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Session 7&8
Jan 22, 2013
INTRODUCTION
BOSTON CONSULTING GROUP (BCG) MATRIX was
developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE EARLY 1970s.
According to this technique, businesses or products are
classified as low or high performers depending upon their market growth rate and relative market share.
A pet tool in the 80s (being revisited even today)
The Origin
Mead Corps inability to assess its financial products
viability like Savings Account, Sweepstakes, Bonds and Mortgages Needed a measure to assess the need for investment over period of time and understand net cash flows Hence also called Portfolio Matrix Overtime became useful for assessing SBU strength and investment potential Now even product strategies and multi brand strategies find its use for cash requirements and generation
Business Sense
To be successful, a company should have a portfolio of
products with different growth rates and different market shares. The portfolio composition is a function of the balance between cash flows.
growth products must generate excess cash to fund the high growth products
High margin = High MS (f) experience curve Growth requires cash input to finance added assets High MS must be earned or bought. Buying MS requires added incremental investments. No market or product can grow indefinitely. The payoff form growth must come form when growth slows down, or it never will. The payoff is cash that cannot be reinvested in that product.
MARKET SHARE
Market share is the percentage of the total market that is being
serviced by your company, measured either in revenue terms or unit volume terms.
RELATIVE MARKET SHARE RMS = Business unit sales this year Leading rival sales this year
The higher your market share, the higher proportion of the
attractiveness.
MGR = Sales
market share available is expanding, and theres plenty of opportunity for everyone to make money.
observation that a companys business units can be classified in to four categories: Stars Question marks Cash cows Dogs
Cash Usage
Cash Generation
fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBUs located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures . Could be an issue overtime Eg Pepsi vs. Coke; Symphony , Auto Ind ???; Apple?, Dell?
CASH COWS
of yesterday. They represent business units having a large market share in a mature, slow growing industry. They generate more cash than required. They extract the profits by investing as little cash as possible and generate cash that can be utilized for investment in other business units. Formed by maturing Stars
Cash Cows
These SBUs are the corporations key source of cash, and are
specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. They are located in an industry that is mature, not growing or declining. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued. Examples: Tata companies Tisco, Telco.. (constantly trying to move to Star status).
DOGS
Low growth, Low market share
Dogs are the cash traps. They may show accounting
profits, but the profit needs to be reinvested to maintain shares, leaving no cash throw-off. Dogs represent businesses having weak market shares in low-growth markets. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. They neither generate cash nor require huge amount of cash. Dogs do not have potential to bring in much cash Due to low market share, these business units face cost disadvantages.
DOGS
Generally retrenchment strategies are adopted because these
firms can gain market share only at the expense of competitors/rival firms. Number of dogs in the company should be minimized. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share.
market share and located in a high growth industry. They will absorb great amounts of cash if the market share remains unchanged, (low). Why question marks? Question marks have potential to become star and eventually cash cow but can also become a dog Investments should be high for question marks. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable.
Classifying the SBUS on the basis of BCG matrix. Developing strategic objectives for each SBU.
BENEFITS
BCG MATRIX is simple and easy to understand.
opportunities open to you, and helps you think about how you can make the most of them. It is used to identify how corporate cash resources can best be used to maximize a companys future growth and profitability.
LIMITATIONS
BCG MATRIX uses only two dimensions, Relative
market share and market growth rate. Problems of getting data on market share and market growth. High market share does not mean profits all the time. Business with low market share can be profitable too
BCG matrix classifies businesses as low and high, but
generally businesses can be medium also. Thus, the true nature of business may not be reflected.
Limitations
This model ignores and overlooks other indicators of
profitability. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. The focus on balancing cash flows rather than other interdependencies. The emphasis on cost leadership rather than differentiation as a source of competitive advantage. Lifecycle stages are important factors missing here Experince curves not factored in
Hotels
Agribusiness Paper & pkg. Net revenue
124.1
4.2 24.9 12.99
577.25
1780.07 1565.31
257.53
1708.77 1253.29
13349.58 11815.04
Paper
Agri business FMCGOthers
17.2 %
34.3 % 60.2 %
Contribution % Revenue PBIT 77.0% 87.7% 7.3% 7.0% 4.3% 4.4% 10.7% 3.7% 5.4% -7.5%
Agri 1of the largest xporters business from India Hotels ITC Group ranks No.2 FMCG (Others) 20% share of greeting cards market, 'Aashirvaad' atta is No.1 in branded segment
A c t 2
?
