Management

*

*

*

*

*

Answer: D

*

*

*

*

Answer: D

*

Newell Rubbermaid’s strategy is a narrowly diversified firm with a strategy based on related diversification. Potential strategic fits include: supply chain activities, distribution-related activities, and strategic fits in sales and marketing activities.

McGraw’s Hill strategy is primarily based on related diversification. Potential strategic fits include: distribution-related activities and strategic fits in sales and marketing activities.

*

*

1-*

Industry Attractiveness Factors

• Market size and projected growth
• Intensity of competition
• Emerging opportunities and threats
• Presence of cross-industry strategic fits
• Resource requirements
• Seasonal and cyclical factors
• Social, political, regulatory, and
  environmental factors
• Industry profitability
• Degree of uncertainty and business risk

1-*

Procedure: Calculating Attractiveness Scores for 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, using a scale of 1 to 10

Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry

1-*

Table 8.1: Calculating Weighted Industry Attractiveness Scores

1-*

• Industries with a score much below 5.0 do not pass the attractiveness test
• If a company’s industry attractiveness scores are all above 5.0, the group of industries the firm operates in is attractive as a whole
• To be a strong performer, a diversified firm’s principal businesses should be in attractive industries—that is, industries with
• A good outlook for growth and
• Above-average profitability

Interpreting Industry Attractiveness Scores

1-*

Difficulties in Calculating
Industry Attractiveness Scores

• Deciding on appropriate weights for industry attractiveness factors
• Different analysts may have different views about which weights are appropriate for the industry attractiveness factors
• Different weights may be appropriate for different companies
• Gaining sufficient command of an industry to assign accurate and objective ratings
• Gathering statistical data to assign objective
  ratings is straightforward for some factors –
  market size, growth rate, industry profitability
• Assessing the intensity of competition
  factor is more difficult due to the different
  types of competitive influences

1-*

• Objectives
• Appraise how well each
  business is positioned in
  its industry relative to rivals
• Evaluate whether it is or can be
  competitively strong enough to
  contend for market leadership

Step 2: Evaluate Each Business-
Unit’s Competitive Strength

1-*

• Relative market share
• Costs relative to competitors
• Ability to match/beat rivals on
  key product attributes
• Ability to benefit from strategic fits with sister businesses
• Ability to exercise bargaining leverage with key suppliers or customers
• Caliber of alliances and collaborative partnerships
• Brand image and reputation
• Competitively valuable capabilities
• Profitability relative to competitors

Factors to Use in
Evaluating Competitive Strength

1-*

Procedure: Calculating Competitive Strength Scores for 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, using a scale of 1 to 10

Step 4: Calculate weighted ratings; sum to get an overall strength rating for each business

1-*

Table 8.2: Calculating Weighted Competitive Strength Scores
for a Diversified Company’s Business Units

1-*

Interpreting Competitive Strength Scores

• Business units with ratings above 6.7 are strong market contenders
• Businesses with ratings in the
  3.3 to 6.7 range have moderate
  competitive strength vis-à-vis rivals
• Business units with ratings below 3.3 are in competitively weak market positions
• If a diversified firm’s businesses all have scores above 5.0, its business units are all fairly strong market contenders

1-*

• Use industry attractiveness (see Table 8.1) and competitive strength scores (see Table 8.2) to plot location of each business in matrix
• Industry attractiveness plotted on vertical axis
• Competitive strength plotted on horizontal axis
• Each business unit appears as a “bubble”
• Size of each bubble is scaled to percentage of revenues the business generates relative to total corporate revenues

Plotting Industry Attractiveness and Competitive Strength in a Nine-Cell Matrix

1-*

Figure 8.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix

1-*

• Businesses in upper left corner
• Accorded top investment priority
• Strategic prescription – grow and build
• Businesses in three diagonal cells
• Given medium investment priority
• Invest to maintain position
• Businesses in lower right corner
• Candidates for harvesting or divestiture
• May, based on potential for good earnings and ROI, be candidates for an overhaul and reposition strategy

Strategy Implications of Attractiveness/Strength Matrix

1-*

Appeal of Attractiveness/Strength Matrix

• Incorporates a wide variety of
  strategically relevant variables
• Strategy implications
• Concentrate corporate resources
  in businesses that enjoy high degree of industry attractiveness and high degree of competitive strength
• Make selective investments in businesses with intermediate positions on grid
• Withdraw resources from businesses low in attractiveness and strength unless they offer exceptional potential

1-*

Test Your Knowledge

The 9-cell industry attractiveness-competitive strength matrix

A. is a valuable tool for ranking a company’s different businesses from most profitable to least profitable.

B. shows which of a diversified company’s businesses have good/poor strategic fit.

C. indicates which businesses have the highest/lowest economies of scope.

D. is a helpful tool for allocating a diversified company’s resources—the basic idea is to give top investment priority to those businesses in the upper left portion of the matrix and to give low priority or perhaps even divest businesses in the lower right portion of the matrix.

