Strategic analysis of

diversified companies
 Outline
 Identifying Present Corporate Strategy
 Matrix Techniques for Evaluating Diversified
Portfolios
 Comparing Industry Attractiveness
 Comparing Business Unit Strength
 Comparing Business Unit Performance
 Strategic Fit Analysis
 Ranking Business Units on Investment Priority
 Crafting a Corporate Strategy
 Guidelines for Managing Corporate Strategy
Formation Process
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 Building share holder value
Three Questions to be addressed
 How attractive is group of businesses firm is in?
 How good is overall performance outlook over
next 5 years?
 If previous 2 answers are not satisfactory, what
should firm do to
 Get out of some businesses,
 Strengthen positions of remaining ones, &
 Acquire new businesses to boost prospects for better
performance?

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 Step I
Identify present strategy
 Step I – identifying present corporate
strategy
 Extent to which firm is diversified
 Whether portfolio is keyed to related or unrelated
diversification or both
 Whether scope of operations is mostly domestic or
increasingly global
 Nature of recent moves to boost performance of key
business units
 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
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 Step II
Draw Business Portfolio
Matrix
 Types of business portfolio matrices
1. Four-Cell Growth-Share Matrix
2. Industry Attractiveness-Business Strength
Matrix
3. Industry Life Cycle Matrix

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 The BCG Matrix
Relative market share position
High Low
Industry Growth Rate

Stars Question marks

High

Low
Cash Cows Dogs
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 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
 RELATIVE MARKET SHARE
 Calculated by dividing firm’s market share by market share of
firm’s largest rival
 “Typical” dividing line between “high” and “low” relative market
share businesses placed 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

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 Implications 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 position erodes to problem child & then falls to a
dog
 Cash cow loses leadership & becomes a dog

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Present V/s future positions in the portfolio Matrix
Relative market share position
High Low
Industry Growth Rate

Stars Question marks

A E Divest
High B
D

F
C
Low
G Divest
Cash Cows Dogs
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 Weaknesses of the matrix
 Four-cell matrix hides fact that many businesses
 Are in “average” growth rate markets and
 Have “average” relative market share positions
 Misleading simplification to categorize 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
 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 experience curve effect implies
 Many firms with small relative market shares are very profitable!

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 GE’s Industry attractiveness –
Business strength matrix
Business Strength
 Market Share  Relative Costs
 Core Competencies  Knowledge
 Profit Margin vs Competitors  Technological Ability
Industry Attractiveness 
 Market Size
Ability to Match Price/Service  Management Caliber
 Growth Rate Strong Average Weak
 Profit Margin
 Competition Intensity
High
 Seasonality
 Cyclicality Long term industry
 Technology & Capital
Medium
 Social Impact
attractiveness

 Regulation
 Environment
 Opportunities & Low
Threats
 Barriers to Exit/Entry
Business Strength – competitive
Kaushal Mehta position
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 Business Strength rating
Competitive Strength Measure Weight Strength Weighted

Rating Strength

Rating

Relative market share 0.15 5 0.75

Costs relative to competitors 0.20 8 1.6

Ability to match rivals on key product attributes 0.05 7 0.35

Bargaining leverage with suppliers/buyers; Caliber of alliances 0.10 6 0.6

Strategic fit relationships with sister concerns 0.15 7 1.05

Technology and innovation capabilities 0.05 4 0.2

How well resources are matched to industry KSF's 0.10 7 0.7

Brand name reputation/image 0.10 4 0.4

Degree of profitability relative to competitors 0.10 5 0.5

Sum of assigned weights 1

Competitive strength rating 6.15

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 Strategic Implications
 Businesses in three cells 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

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Competitive Position Life Cycle portfolio mix

Weak

Average

Strong

Early Industry Rapid Shake Market

Maturity Decline
Development Takeoff Growth out Saturation

Stage in life cycle

•Each business unit appears as a “circle”
•Area of circle is proportional to size of industry
•Kaushal
Pie slices
Mehta within circle reflect business’s market share in industry
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 Constructing Attractiveness
 Quantitative measures of industry attractiveness &
business strength used to
 Plot each 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

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Example

General Electric
 The company
 Climb to global prominence began in 1981 when Jack
Welch became CEO
 The number 1 or number 2 principle
 Between the 80’s and the century end GE had
 Acquired hundreds of companies
 Including 108 in 1998 and 64 during a 90 day period in 1999!
 Expanded to Europe, Asia and Latin America
 By the late 90’s GE was a diversified company
 Having divested $ 9 Billion worth of operations
 And making additional acquisitions worth $ 24 billion
 Cut its work force by 100,000 people
 12 of GE’s 14 business groups had attained Industry
leadership in the US or worldwide markets
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 GE’s Business Portfolio
 Aircraft Engines
 Appliances
 GE Equity
 Industrial Systems
 Lighting
 Medical Systems
 NBC
 Plastics
 Power Systems
 Real Estate

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Internal initiatives to manage the Behemoth
 Creation of a “boundaryless” enterprise
 Emphasis on being a learning organisation
 Six Sigma
 Workout Sessions
 Kill Bureaucracy
 Become an internet company (put 250 business
divisions online within 18 months)
 Developing talent

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 Step III
Compare long term
industry attractiveness
 Step III: Comparing long term
industry attractiveness
 Judged from three perspectives
1. Attractiveness of each industry in portfolio
2. Each industry’s attractiveness relative to others
3. Attractiveness of all industries as a group

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 Step IV
Compare business unit
competitive strength
 Step IV: 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 skills & competencies match industry KSFs
 Profitability relative to competitors
 Other pertinent measures of competitive strength

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 Step V
Compare business unit
performance
 Step IV: 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

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 Step VI
Strategic fit analysis
 Step VI: Strategic fit analysis

 A business is more valuable strategically when

 It presents cost-sharing or skills transfer opportunities
that translate into stronger competitive advantage
and/or added profitability
 It fits with strategic direction of corporation
 A business is more valuable financially when it
 Is capable of contributing heavily to corporate
performance objectives
 Enhances firm’s overall worth

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 Strategic fit analysis

FIRST Analyze value chains of each business to

identify opportunities for cost sharing,
skills transfer, and/or differentiation
enhancement

SECOND Identify important interrelationships

between firm’s present businesses &
other industries not in portfolio

THIRD Decide if existing & potential strategic fit

relationships can lead to an attractive
competitive advantage

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 Translating strategic fit into
competitive advantage
 Absent meaningful strategic fit opportunities,
strategists must try to build shareholder value by
 Doing an exceptionally good job of portfolio
management
 Doing such a good job 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”

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 Step VII
Rank business units on
investment priority
 Step VII: Ranking business units on
investment priority
 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

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 Step VIII
Craft corporate strategy
 Step VII: Crafting 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 stars & emerging
winners?
 Do core businesses generate dependable profits and/or cash flow?
 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?

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 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

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 The performance test
 Actions to be taken if PERFORMANCE
SHORTFALL is indicated
 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

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