MGMT4199 Albany State University Wells Fargo Industry Attractiveness HW Industry Attractiveness , Competitive Matrix, Business Unit Strength Hide Assignmen

MGMT4199 Albany State University Wells Fargo Industry Attractiveness HW Industry Attractiveness , Competitive Matrix, Business Unit Strength
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Instructions

Construct an Industry Attractiveness Graph (ie. table 8.1 page 166), a Business-Unit Competitive Strength Assessment (Table 8.2 page 168), and a Nine Cell Industry Attractiveness – Competitive Strength Matrix (ie. Figure 8.3 page 169) for the company that your are using for your research project this semester.

Support your work with data from your research. Evaluating the Strategy of a
Diversified Company
LO8-4
Evaluate a company’s diversification strategy.
Strategic analysis of diversified companies builds on the methodology used for singlebusiness companies discussed in Chapters 3 and 4 but utilizes tools that streamline the
overall process. The procedure for evaluating the pluses and minuses of a diversified
company’s strategy and deciding what actions to take to improve the company’s
performance involves six steps:
1. Assessing the attractiveness of the industries the company has diversified into.
2. Assessing the competitive strength of the company’s business units.
3. Evaluating the extent of cross-business strategic fit along the value chains of the company’s
various business units.
4. Checking whether the firm’s resources fit the requirements of its present business lineup.
Page 165
5. Ranking the performance prospects of the businesses from best to worst and determining a
priority for allocating resources.
6. Crafting new strategic moves to improve overall corporate performance.
The core concepts and analytical techniques underlying each of these steps are discussed
further in this section of the chapter.
Step 1: Evaluating Industry Attractiveness
A principal consideration in evaluating the caliber of a diversified company’s strategy is
the attractiveness of the industries in which it has business operations. The more
attractive the industries (both individually and as a group) a diversified company is in,
the better its prospects for good long-term performance. A simple and reliable analytical
tool for gauging industry attractiveness involves calculating quantitative industry
attractiveness scores based upon the following measures:
• Market size and projected growth rate. Big industries are more attractive than small
industries, and fast-growing industries tend to be more attractive than slow-growing
industries, other things being equal.
• The intensity of competition. Industries in which competitive pressures are relatively
weak are more attractive than industries with strong competitive pressures.
• Emerging opportunities and threats. Industries with promising opportunities and
minimal threats on the near horizon are more attractive than industries with modest
opportunities and imposing threats.
• The presence of cross-industry strategic fit. The more the industry’s value chain and
resource requirements match up well with the value chain activities of other
industries in which the company has operations, the more attractive the industry is
to a firm pursuing related diversification. However, cross-industry strategic fit may
be of no consequence to a company committed to a strategy of unrelated
diversification.
Resource requirements. Industries having resource requirements within the
company’s reach are more attractive than industries where capital and other
resource requirements could strain corporate financial resources and organizational
capabilities.
• Seasonal and cyclical factors. Industries where buyer demand is relatively steady yearround and not unduly vulnerable to economic ups and downs tend to be more
attractive than industries with wide seasonal or cyclical swings in buyer demand.
• Social, political, regulatory, and environmental factors. Industries with significant
problems in such areas as consumer health, safety, or environmental pollution or
that are subject to intense regulation are less attractive than industries where such
problems are not burning issues.
• Industry profitability. Industries with healthy profit margins are generally more
attractive than industries where profits have historically been low or unstable.
• Industry uncertainty and business risk. Industries with less uncertainty on the horizon
and lower overall business risk are more attractive than industries whose prospects
for one reason or another are quite uncertain.
Each attractiveness measure should be assigned a weight reflecting its relative
importance in determining an industry’s attractiveness; it is weak methodology to Page
166 assume that the various attractiveness measures are equally important. The
intensity of competition in an industry should nearly always carry a high weight (say,
0.20 to 0.30). Strategic-fit considerations should be assigned a high weight in the case
of companies with related diversification strategies; but for companies with an unrelated
diversification strategy, strategic fit with other industries may be given a low weight or
even dropped from the list of attractiveness measures. Seasonal and cyclical factors
generally are assigned a low weight (or maybe even eliminated from the analysis) unless
a company has diversified into industries strongly characterized by seasonal demand
and/or heavy vulnerability to cyclical upswings and downswings. The importance
weights must add up to 1.0.
