Nofe,Edward E.

BST 3 EVALUATE A DIVERSIFIED COMPANY¶S STRATEGY

03/09/11 MWF (12:30-13:30)

STEP 1: Identify present corporate strategy STEP 2: Use business portfolio matrixes to analyze firm¶s business portfolio\ STEP 3: Compare long-term attractiveness of each industry firm has diversified into STEP 4: Compare competitive strength of firm¶s business units STEP 5: Rate business units on basis of historical performance & future prospects STEP 6: Assess each business unit¶s compatibility with corporate strategy & determine value of strategic fit relationships STEP 7: Rank business units in terms of priority for new capital investment & decide on general strategic posture STEP 8: Decide if new strategic moves are needed to improve overall performance BCG GROWTH-SHARE MATRIX: This product portfolio matrix classifies product lines into four categories. The BCG models suggests that organizations should have a healthy balance of products within their range. The Boston Consultancy Group classified these products as following: Two variables used: 1. INDUSTRY GROWTH RATE - Plotted on vertical axis 2. RELATIVE MARKET SHARE - Plotted on horizontal axis CONSTRUCTING A BCG GROWTH-SHARE MATRIX INDUSTRY GROWTH RATE ³High growth´ businesses are in industries growing faster than economy ³Low growth´ businesses are in industries growing slower than economy QUESTION MARKS / PROBLEM CHILDREN / CASH HOGS
y y y

Operate in a high growth market but have low relative market share -- Upper right cell of matrix Rapid industry market growth makes businesses attractive, but low relative share positions raise questions about future potential Cash needs are high & internal cash generation is low, making them cash hogs

Cash Hogs- a business is a cash hog when its internal cash flows are inadequate to fully fund its need for working capital and new capital investment the parent company has to continually pump in capital to ³feed the hog´ Strategic options Aggressively invest in attractive cash hogs Divest cash hogs lacking long-term potential Cash Cow - business generates cash surpluses over and above what is needed to sustain its 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 objective: Fortify and defend present market position--keep the business healthy.Upper left cell of matrix Offer excellent growth opportunities Offer excellent profit opportunities Vary as to whether they are Self-sustaining or Require infusions of investment funds from corporate parent .Have strong competitive positions in rapidly growing industries Are major contributors to corporate revenue & profit growth May or may not be cash hogs Basic Concept STARS .Lower left cell of matrix Can generate cash surpluses over & above that needed for reinvestment & growth in business Valuable portfolio holding because they can be ³milked´ for cash to Pay corporate dividends & overhead Finance new acquisitions Invest in young stars or problem children Cash Cows should not be ³harvested´ but maintained in healthy position for long-term cash flow Weak cash cows may become candidates for harvesting & eventual divestiture The goal is to FORTIFY and DEFEND a cash cow¶s market position while efficiently generating dollars to reallocate to business investments elsewhere! DOGS . Cash Cows .Situated in low growth market but have high relative market share -.Harvest Divest or spin off Liquidate or close down Strategy Prescriptions STARS .Market leaders situated in high growth market with high relative market share -.Situated in low growth market & have low relative market share -.Lower right cell of matrix Have weak competitive position & low profit potential Unable to generate attractive cash flows on a long-term basis DOGS .

sum to get overall business unit attractiveness rating for each business . using scale of 1 to 10 Step 4: Calculate weighted ratings. sum to get an overall industry attractiveness rating for each industry PROCEDURE: RATING BUSINESS POSITION/COMPETITIVE STRENGTH Step 1: Select factors to compare competitive strength of each business unit Step 2: Assign weights to each competitive strength factor Step 3: Rate each business on each competitive strength factor. using scale of 1 to 10 Step 4: Calculate weighted ratings.Question mark to young star to self-supporting star to cash cow Two disaster sequences o Star¶s position erodes to problem child & then falls to a dog o Cash cow loses leadership & becomes a do WEAKNESSES OF GROWTH-SHARE MATRIX y Four-cell matrix hides fact that many businesses o Are in ³average´ growth rate markets and o Have ³average´ 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 o Industry growth and o Relative market share Connection between relative market share & profitability is not as tight as experience curve effect implies o Many firms with small relative market shares are very profitable y y y y y PROCEDURE: RATING INDUSTRY ATTRACTIVENESS Step 1: Select factors to compare long-term attractiveness of each industry Step 2: Assign weights to each attractiveness factor Step 3: Rate each industry on each attractiveness factor.STRATEGY IMPLICATIONS OF GROWTH-SHARE MATRIX: y y y y y 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 -.