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SWOT Analysis

Strengths, Weaknesses, Opportunities, and Threats

It examines:
- The companys internal strengths and weaknesses with
respect to the environment,
- The competition and looks at external opportunities and
threats.
Opportunities may help to define a target market or identify
new product opportunities, while threats are areas of exposure .

SWOT Analysis

SWOT analysis is a tool strategists use to evaluate Strengths,


Weaknesses, Opportunities, and Threats.
Strengths are company resources and capabilities that can lead
to a competitive advantage.
Weaknesses are resources and capabilities that a company does
not possess, to the extent that their absence places the firm at a
competitive disadvantage.
Opportunities are conditions in the broad and operating
environments that allow a firm to take advantage of
organizational strengths, overcome organizational weaknesses,
and/or neutralize environmental threats.
Threats are conditions in the broad and operating environments
that may impede organizational competitiveness or the
achievement of stakeholder satisfaction.

trengths

ASK yourself:
What advantages does your company have?
What do you do better than anyone else?
What unique or lowest-cost resources do you
have access to?
What do people in your market see as your
strengths?
What factors mean that you "get the sale"?

eaknesses

ASK yourself:
What could you improve?
What should you avoid?
What are people in your market likely to see as
weaknesses?
What factors lose you sales?

pportunities
ASK yourself:

Where are the good opportunities facing you?


What are the interesting trends you are aware of?

Useful opportunities can come from such things as:


Changes in technology and markets on both a broad
and narrow scale.
Changes in government policy related to your field.
Changes in social patterns, population profiles, lifestyle
changes.
Local events.

hreats

ASK yourself:
What obstacles do you face?
What is your competitor doing that you should be
worried about?
Are the required specifications for your job, products or
services changing?
Is changing technology threatening your position?
Do you have bad debt or cash-flow problems?
Could any of your weaknesses seriously threaten your
business?

SWOT Analysis Example

Example
The Amazon story
Strength

A smart and talented team that stayed focused and


learned what it didnt know.

Weakness

No experience in:
-Selling books
-Processing credit card transactions
-Boxing books for shipment

Opportunity

To sell online.

Threat

A full-scale push by one of the large bookstore


chains to claim the online market.

Example: Nike
Strengths
- Nike is a very competitive
organization. Phil Knight (Founder and
CEO) is often quoted as saying that
'Business is war without bullets. The
organization have a diversified range
of sports products.

Weaknesses

Opportunities
Product development offers Nike many
opportunities.

Threats
Nike is exposed to the international
nature of trade.

Case Study

Highly Brill Leisure Center has hired you to help them with their marketing
decision making. Perform a SWOT analysis on Highly Brill Leisure Center,
based upon the following issues:
1.The Center is located within a two-minute walk of the main bus station, and is a fifteen-minute
ride away from the local railway station.
2.There is a competition standard swimming pool; although it has no wave machines or whirlpool
equipment as do competing local facilities.
3.It is located next to one of the largest shopping centers in Britain.
4.It is one of the oldest centers in the area and needs some cosmetic attention.
5.Due to an increase in disposable income over the last six years, local residents have more money
to spend on leisure activities.
6.There has been a substantial decrease in the birth rate over the last ten years.
7.In general people are living longer and there are more local residents aged over fifty-five now than
ever before.
8.After a heated argument with the manager of a competing leisure center, the leader of a respected
local scuba club is looking for a new venue.
9.The local authority is considering privatizing all local leisure centers by the year 2000.
10.Press releases have just been issued to confirm that Highly Brill Leisure Center is the first center
in the area to be awarded quality assurance standard BS EN ISO 9002.
11.A private joke between staff states that if you want a day-off from work that you should order a
curry from the Center's canteen, which has never made a profit.
12.The Center has been offered the latest sporting craze.
13.Highly Brill Leisure Center has received a grant to fit special ramps and changing rooms to
accommodate the local disabled.
14.It is widely acknowledged that Highly Brill has the best-trained and most respected staff of all of
the centres in the locality

Answers
Strengths
1, 13, 14 (maybe 2,
10)

Weaknesses
4, 11 (maybe 2)

Opportunities
3, 5, 8, 9, 12 (maybe
10)

Threats
6, 7

As you can see my answer does not completely agree with yours. This does
not mean that you are wrong. It simply means that the results of your analysis
are represented in a different way. Points 2 and 10 are difficult to place. Point
2 depends on whether or not wave machines or a whirlpool have a distinct
competitive advantage over a competition standard pool. Point 10 is an
internal strength and an external opportunity.

TOWS Matrix

Current and Future


conditions in respect of
economy, politics,
financial regulations,
new products, services
and technology

Energy shortages,
competition and other
areas like conditions
mentioned above

Strengths in internal
departments like
management, R&D,
Finance, marketing,
OD etc

Eg weaknesses in
internal
departments

The most successful


strategy, utilizing the
orgs strengths to
take adv of
opportunities in the
market.

Developmental
strategy: to
overcome internal
weaknesses to take
adv of opportunities

Use of strengths to
cope up with threats
or to avoid threats

Retrenchment,
liquidation, joint
ventures etc to
minimize
weaknesses &
threats

TOWS Matrix

S O strategies: pursue opportunities that are


good fit to the companys strengths
W-O strategies: overcome weaknesses to
pursue opportunities
S T strategies: identify ways to use strengths
to reduce vulnerability to external threats
W T strategies: establish a defensive plan to
prevent the firms weaknesses from making it
highly susceptible to external threats.

