bcg
TRANSCRIPT
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Grand Strategies
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Grand Strategies Grand strategies provide basic direction for strategic
actions. They are the basis for coordinated and sustained efforts
directed towards achieving long-term business objectives.
They indicate a time period over which long-term objectives are to be achieved.
Firms involved with multiple industries, businesses, product lines or customer groups usually combine several grand strategies.
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The fifteen grand principles are:1. Concentrated growth e.g. e-bay in online auction
2. Market development e.g. J&J catering to the adults, using sachets for market penetration
3. Product development e.g. personal care products from HUL, newer version of books,
4. Innovation
5. Horizontal integration
6. Vertical integration
7. Concentric diversification
8. Conglomerate diversification
9. Turnaround
10. Divestiture e.g. Sale of TOMCO by Tata, selling of cement division by L&T
11. Liquidation
12. Bankruptcy
13. Joint ventures
14. Strategic alliances
15. Consortia e.g. Mitsubishi, LG
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Innovation Innovation is needed since both consumer and industrial
markets expect periodic changes and improvements in the products offered.
Firms seeking to making innovation as their grand strategy seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product.
As the products enters the maturity stage these companies start looking for a new innovation.
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Innovation The underlining rationale is to create a new product life
cycle and thereby make similar existing products obsolete.
This strategy is different from the product development strategy in which the product life cycle of an existing product is extended.
• e.g. Polaroid which heavily promotes each of its new cameras until competitors are able to match its technological innovation; by this time Polaroid normally is prepared to introduce a dramatically new or improved product.
• Intel, 3M
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Turnaround Sometimes the profit of a company decline due to various
reasons like economic recession, production inefficiencies and innovative breakthrough by competitors.
In many cases the management believes that such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences.
This is known as turnaround strategy.
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Turnaround typically is begun with one or both of the following forms of retrenchment being employed either singly or in combination.
1. Cost reduction
• It is done by decreasing the workforce through employee attrition, leasing rather than purchasing equipment, extending the life of machinery, eliminating promotional activities, laying off employees, dropping items from a production line and discontinuing low-margin customers.
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2. Asset reduction
• This includes sale of land, buildings and equipment not essential to the basic activity of the firm.
Research have showed that turnaround almost always was associated with changes in top management.
New managers are believed to introduce new perspectives, raise employee morale and facilitate drastic actions like deep budgetary cuts in established programs.
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Turnaround situation The model begins with the depiction of external and
internal factors as causes of a firm's performance downturn.
When these factors continue to detrimentally impact the firm, its financial health is threatened.
Unchecked decline places the firm in a turnaround situation.
A turnaround situation represents absolute and relative to the industry declining performance of a sufficient magnitude to warrant explicit turnaround actions.
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Turnaround situation
A turnaround situation represents absolute and relative to the industry declining performance of a sufficient magnitude to warrant explicit turnaround actions.
Turnaround situations may be a result of years of gradual slowdown or months of sharp decline.
For a declining firm, stabilizing operations and restoring profitability almost always entail strict cost reduction followed by shrinking back to those segments of the business that have been the best prospects of attractive profit margins.
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Situation severity The urgency of the resulting threat to company survival
posed by the turnaround situation is known as situation severity.
Severity is the governing factor in estimating the speed with which the retrenchment response will be formulated and activated.
When severity is low stability can be achieved through cost reduction alone.
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Situation severity When severity is high cost reduction must be
supplemented with more drastic asset reduction measures.
Assets targeted for divestiture are those determined to be underproductive.
More productive resources are protected and will become the core business in the future plan of the company.
E.g . strategy adopted by Citibank
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Turnaround response
Turnaround response among successful firms typically include two strategic activities:
• Retrenchment phase
• Recovery phase
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Retrenchment phase
It consists of cost-cutting and asset-reducing activities. The primary objective of this process is to stabilize the
firm's financial condition. Firms in danger of bankruptcy or failure attempt to halt
decline through cost and asset reductions. It is very important to control the retrenchment process
in a effective and efficient manner for any turnaround to be successful.
After the stability has been attained through retrenchment, the next step of recovery phase begins.
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Recovery phase The primary causes of the turnaround situation will be
associated with the recovery phase. For firms that declined as a result of external problems,
turnaround most often has been achieved through creative new entrepreneurial strategies.
For firms that declined as a result of internal problem, turnaround has been mostly achieved through efficiency strategies.
Recovery is achieved when economic measures indicate that the firm has regained its predownturn levels of performance.
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Turnaround Strategy
Changing the Leadership
The Main The Main Steps of TurnaroundSteps of Turnaround
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Turnaround Strategy
Redefining the Strategic Focus
The Main The Main Steps of TurnaroundSteps of Turnaround
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Turnaround Strategy
Asset Sales and Closures
The Main The Main Steps of TurnaroundSteps of Turnaround
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Turnaround Strategy
Improving Profitability
The Main The Main Steps of TurnaroundSteps of Turnaround
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Turnaround Strategy
Acquisitions
The Main The Main Steps of TurnaroundSteps of Turnaround
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BCG Matrix &
GE Nine Cell Planning Grid
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BCG MATRIX– A concept developed by the Boston Consulting
Group that evaluates SBUs with respect to the dimension of business growth rate and market share.
– Mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage
– ALSO CALLED AS PORTFOLIO STRATEGY
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Reviewing the Corporate Portfolio
Portfolio Planning Identifying SBUs Assessing and Comparing SBUs
• Relative Market Share• Relative Growth Rate
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Formulating Business-Level Strategy
It is a strategy formulation within the strategic business unit in which the concern is how to compete.
The same three GRAND strategies (growth, stability, and retrenchment) apply at the business level, but they are accomplished through competitive actions rather than the acquisition or divestment of business divisions.
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Portfolio Strategy
26
BCG Matrix
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The BCG MatrixHigh
HighLow
Low
Ind
ust
ry G
row
th R
ate
Ind
ust
ry G
row
th R
ate
Relative Market ShareRelative Market Share
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High
HighLow
Low
Ind
ust
ry G
row
th R
ate
Ind
ust
ry G
row
th R
ate
Relative Market ShareRelative Market Share
Stars
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1. Stars(=High growth, high market share) The business has high market share compared to
competitors and it is doing business in high-growth market
Use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.
Frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold share, because the rewards will be a cash cow if market share is kept.
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High
HighLow
Low
Ind
ust
ry G
row
th R
ate
Ind
ust
ry G
row
th R
ate
Relative Market ShareRelative Market Share
The BCG Matrix
Cash Cows
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2.Cash Cows(=low growth, high market share)
– The market is not very attractive – low market growth rate, however the business has high market share compared to competitors.
Profits and cash generation should be high , and because of the low growth, investments needed should be low. Keep profits high
Foundation of a company
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High
HighLow
Low
Ind
ust
ry G
row
th R
ate
Ind
ust
ry G
row
th R
ate
Relative Market ShareRelative Market Share
The BCG Matrix
Dogs
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3. Dogs(=low growth, low market share)
– This business has low market share and operates in low-growth market.
Avoid and minimize the number of dogs in a company. Beware of expensive ‘turn around plans’. Deliver cash, otherwise liquidate
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High
HighLow
Low
Ind
ust
ry G
row
th R
ate
Ind
ust
ry G
row
th R
ate
Relative Market ShareRelative Market Share
The BCG Matrix
???? ????Question Marks
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Question Marks (= high growth, low market share)
– The business unit has low market share compared to competitors, however it is doing business in high-growth market.
– Have the worst cash characteristics of all, because high demands and low returns due to low market share
If nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, a dog.
Either invest heavily or sell off or invest nothing and generate Whatever cash it can. Increase market share or deliver cash.
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High
HighLow
Low
Ind
ust
ry G
row
th R
ate
Ind
ust
ry G
row
th R
ate
Relative Market ShareRelative Market Share
The BCG Matrix
???? ????Question Marks
Cash Cows
Dogs
Stars
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Analysis of Your Enterprise Position
Stars Cash Cows
Question Marks
Dogs
High growthHigh share
Low growthHigh share
High growthLow share
Low growthLow share
Business is likely to generate enough cash to be self sustaining.
Business can be used to support other business units.
defend & maintain
Business requires a lot of cash to maintain market share.
invest more cash
or, divest
Business is a cash trap.
focus on short term avoid risky project limited future
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Reviewing the Corporate Portfolio
Strategic Implications• Cash Surplus from Cash Cows Used to Support
Question Marks and Stars• Question Marks Divested• Exit Industry Where SBU is a Dog• Firm with Insufficient Cash Cows, Stars, or
Question Marks Should Consider Acquisitions and Divestments
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Limitations of B C G Model:
Defining a market, measuring share and growth rate difficult. In the matrix average growth rate & average market share not
recognized. The relationship between market share and profitability
underlying the BCG matrix – the experience curve effect -varies across industries and market segments.
The BCG matrix is not particularly helpful in comparing relative investment opportunities across different business units in the corporate portfolio.
Strategic evaluation of a set of business requires examination of more than relative market shares and market growth.
It oversimplifies the four classifications.
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G E nine cell planning grid
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Introduction GE came up with the multifactor portfolio matrix in the
1970’s for the assessment of their SBU’s.
It is similar to BCG matrix
Vertical axis represents industry attractiveness and the horizontal axis represents the company’s strength in the industry or business position
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G E Nine cell planning grid
The General Electrical company is highly admired for the sophistication, maturity& quality of its planning system.
It uses a 3×3 matrix called the General Electric’s Stoplight matrix to guide the allocation of resources.
