Strategic Analysis & Choice Topic 5

S

S

TRATEGIC

TRATEGIC

A

A

NALYSIS

NALYSIS

&

&

C

C

HOICE

HOICE

Refer to Page 249, Azhar Kazmi Refer to Page 249, Azhar Kazmi

1.

1. Strategic AnalyStrategic Analysis and Csis and Choice -hoice

-meaning

meaning

2.

2. Corporate Level Corporate Level Strategic AnalysStrategic Analysisis

3.

•

• Corporate level analysisCorporate level analysis – –

•

•

BCG Matrix

BCG Matrix

•

GE nine cell Matrix

GE nine cell Matrix

•

•

Hofer’s

Hofer’s

Product Market Evolution

Product Market Evolution

•

•

Shell Directional Policy Matrix

Shell Directional Policy Matrix

•

• Industry level analysis -Industry level analysis

-•

•

• Corporate level analysisCorporate level analysis – –

•

•

BCG Matrix

BCG Matrix

•

GE nine cell Matrix

GE nine cell Matrix

•

•

Hofer’s

Hofer’s

Product Market Evolution

Product Market Evolution

•

•

Shell Directional Policy Matrix

Shell Directional Policy Matrix

•

• Industry level analysis -Industry level analysis

-•

P

P

ROCESS

ROCESS

OF

OF

S

S

TRATEGIC

TRATEGIC

C

C

HOICE

HOICE



 Essentially a decision Making ProcessEssentially a decision Making Process – –

1.

1. Setting objectivesSetting objectives

2.

2. Generating alternativesGenerating alternatives

3.

3. Choosing one/more alternatives that will help theChoosing one/more alternatives that will help the

organization achieve its objectives in the best possible organization achieve its objectives in the best possible manner

manner

4.

4. Implementing the chosen alternativeImplementing the chosen alternative

In order to make this choice from among the

In order to make this choice from among the

alternatives the decision maker has to set certain

alternatives the decision maker has to set certain

criteria on which he accepts / rejects the

criteria on which he accepts / rejects the

alternatives



 These Criteria are the selection factorsThese Criteria are the selection factors



 Act as guides to decision-making & simplify the processAct as guides to decision-making & simplify the process

of selection of selection



 Definition of Strategic ChoiceDefinition of Strategic Choice  – – “the“the decision to selectdecision to select

from among the Grand strategies considered, the from among the Grand strategies considered, the strategy which will best meet the

strategy which will best meet the enterprise’senterprise’s objectives.objectives.””

The decision involves The decision involves – –

1.

1. Focussing on a few alternativesFocussing on a few alternatives 2.

2. Considering the selection of factorsConsidering the selection of factors 3.

3. Evaluating the alternatives against these criteriaEvaluating the alternatives against these criteria 4.

4. And making an actual choiceAnd making an actual choice

Refer to page

Refer to page 350, Azhar Kazmi to350, Azhar Kazmi to explain the above points in detail explain the above points in detail

C

ORPORATE

L

EVEL

A

NALYSIS

 Analysis focuses on what should a corporate entity do

regarding the several businesses that are there in its portfolio ….

Corporate Level Strategic Analysis –

 Treats a corporate entity as constituting a portfolio of

businesses under a corporate umbrella

 Analysis focuses on the question of what should a corporate

entity do regarding the several businesses that are there in its portfolio

 Strategic alternatives constitute the Grand Strategies  –

Stability, Expansion, Retrenchment & Combination

 Relevant to the case of a diversified corporation which has

W

HAT IS

C

ORPORATE

P

ORTFOLIO

A

NALYSIS

?

 A set of techniques that evolved during the mid 1960s &

became a „Management Fad’ 

 Presently these techniques are useful & accepted to set a

criteria – normative as well as descriptive

 Assist expert strategists in exercising a strategic choice

Fad - a custom, style, etc. that many people are interested in for a short time; passing fashion; craze

D

EFINITION OF

C

ORPORATE PORTFOLIO

ANALYSIS

 A set of techniques that help strategists in taking strategic

decisions with regard to individual products/ businesses in a

firm’s portfolio

 Primarily used for Competitive analysis & corporate strategic

planning in multi product & multi business firms

Advantages –

•Resources could be channelized at corporate level to those business that possess the greatest potential

B

OSTON

C

ONSULTING

G

ROUP

M

ATRIX

(BCG),

 Graphic representation of an Organization to examine the

different businesses in its portfolio on the basis of their Relative Market shares & the Industry Growth rates

BCG M

ATRIX

 Developed by BRUCE HENDERSON of the BOSTON

CONSULTING GROUP in 1970

 According to this technique, different businesses/ 

products could be classified as low or high performers depending upon their industry growth rate & relative market share

