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UNIT-3

STRATEGIES

GE - PORTFOLIO MATRIX Framework Summarized by Sam Mishra, MBA (MIT Sloan) This 3 x 3 matrix is an outgrowth of a framework pioneered by General Electric (GE) in the 1970s to assess its Strategic Business Units (SBUs) along two dimensions: industry attractiveness, and business strength. In the figure below, three possible values of each of these two dimensions are plotted, resulting in a nine-cell 3 x 3 matrix.

All business units of a firm can be represented by circles placed appropriately within the matrix. The size of the circle represents the industry / market size. The market share of the SBU is represented by the smaller sector within the circle. Thus, as you can see, this is a complex framework to evaluate an SBU along four dimensions: market attractiveness, market size, market share, and business strength. The cells in the nine-cell matrix are colored differently to categorize the matrix into five distinct zones of overall business attractiveness: high (green cell), medium-high (yellow cells), medium (ocean-blue cells), medium-low (pink cells), and low (red cell). The strength of this framework is based on the premise that to be successful, a firm should enter attractive markets / industries for which it has the needed business strengths to succeed. However, over-reliance on this framework may lead to undue neglect of existing businesses. SBU owners / managers will also be susceptible to manipulate the parameters so that their SBUs show up on the desired high or medium-high overall attractive zones. Thus, this framework should be used with caution while crafting strategy. The BCG Growth-Share Matrix The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth-share". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The



growth-share matrix thus maps the business unit positions within these two important determinants of profitability. BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption often is true because of the experience curve; increased relative market share implies that the firm is moving forward on the experience curve relative to its competitors, thus developing a cost advantage. A second assumption is that a growing market requires investment in assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indication of its cash generation and its cash consumption. Henderson reasoned that the cash required by rapidly growing business units could be obtained from the firm's other business units that were at a more mature stage and generating significant cash. By investing to become the market share leader in a rapidly growing market, the business unit could move along the experience curve and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix was born. The four categories are: DOGS:

Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash.

However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.

QUESTION MARKS:

Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is large net cash consumption.

A question mark (also known as a "problem child") has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows.

If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines.

Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share STARS:

http://www.netmba.com/strategy/experience-curve/



Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out.

If a star can maintain its large market share, it will become a cash cow when the market growth rate declines.

The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation. CASH COWS

As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume.

Such business units should be "milked", extracting the profits and investing as little cash as possible. Cash cows provide the cash required to turn question marks into market leaders, to cover the

administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders.

Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis. Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined soley by whether it had become the market leader during the period of high growth. While originally developed as a model for resource allocation among the various business units in a corporation, the growth-share matrix also can be used for resource allocation among products within a single business unit. Its simplicity is its strength - the relative positions of the firm's entire business portfolio can be displayed in a single diagram. Limitations The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are:

Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability.

The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage.

The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation's business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units. SWOT ANALYSIS SWOT analysis (alternately SLOT analysis) is a strategic planning method used to evaluate the Strengths, Weaknesses/Limitations, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. The technique is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies. Setting the objective should be done after the SWOT analysis has been performed.

http://en.wikipedia.org/wiki/Strategic_planning

http://en.wikipedia.org/wiki/Project

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Albert_S_Humphrey

http://en.wikipedia.org/wiki/Fortune_500



This would allow achievable goals or objectives to be set for the organization. Strengths: characteristics of the business, or project team that give it an advantage over others Weaknesses (or Limitations): are characteristics that place the team at a disadvantage relative to others Opportunities: external chances to improve performance (e.g. make greater profits) in the environment Threats: external elements in the environment that could cause trouble for the business or project

Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs. First, the decision makers have to determine whether the objective is attainable, given the SWOTs. If the objective is NOT attainable a different objective must be selected and the process repeated.

Internal and external factors

The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective. These come from within the company's unique value chain. SWOT analysis groups key pieces of information into two main categories:

Internal factors – The strengths and weaknesses internal to the organization. External factors – The opportunities and threats presented by the external environment to the

organization.

The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective. The factors may include all of the 4P's; as well as personnel, finance, manufacturing capabilities, and so on. The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position. The results are often presented in the form of a matrix.

http://en.wikipedia.org/wiki/Marketing_mix



SWOT analysis is just one method of categorization and has its own weaknesses. For example, it may tend to persuade companies to compile lists rather than think about what is actually important in achieving objectives. It also presents the resulting lists uncritically and without clear prioritization so that, for example, weak opportunities may appear to balance strong threats. It is therefore advisable to combine a SWOT analysis with portfolio analyses such as the GE/McKinsey matrix [2] or COPE analysis[3].