Next, each industry is rated on each of the chosen industry attractiveness measures,
using a rating scale of 1 to 10 (where 10 signifies high attractiveness and 1
signifies low attractiveness). Weighted attractiveness scores are then calculated by
multiplying the industry’s rating on each measure by the corresponding weight. For
example, a rating of 8 times a weight of 0.25 gives a weighted attractiveness score of
2.00. The sum of the weighted scores for all the attractiveness measures provides an
overall industry attractiveness score. This procedure is illustrated in Table 8.1.
•
Industry
Attractive
ness
Measure
Market size
and
projected
growth rate
Importance/W
eight
Industry
A
Rating/Sc
ore
Industry
B
Rating/Sc
ore
Industry
C
Rating/Sc
ore
Industry
D
Rating/Sc
ore
0.10
8/0.80
5/0.50
2/0.20
3/0.30
Intensity of
competition
0.25
8/2.00
7/1.75
3/0.75
2/0.50
Emerging
opportunitie
s and threats
0.10
2/0.20
9/0.90
4/0.40
5/0.50
Crossindustry
strategic fit
0.20
8/1.60
4/0.80
8/1.60
2/0.40
Resource
requirement
s
0.10
9/0.90
7/0.70
5/0.50
5/0.50
Seasonal
and cyclical
influences
0.05
9/0.45
8/0.40
10/0.50
5/0.25
Societal,
political,
regulatory,
and
environmen
tal factors
0.05
10/0.50
7/0.35
7/0.35
3/0.15
Industry
profitability
0.10
5/0.50
10/1.00
3/0.30
3/0.30
Industry
uncertainty
and
business
risk
0.05
5/0.25
7/0.35
10/0.50
1/0.05
Sum of the
assigned
weights
1.00
7.20
6.75
Overall
weighted
industry
attractive
ness
scores
5.10
TABLE 8.1
CALCULATING WEIGHTED INDUSTRY ATTRACTIVENESS SCORES
2.95
Rating scale: 1 = Very unattractive to company; 10 = Very attractive to company
Calculating Industry Attractiveness Scores
Two conditions are necessary for producing valid industry attractiveness scores using
this method. One is deciding on appropriate weights for the industry attractiveness
measures. This is not always easy because different analysts have different views about
which weights are most appropriate. Also, different weightings may be appropriate for
different companies—based on their strategies, performance targets, and financial
circumstances. For instance, placing a low weight on financial resource requirements
may be justifiable for a cash-rich company, whereas a high weight may be more
appropriate for a financially strapped company.
Page 167
The second requirement for creating accurate attractiveness scores is to have sufficient
knowledge to rate the industry on each attractiveness measure. It’s usually rather easy
to locate statistical data needed to compare industries on market size, growth rate,
seasonal and cyclical influences, and industry profitability. Cross-industry fit and
resource requirements are also fairly easy to judge. But the attractiveness measure that
is toughest to rate is that of intensity of competition. It is not always easy to conclude
whether competition in one industry is stronger or weaker than in another industry. In
the event that the available information is too skimpy to confidently assign a rating
value to an industry on a particular attractiveness measure, then it is usually best to use
a score of 5, which avoids biasing the overall attractiveness score either up or down.
Despite the hurdles, calculating industry attractiveness scores is a systematic and
reasonably reliable method for ranking a diversified company’s industries from most to
least attractive.
