENCIES MATCH KEY SUCCESS FACTORS AVERAGE
OVERALL EVALUATION = AVERAGE to STRONG
25. ASSIGN NUMBERS TO EACH BUSINESS STRENGTH FACTOR …USE THE FOLLOWING…
WEAK = 0, 1, 2, 3 AVERAGE = 4, 5, 6 STRONG = 7, 8, 9, 10
---------------------------------------------------------
------
INDUSTRY FACTOR ASSIGNED NUMBER
RELATIVE MARKET SHARE 7
RELATIVE PRICE v. RIVALS 5
QUALITY & SERVICE v. RIVALS 6
RELATIVE COST POSITION v. RIVALS 8
PROFIT MARGINS v. RIVALS 8
KNOWLEDGE OF CUSTOMERS & MARKETS 5
TECHNOLOGICAL CAPABILITY & LEADERSHIP 2
FINANCIAL & PHYSICAL RESOURCES 4
CALIBER OF MANAGEMENT & STAFF 8
COMPETENCIES MATCH KEY SUCCESS FACTORS 6
OVERALL EVALUATION = 59/10 = 5.9 = AVERAGE
26. 1--ASSIGN WEIGHTS TO EACH COMPETITIVE FACTOR (Must add up to 100%)
2--THEN ASSIGN NUMBERS TO EACH FACTOR USING THE FOLLOWING SCHEME…
WEAK = (0 – 3) AVERAGE = (4 – 6) STRONG = (7 – 10)
3--MULTIPLY WEIGHTS BY NUMBERS TO DETERMINE THE WEIGHTED SCORE
---------------------------------------------------------
---
WEIGHT COMPETITIVE BUSINESS STRENGTH ASSIGNED NUMBER
.08 RELATIVE MARKET SHARE 7
.08 RELATIVE PRICE v. RIVALS 5
.15 QUALITY & SERVICE v. RIVALS 6
.12 RELATIVE COST POSTION v. RIVALS 8
.06 PROFIT MARGINS v. RIVALS 8
.15 KNOWLEDGE OF CUSTOMERS & MARKETS 5
.05 TECHNOLOGICAL CAPABILITY / LEADERSHIP 2
.10 FINANCIAL & PHYSICAL RESOURCES 4
.06 CALIBER OF MANAGEMENT & STAFF 8
.15 COMPETENCIES MATCH KEY SUCCESS FACTORS 6
OVERALL EVALUATION = 5.93 = AVERAGE
27. WHICH BUSINESS UNITS HAVE THE BEST/WORST PERFORMANCE?
ASSESS THE TRENDS RE:
Sales Growth
Profit Growth
Contribution to Company Earnings
Return on Capital Invested in the Business (ROA)
Cash Flow Generated
STRATEGIC FIT ANALYSIS
STRATEGIC ATTRACTIVENESS
Does this business have cost-sharing or skills-transfer
opportunities?
FINANCIAL ATTRACTIVENESS
Does this business contribute to corporate performance
objectives?
RANK THE BUSINESS UNITS ON INVESTMENT PRIORITY
Which units should get the highest priority regarding financial
support?
28. UNIT A UNIT B UNIT C UNIT D
SALES GROWTH .018 .068 .102 .071
GROWTH IN PROFITS .032 .062 .103 .044
CONTRIBUTION TO CORP
EARNINGS (Omit 000s) $ 70 $554 $ 29 $237
RETURN ON ASSETS .072 .124 .088 .096
GENERATED CASH FLOWS $234 $611 $ 28 $342
(Omit 000s)
STRATEGICALLY ATTRACTIVE No Yes Yes No
FINANCIALLY ATTRACTIVE Yes Yes No Yes
INVESTMENT PRIORITY 4 1 2 3
29. 1. DOES THE PORTFOLIO HAVE ENOUGH BUSINESSES IN ATTRACTIVE
INDUSTRIES?
2. DOES THE PORTFOLIO CONTAIN TOO MANY MARGINAL BUSINESSES
OR QUESTION MARKS?
3. DOES THE CORPORATION HAVE ENOUGH CASH COWS TO FINANCE
THE STARS AND EMERGING WINNERS?
4. DO THE CORE BUSINESSES GENERATE DEPENDABLE PROFITS OR CASH
FLOWS?
5. IS THE PORTFOLIO VULNERABLE TO SEASONAL OR RECESSIONARY
INFLUENCES?
6. DOES THE PORTFOLIO CONTAIN BUSINESSES THAT THE CORPORATION
DOESN’T NEED TO BE IN?
7. IS THE CORPORATION BURDENED WITH TOO MANY BUSINESSES IN
AVERAGE-TO-WEAK COMPETITIVE POSITIONS?
8. DOES THE MAKEUP OF THE PORTFOLIO PUT THE CORPORATION IN A
GOOD POSITION FOR THE FUTURE?
30. 1. IDENTIFY THE PRESENT CORPORATE STRATEGY
2. CONSTRUCT BUSINESS PORTFOLIO MATRICES
3. PROFILE THE INDUSTRY AND COMPETITIVE ENVIRONMENT OF EACH
BUSINESS UNIT
4. EVALUATE THE COMPETITIVE STRENGTH OF EACH INDIVIDUAL
BUSINESS
5. COMPARE PERFORMANCE RECORDS OF EACH BUSINESS UNIT
6. HOW WELL DOES EACH BUSINESS UNIT “FIT” WITH CURRENT
CORPORATE STRATEGY?
7. RANK THE UNITS FROM HIGHEST TO LOWEST IN INVESTMENT PRIORITY
8. CRAFT A SERIES OF MOVES TO IMPROVE OVERALL CORPORATE
PERFORMANCE