It is prudent not to eliminate too quickly any candidate SWOT entry. The importance of individual SWOTs will be revealed by the value of the strategies it generates. A SWOT item that produces valuable strategies is important. A SWOT item that generates no strategies is not important.

Use of SWOT analysis

The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has

been defined. Examples include: non-profit organizations, governmental units, and individuals. SWOT analysis may also be used in pre-crisis planning and preventive crisis management. SWOT analysis may also be used in creating a recommendation during a viability study/survey.

Using SWOT to analyse the market position of a small management consultancy with specialism in HRM.[8]

Strengths Weaknesses Opportunities Threats

Reputation in marketplace Shortage of consultants at operating level rather than partner level

Well established position with a well defined market niche

Large consultancies operating at a minor level

Expertise at partner level in HRM consultancy

Unable to deal with multi-disciplinary assignments because of size or lack of ability

Identified market for consultancy in areas other than HRM

Other small consultancies looking to invade the marketplace

Strategy: PEST analysis

PEST analysis is concerned with the key external environmental influences on a business.

The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business.

Identifying PEST influences is a useful way of summarising the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.

The table below lists some possible factors that could indicate important environmental influences for a business under the PEST headings:

Political / Legal Economic Social Technological

Environmental regulation and protection

Economic growth (overall; by industry

Income distribution (change in distribution of disposable

Government spending on research

http://en.wikipedia.org/wiki/SWOT_analysis#cite_note-GE.2FMcKinsey-1

http://en.wikipedia.org/wiki/SWOT_analysis#cite_note-COPE_analysis-2

http://en.wikipedia.org/wiki/Non-profit_organizations

http://en.wikipedia.org/wiki/Crisis_management

http://en.wikipedia.org/wiki/Viability_study

http://en.wikipedia.org/wiki/SWOT_analysis#cite_note-arms-7



sector) income;

Taxation (corporate; consumer) Monetary policy (interest rates)

Demographics (age structure of the population; gender; family size and composition; changing nature of occupations)

Government and industry focus on technological effort

International trade regulation Government spending (overall level; specific spending priorities)

Labour / social mobility New discoveries and development

Consumer protection Policy towards unemployment (minimum wage, unemployment benefits, grants)

Lifestyle changes (e.g. Home working, single households)

Speed of technology transfer

Employment law Taxation (impact on consumer disposable income, incentives to invest in capital equipment, corporation tax rates)

Attitudes to work and leisure

Rates of technological obsolescence

Government organisation / attitude

Exchange rates (effects on demand by overseas customers; effect on cost of imported components)

Education Energy use and costs

Competition regulation Inflation (effect on costs and selling prices)

Fashions and fads Changes in material sciences

Stage of the business cycle (effect on short-term business performance)

Health & welfare Impact of changes in Information technology

Economic "mood" - consumer confidence

Living conditions (housing, amenities, pollution)

Internet!

CORPORATE LEVEL STRATEGY:

COMBINATION STABILITY RETRENCHMENT

No change/Do-nothing Turnaround Simultaneous

Profit Liquidation Sequential

Pause/with caution Divestment Simultaneous

Corporate level strategies



EXPANSION and sequential

Market Penetration Vertical Concentric/related International Mergers & acquisition

Market development Horizontal 1.Marketing related Multidomestic Joint venture

Product development 2.Technology related Global Strategic Alliances

3. Marketing and Translational

Technology related

Conglomerate/Unrelated

Meaning of Corporate Strategy:

Corporate strategy helps to exercise the choice of direction that an organization adopts. There could be a small business firm involved in a single business or a large, complex and diversified conglomerate with several different businesses. The corporate strategy in both these cases would be about the basic direction of the firm as a whole.

Stability strategies:

The corporate strategy of stability is adopted by an organization when it attempts an incremental improvement of its performance by marginally changing one or more of its businesses in terms of their respective customer groups, customer functions and alternative technologies respectively.

Types of stability

No change Strategy

Profit Strategy

Paused/Proceed with Caution Strategy

Expansion strategies:

The corporate strategy of expansion is followed when an organization aims at high growth by substantially broadening the scope of one or more of its businesses in terms of their respective customer groups, customer functions and alternative technologies singly or jointly in order to improve its overall performance.

