Stm Unit III

8/3/2019 Stm Unit III

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About Strategic Analysis and Choice

Strategic implementation is the last stage of

strategic management and strategic analysis and

choice are two significant constituents (elements)

of that process.

The strategy of a company refers to its all-inclusive plan or program for the purpose of

accomplishing its aims and targets in the long run.

Different types of strategies include business unit

strategy, corporate strategy, operational strategy

and others.

Strategic analysis implies the examination

of the present condition of a business and

consequently developing an appropriate business

strategy.

At the time of performing strategic analysisand arriving at strategic choices, long term goals

are fixed and different types of strategies are

chosen that are most appropriate for the mission of

the company and the variable conditions.

Strategic analysis and choice of strategies

are done with the help of a number of techniques.

If the appropriate strategy is chosen, a company

would become more efficient to establish

sustainability in competitive advantage and

maximize firm valuation.

BENEFITS OF SAC

Sustainability

To survive and succeed long-term, you

need to think and plan long-term.

Funding

Strategic analysis demonstrates an

organizations relevance and viability. It increases

your organisation's credibility. So your funding

applications are more likely to succeed.

Whole organisation approach

Looking at your external environment can

help you take a whole organisation approach. It

will help you work out how different trends might

affect different elements of your project, group or

organisation.

Without environmental analysis an organisation

doesnt consider the way things are changing

around them, so no analysis is done and you never

notice that things have moved on around you.

Paul Sullivan from Shelter

Sound goals

It is used to choose the right path is

challenging. Strategic analysis will help you make

the right decisions to make your organisation more

effective.External focus

An effective organisation can identify and

respond to opportunities and threats. Internal focus

alone is not enough.

Clear expectations

Everyone with a stake in your organisation

helps to ensure your strategy is relevant and

appropriate.

Effectiveness

Analysis will help you meet your objectives

in a smarter, more effective and savvy way. It is an

endless source of ideas that will inspire you to

innovate and improvise.

KEY FACTORS FOR SAC

Key Internal Factors

Marketing

Management

Operations/ProductionAccounting/Finance

Computer Information Systems

Research and Development

Key External Factors

Political/Governmental/Legal

Economy

Technological

Social/Demographic/Cultural/Environmental


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Competitive

Techniques Used in Strategic Analysis

The following devices or techniques are

used in the procedure of strategic analysis:

Five Forces Analysis

PEST Analysis (Political, Economic, Social

and Technological Analysis)

Market segmentation

Scenario planning

Competitor analysis

Directional policy matrix

SWOT Analysis (Strength, Weaknesses,

Opportunities, and Threats Analysis)

Critical Success Factor Analysis

Characteristics of Strategic Analysis and Choice

Following are the features of strategic analysis andchoice:

Establishment of long term goals

Producing strategy options

Choosing strategies to act on

Selecting the best option and accomplishing

mission and goals

Strategic Analysis is the process of conducting

research on the business environment within

which an organisation operates and on the

organisation itself, in order to formulate strategy.

BNET Business Dictionary

Strategic Analysis a theoretically

informed understanding of the environment in

which an organisation is operating, together with

an understanding of the organizations interaction

with its environment in order to improve

organizational efficiency and effectiveness by

increasing the organizations capacity to deployand redeploy its resources intelligently.

Professor Les Worrall, Wolverhampton Business School

Definitions of strategic analysis often

differ, but the following attributes are commonly

associated with it:

Identify and evaluate of data relevant to the

strategy formulation.

Definition of external and internal environment

should be analyzed.

Identify the range of analytical methods that can

be employed in the analysis.

Examples of analytical methods used instrategic analysis include:

**SWOT analysis

**PEST analysis

**Porters five forces analysis

**Four corners analysis

**Value chain analysis

**Early warning scans

**War gaming.

PEST ANALYSIS

PEST analysis is a scan of the external

macro-environment in which an organisation

exists. It is a useful tool for understanding thepolitical, economic, socio-cultural and

technological environment that an organisation

operates in. It can be used for evaluating market

growth or decline, and as such the position,

potential and direction for a business.