The Strategy Hierarchy


In large corporations there are several levels of strategy. Strategic
management is the highest in the sense that it is the broadest, applying to all
parts of the firm. It gives direction to corporate values, corporate culture,
corporate goals, and corporate missions. Under this broad corporate strategy
there are often functional or business unit strategies
Different Levels of Strategy
Levels

Structure

Corporate

SBU

Strategy
Corporate Level

Corporate Office

SBU - A

SBU - B

SBU - C

Functional
Finance

Personnel

Marketing

Operations

Information

Business level

Functional Level

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Corporate Strategy

Those strategies concerned with the broad


and long-term questions of what business(es)
the organization is in and what it wants to do
with those businesses.

Kinds of Corporate Strategy -1


There are four Grand Strategic alternatives:
a) Stability Strategy: Main aim here is Stabilising and
improving Functional Performance.
a.1) No Change Strategy.
a.2) Profit Strategy.
a.3) Pause / Proceed with caution Strategy.

b) Growth Strategy: Main aim here is High Growth.


b.1) Concentration
b.2) Diversification.

Kinds of Corporate Strategy - 2


c) Retrenchment Strategy: Main aim here is contraction of its
activities. It is done through Turnaround, divestment and
liquidation in modes like
c.1) Turnaround
c.2) Captive company
c.3) Sellout/ Divestment
c.4) Bankruptcy/ Liquidation
d) Combination Strategies: It is combination of all above three
policies simultaneously in different businesses or at different
times. e.g.:
i)
Merger of Tata with Corus.
ii)
Virgin Mobile India Limited is a cellular telephone service
provider company which is a joint venture between Tata Tele
service and Richard Branson's Service Group. Currently, the
company uses Tata's CDMA network to offer its services
under the brand name Virgin Mobile, and it has also started
GSM services in some states.

Corporate Strategy: The companywide game plan for managing a set of businesses.
The levels involved are CEO and other Senior Executives.
Business & Corporate Strategy
Business strategy, which refers to the aggregated operational strategies of single
business firm or that of an SBU in a diversified corporation, refers to the way in which a
firm competes in its chosen areas.
Corporate strategy, then, refers to the overarching strategy of the diversified firm.
Such corporate strategy answers the questions of "in which businesses should we
compete?" and "how does being in one business add to the competitive advantage of
another portfolio firm, as well as the competitive advantage of the corporation as a
whole
Business Strategy for Strategic Business Units: One for each business, the
company has diversified into. Actions to build competitive capabilities and strengthen
market position. Executed by General Managers, Plant Heads, Division heads of each
business with inputs from Corporate and Functional levels.
Many companies feel that a functional organizational structure is not an efficient way to
organize activities so they have re engineered according to processes or strategic
business units (called SBUs). A Strategic Business Unit is a semi-autonomous unit
within an organization. It is usually responsible for its own budgeting, new product
decisions, hiring decisions, and price setting. An SBU is treated as an internal profit
centre by corporate headquarters. Each SBU is responsible for developing its business
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strategies, strategies that must be in tune with broader corporate strategies

Functional Strategies
Functional strategies include Marketing Strategies, new product development
strategies, human resource strategies, financial strategies, legal strategies, supplychain strategies, and information technology management strategies. The emphasis
is on short and medium term plans and is limited to the domain of each
departments functional responsibility and is executed by Functional heads. Each
functional department attempts to do its part in meeting overall corporate
objectives, and hence to some extent their strategies are derived from broader
Corporate & Business strategies.
Operational Strategy
The lowest level of strategy is operational strategy. At this level, detailing is
done to add completeness to Business & Functional Strategies. It is very narrow in
focus and deals with day-to-day operational activities such as scheduling criteria. It
must operate within a budget but is not at liberty to adjust or create that budget.
Operational level strategy was encouraged by Peter Drucker in his theory of
Management By Objectives (MBO). Operational level strategies are informed to
business level strategies which, in turn, are informed to corporate level strategies.
These strategies are executed by Brand Managers, Operating Managers, Plant
managers. Important activities like Advertising, Web site operations, distributions
are involved at this level.
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1. Stability Strategies:
1.a) No-Change Policy: It is a conscious decision of not
doing anything new and continue with present business
definition. When environment is stable and predictable with no
new significant threats & opportunities in the environment, it
may not be worthwhile to alter strategy in present situation.
Also no new strengths have been generated and no new
weaknesses have been developed.
No new threat of substitutes and new entrants. However, this
should be a conscious decision and should not arise out of inactivity and owing to inertia. It is dangerous to be complacent.
1.b)Profit Strategy: No change policy cannot sustain for long and
situations keep changing. However if company believes that
the changes like economic recession, govt. rules, industry
downturn, competitive pressures are temporary and will turn
favourable after some time,

Contd..
then firm opts for maintain profit policy by artificial measures
like cut costs, hold investments / replacements, raise prices,
increase productivity and some such measures to tide over the
difficult days. However, if the problems are not temporary, the
company position deteriorates.
Pause / Proceed with caution Strategy is a temporary
strategy like profit strategy and is used for consolidation. It is
used to test the ground before going ahead with full-fledged
Grand Strategy. Sometimes after a major expansion firms need
to stabilise, allow strategic change to percolate through
organisation structure and allowing existing systems to adopt
the strategy and the move for further expansions. It is also
used to bide the time for more opportune time and move on
with rapid strides again.