E. pinpoints which of a diversified company’s businesses are resource-rich and which are resource-poor.

1-*

• Objective
• Determine competitive advantage potential of cross-business strategic fits among portfolio businesses
• Examine strategic fit based on
• Whether one or more businesses
  have valuable strategic fits with
  other businesses in portfolio
• Whether each business meshes well
  with firm’s long-term strategic direction

Step 3: Check Competitive Advantage Potential of Cross-Business Strategic Fits

1-*

• Identify businesses which have value
  chain match-ups offering opportunities to
• Reduce costs
• Purchasing
• Manufacturing
• Distribution
• Transfer skills / technology / intellectual capital from one business to another
• Share use of a well-known, competitively powerful brand name
• Create valuable new competitive capabilities

Evaluate Portfolio for Competitively Valuable Cross-Business Strategic Fits

1-*

Figure 8.6: Identifying Competitive Advantage
Potential of Cross-Business Strategic Fits

1-*

• Objective
• Determine how well firm’s resources
  match business unit requirements
• Good resource fit exists when
• A business adds to a firm’s resource strengths,
  either financially or strategically
• Firm has resources to adequately support requirements of its businesses as a group

Step 4: Check Resource Fit

1-*

• Determine cash flow and investment
  requirements of business units
• Which are cash hogs and
  which are cash cows?
• Assess cash flow 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 and divestiture
  strategies

Check for Financial Resource Fits

1-*

• Internal cash flows are inadequate to fully fund needs for working capital and new capital investment
• Parent company has to continually pump in capital to “feed the hog”
• Strategic options
• Aggressively invest in
  attractive cash hogs
• Divest cash hogs lacking
  long-term potential

Characteristics of Cash Hog Businesses

1-*

• Generate cash surpluses over what is needed to sustain 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 objectives
• Fortify and defend present market position
• Keep the business healthy

Characteristics of Cash Cow Businesses

1-*

• Good financial fit exists when a business
• Contributes to achievement of
  corporate objectives
• Enhances shareholder value
• Poor financial fit exists when a business
• Soaks up disproportionate share of financial resources
• Is an inconsistent bottom-line contributor
• Experiences a profit downturn
  that could jeopardize entire company
• Is too small to make a sizable
  contribution to total corporate earnings

Good vs. Poor Financial Resource Fit

1-*

Other Tests of Resource Fits

• Does the business adequately contribute to achieving companywide performance targets?
• Does the company have adequate financial strength to fund its different businesses and maintain a healthy credit rating?
• Does the company have or can it develop the specific resource strengths and competitive capabilities needed to be successful in each of its businesses?
• Are recently acquired businesses acting to strengthen a company’s resource base and competitive capabilities or are they causing its competitive and managerial resources to be stretched too thin?

1-*

• 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
• Transferring resource capabilities to
  new businesses can be far more arduous and expensive than expected
• Management can misjudge difficulty
  of overcoming resource strengths of
  rivals it will face in a new business

A Note of Caution: Why
Diversification Efforts Can Fail

1-*

Step 5: Rank Business Units Based on
Performance and Priority for Resource Allocation

• Factors to consider in judging
  business-unit performance
• Sales growth
• Profit growth
• Contribution to company earnings
• Return on capital employed in business
• Economic value added
• Cash flow generation
• Industry attractiveness and business strength ratings

1-*

• Objective
• “Get the biggest bang for the buck”
  in allocating corporate resources
• Approach
• Rank each business from highest to lowest priority for corporate resource support and new capital investment
• Steer resources from low- to high-opportunity areas
• When funds are lacking, strategic uses of resources should take precedence

Determine Priorities
for Resource Allocation

2

3

5

6

4

1-*

Figure 8.7: The Chief Strategic and Financial Options or
Allocating a Diversified Company’s Financial Resources