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BUSINESS
STRENGTH
weak
average
strong
Industry AttractivenessHigh Medium Low
General Electric’s Nine-cell (multi-factor) Port-folio Matrix
0
1000
Invest/grow
Selectivity/earning
Harvest/divest
legend
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G E Nine cell planning grid This matrix calls for evaluating the business of a firm in
terms of two key uses: Business Strength : How strong is the firm vis-à-vis its
competitors ? Industry strength : What is the attractiveness or potential
of the industry ?
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G E’s Nine-cell Planning Grid:
Business Strength: Industry Attractiveness:
Relative market share Market Size and growth rate Profit margins Industry Profit margins Ability to compete on Competitive intensity
price and quality Seasonality Knowledge of customer Cyclical
and market Economies of scale Competitive strength and Technology
weaknesses Social, environmental, legal, Technological capabilities and human impacts Caliber of management
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G E Nine cell planning grid
The commitment of resources to various business is guided by how they are rated in terms of above two dimensions.
Business which are favorably placed justify substantial commitment of funds.
Business which are unfavorably placed call for divestment.
And business which are placed in between quality for modest investment.
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G E Nine cell planning grid
More advanced than BCG matrix in three ways:
Market growth is replaced be market attractiveness
Market share is replaced by competitive strength
GE uses 6 step approach (BCG-2*2, GE -3*3)
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Attractiveness include Broader range of factors other than market growth rate.
Depending on the product characteristics, different parameters can select to measure market attractiveness.
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Market attractiveness factors MARKET SIZE MARKET GROWTH MARKET PROFITABILITY PRICING TRENDS COMPETITIVE INTENSITY OPPORTUNITY TO DIFFERENTIATE PRODUCTS
AND SERVICES DISTRIBUTOIN STRUCTURE (EG: RETAIL, DIRECT,
WHOLESALE)
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Factors that affect competitive strength
STRENGTH OF ASSETS AND COMPETENCIES
RELATIVE BRAND STRENGTH
MARKET SHARE
CUSTOMER LOYALTY
RELATIVE COST POSITION
DISTRIBUTION STRENGTH
RECORD OF TECHNOLOGICAL AND OTHER INNOVATION
ACCESS TO FINANCIAL AND OTHER INVESTMENT RESOURCES
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Plotting the Information:
1. Select factors to rate the industry for each product line or business unit. Determine the value of each factor on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor.
Industry attractiveness = factor value1 x factor weighting1
+ factor value2 x factor weighting2
.
.
.
+ factor valueN x factor weighting N
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2. Select the key factors needed for success in each of the product line or business unit. Determine the value of each key factor in the criteria on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor.
Business strengths/competitive position = key factor value1 x factor weighting1
+ key factor value2 x factor weighting2
.
.
.
+ key factor value N x factor weighting N
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3. Plot each product line's or business unit's current position on a matrix.
4. The individual product lines or business units is identified by a letter and plotted as circles on the GE Business Screen.
5. The area of each circle is in proportion to the size of the industry in terms of sales. The pie slice within the circles depict the market share of each product line or business unit.
6. Plot the firm's future portfolio assuming that present corporate and business strategies remain unchanged. This is shown as an arrow which starts from the circle representing the current position and the tip of the arrow will be the tentative center of the future circle.
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Strategic Implications
• Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows:
1. Grow strong business units in:
– attractive industries
– average business units in attractive industries
– strong business units in average industries.
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1. Hold average business units in:
– average industries
– strong businesses in weak industries
– weak business in attractive industries.
2. Harvest weak business units in:
– unattractive industries
– average business units in unattractive industries
– weak business units in average industries.
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The McKinsey MatrixCompetitive PositionCompetitive Position
Ind
ust
ry A
ttra
ctiv
enes
sIn
du
stry
Att
ract
iven
ess
Good Medium PoorHigh
Medium
Low
Winner
Winner
Winner
ProfitProducer
AverageBusiness
QuestionMark
Loser
LoserLoser
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There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry.
GE business screen represents an improvement over the more simple BCG growth-share matrix.
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Limitations
• It presents a somewhat limited view by not considering interactions among the business units
• It neglects to address the core competencies leading to value creation
• Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.
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Protect positionInvest at maximumDigestible rateConcentrate effort on maintaining strength
Invest to buildBuild selectively on strengthsReinforce vulnerable areasChallenge for leadership
Build selectivelySeek ways to overcome weaknessesSpecialize around limited strengths
Build selectivelyInvest heavily in most attractive segmentsEmphasize profitability by raising productivity
Manage for earningsProtect existing business Concentrate investments in segments with good profits, low risk
Limited expansion
Rationalize operations
Protect and refocusManage for current earningsDefend strength
Manage for earnings- Protect position in most profitable segments
DivestSell at time that will maximize cash value cut fixed cost Avoid investment
Industry
attractiveness
high
medium
low
strong Average weak
competitive strength
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Strategies for SBU at different quadrants