What is the industry attractiveness test? How is it used to evaluate a diversified company's business lineup? Why is it relevant?
What will be an ideal response?
The industry to be entered through diversification must offer an opportunity for profits and return on investment that is equal to or better than that of the company's present lineup of businesses-and this is known as industry attractiveness.
The test for gauging industry attractiveness involves calculating quantitative industry attractiveness scores based upon the following nine dimensions: (1) market size and projected growth rate; (2) intensity of competition; (3) emerging opportunities and threats; (4) presence of cross-industry strategic fit; (5) resource requirements; (6) seasonal and cyclical factors; (7) social, political, regulatory, and environmental factors; (8) industry profitability; (9) industry uncertainty and business risk. These dimensions are first assigned numbers from 1 to 10, and are then weighted to reflect their relative importance.
Two conditions are necessary for an industry attractiveness score to be relevant: (1) deciding on appropriate weights for the industry attractiveness measures, and (2) for diversified companies possessing portfolios of business that have strong cross-industry strategic fit.
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