Strategic Analysis & Choice Topic 5

STRATEGIC ANALYSIS & CHOICE 1.

Strategic Analysis Analysis and Choice C hoice meaning

2.

Corporate Level Strategic Analysis Analysis

3.

Business Level Strategic Analysis

Refer to Page 249, Azhar Kazmi

•

Corporate level analysis – • •

• •

•

BCG Matrix GE nine cell Matrix Hofer’s Product Market Evolution Shell Directional Policy Matrix

Industry level analysis •

Porter’s five forces model

•

Corporate level analysis – • •

• •

•

BCG Matrix GE nine cell Matrix Hofer’s Product Market Evolution Shell Directional Policy Matrix

Industry level analysis •

Porter’s five forces model

PROCESS OF STRATEGIC CHOICE 

Essentially a decision Making Process  – Setting objectives 2. Generating alternatives 3. Choosing one/more alternatives that will help the organization achieve its objectives in the best possible manner 4. Implementing the chosen alternative 1.

In order to make this choice from among the alternatives the decision maker has to set certain criteria on which he accepts / rejects the alternatives



These Criteria are the selection factors



Act as guides to decision-making & simplify the process of selection



Definition of Strategic Choice  – “the decision to select from among the Grand strategies considered, the strategy which will best meet the enterprise’s objectives.” The decision involves  – 1. 2. 3. 4.

Focussing on a few alternatives Considering the selection of factors Evaluating the alternatives against these criteria And making an actual choice

Refer to page 350, Azhar Kazmi to explain the above points in detail

CORPORATE LEVEL ANALYSIS 

Analysis focuses on what should a corporate entity do regarding the several businesses that are there in its portfolio ….

Corporate Level Strategic Analysis – 







Treats a corporate entity as constituting a portfolio of businesses under a corporate umbrella Analysis focuses on the question of what should a corporate entity do regarding the several businesses that are there in its portfolio Strategic alternatives constitute the Grand Strategies  – Stability, Expansion, Retrenchment & Combination Relevant to the case of a diversified corporation which has several businesses

WHAT IS CORPORATE PORTFOLIO ANALYSIS? 

A set of techniques that evolved during the mid 1960s & became a „Management  Fad’ 



Presently these techniques are useful & accepted to set a criteria  – normative as well as descriptive



Assist expert strategists in exercising a strategic choice

Fad - a custom, style, etc. that many people are interested in for a short time; passing fashion; craze

DEFINITION OF CORPORATE PORTFOLIO ANALYSIS 

A set of techniques that help strategists in taking strategic decisions with regard to individual products/ businesses in a firm’s portfolio



Primarily used for Competitive analysis & corporate strategic planning in multi product & multi business firms

Advantages  – •Resources could be channelized at corporate level to those business that possess the greatest potential

BOSTON CONSULTING (BCG), (MOST POPULAR)

GROUP

MATRIX



Graphic representation of an Organization to examine the different businesses in its portfolio on the basis of their Relative Market shares & the Industry Growth rates



Enterprise Strategy development tool

BCG MATRIX 

Developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP in 1970



According to this technique, different businesses/  products could be classified as low or high performers depending upon their industry growth rate & relative market share

Each of the cells represent a particular type of business The company’s business units can be classified into four categories/ cells:

Stars 



Question marks 



Cash cows 



Dogs 



The vertical axis represents the rate of growth in sales in percentage for a particular industry



The horizontal axis denotes the relative market share

R ELATIVE  M ARKET  S HARE  Percentage of the total market that is being serviced by your company, measured either in revenue (income) terms or unit volume terms •

RMS = Business unit sales this year Leading rival sales this year

•

The higher your market share, the higher proportion of the market you control

MARKET GROWTH RATE  Used as a measure of a market’s attractiveness 



MGR = Individual sales - individual sales this year last year Individual sales last year

Markets experiencing high growth are ones where the total market share available is expanding, and there’s plenty of opportunity for everyone to make money

STARS  H IGH GROWTH , H IGH MARKET  SHARE  

This phase corresponds to the growth phase of the PLC



Leaders in business



Require heavy investment to maintain its large market share

Leads to large amount of cash consumption & cash generation  Company pursues an expansion strategy to establish a strong competitive position  – “to have a star business” 



Examples  – Telecommunications, fast food, etc.