Each of the cells represent a particular type of business

The company’s business units can be classified into four

categories/

cells:- Stars 

 Question marks   Cash cows 

 Dogs 

 The vertical axis represents the rate of growth in

sales in percentage for a particular industry

 The horizontal axis denotes the relative market

R 

ELATIVE 

M 

ARKET 

S 

HARE 

Percentage of the total market that is being serviced by your company, measured either in revenue (income) terms or unit volume terms

• RMS = Business unit sales this year

Leading rival sales this year

• The higher your market share, the higher proportion of

MARKET GROWTH RATE 

Used as a measure of a market’s attractiveness

 MGR = Individual sales - individual sales

this year last year Individual sales last year

 Markets experiencing high growth are ones where

the total market share available is expanding, and

there’s plenty of opportunity for everyone to make

STARS 

H 

IGH GROWTH 

, H 

IGH MARKET  SHARE 

 This phase corresponds to the growth phase of the PLC  Leaders in business

 Require heavy investment to maintain its large market

share

 Leads to large amount of cash consumption & cash

generation

 Company pursues an expansion strategy to establish a

strong competitive position  – “to have a star

business”

CASH COWS 

L

OW GROWTH 

, H 

IGH MARKET  SHARE 

 These are mature businesses (PLC) & often the stars of

yesterday

 Generate more cash than required  – The cash generation

exceeds the reinvestment

 Hence, extract the profits by investing as little cash as

possible

 These businesses can adopt mainly Stability Strategies.

In a case where long-term prospects are bright, limited expansion could be adopted

QUESTION MARKS/ P 

C 

H 

, L

 Most businesses start off as question marks (PLC)

 Will absorb great amounts of cash if the market share

remains unchanged

 Are usually new products/ services with a good commercial

potential

 No single set of strategies can me used here – if the

company feels it can obtain a dominant market share it may select expansion strategies/ retrenchment may be a more realistic alternative

 Have the potential to become stars if enough investment

is made or become dogs if ignored

 Eg.  – Holiday resorts, Light commercial vehicles, home

DOGS 

S 

LOW GROWTH 

, L

OW MARKET  SHARE 

 Neither generate nor require large amounts of cash  Business is situated at a declining stage (PLC)

 Retrenchment strategies are suggested here  Do not have potential to bring in much cash

 Number of dogs in the company should be minimized

Example  – Cotton

Textiles, Jute,

B

ENEFITS

 Simple & easy to understand

 Helps to quickly & simply screen the opportunities. Helps

figure out how you can make the most of them

 Used to identify how corporate cash resources can best

be utilized to maximize the company’s future growth & profitability

P

ROBLEMS OF USING THE

BCG M

ATRIX

 Difficult, time-consuming, & costly to implement  Focuses only on current businesses

 Low share or niche businesses can be profitable too  High market share does not mean profits all the time

 When Airbus launched a new jet, Airbus A380, it gained a high

market share very quickly. But had to still cover very high development costs

 The main problem is that it oversimplifies a complex set of

GE N

INE

C

ELL

M

ULTIFACTOR

GE M

ODEL

 Originally developed by General Electric (GE) supported

by the consulting firm McKinsey & company

 Enlarged version of the BCG model

 GE Business Screen introduces a three by three matrix,

which now includes a medium category

 Company can appropriately rate its different businesses

for the purpose of Strategic Planning on the basis of 2 parameters –

1. Industry Attractiveness

 A large corporation may have many SBU's, which

essentially operate under the same strategic umbrella, but are distinctive & individual

 Example  – Microsoft SBU's are distributed into

operating systems, business software, consumer software and mobile & Internet technologies

I

NDUSTRY

A

TTRACTIVENESS

 Based on how strong is the firm in the industry

 Desire of every firm to stay in the most attractive industries

& excel through distinctive strengths

 Factors –

 Industry potential

 Current size of the industry  Market Growth rate

 Structure of the industry  Profitability of the industry

 The nature of competition and its diversity

 Impact of technology, the law, and energy efficiency  Environmental impact

C

OMPANY

‟

S

B

USINESS

S

TRENGTHS

 Business-strengths assessment factors –

 Current Market Share  Management profile

 Company’s Financial Solid Position

 Good Bargaining Position over Suppliers  High level of Technology Use

 Quality of products and services  R & D

 Growth rate

 Strong distribution network

 Differentiation strength - Branding and promotions success  Brand & Corporate image

 Efficiency

 Firm selects the factors relevant to its industry &

Industry Attractiveness High High Medium Medium Low Low Invest/Grow Selectivity  /earnings Harvest  /Divest Protect Position Invest to

Build Build_selectively

Build selectively Selectively manage for earnings Limited expansion or harvest Protect & refocus _Divest Manage for earnings