Types of Expansion Strategy

Concentration

Integration

Concentration Integration Diversificatio

n

Internationalization Co-operation



Diversification

Internationalization

Cooperation

Concentration

Expansion concentration is often the first preference strategy for company. The simple reason for this is that a company that familiar with an industry would naturally like to invest more in known business rather than unknown ones.

Types of Concentration Strategies

Market Penetration

Market Development

Product Development

Advantage of Concentration Strategies

Concentration involves fewer organizational changes.

It is less threatening and more comfortable saying with present business

Disadvantages of Concentration Strategies

Concentration strategies are heavily dependent on the industries So adverse condition in an industry can also companies if they are intensely concentrated

Integration

Integration basically means combining activities on the basis of the value chain related to the present activity of a company.

Types of integration

Vertical integration

Vertical Forward Integration

Vertical Backward Integration

Horizontal Integration

1. Horizontal integration:

A firm is said to follow horizontal integration if it acquires another firm that produces the same type of products the same type products with similar production process/marketing practices.

2. Vertical integration:

Vertical integration means the degree to which a firm operates vertically in multiple locations on an industry’s value chain from extracting raw materials to manufacturing



and retailing. Vertical integration occurs when a company produces its own inputs or disposes of its own outputs.

Backward Integration: Backward integration refers to performing a function previously provided by a supplier.

Forward integration: Forward integration means performing a function previously provided by a retailer.

Diversification: Diversification is considered to be a complex one because it involves a simultaneous departure from current business, familiar products and familiar markets. Firms choose diversification when the growth objectives are very high and it could not be achieved within the existing product/market scope. Types of diversification:

Related diversification: In related diversification the firm enters into a new business activity, which is linked in a company’s existing business activity by commonality between one or more components of each activity’s value chain.

Unrelated diversification: In unrelated diversification, the firm enters into new business area that has no obvious connection with any of the existing business. It is suitable, if the company “score functional skills are highly specialized and have few applications outside the company’s core business.

Concentric diversification: Concentric diversification is similar to related diversification as there are benefits of synergy when the new business is related to existing business through process, technology and marketing.

Internationalisation:

It is a type of expansion strategies that require organizations to market their product and services beyond the domestic or national market.

Type of Internationalisation

International Strategy

Multidomestic Strategy

Global Strategy

Transnational Strategy

Cooperation

The term ‘cooperation’ expenses the idea of simultaneous competition and cooperation among rival firms for mutual benefits.

Types of cooperative

Mergers(Combination)

Horizontal Mergers

Vertical Merger



Concentric Merger

Conglomerate Merger

Reverse Merge

Acquisition/Takeover Strategy

Amalgamation

Acquisitions/Takeovers

Sale of Assets

Holding Company Acquisition

Joint Venture

Between two firms in one industry,

Between two firms across different industries,

Between an indian firms and a foreign company in India

Between an Indian firm and a foreign company in that foreign country

Between an Indian Firm and a foreign in a third country

Strategic Alliance Meaning:

A strategic alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. Types of Strategic Alliances: Joint Venture

Equity Strategic Alliance

Non-equity Strategic Alliance

Global Strategic Alliance

Stages of Alliance operation: Strategy DevelopmenT

BUSINESS LEVEL STRATEGES

Meaning: Business Strategies are the course of action adopted by a firm for each of it is business separately to serve identified customer groups and provide value to the customer by a satisfaction of their needs. In the process the firm uses its competencies to gain, sustain, and enhance its strategies or competitive advantage.

Types of Strategic at Business level

o Generic Strategic Alternative/Generic Competitive Strategies

o Competitive Tactics



Generic Strategies;

A company competitive strategy consists of the business approach and initiative it undertakes to attract customer and fulfill their expectation, to withstand competitive pressure and to strengthen is market position.

Types of generic strategic alternative

o Cost leadership(lower cost/broad target)

o Differentiation(Differentiation/broad target)

o Focus(lower cost or differentiation/ narrow target)

Competitive Tactics

Strategy gives rise to tactics and thus, “tactics may be thought of as a sub-strategy.”

Categories of Competitive Tactics

Timing Tactics

First-mover Strategies Advantage

Second-mover and late –mover Strategies Advantages

Market Location Tactics

Offensive Strategy

Defensive Strategy

Cooperative Strategies

STRATEGY IN GLOBAL ENVIRONMENT

Meaning:

A firm’s strategy can be defined as the action managers take to attain the gaol of the firms. For most firms, a principle goal is to be highly profitability. To be profitability in a competitive global environment, a firm must pay continual attention to both reducing the costs of value creation and to different it’s product offering so that consumer are willing to pay more for the product than it costs to produce it.