2. Expansion Strategies
If organisation is not moving ahead, it is actually going
backwards. Companies aim for substantial growth to take
advantage of Growing economy, liberalisation, rapidly
increasing markets, globalisation, Emerging technologies
etc.
Expansion Strategies are of 5 types.

2.a) Expansion through Concentration: Firms tend to rely on


doing what they know they are best at doing. Concentration
Strategy involves investment of resources in a product line for
an identified market. The firm has proven technology, market
has high potential for growth and industry is sufficiently
attractive for concentration to take place. The firm should also
have financial strength to sustain expansion. This is a first
preference strategy of firm doing what they are doing already
and would like to invest more in known business. (Bajaj,
Maruti)

Concentration strategy involves minimal organisation changes,


improves competitive advantage due to in depth knowledge &
expertise.
The limitations are putting all resources at one project, it is
industry dependent and adverse condition in industry can
affect. In the Recession time, it is too difficult for concentrated
firms to withdraw. Product obsolescence is another threat for
the heavy investment.
2.b) Expansion through Integration: When firms use their
existing base to expand in the direction of their raw material or
the ultimate consumer or acquire adjacent businesses;
expansion through Integration takes place. This is exploring
Vertical and Horizontal dimensions of Grand Strategy.
Expansions are pivoted around present base of customers.
Scope of business definition is widened. Alternative
technologies are used for backward or forward integration. The
firm moves up or down the value chain. The firm aims at cost
economics. It is also one type of Make or Buy decision. All
integration strategies require Trade-offs. There are two types
of Integrations.

Vertical Integration: When an organisation start making new


products that serve its own need or is for self consumption.
Backward Integration means retreating to source of raw
materials while forward integration moves the organisation to
its ultimate customers.
Horizontal Integration: When an organisation takes up the
same type of products at the same level for production or for
marketing. Many a times Horizontal Integration is a merger of
like industries.
Integration strategy gives more control on Value chain but
carry a risk as industry is set to serve same customer group
and in case product fails or becomes obsolete.
2.c) Expansion through Diversification: Several firms
diversify to reduce the risk of dependence on product and
same set of customers. Diversification involves all dimensions
of Strategic Alternatives. It could be internal or external,
related or unrelated, horizontal or vertical, technological etc. It
changes business definition.

Concentric Diversification: The activity is related to existing


business definition either in businesses, customer groups &
functions and /or alternative technology. It could be market
related concentric diversification as different products for
same set of customers or Technology related Diversification as
related technology to the present business or combination of
Market & Technology related diversification.

Conglomerate diversification: Diversification in activities


which are totally unrelated to existing business definition of
one or more of its businesses. (ITC Tobacco & Hotel )

Contd..
2.d) Expansion through Co-operation:
1. Mergers Strategy
2. Takeovers or Acquisitions Strategy.
3. Joint Ventures Strategy.
4. Strategic Alliances Strategy

2.e) Expansion through Internationalisation:


1. International Strategy.
2. Multi-domestic Strategy.
3. Global Strategy.
4. Trans-national Strategy.

3. Retrenchment Strategies.

Retrenchment Strategy is followed when an organisation


substantially reduces scope of its activities. The organisation
need to find out problem areas and diagnose the causes of the
Problems, accordingly, various types of Retrenchment
Strategies are adopted.
External Developments, Government Policies, Substitute
Products, Changing Customer needs, Wrong Strategies,
Obsolete Products, could be reasons for decline.
Symptoms are noticed in poor performance, declining profits,
diminishing Cash flow, falling sales, Shrinking markets,
Shrinking market share, increasing debt.
The organisation with proper monitoring controls can sense
approaching danger and position itself to find alternatives.

3.a) Retrenchment Strategies: Turnaround


Strategies:

3.a.1.: If CEO has credibility with Banks and Financial


Institutions and if a qualified Consultant is available, then
management team handles the entire turn-around strategy with
support of advisory specialist external consultant.
3.a.2: In another situation, Turnaround specialist is employed
to do the job and existing team is temporarily withdrawn.
3.a.3: Replacement of existing team, or merging sick unit with
a healthy one.
Possible actions could be: Analysis of Product, market,
production processes, competition, market segment
positioning, production logic, Target setting, feedback,
corrective actions.

3.b) Retrenchment Strategies : Divestment Strategies:

3.b.1: Divestment is done due to negative cash flows,


mismatch of business with the company, project feared to be
non-viable in long range, strict competition, Technological upgradation asking for funds which are not available, Selling a
part of company for survival of organisation, a better
alternative is available for investment, Divestment as a part of
merger plan of mutual exchange,

Divestment is done in two ways : A part of company is


divested or firm may sell a unit entire to a buyer, who finds the
purchase as a strategic fit.

3.c) Retrenchment Strategies : Liquidation Strategies:

This is most un-attractive strategy, where


company shuts down and tries to sell its
assets. It is a last resort. Liquidation is
difficult due to various legal constraints and
protection given to employees in labour law.

