Final answer:
Competitive strength scores are calculated to evaluate the market position and competitive capabilities of each business unit within a diversified company, using metrics such as the four-firm concentration ratio and the Herfindahl-Hirschman Index.
Step-by-step explanation:
The basic purpose of calculating competitive strength scores for each of a diversified company's business units is to assess their ability to compete in the market and identify how dominant they are within their respective industries. Metrics like the four-firm concentration ratio and the Herfindahl-Hirschman Index (HHI) are used for this purpose. The four-firm concentration ratio adds up the market shares of the four largest firms to understand the level of market concentration, while the HHI takes the market shares of all firms, squares them, and sums them up to get a more nuanced picture of market dominance. These tools are crucial for companies in understanding their market positions, for regulators and antitrust bodies when overseeing mergers and the competitive landscape, and for informing strategic decisions such as investment, mergers, and market entry. However, it's important to note that they rely on the assumption of a well-defined market and similar competitive conditions, which might not always be accurate. As a result, methods of analysis can evolve over time to better capture the complexities of market competition.