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Building Shareholder Value: The Questions to Ask

Building Shareholder Value: The Questions to Ask. 1. How attractive is the group of businesses the company has diversified into? 2. How good is the firm’s overall performance outlook in the years ahead with these businesses?

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Building Shareholder Value: The Questions to Ask

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  1. Building Shareholder Value: The Questions to Ask 1. How attractive is the group of businesses the company has diversified into? 2.How good is the firm’s overall performance outlook in the years ahead with these businesses? 3.If previous two answers aren’t satisfactory,what should the firm do in the way of realigning its business lineup? • Divest unattractive businesses? • Strengthen positions of remaining ones? • Acquire new businesses?

  2. How to Evaluate a Diversified Company’s Strategy Step 1:Identify present corporate strategy Step 2:Evaluate long-term attractiveness of each industry firm is in Step 3:Evaluate competitive strength of firm’s business units Step 4:Apply strategic fit test Step 5:Apply resource fit test

  3. How to Evaluate a Diversified Company’s 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

  4. Step 2: EvaluateIndustry Attractiveness Attractiveness of each industry in portfolio Each industry’s attractiveness relative to the others Attractiveness of all industries as a group

  5. Industry Attractiveness Factors • Market size and projected growth • Intensity of competition • Emerging opportunities and threats • Seasonal and cyclical factors • Resource requirements • Strategic fits and resource fits with present businesses • Industry profitability • Social, political, regulatory, and environmental factors • Degree of risk and uncertainty

  6. 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

  7. Industry Attractiveness Factor Weight Attractiveness Rating Weighted Industry Rating Market size and projected growth 0.15 5 0.75 Intensity of competition 0.30 8 2.40 Emerging industry opportunities and threats 0.05 2 0.10 Social, political, regulatory, and environmental factors 0.05 6 0.30 Seasonality and cyclical influences 0.05 4 0.20 Resource requirements 0.15 7 1.05 Industry profitability 0.15 4 0.60 Degree of risk and uncertainty 0.10 5 0.50 Sum of weights 1.00 Industry attractiveness rating 5.90 Example: Rating IndustryAttractiveness Rating Scale: 1 = Unattractive; 10 = Very attractive

  8. 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 eachfactor (use scale of 1 to 10) Step 4:Calculate weighted ratings; sum to get an overall attractiveness rating for each business

  9. Competitive Strength Measure Weight Strength Rating Weighted Strength Rating Relative market share 0.20 5 1.00 Ability to compete on cost 0.25 8 2.00 Ability to match rivals on quality or service 0.05 2 0.10 0.10 6 0.60 Technology/innovation capabilities 0.05 4 0.20 How well resources match KSFs 0.15 7 1.05 Brand name reputation/image 0.10 4 0.40 Degree of profit relative to rivals 0.10 5 0.50 Sum of weights 1.00 Competitive strength rating 5.85 Example: Rating a Business Unit’s Competitive Strength Bargaining leverage Rating Scale: 1 = Weak ; 10 = Strong

  10. Opportunity to combine purchasing activities & gain greater leverage with suppliers Opportunity to share technology, transfer technical skills, combine R&D Opportunity to combine sales & marketing activities, use common distribution channels, leverage use of a common brand name, and/or combine after-sale service No strategic fit opportunities Identifying Strategic Fits Among a Diversified Firm’s Business Units Value Chain Activities Inbound Logistics Technology Operations Sales and Marketing Distribution Service Business A Business B Business C Business D Business E

  11. Identifying AdditionalDiversification Opportunities • Related Diversification • Identify industries/businesses whose value chains have fits with value chains of present businesses • Identify industries/businesses whose resource requirements are well-matched to firm’s corporate resource capabilities • Unrelated Diversification • Find firms offering attractive financial returns regardless of industry

  12. Guidelines: Managing theCorporate Strategy Process • Not done all at once in comprehensive fashion • Approached a step at a time, emerging gradually • Begin with broad, intuitive concepts and then are fine-tuned as • More information is gathered • Formal analysis confirms or modifies emerging judgments about situation • Confidence and consensus build for the proposed strategic moves

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