Combination Strategies

Combination Strategies are mixture of Stability, Expansion


and Retrenchment strategies. They are either followed
simultaneously or in a sequential way. It is very difficult in the
business environment to follow a single pure Strategy.
Situation is Complex and business demands different
strategies to suit the situational demands made upon the
organisation.

As an example, observe a paint company following three


strategies together. Addition of new variety of Decorative
paint for widening customer base, (Stability), and Adding an
entirely new product like Automotive Paint with new set of
customers & functions (Expansion), while eliminating or
closing the contract division, which used to take Painting
Contracts (Retrenchment).

Definition of Strategy/Strategic
planning

A careful plan or method


The art of devising or employing plans or strategies
towards a goal
Of great importance within an integrated whole or to
a planned effect
Necessary to or important in the initiation, conduct,
or completion of a strategic plan

What Strategic Planning is Not

Strategic planning is not forecasting


Strategic planning is not the simple application of
quantitative techniques to business planning.
Strategic planning is concerned with making
decisions today that will affect the organization
(product line) and its future.
Strategic planning does not eliminate risk, it helps
managers access the risks they must take by gaining a
better understanding of the parameters involved in
their decisions.

Process of Strategic Planning


The process of strategic planning is a step-by-step
approach three key questions that lie at the heart of
any business strategy:

What are you going to sell?


Who are your target customers?
How can you beat or avoid your competition?
If you can answer these three questions well, you
have a strategy.

1.
2.
3.

Data
External Situation
Internal Situation
Capabilities and
competencies

4.

Analysis
5. Strategic assessment
Strategic Issues

6.

7.

Direction
Strategies

Commitment
Mission Statement
Goals
Objectives

Implementation
8. Action Plans
9. Budgets
10. Schedules

Ideas
Assumptions

Simplified Process of Strategic


Planning- How it Works
Planning
Gather Information
Assess Capabilities
Make Assumptions
Make Strategic Assessments
Formulate Strategy
Establish Goals and Objectives
Formulate Tentative Action Plans
Finalize Action Plans

Monitor Developments
and
Progress

Execution

Stages of corporate development

Corporate Development refers to the planning and execution


of a wide range of strategies to meet specific organizational
objectives.

Stages of Corporate Development

Stages of corporate
development
Stage I: Simple Structure (Entrepreneur)
Flexible and dynamic
Decision making tightly controlled
Little formal structure
Planning short range/reactive
Stage II: Functional Structure
Functional specialization
Delegation of decision making
Concentration/specialization in industry
40

Contd
Stage III: Divisional Structure (SBU)
Diverse product lines
Decentralized decision making
Stage IV: Beyond SBUs: Matrix, Network, and Cellular
Increasing environmental uncertainty & Tech
advances
More emphasis on Teams

4. Structural Implementation
Entrepreneurial:

Owner
Owner- -Manager
Manager
Employees

Functional
Public
Relations

CEO

Production

Finance

Divisional / Product
Corporate

Division

Finance

Product DIV. A

Marktg., Operations, Pers.,

Marktg.

Personnel

Legal

CEO

Legal / PR

Product- Div. B

Marktg., Operations, Pers.,


42

Contd..

SBU Based
CEO

Head SBU 1

Head SBU 2

Div. A,B,C

Div. D,E,F

Head SBU 3

Div. G,H,K

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Matrix
Corporate

CEO

Finance

Operations

Personnel

Marketing

Head A
Location /
Product /
Plant

Head B
Location /
Product /
Plant

Head C
Location /
Product /
Plant
44

Network
Region
A

Project
M

Function
X

Corporate

Headquarter

Region
B

Project
N

Function
Y

45

1. Strategic Alliances & Collaborative Partnerships?

In the present era of Privatisation & Globalisation, Industries


have to face altogether different challenges not faced hitherto.
Rapid advances in technology, free economy, new markets in
developed & under developed countries, and invasion of
foreign companies are forcing Industries to enter into race of
building Global presence and into race of adopting new
technologies.
Industries also find that they do not have expertise for running
the race of Global leadership. The global environment requires
diverse & expensive skills, resources, technological skills. The
fastest & surest way to fill up the gap is Alliances with
enterprises with desired strengths.
Strategic Alliances are collaborative partnerships where two
or more companies join forces to achieve mutually beneficial
strategic outcomes. These alliances are more than company to
company give & take dealings but fall short of Merger or JV.
These alliances are mainly for bridging gap of resources and
technology.
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Advantages of Alliance:
Alliance is basically between equals, but alliances are also
done with suppliers, distributors as partners by many big
business houses. These alliances are mostly done with Value
chain contributors.
It is now common for companies to pursue their strategies in
collaboration with suppliers, distributors, makers of
complimentary product and some select companies. e.g. IBM
& DELL.
Advantages of Alliance:
Get into critical country markets quickly.
Gain, in-side information & knowledge about unknown /
unfamiliar markets & cultures.
Access valuable skills & competencies.
Get a handle to participate in target technology or industry.
Master new technology; build new expertise & competencies
faster.
Open up broader opportunities.
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Stability of Alliances:

Alliances to be successful should have partners working


together. Stability of alliances depend upon their success in
adopting to changing internal & external conditions,
willingness to bargain on issues, real collaboration and not
merely arm length exchange of ideas. Each partner must
bring in high value allied skills, resources and contributions
and respect each other. They should have co-operative
arrangements working for win-win solutions.
Causes for failures of alliances could be, diverging
objectives and priorities, in-ability to work together,
changing conditions which make initial reason for alliance
as obsolete, more attractive technologies and / or rivalry at
marketplace.
Alliance partners should guard themselves from undue
dependence. Over a period the partners must learn skills
and technology. To be a market leader companies must
develop their own capabilities or alliance will ultimately lead
to Merger or Acquisition.
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Merger & Acquisition Strategies:

The phrase Mergers and Acquisitions (abbreviated M&A)


refers to the aspect of corporate strategy, corporate finance and
Management dealing with the buying, selling and combining
of different Companies that can aid, finance, or help a growing
company in a given industry to grow rapidly without having to
create another business entity.