Step 2: Evaluating Business-Unit
Competitive Strength
The second step in evaluating a diversified company is to determine how strongly
positioned its business units are in their respective industries. Doing an appraisal of
each business unit’s strength and competitive position in its industry not only reveals its
chances for industry success but also provides a basis for ranking the units from
competitively strongest to weakest. Quantitative measures of each business unit’s
competitive strength can be calculated using a procedure similar to that for measuring
industry attractiveness. The following factors may be used in quantifying the
competitive strengths of a diversified company’s business subsidiaries:
• Relative market share. A business unit’s relative market share is defined as the ratio of
its market share to the market share held by the largest rival firm in the industry,
with market share measured in unit volume, not dollars. For instance, if business A
has a market-leading share of 40 percent and its largest rival has 30 percent, A’s
relative market share is 1.33. If business B has a 15 percent market share and B’s
largest rival has 30 percent, B’s relative market share is 0.5.
• Costs relative to competitors’ costs. There’s reason to expect that business units with
higher relative market shares have lower unit costs than competitors with lower
relative market shares because of the possibility of scale economies and experience-
•
•
•
•
or learning-curve effects. Another indicator of low cost can be a business unit’s
supply chain management capabilities.
Products or services that satisfy buyer expectations. A company’s competitiveness
depends in part on being able to offer buyers appealing features, performance,
reliability, and service attributes.
Ability to benefit from strategic fit with sibling businesses. Strategic fit with other
businesses within the company enhances a business unit’s competitive strength and
may provide a competitive edge.
Number and caliber of strategic alliances and collaborative partnerships. Wellfunctioning alliances and partnerships may be a source of potential competitive
advantage and thus add to a business’s competitive strength.
Brand image and reputation. A strong brand name is a valuable competitive asset in
most industries.
Page 168
Competitively valuable capabilities. All industries contain a variety of important
competitive capabilities related to product innovation, production capabilities,
distribution capabilities, or marketing prowess.
• Profitability relative to competitors. Above-average returns on investment and large
profit margins relative to rivals are usually accurate indicators of competitive
advantage.
After settling on a set of competitive strength measures that are well matched to the
circumstances of the various business units, weights indicating each measure’s
importance need to be assigned. As in the assignment of weights to industry
attractiveness measures, the importance weights must add up to 1.0. Each business unit
is then rated on each of the chosen strength measures, using a rating scale of 1 to 10
(where 10 signifies competitive strength and a rating of 1 signifies competitive weakness).
If the available information is too skimpy to confidently assign a rating value to a
business unit on a particular strength measure, then it is usually best to use a score of 5.
Weighted strength ratings are calculated by multiplying the business unit’s rating on
each strength measure by the assigned weight. For example, a strength score of 6 times
a weight of 0.15 gives a weighted strength rating of 0.90. The sum of weighted ratings
across all the strength measures provides a quantitative measure of a business unit’s
overall market strength and competitive standing. Table 8.2 provides sample
calculations of competitive strength ratings for four businesses.
•
Competit
ive
Strength
Measure
Relative
market
share
Importance/W
eight
Business
A in
Industry
A
Rating/Sc
ore
Business
B in
Industry
B
Rating/Sc
ore
Business
C in
Industry
C
Rating/Sc
ore
Business
D in
Industry
D
Rating/Sc
ore
0.15
10/1.50
1/0.15
6/0.90
2/0.30
Costs
relative to
competitor
s’ costs
0.20
7/1.40
2/0.40
5/1.00
3/0.60
Ability to
match or
beat rivals
on key
product
attributes
0.05
9/0.45
4/0.20
8/0.40
4/0.20
Ability to
benefit
from
strategic
fit with
sister
businesses
0.20
8/1.60
4/0.80
4/0.80
2/0.60
Bargainin
g leverage
with
suppliers/
buyers;
caliber of
alliances
0.05
9/0.45
3/0.15
6/0.30
2/0.10
Brand
image and
reputation
0.10
9/0.90
2/0.20
7/0.70
5/0.50
Competiti
vely
valuable
capabilitie
s
0.15
7/1.05
2/0.30
5/0.75
3/0.45
Profitabilit
y relative
to
competitor
s
0.10
5/0.50
1/0.10
4/0.40
4/0.40
Sum of
the
assigned
weights
1.00
Overall
weighted
competiti
ve
strength
scores
7.85
2.30
5.25
3.15
TABLE 8.2