CASH COWS  LOW GROWTH  , H IGH MARKET  SHARE  

These are mature businesses (PLC) & often the stars of yesterday



Generate more cash than required  – The cash generation exceeds the reinvestment



Hence, extract the profits by investing as little cash as possible



These businesses can adopt mainly Stability Strategies. In a case where long-term prospects are bright, limited expansion could be adopted



Eg – Colgate toothpaste, Nescafe,

QUESTION MARKS/ P ROBLEM  C HILD  H IGH GROWTH  , LOW MARKET  SHARE  

Most businesses start off as question marks (PLC)



Will absorb great amounts of cash if the market share remains unchanged



Are usually new products/ services with a good commercial potential



Investments should be high for question marks

No single set of strategies can me used here  – if the company feels it can obtain a dominant market share it may select expansion strategies/ retrenchment may be a more realistic alternative  Have the potential to become stars if enough investment is made or become dogs if ignored  Eg.  – Holiday resorts, Light commercial vehicles, home improvement products 

DOGS  S LOW GROWTH , LOW MARKET  SHARE  

Neither generate nor require large amounts of cash

Business is situated at a declining stage (PLC)  Retrenchment strategies are suggested here 



Do not have potential to bring in much cash



Number of dogs in the company should be minimized

Example  – Textiles, Shipping

Cotton Jute,

BENEFITS 

Simple & easy to understand



Helps to quickly & simply screen the opportunities. Helps figure out how you can make the most of them



Used to identify how corporate cash resources can best be utilized to maximize the company’s future growth & profitability

PROBLEMS OF USING THE BCG MATRIX 

Difficult, time-consuming, & costly to implement



Focuses only on current businesses



Low share or niche businesses can be profitable too



High market share does not mean profits all the time 



When Airbus launched a new jet, Airbus A380, it gained a high market share very quickly. But had to still cover very high development costs

The main problem is that it oversimplifies a complex set of decisions.

GE NINE CELL MULTIFACTOR MATRIX

GE MODEL 

Originally developed by General Electric (GE) supported by the consulting firm McKinsey & company



Enlarged version of the BCG model



GE Business Screen introduces a three by three matrix, which now includes a medium category



Company can appropriately rate its different businesses for the purpose of Strategic Planning on the basis of 2 parameters  – Industry Attractiveness 2. Company‟s Business Strength 1.



A large corporation may have many SBU's, which essentially operate under the same strategic umbrella, but are distinctive & individual



Example  – Microsoft SBU's are distributed into operating systems, business software, consumer software and mobile & Internet technologies

INDUSTRY ATTRACTIVENESS 

Based on how strong is the firm in the industry



Desire of every firm to stay in the most attractive industries & excel through distinctive strengths



Factors  –        

Industry potential Current size of the industry Market Growth rate Structure of the industry Profitability of the industry The nature of competition and its diversity Impact of technology, the law, and energy efficiency Environmental impact

COMPANY‟S BUSINESS STRENGTHS 

Business-strengths assessment factors  –            



Current Market Share Management profile Company’s Financial Solid Position Good Bargaining Position over Suppliers High level of Technology Use Quality of products and services R&D Growth rate Strong distribution network Differentiation strength - Branding and promotions success Brand & Corporate image Efficiency

Firm selects the factors relevant to its industry & competitive image

Industry Attractiveness

High

Medium

High

Medium

Protect Position

Invest to Build

Build selectively

Selectively manage for earnings

Low Build selectively

Limited expansion or harvest

Invest/Grow Selectivity  /earnings

Low

Protect & refocus

Manage for earnings

Divest

Harvest  /Divest

LIMITATIONS 

Process highly subjective - Both selection & weighting of factors



There is no research to prove that there is a relationship between market attractiveness and business position



The interrelationships between SBU's, products, brands, experiences or solutions is not taken into account



This approach requires extensive data gathering



The GE matrix offers a broad strategy but does not indicate how best to implement it

THE SHELL DIRECTIONAL POLICY MATRIX

Refer to page 258, Kazmi

Developed by Shell Chemicals, UK. Uses two Parameters  – Business Sector prospects /prospects for sector profitability/ Market Attractiveness

1.   

Market Growth Market Quality Market Supply

Company’s Competitive Abilities

2.   