In the pure sense of the term, a Merger happens when two


firms, often of about the same size, agree to go forward as a
single new company rather than remain separately owned and
operated. This kind of action is more precisely referred to as a
Merger of equals." Both companies' stocks are surrendered
and new company stock is issued in its place. For example,
both Daimler-Benz and Chrysler ceased to exist when the two
firms merged, and a new company, DaimlerChrysler, was
created.
50

Merger & Acquisition Strategies-2:

When one company takes over another and clearly established


itself as the new owner, the purchase is called an Acquisition.
From a legal point of view, the Target Company ceases to exist,
the buyer "swallows" the business and the buyer's stock
continues to be traded.
Whether a purchase is considered a Merger or an Acquisition
really depends on whether the purchase is friendly or hostile and
how it is announced. In other words, the real difference lies in
how the purchase is communicated to and received by the target
company's Board of Directors, employees and Shareholders.
M & A have not produced hoped-for results on many instances.
Resistance of rank and file employees of two large companies is
some times too difficult to resolve. Conflicts of management
styles and difference in Corporate Cultures create problems in
integration. Cost savings, expertise sharing, and enhanced
competitive capabilities take substantially long time to
materialise in view of above problems .
51

Strategic objectives of Mergers & Acquisitions:


1.

2.
3.

4.

5.

6.

To pave the way for the acquiring company to gain more


market share and, further, create a more efficient operation
out of combined companies by closing high cost plants and
eliminating surplus capacity industry-wise.
To expand companies geographic coverage.
To extend companys business into new product categories
or international markets.
To gain quick access to new technologies and avoid the need
for a time consuming R & D effort.
To try to invent new industry and lead the convergence of
industries whose boundaries are being blurred by changing
technologies and new market opportunities
To fill resource gaps
52

Business Portfolio Analysis

Definition : Analyzing Elements of a firm's Product Mix


to determine the Optimum Allocation of its Resources.
Two most Common Measures
used in a Portfolio
Analysis are Market Growth and Relative Market
Share.

The strategic units that make up the company and the


attempts to evaluate current effectiveness and vulnerabilities
(McDonald et al, 1992)

Business Portfolio Management enable strategic planners to


select the optimal strategies for the individual products whilst
achieving overall corporate objectives (McNamee, 1985)
53

When a Business Portfolio comprises of Multi-business Units


and / or operating at multi-location, then the Strategist often ask
two questions to take a decision on Business Strategy.
How much of our time and money should we spend on our best
products to ensure that they continue to be successful?
How much of our time and money should we spend developing
new costly products, most of which will never be successful

Examples of Portfolios:
Gillette: batteries, Shaving products
ITC : Tobacco, Soaps, Cigarettes

54

Business Portfolio Analysis

Portfolio analysis looks at the corporate investments in different


products or industries under common corporate jurisdiction. It
involves, analysing future implications of presents resource
allocation and continuously deciding, adding, curtailing or
disposing, operations or products, so that overall portfolio
balance is maintained or improved.

Portfolio analysis takes into considerations aspects such as


Companies Competitive Strength, Resource Allocation
Pattern & Industry Characteristics.
All businesses have to balance, three basic aspects of running the
business :
Net Cash Flow.
State of Development.
Risk.
55

1.
2.
3.

Boston Consulting Group BCGs Growth Share Matrix

56

1.

2.

BCGs Growth Share Matrix


Different businesses which forms the Business Portfolio can be
characterised by two parameters:
Companys Market share for the business, representing the
firms competitive position and
The overall growth rate of the business.
For each activity in the portfolio, a separate strategy must be
developed depending upon its position in 2 X 2 matrix.
Higher Market share will mean, higher profits and higher cash
flows. Relative market share is defined as the market share of the
relevant business divided by the market share of its largest
competitor. i.e. A = 10%, B = 20% & C = 60%, then, As
relative market share is 1/6 & Cs share is 3.
Higher Growth rate will mean profitable investment / expansion
opportunities and easier to increase market share.
57

1.

2.

3.

4.

5.

