Strategic Management Attractiveness test

Diversification in the corporate world refers to the business ventures a company undertakes to improve its performance and, consequently, shareholder value. Shareholder value increases because a diverse group of companies under the auspices of a single entity can outperform independent, stand-alone companies. The goal is to achieve a performance advantage of 1+1=3. Good earnings prospects and favorable financial conditions are some of the factors motivating companies to diversify. There is also diversification with three main forms. Internal startups, acquisitions and strategic partnerships. Three diversification tests determine the success or failure of the new diversification test. The three tests are the attractiveness test, the cost-of-entry test, and the better-off test. However, for this research, the study is going to look at what does the industry attractiveness test involve in evaluating a diversified company’s business lineup, and also look at the relevance of the attractiveness test for the diversified company. The ultimate aim of the industry attractiveness test is to ensure that the diversification creates shareholder value by having a high return on investment. The diversification cannot create shareholder value if the new industries do not have favorable structures that support returns that exceed the cost of capital. Such gains can only be realized if the company restructures to meet the demands of the market or gain a sustainable competitive advantage (Palepu, 1985). Industry attractiveness needed to be evaluated in three perspectives; attractiveness of individual industry on its own, the attractiveness of each industry compared to the others, and the attractiveness of all the industries as a corporate. Some of the industry attractiveness indicators include; market size and the prospect of growth, industry profitability, the intensity of competition, and resource requirements (Rumelt, 1982). Once the issues above have been utilized, the industry can exploit its competitive strength to its advantage and realize positive shareholder value. However, it is important to know that industry need not be attractive before diversification (Chandler et al., 1994). In fact, a company might gain a lot by entering before the industry showing its maximum potential. The diversification can then change the sector’s infrastructure.

It is important to have the industry attractiveness test in evaluating a diversified company’s business lineup. The primary importance of the attractiveness test is the strategy implications on the diversification (Freeman, 2010). Business units with high industry attractiveness score and high competitive strength scores will be given top investment priority. These companies guarantee a high return on investment to the diversified corporate and therefore will be given strategic importance that ensures that the firm grows. Subsequently, there are those business units with an intermediate score; they have a medium industry attractiveness score and medium competitive strength score. These companies will be given medium investment priority. The corporate invests just in maintaining status quo. The medium businesses come in handy when there is instability in the top performing markets. Lastly, there are those companies with small industry attractiveness score and low competitive strength score. The businesses can be overhauled by withdrawing resources unless they have unique have potential.

The study has looked at the attractiveness test concerning the diversification of a company business. Attractiveness test is one of the core factors to be considered in ensuring that the goal of diversification (creating shareholder value) is achieved. The test is important in strategizing for the corporate. It ensures that resources are put in businesses that are profitable and support growth.

References

Chandler, G., & Hanks, S. (1994). Market attractiveness, resource-based capabilities, venture strategies, and venture performance. Journal of business venturing, 9(4), 331-349.

Freeman, E. (2010). Strategic management: A stakeholder approach. Cambridge University Press.

Palepu, K. (1985). Diversification strategy, profit performance and the entropy measure. Strategic management journal, 6(3), 239-255.

Rumelt, R. (1982). Diversification strategy and profitability. Strategic management journal, 3(4), 359-369.