CALCULATING WEIGHTED COMPETITIVE STRENGTH SCORES FOR A DIVERSIFIED
COMPANY’S BUSINESS UNITS
Rating scale: 1 = Very weak; 10 = Very strong
Using a Nine-Cell Matrix to Evaluate the Strength of a Diversified Company’s
Business Lineup
The industry attractiveness and business strength scores can be used to portray the
strategic positions of each business in a diversified company. Industry attractiveness is
plotted on the vertical axis and competitive strength on the horizontal axis. A nine-cell
grid emerges from dividing the vertical Page 169axis into three regions (high, medium,
and low attractiveness) and the horizontal axis into three regions (strong, average, and
weak competitive strength). As shown in Figure 8.3, high attractiveness is associated
with scores of 6.7 or greater on a rating scale of 1 to 10, medium attractiveness with
scores of 3.3 to 6.7, and low attractiveness with scores below 3.3. Likewise, high
competitive strength is defined as a score greater than 6.7, average strength as scores of
3.3 to 6.7, and low strength as scores below 3.3. Each business unit is plotted on the ninecell matrix according to Page 170its overall attractiveness and strength scores, and then
shown as a “bubble.” The size of each bubble is scaled to what percentage of revenues the
business generates relative to total corporate revenues. The bubbles in Figure 8.3 were
located on the grid using the four industry attractiveness scores from Table 8.1 and the
strength scores for the four business units in Table 8.2.
FIGURE 8.3 A Nine-Cell Industry Attractiveness–Competitive Strength Matrix
The locations of the business units on the attractiveness–competitive strength matrix
provide valuable guidance in deploying corporate resources. In general, a diversified
company’s best prospects for good overall performance involve concentrating corporate
resources on business units having the greatest competitive strength and industry
attractiveness. Businesses plotted in the three cells in the upper left portion of the
attractiveness–competitive strength matrix have both favorable industry attractiveness
and competitive strength and should receive a high investment priority. Business units
plotted in these three cells (such as business A in Figure 8.3) are referred to as “grow
and build” businesses because of their capability to drive future increases in shareholder
value.
Next in priority come businesses positioned in the three diagonal cells stretching from
the lower left to the upper right (businesses B and C in Figure 8.3). Such businesses
usually merit medium or intermediate priority in the parent’s resource allocation
ranking. However, some businesses in the medium-priority diagonal cells may have
brighter or dimmer prospects than others. For example, a small business in the upper
right cell of the matrix (like business B), despite being in a highly attractive industry,
may occupy too weak a competitive position in its industry to justify the investment and
resources needed to turn it into a strong market contender. If, however, a business in
the upper right cell has attractive opportunities for rapid growth and a good potential
for winning a much stronger market position over time, management may designate it
as a grow and build business—the strategic objective here would be to move the business
leftward in the attractiveness–competitive strength matrix over time.
Businesses in the three cells in the lower right corner of the matrix (business D in Figure
8.3) typically are weak performers and have the lowest claim on corporate resources.
Such businesses are typically good candidates for being divested or else managed in a
manner calculated to squeeze out the maximum cash flows from operations. The cash
flows from low-performing/low-potential businesses can then be diverted to financing
expansion of business units with greater market opportunities. In exceptional cases
where a business located in the three lower right cells is nonetheless fairly profitable or
has the potential for good earnings and return on investment, the business merits
retention and the allocation of sufficient resources to achieve better performance.
The nine-cell attractiveness–competitive strength matrix provides clear, strong logic for
why a diversified company needs to consider both industry attractiveness and business
strength in allocating resources and investment capital to its different businesses. A
good case can be made for concentrating resources in those businesses that enjoy higher
degrees of attractiveness and competitive strength, being very selective in making
investments in businesses with intermediate positions on the grid, and withdrawing
resources from businesses that are lower in attractiveness and strength unless they offer
exceptional profit or cash flow potential.

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