BCGs Growth Share Matrix - Methodology


Step-by-step procedure to develop the business portfolio matrix
and identify appropriate strategies for different businesses:
Classify various activities of the Company into different business
segments or SBUs. (Strategic Business Units)
For each business segment, determine the growth rate of the
market. Plot it on linear scale.
Gather assets employed for each business segment and determine
the relative size of the business within the company.
Estimate the relative market shares for the different business
segments.
Plot the position of each business on a matrix of business growth
rate and relative market share.
58

BCGs Growth Share Matrix - illustration


Relative market Share

20
18

STARS

QUESTION
MARKS

CASH COWS

DOGS

16
Business 14
Growth 12
rate %
10
8
6
4
2
10
X

4X

1.5
X

1X

0.5
X

0.1
59
X

Strategies as per Product Life Cycle-1

Expansion Strategy : Stars are the businesses which have high


growth rate & high market share. At times they are not self
sufficient in cash flow, but need to be supported in view of their
potential. This is Growth phase of Product Life Cycle (PLC).
Such businesses generate as well as use large amount of cash. The
Star generate high profits and represent the best investment
opportunities for growth. We need to reaffirm the Companys
Competitive Edge at this phase by sufficient doses of resources
for expansion. The best strategy regarding stars is to make
necessary investments and consolidate the companys high
relative competitive position.

e.g.Electronics & Communications is Star industry.


60

Strategies as per Product Life Cycle-2

Hold Strategy - Cash Cows are the businesses with low growth
rate and high market share. High market share leads to high
generation of cash and profits. Cash Cow is a business that
generates cash flows over & above its internal needs. Cows can be
milked to provide a corporate parent with funds for investing in star
/ cash dog businesses, financing new acquisitions or paying
dividends.
Cash cows provide the financial base for the company.
A strong cash flow resulting out of relatively high market share /
low market growth rate Cash Cow opportunities should be able to
maintain market share at or around existing levels.
In this state of business, Corporate can adopt mainly Stability
Strategies. Expansions & investments can be thought only if the
long term prospects are exceptionally bright.
These are generally mature businesses reaping benefits of
experience and expertise. Funds generated are to be used for
Question Mark or Star businesses as Cash Cow's are destined
to slow down. A phased retirement need to be planned.
61

Strategies as per Product Life Cycle- 3


Build Strategy Question Mark : The Businesses with high
industry growth but low market share are Question Marks. In
the business, these Question Mark need investment in order to
grow and gain market share.
Because of their high growth, the cash requirement is high, but
due to their low market share cash generation is low.
These are sometimes known as Problem Child as someone
with huge potential, but not clicking. Here, a large amount of
Cash inflow is required to stabilise and enter into Star phase.
Companies must obtain early lead to strengthen the business
and capture growth opportunities.
A question Mark business can either become a Star or can go to
Dogs depending upon funds & competitive edge.
62

Strategies as per Product Life Cycle - 4


The business is called Dogs, if business growth rate is low and the
companys relative market share is also low.
The lower market share means poor profits and as market growth
is low, any investment is prohibitive as cash demanded will exceed
the cash generation, causing negative cash flow.
Under such circumstances, the Strategic solution is to either
liquidate, or if possible harvest or divest the DOG business.
Harvest Strategy : To develop short term cash flow irrespective of
the long term damaging effect to the product or business. This
strategy is appropriate for any weak products where disposal in the
form of a sale is unavailable or not preferred due to high exit
barriers
Divest Strategy : To change the capital of the business and allow
resources to be used elsewhere of industries that have a very slow
or negative market growth rate and where a company has low
market share. These are products in late maturity or declining stage
as mostly substitutes start taking over these products. They stop
generating large amount of Cash and face a cost disadvantage
owing to low market share. Sometimes to reduce the high costs
involved, a Retrenchment Strategy is also adopted.
63

Cash Positions of Various Businesses


Business
Type

Cash
Cash
Source Use

Net Cash Balance

COW

More

Less

Funds available, so milk and


deploy

STAR

More

More

Build competitive position


and grow

DOG

Less

Less

Divest and re-deploy


proceeds.

QUESTION Less

More

Funds needed to invest


selectively to improve
competitive position.

64

Limitation of BCG Matrix

Predicting Profitability from Growth and Market Share:- BCG


assumes that profit depends on growth & market share. This may not be
100% true. Industry attractiveness may be different from simple growth
rate and the firms competitive position may not be reflected in its market
share.
Difficulty in determining Market Share:- BCG has heavy dependence
on market Share as indicator of its competitive strength. The calculation of
market share depends upon how we decide, what is total market.
Sometimes, we may have to consider niche market for analysis.
No consideration for experience curve synergy :- In BCG each quadrant
is viewed independently. Low costs due to expertise of employees can
prolong Dog, star or cash cow stages.
Disregard for Human aspect:- BCG does not recognise human aspect of
business. Cash generated in one business in one business get associated
with the power of concerned manager. Cash Cow unit may be reluctant to
part away with its cash to other businesses in the house. Strategic options
given by BCG may not be easy to implement.
65

General Electrics ( or McKinsey) 9 point


Multifactor Portfolio Planning Matrix

Different businesses in the organisation as SBUs can be rated


for purpose of strategic planning.
Two parameters are considered based on internal appraisal of
all the SBUs done individually.
1. Industry Attractiveness: How attractive is the industry? The
attractiveness index depends upon business strengths. It is a
product of several factors like Industry potential, the current
size of industry, the rate of growth of industry, structure and
profitability of the industry. This is generally highly profitable,
productive arena, where firm would like to deploy best of
everything. Similarly least attractive business is kept with little
attention or is for grabs i.e. for divestment.
2. Company business strength: Company business strengths is
a product of several factors like companys current market
share, growth rate, differentiation strength, brand image,
corporate image.
66

GEs 9 Point Model.

