Strategy Formulation

Strategies for Growth and Diversification

Portfolio Analysis
Three main ones

The BCG (Growth-Share) Matrix:

Simple four-cell matrix created by the Boston Consulting Group A way to determine whether a business unit is a cash producer or a cash user A nine-cell matrix which provides a comprehensive analysis of a business units internal (competitive strength) & external (industry attractiveness) factors A 15 cell matrix developed by C. W. Hofer

McKinsey-GE Spotlight Matrix

Product-Market Evolution Matrix

BCG Growth-Share Matrix

Relative Market Share Position
High High Low Question Marks Or Cash Hogs

Industry Growth Rate

Low

Stars

Cash Cows

Dogs

BCG Growth-Share Matrix

Question Marks or Cash Hog
Internal cash flows are inadequate to fully fund its need for working capital & new capital investments Parent company has to pump in capital to feed the hog Sometimes called problem children or wildcats Strategic options

Aggressively invest in attractive cash hogs Divest cash hogs lacking long-term potential

BCG Growth-Share Matrix

Stars
Businesses that are market leaders Usually in rapidly growing markets Able to generate enough cash to maintain share in the market, but sometimes requires significant investment to maintain market share When market slows, stars become cash cows Strategic options

Fortify & defend position in industry Short-term priority

BCG Growth-Share Matrix

Cash Cow
Businesses that generates cash surpluses over & above what is needed to sustain its present market position Cash cow businesses are valuable because surplus cash can be used to

Pay corporate dividends Finance new acquisitions Invest in promising cash hogs

Strategic Objective

Fortify & defend present market position

BCG Growth-Share Matrix

Dogs
Businesses with low market share & no potential to bring in much cash Requires significant cash injection to maintain position Strategic options

Exit business by divesting or liquidating Harvest if business is generating some profits

McKinsey-GE Spotlight Matrix

Business Unit Strength Strong
High Industry Medium Attractiveness Low

Average
Winners Average Business Losers

Weak Question Mark

Losers Losers

Winners

Winners Profit Producers

Strategic Implications of StrengthAttractiveness Matrix

Winners
Given top investment priority Strategic prescription is grow & build

Question marks, Average, Profit producers

Given medium investment Strategic prescription is invest to maintain position

Losers
Candidates for divestment May be candidates for turnaround

Changing Corporate Strategies

Changes are needed if evaluation shows
Growth objectives are not being attained Organizational stability causes firm to fall behind Corporate renewal efforts are not working

Possible Strategies to change

Functional Competitive Corporate direction

BCG Business Portfolio Matrix

Relative Market Share Position
High
Stars

Low
Question Marks

High
Industry Growth Rate Low
Cash Cows Dogs

BCG Matrix -- Strengths

Encourages strategists to view a diversified firm as a collection of cash flows & cash requirements (** its major strategic implication **)

Explains why priorities for corporate resource allocation differ from SBU to SBU

Demonstrates the progression of an SBU -from Q-mark ===>Star ===>Cash Cow

BCG Matrix -- Weaknesses

Over-simplifies market growth & market share issues 4 simple categories are neat, but trends are more valuable

Doesnt directly identify which SBUs offer the best investment opportunities
Considers only 2 variables

G.E. 9-Cell Matrix

Dimensions: Long-term industry attractiveness

Business strength/Competitive position

SBUs plotted as circles with area proportional to the size of the industry, & a sector within each circle representing the SBUs market share in its industry

GE 9-Cell Matrix
Business Strength/Competitive Position

Strong

Average

Weak

H
Long-Term Industry Attractiveness

Strategic Implications of the G.E. 9-Cell Matrix

SBUs in 3 upper left cells get top investment priority

SBUs in 3 middle diagonal cells merit steady investment to maintain & protect their industry positions

SBUs in 3 lower right cells are candidates for harvesting or divestiture

Advantages of G.E. 9-Cell Matrix

Allows for intermediate rankings between high & low and between strong & weak

Incorporates a wider variety of strategically relevant variables than the BCG matrix
Stresses the channeling of corporate resources to SBUs with the greatest potential for competitive advantage & superior performance

Weaknesses of G.E. 9-Cell Matrix

Provides no guidance on specifics of SBU strategy Only suggests general strategic posture -- aggressive expansion, fortify-&-defend, or harvest/divest Doesnt address the issue of strategic coordination across related SBUs

Tends to obscure SBUs about to take off or crash & burn -static, not dynamic

Life-Cycle Portfolio Matrix

Dimensions:

Industry stage in the life cycle

SBUs competitive position

Area of each SBU circle is proportional to size of the industry; sectors denote SBUs market share in its industry This matrix displays the distribution of the firms businesses across the various stages of industry evolution

Life-Cycle Portfolio Matrix

SBUs Competitive Position Strong Introduction Growth LifeCycle Stages Early Maturity Late Maturity Decline Average Weak

Common Problems Associated With Diversified Firms:

Overemphasis on ROI Under-emphasis on future earnings streams Short-term focus Growth more valued than quality & value Over-decentralized; top managers become isolated & out-of-touch Avoidance of manageable (strategic) risk for the sake of short-run profit

Performance: Effectiveness & Efficiency

Effectiveness: external criteria Efficiency: internal criteria Not mutually exclusive Both important

Effectiveness
Doing the right thing; goal attainment Determine by the market Establishes what price you can command Measures: sales, market share, etc.

Efficiency
Doing the thing right Ratio of output to input Determines price you must charge Measures: operating profit, unit cost structure, etc.

Market Criteria
Future projection Reflects anticipated results Indicates investor confidence Measures: trend in stock price or cash value

Operational Criteria
Past & present Reflects actual results Indicates managerial competence Measures: ROE, ROI, ROA, market share, revenue, operating margin (profit), time-tomarket, inventory turns, quality, etc.

Performance: The Bottom Line

No simple bottom line No single criterion of performance is inherently most important Multidimensional Situational -- different measures are more appropriate at different times Difficult to be successful on all measures at the same time