POLITICAL FACTORS

These include government regulations

such as employment laws, environmental

regulations and tax policy. Other political factors

are trade restrictions and political stability.

ECONOMIC FACTORS

These affect the cost of capital and

purchasing power of an organisation. Economic

factors include economic growth, interest rates,

inflation and currency exchange rates.

SOCIAL FACTORS

These have impact on the consumers need

and the potential market size for an organizations

goods and services.S

ocial factors include population growth, age demographics and

attitudes towards health.

TECHNOLOGICAL FACTORS

These influence barriers to entry, make or

buy decisions and investment in innovation, such

as automation, investment incentives and the rate

of technological change.

PEST factors can be classified as opportunities or

threats in a SWOT analysis. It is often useful to


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complete a PEST analysis before completing a

SWOT analysis.

It is also worth noting that the four

paradigms of PEST vary in significance depending

on the type of business. For example, social

factors are more obviously relevant to consumer

businesses or a B2B business near the consumer

end of the supply chain. Conversely, political

factors are more obviously relevant to a defence

contractor or aerospace manufacturer.

FOUR CORNERS ANALYSIS

Developed by Michael Porter, the four

corners analysis is a useful tool for analyzing

competitors. It emphasizes that the objective of

competitive analysis should always be on

generating insights into the future.

The model can be used to:Develop a profile of the likely strategy changes a

competitor might make and how successful they

may be

Determine each competitors probable response

to the range of feasible strategic moves other

competitors might make

Determine each competitors probable reaction to

the range of industry shifts and environmental

changes that may occur.

The four corners refers to four

diagnostic components that are essential to

competitor analysis: future goals; current

strategy; assumptions; and capabilities.

Many organisations carry out basic SWOT

analysis and have an appreciation for their

competitors strategies. However, motivational

factors are often overlooked and yet are generally

the key drivers of competitive behaviour.

Understanding the following fourcomponents can help predict how a competitor

may respond to a given situation.

MOTIVATION DRIVERS

Analyzing a competitors goals assists in

understanding whether they are satisfied with their

current performance and market position. This

helps predict how they might react to external

forces and how likely it is that they will change

strategy.

MOTIVATION ACTION

MOTIVATION: MANAGEMENT ASSUMPTIONS

The perceptions and assumptions that a

competitor has about itself, the industry and other

companies will influence its strategic decisions.

Analyzing these assumptions can help identify the

competitors biases and blind spots.ACTIONS STRATEGY

A companys strategy determines how a

competitor competes in the market. However,

there can be a difference between intended

strategy (the strategy as stated in annual reports,

interviews and public statements) and the realized

strategy (the strategy that the company is

following in practice, as evidenced by

acquisitions, capital expenditure and new product

development).

Where the current strategy is yielding

satisfactory results, it is reasonable to assume that

an organisation will continue to compete in the

same way as it currently does.

ACTIONS CAPABILITIES

The drivers, assumptions and strategy of

an organisation will determine the nature,

likelihood and timing of a competitors actions.

ANALYSIS DRIVERS

Financial goals

Corporate culture

Organizational structure

Leadership team

backgrounds

External constraints

Business philosophy

CURRENT STRATEGY

How the business creates

value

Where the business ischoosing to invest

Relationships and networks

the business has developed

MANAGEMENT

ASSUMPTIONS

Companys perceptions ofits strengths and weaknesses

Cultural traits

Organizational valuePerceived industry forces

Belief about competitors

goals

CAPABILITIES

Marketing skills

Ability to service channels

Skills and training to work

force

Patents and copyrights Financial strength

Leadership qualities of

CEO

COMPETITORS FUTURE STRATEGY


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However, an organizations capabilities will

determine its ability to initiate or respond to

external forces.