The weighted factors for both these areas are plotted in


Company business Strength/Industry attractiveness
Company Business Strength

I
n
d
u
s
t
r
y

A
t
t
r
a
c
t
i
v
e
n
e
s
s

Strong

Medium

Weak

High

Invest

Selective Up or Out
Growth

Medium

Selective Up or Out Harvest


Growth

Low

Up or Out Harvest

Divest
67

General Electrics Business Screen


I
n
d
u
s
t
r
y
A
t
t
r
a
c
ti
v
e
n
e
s
s

Winners
A

Winners
B

High

Question
Marks
D

Winners
E

Average
Businesses
F

Medium

Losers

Losers
G

Low

Profit
Producers
Strong

Losers
Average

Weak

Business Strength / Competitive position

Circle denotes the size of Industry , while blue colour portion68


corresponds to Market Share.

Contd.

The circle indicates companys SBUs, the areas of the circles


are proportional to the relative size of the industries in which
these SBUs compete.

The pie slices within the circles represent each SBUs market
share.

General Electrics Business Screen

1.
2.
3.
4.

5.
6.
7.
8.

The vertical axis represents Industry Attractiveness. This is


weighted composite rating based on eight different factors. These
factors are:
Size of Market
Rate of Growth of Sales
Industry Profit Margin.
Competitive intensity including vulnerability to foreign
competition.
Seasonality.
Economics of Scale.
Susceptibility to Technological obsolesce
Entry conditions, Social, legal, environmental & human impacts.

Against each of these factors, the concerned business is


rated on a scale of 1 to 5 and then the weighted score is
determined from maximum of 5. This gives the Industry
Attractiveness Index.

70

General Electrics Business Screen

1.
2.
3.
4.
5.
6.
7.

The horizontal axis represents business strength competitive


position. This is a weighted composite rating based on seven
factors. These factors are:
Relative market Share.
Profit margins.
Ability to compete on Price & Quality.
Knowledge of Customer & Market.
Competitive Strengths & Weaknesses.
Technological Capability
Calibre of Management.
The two composite values for Industry Attractiveness and
Business Strength are plotted for each business in a
Companys Portfolio. The pie charts denote the proportional
size of the industry white colour & blue segment represent
company share.
71

Contd..
In this model market growth is replaced by market attractiveness.
The strategic planning approach in this model is based on analogy of traffic
lights at street crossing:
Green(G0)
Yellow( Caution)
Red(Stop)
GREEN
INVEST/EXPAND

YELLOW

RED

SELECT/EARN

HARVEST/DIVEST

Contd

If the product falls in the Green section it means the business


is strong and industry is at least medium in attractiveness, the
strategic decision should be to expand, to invest and grow.
If the business strength is low but industry attractiveness is
high, the product is in yellow zone.
A product in Red zone indicates that the business strength is
low and so is industry attractiveness. The appropriate strategy
in this should be retrenchment, divestment or liquidation.
The SBU in the green section may be said to belong to the
category of stars and cash cows in BCG matrix.
Those in Red zone are like Dogs and those in Yellow are like
Question marks.

Contd.
The following steps are taken to plot SBUs on the GE portfolio
matrix.
Step 1 Specify the typical factors that determine the industry
attractiveness. For each product line or SBU, overall industry
attractiveness is assessed and rated in a 5-point scale ranging
from 5 to 1.(Very attractive to very unattractive).
Step 2 The typical factors that characterize business strength of
each product line or SBU are assessed and measured on a 5point scale ranging from 1 to 5.(Very week to very strong).
Step 3 Determine the weight of each factor. The company must
assign relative importance weights to factors.
Step 4 Multiply the weights with scores of each factor of industry
attractiveness and ascertain the overall weighted score of
industry attractiveness.

Contd..
Step 5 Multiply the weights with scores of each factor of business
strength and ascertain the overall weighted score of business
strength.
Step 6 plot each product line or SBU current position on matrix.
Step 7 View resulting graph and interpret it.
Step 8 Perform a review analysis using adjusted weights and
scores.

Limitations of GE matrix

It is complicated.
Aggregation of the indicators is difficult.
Core competencies are not represented.
It does not depict the position of new products or business
units in developing industries.
It does not provide specific strategy to use or how to
implement that strategy.
The process of selecting factors, assigning weights, rating and
computing values, in reality is based on subjective
judgements.

Strategic Choice

The business firms face an almost infinitive number of


alternative strategies from which to choose.
Rational views of decision making advocate that all
alternatives be evaluated.
Strategic choice may be defined as The decision to select
from among grand strategies considered, the strategy which
will best meet the enterprises objectives. The decision
involves focussing on a few alternatives, considering the
selection factors, evaluating the alternatives against these
criteria and making the actual choice.
Strategic choice is the evaluation of alternative strategies and
the selection of best alternative.

Steps in Strategic Choice


The strategic choice consists of following steps:
(a) Focussing on strategic alternatives
(b) Analyzing the strategic alternatives
(c) Evaluating the strategic alternatives
(d) Choosing from among the strategic alternatives

Structure for making strategic choice

What Options
are available?

Options about
products, markets
and services

Choice Criteria
-Assessment
-Intent
Who should be
involved in
the Choice?