L

IMITATIONS

 Process highly subjective - Both selection & weighting of

factors

 There is no research to prove that there is a relationship

between market attractiveness and business position

 The interrelationships between SBU's, products, brands,

experiences or solutions is not taken into account

 This approach requires extensive data gathering

 The GE matrix offers a broad strategy but does not indicate

T

HE

S

HELL

D

IRECTIONAL

P

OLICY

M

ATRIX

Developed by Shell Chemicals, UK. Uses two

Parameters

 –

1. Business Sector prospects /prospects for sector

profitability/ Market Attractiveness

 Market Growth  Market Quality  Market Supply

2. Company’s Competitive Abilities

 Weak/ Unattractive

 Average

Weak Average Strong Strong Average Weak Market Leadership & Innovation

 Market Leader - major resources are focused upon the SBU

 Try harder - could be vulnerable over a longer period of time, but

fine for now

 Double or quit - gamble on potential major SBU's for the future  Growth - grow the market by focusing just enough resources

 Proceed with care - just like a cash cow, milk it & do not commit

any more resources

 Cash Generator - cash cow, milk here for expansion elsewhere  Phased withdrawal - move cash to SBU's with greater potential  Divest - liquidate or move these assets on a fast as you can

 Divestment Domain - Products falling in this area will probably be

losing money, not necessarily every year, but the losses in bad years will outweigh the gains in good years. It is unlikely that management will be surprised by specific activities falling into this area since poor performance should already be known

 Phased Withdrawal Domain - A product with an average to weak

position with unattractive market prospects or a weak position with average market prospects is unlikely to be earning any significant amounts of cash. The indicated strategy is to realise the value of the assets on a controlled basis to make the resources available for redeployment elsewhere.

 Diversification/Cash Generator Domain - A typical situation in this

matrix area is when the company has a product that is moving towards the end of its life cycle and is being replaced in the market by other products. No finance should be allowed for expansion, and so long as it is profitable, the opportunity should be used as a source of cash for other areas. Every effort should be made to maximise profits since this particular activity has no long-term future

 Growth - Investment should be made to allow the product to grow

with the market. Generally, the product will generate sufficient cash to be self-financing and should not be making demands on other corporate cash resources

 Market Leadership & Innovation - The strategy should be to

maintain this position. At certain stages this may imply a need for resources which cannot be met entirely from funds generated by the product, (e.g. resources to expand capacity), although earnings should be above average

 Try Harder Domain - The implication is that the product can be

moved towards the leadership box by judicious application of resource. In these circumstances the company should certainly consider making available resources in excess of what the product can generate

 Double or Quit Domain - Tomorrow’s breadwinners among today’s

R&D projects may come from this area. Putting the strategy simply, those with the best prospects should be selected for full backing and development; the rest should be abandoned

 Proceed with Care Domain - In this position, some investments

may be justified but major investments should be made with extreme caution.

HOFER‟S METHOD OF

BUSINESS PORTFOLIO

ANALYSIS

B

ACKGROUND



The 15 cell matrix was proposed by Charles W.

Hofer and Dan Schendel, developed in the late

1970s



It considers the stages of development of the

product/ market & the competitive position/

market evolution of different businesses in

a

company’s

corporate portfolio

What is the Purpose of

conducting an Analysis

for

Strategic

Planning?????

1) To identify the major opportunities and

threats a business unit faces in the future

2) to identify the skills around which it can

develop

a

strategy

to

exploit

the

opportunities and negotiate around the

threats

CRITICISMS FOR G.E MATRIX

 According to Hofer and Schendel  - the major weakness

with the GE Multi-factor matrix was that it didn‟t

effectively depict the positions of new businesses that are just starting to grow in new industries

 Hence, in that case, it is preferable to use a fifteen-cell

matrix

 Here businesses are plotted in terms of their

competitive position & their stage of product/market evolution".

 Thus, Hofer  developed the - Product/Market 

T

HE

A

PPROACH

• Hofer-Schendel ascertain that four steps have to be undertaken to determine a basic strategic position

• This in turn determines the investment strategy of the  business 

T

HE FOUR STEPS ARE

-1. Short-term financial condition & health of company

must be determined - to assess whether it is a feasible entity to grow/ likely to go bankrupt

2. Relative competitive position of the business must be

ascertained

3. Necessary to determine the position of evolution of

the market that the business competes in - This will help decide increasing, growth / profit of the business

4. A plot is then made of the business’s basic strategic

LIFE-CYCLE MARKET

EVOLUTION MATRIX

STAGE OF INDUSTRY EVOLUTION

The business unit competitive position

Strong Average Weak

The Life-Cycle Portfolio Matrix Development Growth Competitive shakeout Maturity Decline Saturation    T     h   e    I    n    d    u    s    t    r    y     ’   s    s    t    a    g    e    i    n    t     h   e    e    v    o     l   u    t    i    o    n    a    r    y     l   i     f   e    c    y    c     l   e