CHAPTER 10

EVALUATING THE
STRATEGIES OF
DIVERSIFIED COMPANIES
Screen graphics created by:
Jana F. Kuzmicki, PhD, Mississippi University for Women
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Chapter Outline
Identify Present Corporate Strategy
Evaluate a Diversified Companys Strategy
Rating the Relative Attractiveness of Each

Industry
Rating the Competitive Strength of Each

Business
Why Diversification Efforts Can Fail

Rank Business Units Based on Performance

Crafting a Corporate Strategy -Key Issues

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Building Shareholder Value: Questions to

Ask About a Diversified Company
1. How attractive is the group of businesses the
company has diversified into?
2. How good is the firms overall performance
outlook in the years ahead with these
businesses?
3. If previous two answers arent satisfactory,
what should the firm do to realign its
business lineup?
Divest unattractive businesses?
Strengthen positions of remaining ones?
Acquire new businesses?
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How to Evaluate a
Diversified Companys Strategy
Step 1:
1 Identify present corporate strategy
Step 2:
2 Evaluate long-term attractiveness of
each industry firm is in
Step 3:
3 Evaluate competitive strength of firms
business units
Step 4:
4 Apply strategic fit test
Step 5:
5 Apply resource fit test
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How to Evaluate a
Diversified Companys Strategy
Step 6: Rank business units based on
historical performance and future
prospects
Step 7: Rank business units in terms of
priority for resource allocation and
decide on general strategic posture
Step 8: Craft new strategic moves to
improve overall company
performance
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Procedure: Rating the Relative

Attractiveness of 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 (use scale of 1 to 10)
Step 4: Calculate weighted ratings; sum to get an
overall industry attractiveness rating for
each industry
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Example: Rating Industry Attractiveness

Weight

Attractiveness
Rating

Weighted
Industry Rating

Market size and projected growth

0.10

0.50

Intensity of competition

0.25

2.00

Strategic fits and resource fits with

other industries in portfolio
Resource requirements

0.15

0.75

0.15

1.05

Emerging industry opportunities and

threats
Seasonal and cyclical influences

0.10

0.60

0.05

0.20

Social, political, regulatory, and

environmental factors
Industry uncertainty and business
risk
Sum of weights

0.10

0.20

0.10

0.50

Industry Attractiveness Factor

Industry attractiveness rating

1.00

5.80

Rating Scale: 1 = Very unattractive; 5 = Average; 10 = Very attractive

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Procedure: Rating the Competitive

Strength of 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 (use scale of 1 to 10)
Step 4: Calculate weighted ratings; sum to get an
overall strength rating for each business
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Example: Rating a Business Units

Competitive Strength
Weight

Strength
Rating

Weighted
Strength Rating

Relative market share

0.15

0.75

Costs relative to competitors

0.20

1.60

Ability to match rivals on key product

attributes
Bargaining leverage

0.10

0.70

0.10

0.60

Strategic fit relationships

0.15

1.05

Technology and innovation

capabilities
How well resources match KSFs

0.10

0.40

0.10

0.70

Degree of profit relative to rivals

0.10

0.50

Competitive Strength Measure

Sum of weights

Competitive strength rating

1.00

6.30

Rating Scale: 1 = Very weak ; 5 = Average; 10 = Very strong

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Notes of Caution: Why

Diversification Efforts Can Fail
Transferring resource capabilities to new

businesses can be far more arduous and

expensive than expected
Trying to replicate a firms success in one

business and hitting a second home run in a

new business is easier said than done
Management can misjudge

difficulty of overcoming
resource strengths of rivals it
will face in a new business
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Step 6: Rank Business Units Based

on Financial Performance
Yardsticks for comparing performance

of different businesses
Sales growth
Profit growth
Contribution to company earnings
Return on capital employed in business
Cash flow generation
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Options: General Strategic Direction

Invest and grow
Aggressive expansion
Fortify and defend
Protect current position

dir Our
wil ectio
lb n
e.
.

Overhaul and reposition

Make major strategy changes
Harvest or divest
Gradual market retreat
Spin off business as independent company
Sell business
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Step 8: Crafting a Corporate Strategy

-Key Issues
Are enough businesses in attractive industries?
Is the number of mature or declining businesses

so great that corporate growth will be sluggish?

Are businesses overly vulnerable to

seasonal

influences or recession?
Are there too many average-to-weak businesses

in the companys business

make-up?
Is there ample strategic fit among the businesses?

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Step 8: Crafting a Corporate Strategy

-Key Issues (continued)
Is there ample resource fit among the

businesses?
Are there enough cash cows to finance

those cash hogs with potential to be star

performers?
Do core businesses generate dependable

profits and/or cash flow?

Does makeup of business portfolio put firm

in good future position?

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