Weak/ Unattractive Average Strong/ Attractive

Strong

Weak

Average

Strong

Market Leadership & Innovation

Average

Weak



Market Leader - major resources are focused upon the SBU



Try harder - could be vulnerable over a longer period of time, but fine for now



Double or quit - gamble on potential major SBU's for the future



Growth - grow the market by focusing just enough resources



Proceed with care - just like a cash cow, milk it & do not commit any more resources



Cash Generator - cash cow, milk here for expansion elsewhere



Phased withdrawal - move cash to SBU's with greater potential



Divest - liquidate or move these assets on a fast as you can



Divestment Domain - Products falling in this area will probably be losing money, not necessarily every year, but the losses in bad years will outweigh the gains in good years. It is unlikely that management will be surprised by specific activities falling into this area since poor performance should already be known



Phased Withdrawal Domain - A product with an average to weak position with unattractive market prospects or a weak position with average market prospects is unlikely to be earning any significant amounts of cash. The indicated strategy is to realise the value of the assets on a controlled basis to make the resources available for redeployment elsewhere.



Diversification/Cash Generator Domain - A typical situation in this matrix area is when the company has a product that is moving towards the end of its life cycle and is being replaced in the market by other products. No finance should be allowed for expansion, and so long as it is profitable, the opportunity should be used as a source of cash for other areas. Every effort should be made to maximise profits since this particular activity has no long-term future



Growth - Investment should be made to allow the product to grow with the market. Generally, the product will generate sufficient cash to be self-financing and should not be making demands on other corporate cash resources



Market Leadership & Innovation - The strategy should be to maintain this position. At certain stages this may imply a need for resources which cannot be met entirely from funds generated by the product, (e.g. resources to expand capacity), although earnings should be above average



Try Harder Domain - The implication is that the product can be moved towards the leadership box by judicious application of resource. In these circumstances the company should certainly consider making available resources in excess of what the product can generate



Double or Quit Domain - Tomorrow’s breadwinners among today’s R&D projects may come from this area. Putting the strategy simply, those with the best prospects should be selected for full backing and development; the rest should be abandoned



Proceed with Care Domain - In this position, some investments may be justified but major investments should be made with extreme caution.

HOFER‟S METHOD OF BUSINESS PORTFOLIO ANALYSIS Refer to page 257, Kazmi

BACKGROUND 

The 15 cell matrix was proposed by Charles W. Hofer and Dan Schendel, developed in the late 1970s



It considers the stages of development of the product/ market & the competitive position/ market evolution of different businesses in a company’s corporate portfolio

What is the Purpose of conducting an Analysis for Strategic Planning?????

1) To identify the major opportunities and threats a business unit faces in the future

2) to identify the skills around which it can develop a strategy to exploit the opportunities and negotiate around the threats

CRITICISMS FOR G.E MATRIX 

According to Hofer and Schendel  - the major weakness with the GE Multi-factor matrix was that it didn‟t effectively depict the positions of new businesses that are just starting to grow in new industries



Hence, in that case, it is preferable to use a fifteen-cell matrix



Here businesses are plotted in terms of their competitive position & their stage of product/market evolution".



Thus, Hofer  developed the - Product/Market  Evolution Portfolio Matrix, or Life Cycle Matrix 

THE APPROACH • Hofer-Schendel ascertain that four steps have to be undertaken to determine a basic strategic position • This in turn determines the investment strategy of the  business 

THE FOUR STEPS ARE 1.

Short-term financial condition & health of company must be determined - to assess whether it is a feasible entity to grow/ likely to go bankrupt

2.

Relative competitive position of the business must be ascertained

3.

Necessary to determine the position of evolution of the market that the business competes in - This will help decide increasing, growth / profit of the business

4.

A plot is then made of the business’s basic strategic position

LIFE-CYCLE MARKET EVOLUTION MATRIX STAGE OF INDUSTRY EVOLUTION • • • • •

Early Development Rapid Growth/Takeoff Shake-Out Maturity/Saturation Decline/Stagnation

COMPETITIVE POSITION Strong / Average / Weak

The business unit competitive position

The Life-Cycle Portfolio Matrix Development

   e     l    c    y    c    e     f    i     l    y    r    a    n    o    i    t    u     l    o    v    e    e     h    t    n    i    e    g    a    t    s    s     ’    y    r    t    s    u    d    n    I    e     h    T

Growth

Competitive shakeout Maturity

Saturation

Decline

Strong

Average

Weak