Food - Grocery, Snacks, Biscuits) FMCG Body care, Hair care Infotech (if ITS growth is >10% pa) Dogs Lifestyle (?)
Market Growth
Cows FMCG-Cigarettes
(RMS ratio) = 2
Low
High
Relative MS
Low
Soaps, Cards, Stationery? What if FDI in retail comes in? In 2002 + retail boomed and LS may be in Q, then fell to Dogs in 2008 11.
and Qs.
(Ex: Paperboards).
Lifestyle challenge to be overcome
BCG Matrix-HUL
Stars Hair Care Skin Care Premium Soaps & Laundry Deodorants Water (PureIt) Question marks? Processed foods Colour Cosmetics
C
Time
Niche Market
For a niche to be a separate market
Different customers Different product or service Different way of doing business
small, sports (High priced like Ferrari, Maseretti or ordinary like Porsche) and more such specific niche that address the varying needs of the customers
Highly profitable Generates lots of cash The business must sooner or later
generate lost of cash, not just book profits Impact of Technology, Internet firms, E-commerce
Affects not only the growth but can alter the equation of
Yahoo
Amazon Netscape Facebook Apple Microsoft Nike
Infosys
Coke McDonalds Auto industry any
Dubai
Singapore
potential
Debt Raise equity Other borrowings
data inputted into the risk management models generally covered only the past two decades, a period of euphoria Grow, grow, grow, invest, invest, invest period of excessive Stars and Qs and no focus on CC CCs pay for dividends, fund growth Generating investment cash internally still is the most prudent way of doing business. Companies with reserves may be in fashion once again
Refinements on BCG
corporation. Synonyms for this method are; GE Matrix, Business Assessment Array and GE Business Screen.
What is a portfolio? Collection of Strategic Business Units that
together form a corporation. The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets.
What is a SBU?A SBU can either be an entire medium size
company or a division of a large corporation. As long as it formulates its own business level strategy and has separate objectives from the parent company.
GE / McKinsey Matrix
Business Unit Strength High Medium Low
Market Attractiveness
High
40%
Medium
30%
Low
Attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry / market. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit. Finally, the GE Matrix works with a 3*3 matrix, while the BCG Matrix has only 2*2. This also allows more sophistication.
Two Dimensions
Typical (internal) factors that affect Competitive Strength of a Strategic Business Unit:
- Strength of assets and competencies - Relative brand strength (marketing) - Market share - Market share growth - Customer loyalty - Relative cost position (cost structure compared with competitors) - Relative profit margins (compared to competitors) - Distribution strength and production capacity - Record of technological or other innovation - Quality - Access to financial and other investment resources - Management strength
that are important to its overall strategy. Determine the weight of each driver. Assign relative importance weights to the drivers. Score the SBU's on each driver. Multiply weights and scores for each SBU. View resulting graph and interpret it. Perform a review/sensitivity analysis. Example: Titan
competitive position of the business changes or when the industry moves from one stage of its life cycle to another.
The ADL matrix, developed by Arthur D. Little, shows how a
business should plan its strategy keeping in mind its competitive position and the stage of the industrys life cycle.
The matrix is plotted with the industry life cycle stages on one
the industry. The business strength measure is a categorization of the corporation's SBU's into one of five (six) competitive positions: dominant, strong, favorable, tenable, weak (and non-viable).
This yields a matrix of 5 competitive positions by 4 life cycle
stages. Positioning in the 20 cell matrix identifies a general strategy (More finely segmented).
commonalities among products and business lines using the following criteria as guidelines:
Common rivals eg HLL different groups may compete with P&G Prices May operate in same cluster Customers Same customer groups eg Male 35 - 45 Quality/Style Substitutability Eg Clinic & Dove may compete with a single product ARBER of Bodyshop addressing both the needs together. Divestment or liquidation
ADL Matrix
Industry life cycle stage
Embryonic
All out push for
Hold position.
Growth
Hold position. Hold share.
Mature
Aging
Strong
Attempt to improve Attempt to improve Hold position. Hold position position. All out position. Grow with industry. or harvest. push for share. Push for share. Attempt to improve position. Selective push for share. Find niche and protect it. Custodial or mainteHarvest, or phased nance. Find niche out withdrawal. and attempt to protect it. Find niche and hang on, or phased out Withdrawal. Turnaround, orphaned out withdrawal. Phased out withdrawal, or Abandon.