Increasing Profitability and Profit Growth through Global Expansion.

Expanding the Market

Realising Cost Economics from Global Volume

Realising Location Economics

Leveraging the skill of Global Subsidiaries

Cost Pressure and Pressure for Local Responsion

Pressure for cost Reduction



Pressure for Local Responsiveness

High

Low

Low Pressures For local responsive High

Basic Global Entry Decisions

Which Market to Enter

When to Enter these Markets

Scale of Entry

Choice of Entry Modes in Global Market

CORPORATE DEVELOPMENT: BUILDING AND RESTRUCTURING THE CORPORATION.

Corporate Development refers to the planning and execution of a wide range of strategies to meet specific organizational objectives. The kinds of activities falling under corporate development may include initiatives such as recruitment of a new management team, plans for phasing in or out of certain markets or products, establishing relationships with strategic business partners, identifying and acquiring companies , securing financing, divesting of assets or divisions, increasing intellectual property assets and so on.

Company

A

Company B

Company C

Choice of Entry Modes in Global Market

Exporting Licensing & Franchising

Contract manufacturing Management contracting

Turnkey contracts Wholly owned manufacturing

facilities

Assembly operations Joint ventures

Third country location Merges and Acquisitions

Strategic Alliance Counter Trade



CORPORATE PORTFOLIO ANALYSIS.

When the company is in more than one business, it can select more than one strategic alternative depending upon the demand of the situation prevailing in the different portfolios. It is necessary to analyse the position of different business of the business house which is done by corporate portfolio analysis.

Portfolio analysis is an analytical tool which views a corporation as a basket or portfolio of products or business units to be managed for the best possible returns.

The aim of portfolio analysis is:

1) To analyse its current business portfolio and decide which business should receive more or less investment.

2) To develop growth strategies, for adding new business to the portfolio; and

3) To decide which business should no longer be retained.

Techniques of Corporate analysis:

1. Boston’s Consultancy Model

2. GE-9 Cell Model

3. Corporate Parenting Analysis

BOSTON’S CONSULTANCY MODEL.

DCG Matrix

High

20% Remain Diversified

15%

10%

Liquidate

Low5%

High Relative market share Low

1) Stars

2) Cash cows

3) Question Marks (problem child or wild cat)

4) Dogs.

GE-9 CELL MODEL.

Nine cells of GE grid are dividing into three zones and depicted by different colours:

Select a few

Stars Invest

Questions Marks

Cash cows

Dogs



1) Invest/Expand

2) Select/Earn

3) Harvest/Divest

CORPORATE PARENTING ANALYSIS.

1) Heartland Businesses

2) Edge-of-heartland Businesses

3) Ballast Businesses

4) Alien Territory Businesses

5) value-trap Businesses

STRATEGIC ANALYSIS AND CHOICE (SAC)

Strategic Analysis and Choice (SAC) seek to determine alternative courses of action that could best enable the achieve its mission and objectives. The firm’sPresent strategies, objectives and mission coupled with information gathered through external and internal analysis provide a basis for generating and evaluating feasible alternative strategies.

Process of strategic analysis

Industry Analysis;

Define the business

Describe the Industry Structure

Identify Key Success Factor

Business Strategies Analysis

Identify Strategies Goals

Define Business Strategy

Identify Internal Capabilities and skills

Strategies Performance

Business Strategies Evaluation and Recommendations

Evaluations Business Strategy

Identify Critical Issues and Priorities

Make Recommendations

Benefits of Strategies Analysis

Sustainability

Whole Organizations Approach



Sound goals

Funding

External Focus

Clear Expectations

Effectiveness

Limitations of Strategic Analysis

Lack of skill

Cynicism

Relevance

Force of Habit

Strategic choice:

According to Pearce and Robinson, “Strategies choice is a decision which determines the future strategy of the firm”.

PROCESS OF STATEGIEC CHOICE:

The decision to select from among grand strategies considered, the strategy which will best meet the enterprise objectives. The decision involves focusing on a few alternative considering the selections the selections factors evaluating the alternatives against these criteria, and making the actual choice”.

FACTORS AFFECTING STRATEGIES CHOCE

External Constraints

Intra-organizational force and managerial Power-relations

Values and preferences and managerial attitude towards Risk

Impact of past Strategy

Time Constraints in Choice of strategy

Focusing

Strategic

alternative

Evaluating

strategies

alternative

Considering

decision factors

Strategy choice

Subjective factors

Objective

factors



Information Constraints

Competitors Reaction

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