1-*

• Stick closely with existing business lineup
  and pursue opportunities it presents
• Broaden company’s business scope by
  making new acquisitions in new industries
• Divest certain businesses and retrench
  to a narrower base of business operations
• Restructure company’s business lineup, putting a whole new face on business makeup
• Pursue multinational diversification,
  striving to globalize operations of
  several business units

Step 6: Craft New Strategic
Moves – Strategic Options

1-*

Figure 8.8: A Company’s Four Main Strategic Alternatives After It Diversifies

1-*

Stick Closely with
Existing Business Lineup

• Attractive approach when
  current businesses
• Offer attractive growth opportunities
• Can be counted on to generate good
  earnings and cash flows
• Place company in a good future position
• Have good strategic and/or resource fits
• Strategic options include
• Pursuing the best performance from each business
• Steering corporate resources to areas
  of greatest potential and profitability

1-*

• Conditions making this
  approach attractive
• Slow grow in current businesses
• Vulnerability to seasonal or
  recessionary influences or to threats
  from emerging new technologies
• Potential to transfer resources and capabilities to other related businesses
• Rapidly-changing conditions in one or more core industries alter buyer requirements
• Complement and strengthen market position of one or more current businesses

Strategies to Broaden a
Diversified Company’s Business Base

1-*

• Strategic options
• Retrench to a smaller but more
  appealing group of businesses
• Divest unattractive businesses
• Sell it
• Spin it off as
  independent company
• Liquidate it (close it down
  because no buyers can be found)

Divestiture Strategies Aimed at Retrenching
to a Narrower Diversification Base

Retrench ?

Divest ?

Sell ?

Close ?

1-*

Retrenchment Strategies

• Objective
• Reduce scope of diversification to smaller number of “core “ businesses
• Strategic options involve divesting businesses that
• Are losing money
• Have little growth potential
• Have little strategic fit
  with core businesses
• Are too small to contribute
  meaningfully to earnings

1-*

• Diversification efforts have become too broad, resulting in difficulties in profitably managing all the businesses
• Deteriorating market conditions in a once-attractive industry
• Lack of strategic or resource fit of a business
• A business is a cash hog with questionable long-term potential
• A business is weakly positioned in its industry
• Businesses that turn out to be “misfits”
• One or more businesses lack compatibility of values essential to cultural fit

Conditions That Make
Retrenchment Attractive

1-*

Options for Accomplishing Divestiture

• Sell it
• Involves finding a company which views the business as a good deal and good fit
• Spin it off as independent company
• Involves deciding whether or not to retain partial ownership
• Liquidation
• Involves closing down operations
  and selling remaining assets
• A last resort because no buyer
  can be found

1-*

Strategies to Restructure a
Company’s Business Lineup

• Objective
• Make radical changes in mix
  of businesses in portfolio via both
• Divestitures and
• New acquisitions

to put a whole new
face on the company’s
business makeup

1-*

• Too many businesses in unattractive industries
• Too many competitively weak businesses
• Ongoing declines in market shares of one or more major business units
• Excessive debt load
• Ill-chosen acquisitions performing
  worse than expected
• New technologies threaten survival
  of one or more core businesses
• Appointment of new CEO who decides to redirect company
• “Unique opportunity” emerges and existing businesses must be sold to finance new acquisition

Conditions That Make Portfolio Restructuring Attractive

1-*

Multinational Diversification Strategies

• Distinguishing characteristics
• Diversity of businesses and
• Diversity of national markets
• Presents a big strategy-making challenge
• Strategies must be conceived and executed
  for each business, with as many
  multinational variations as appropriate
• Cross-business and cross-country collaboration opportunities must be pursued and managed

1-*

Appeal of Multinational
Diversification Strategies

• Offer two avenues for long-term
  growth in revenues and profits
• Enter additional businesses
• Extend operations of
  existing businesses into
  additional country markets

1-*

Opportunities to Build Competitive Advantage via Multinational Diversification

• Full capture of economies of scale and experience curve effects
• Capitalize on cross-business economies of scope
• Transfer competitively valuable resources from one business to another and from one country to another
• Leverage use of a competitively
  powerful brand name
• Coordinate strategic activities and
  initiatives across businesses and countries

1-*

• Competitive advantage
  potential is based on
• Using a related diversification
  strategy based on
• Resource-sharing and resource-transfer
  opportunities among businesses
• Economies of scope and brand name
  benefits
• Managing related businesses to capture important cross-business strategic fits

Competitive Strength of
a DMNC in Global Markets