Selective or all out push for share. Favorable Selectively attempt to improve position.
Tenable
Weak
Up or out.
Turnaround or abandon.
Abandon.
LIMITATIONS
There is no standard life cycle length.
Ch 6 -62
Strategy-Formulation Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Ch 6 -63
display
Based on two key dimensions
The IFE total weighted scores on the x-axis The EFE total weighted scores on the y-axis
Ch 6 -64
Ch 6 -65
Strategy-Formulation Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Ch 6 -66
Competitive position
Market growth
Ch 6 -67
3.
4. 5. 6.
Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation
1. 2.
3.
4. 5. 6. 7.
Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Related diversification Quadrant IV Related diversification Unrelated diversification Joint ventures
1. 2. 3.
Excellent
strategic position
Concentration
on current markets/products
Take
present approach
to improve competitiveness
Rapid
in slow-growth industries
Drastic Cost
competitive position
Slow-growth
industry
Diversification
Ch 6 -73
Introduction
Quantitative Strategic Planning Matrix (QSPM) is a
best strategy using input from other management techniques and some easy computations
The QSPM method uses inputs from stage 1 analyses,
matches them with results from stage 2 analyses, and then decides objectively among alternative strategies
2.
3. 4.
5. 6.
The overall strategic management analysis is used to identify key strategic factors. This can be done using the EFE & IFE matrix. Formulation of the type of the strategy we would like to pursue. This can be done using the SWOT analysis, SPACE matrix analysis, BCG matrix model, or the IE matrix model. Each key external and internal factor should have some weight in the overall scheme. These weights form the IFE and EFE matrices. Attractiveness Scores (AS) how each factor is important or attractive to each alternative strategy. Attractiveness Scores are determined by examining each key external and internal factor separately(0,1,2,3,4) Total Attractiveness Scores are defined as the product of multiplying the weights (step 3) by the Attractiveness Scores (step 4) in each row. Calculate the Sum Total Attractiveness Score by adding all Total Attractiveness Scores in each strategy column of the QSPM.
78
Step 1
Internal audit and IFE Matrix External audit and EFE Matrix
Step 2
Step 3
0.07 0.1
0.05 0.02 0.15 0.05 0.03 0.02
4 3
3 3 3 4 3 3
0.28 0.3
0.15 0.06 0.45 0.2 0.09 0.06
2 2 1
0.02
0.04 0.05 0.03 0.05 1
1
1 2 1 1
0.02
0.04 0.1 0.03 0.05 2.5
Threats
9 Best Buy opening a new store Nearby 10 Local universities offer Computer Repair 11 New bypass highway in 1 year will divert traffic 12 New Mall being builtnearby in 1 year 13 Gas prices up by 14% in pat year 14 Vendors raising prices 8% Quarterly Total
Rating 4 3 3 1 4 2
SWOT
S W
Stage 2
1. 2. 3. 4. 5. 6.
Inventory turnover up 5.8 to 6.7 Average customer purchase up $97 to $128 Employee morale is excellent In store promo-20% increase in sales Newspaper ads expense down by 10% Revenues from repair up by 16%
1. 2. 3.
4.
5.
6.
Software revenues in store down by 16% Location of store hurt by new Highway Carpet & paint in store in disrepair Bathroom in store needs refurbishing Total store revenues down by 8% Store has no website
SWOT (Cont)
O T
Stage 2
1.
2.
3.
4.
5.
6.
Population of city growing at 10% Vehicle traffic passing store up 12% Senior citizens use of products up by 8% Small business grow in area up 10% Desire for websites up 18% by realtors Desire for websites up 12% by small firms
1.
2.
3.
4. 5. 6.
Best buy opening store in 1 year Local university offers computer repair New bypass highway will divert traffic in one year New mall being built near Gas prices up by 14% Vendor raising price by 8%
then it affects the choice so the AS should be recorded for both strategies Scores in a row is never duplicated QSPM is always prepared row-wise If there is more than one strategy in QSPM then AS scores can range from 1 to no. of strategies being evaluated
Organization Culture
A
set of values, beliefs, attitudes, customs, norms, personalities, heroes and heroines that describe a firm
Successful
Ch 6 -89
Politics in Organizations
Hierarchy Career
of command
aspirations
of scarce resources
Allocation
Ch 6 -90
issues
Ch 6 -91
Governance Issues
Control
Adherence
Consideration
Advancement
of stakeholders interests
of stockholders rights
Ch 6 -92