Options to improve
resources &
capabilities

Options of
method on
how to progress

Linking into available strategic options

Making the Choice

Chosen Strategy

Theoretical
Frameworks for
making
strategic choice

Contd..

Two techniques help strategic managers avoid the consensus


trap that Alfred Sloan found:

Devils Advocate: The idea of the devils advocate originated


in the medieval Roman Catholic Church as a way of ensuring
that imposters were not canonized as saints.
One trusted person was selected to find and present all the
reasons why a person should not be canonized.
When this process is applied to strategic decision making, a
devils advocate( who may be an individual or a group) is
assigned to identify potential pitfalls and problems with a
proposed alternative strategy in a formal presentation.

Contd..

Dialectical inquiry: The dialectical philosophy, which can be


traced back to Plato and Aristotle and more recently to Hegel,
involves combining two conflicting views- the thesis and
antithesis- into synthesis. When applied to strategic decision
making, dialectical inquiry requires that two proposals using
different assumptions be generated for each alternative
strategy under consideration.

After advocates of each position present and debate the merits


of their arguments before key decision makers, either one of
the alternatives or a new compromise alternative is selected as
the strategy to be implemented.

Contd..

Research generally supports the conclusion that devils


advocate and dilectical inquiry methods are equally superior to
consensus in decision making, especially when the firms
environment is dynamic.
Regardless of the process used to generate strategic
alternatives each resulting alternative must be rigorously
evaluated in terms of its ability to meet four criteria:
1. Mutual Exclusivity: Doing any one alternative would
preclude doing any other.
2. Success: It must be feasible and have a good probability of
success.
3. Completeness: It must take into account all the key strategic
issues.

Contd..

4.Internal Consistency: It must make sense on its own as a


strategic decision for the entire firm and not contradict key
goals, policies, and strategic currently being pursued by the
firm or its units.

B
M
T
CO ED AC
P
M
I

IN

E
M

N
R
E
V NT
O
G

BI
M
CO ED AC
N P
IM T

CH

The diamond is mutually reinforcing

CE
N

Porter's diamond model suggests that there are


inherent reasons why some nations, and
industries within nations, are more competitive
than others on a global scale.
The argument is that the national home base of
an organization provides organizations with
specific factors, which will potentially create
competitive advantages on a global scale.

Contd.

Porter's model includes 4 determinants of national advantage,


which are shortly described below:
Factor Conditions
Factor conditions include those factors that can be exploited
by companies in a given nation.
Factor conditions can be seen as advantageous factors found
within a country that are subsequently build upon by
companies to more advanced factors of competition.
Adverse conditions such as labor shortages or scarce raw
materials force firms to develop new methods, and this
innovation often leads to a national comparative advantage.
Some examples of factor conditions:
Highly skilled workforce
Linguistic abilities of workforce
Rich amount of raw materials
Workforce shortage

Demand Conditions

If the local market for a product is larger and more demanding


at home than in foreign markets, local firms potentially put
more emphasis on improvements than foreign companies.
This will potentially increase the global competitiveness of
local exporting companies.
A more demanding home market can thus be seen as a driver
of growth, innovation and quality improvement.
For eg. Japanese consumers have historically been more
demanding of electrical and electronic equipment than western
consumers. This has partly founded the success of Japanese
manufacturers within this sector.

Related and Supporting Industries

When local supporting industries and suppliers are


competitive, home country companies will potentially get
more cost efficient and receive more innovative parts and
products.
This will potentially lead to greater competitiveness for
national firms.
For eg. The Italian shoe industry benefits from a highly
competent pool of related businesses and industries, which has
strengthened the competitiveness of the Italian shoe industry
world-wide.

Firm Strategy, Structure, and


Rivalry

The structure and management systems of firms in different


countries can potentially affect competitiveness.
If rivalry in the domestic market is very fierce, companies may
build up capabilities that can act as competitive advantages on
a global scale.
Home markets with less rivalry may therefore be
counterproductive, and act as a barrier in the generating of
global competitive advantages such as innovation and
development.

Contd..

By using Porter's diamond, business leaders may analyze


which competitive factors may reside in their company's home
country, and which of these factors may be exploited to gain
global competitive advantages.

Business leaders can also use the Porter's diamond model


during a phase of internationalization, in which leaders may
use the model to analyze whether or not the home market
factors support the process of internationalization, and whether
or not the conditions found in the home country are able to
create competitive advantages on a global scale.

Contd.

The Diamond as a System


The effect of one point depends on the others. For
example, factor disadvantages will not lead firms to
innovate unless there is sufficient rivalry.
The diamond also is a self-reinforcing system. For
example, a high level of rivalry often leads to the
formation of unique specialized factors.

Contd

Application to the Japanese Fax Machine Industry

The Japanese facsimile (true copy) industry illustrates the


diamond of national advantage. Japanese firms achieved
dominance is this industry for the following reasons:
Japanese factor conditions: Japan has a relatively high number of
electrical engineers per capita.
Japanese demand conditions: The Japanese market was very
demanding because of the written language.
Large number of related and supporting industries with good
technology, for example, good miniaturized components since
there is less space in Japan.
Domestic rivalry in the Japanese fax machine industry pushed
innovation and resulted in rapid cost reductions.
Government support - NTT (the state-owned telecom company)
changed its bulky approval requirements for each installation to a
more general type approval.