VALUE CHAIN ANALYSIS

Before making a strategic decision, it is

important to understand how activities within the

organisation create value for customers. One way

to do this is to conduct a value chain analysis.

Value chain analysis is based on the

principle that organisations exist to create value for

their customers. In the analysis, the organizations

activities are divided into separate sets of activities

that add value. The organisation can more

effectively evaluate its internal capabilities by

identifying and examining each of these activities.

Each value adding activity is considered to be a

source of competitive advantage.

The three steps for conducting a valuechain analysis are:

Separate the organizations operations into

primary and support activities.

Primary activities are those that

physically create a product, as well as market the

product, deliver the product to the customer and

provide after-sales support. Support activities are

those that facilitate the primary activities.

Allocate cost to each activity.

Activity cost information provides

managers with valuable insight into the internal

capabilities of an organisation.

Identify the activities that are critical to

customers satisfaction and market success.

There are three important considerations

in evaluating the role of each activity in the value

chain.

**Company mission. This influences the

choice of activities an organisation undertakes.**Industry type. The nature of the

industry influences the relative importance of

activities.

**Value system. This includes the value

chains of an organizations upstream and

downstream partners in providing products to end

customers.

Value chain analysis is a comprehensive

technique for analyzing an organizations source of

competitive advantage.

EARLY WARNING SYSTEMS

The purpose of strategic early warning

systems is to detect or predict strategically

important events as early as possible. They are

often used to identify the first scene of attack from

a competitor or to assess the likelihood of a given

scenario becoming reality.

The seven key components of an early

warning system are:

Market definition: A clear definition of the scope

of the arena to be scrutinized. For example, is the

arena a particular geographical region, brand or

market?

Open systems: An ability to capture a wide rangeof information on relevant competitors.

Filtering: Information that has been collected on

the arena needs to be filtered according to

significance. Expert interpretation is required in

order to identify particular events that signify

strategic moves or shifts.

Predictive intelligence: Using knowledge of the

forces driving a competitor to predict which

direction they are likely to take. One technique is

to build likely scenarios and actively seek the

signals that confirm the scenario. The predictions

need to be assessed for their probability of

occurring and potential impact.

Communicating intelligence: Ensuring that the

right people in an organisation receive regular

briefing on key signals.

Contingency planning: Events that have a high

potential impact or probability of occurring may

merit contingency plans, for example, a change ofstrategy or mitigating actions.

A cyclical process: The process of scrutinizing

information for new warning signals should never

stop. While the emphasis is on emerging threats

and opportunities, the process should be flexible

enough to tackle unexpected shorter term

developments too.


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WAR GAMING

War games are a useful technique for

identifying competitive vulnerabilities and

misguided internal assumptions about competitors

strategies.

Simulations of competitive scenarios are used to

explore the implications of changes in strategy in a

no risk environment. They also encourage new

ways of thinking about the competitive context.

War games are often particularly useful for

organisations facing critical strategic decisions.

A typical business war game has the

following characteristics:

An off-site venue

Senior managers representing a cross-functional

mix of participants

Two to three full days duration

Four or more teams of with four to eight peopleeach. Each team represents either the sponsoring

company or one of its competitors

Preparation time in which each team receives a

dossier describing the company they are

representing, and its strengths and weaknesses

Games comprise several moves or decision

rounds. Each move consists of a fixed,

predetermined amount of time ranging from a

couple of months to several years. During each

move, teams make and carry out strategic

decisions. After each move, teams assess their

positions relative to other teams.

A control team of facilitators who serve as the

board of directors. They ensure that strategic plans

are acceptable and legal. They also facilitate the

deep brief, in which participants review the merit

of each strategy.

STRATEGIC CHOICE

Many opportunities and issues that require

a strategic decision emerge outside of the annual

planning process. In some organizations, this

means that the board or staff doesnt apply the

same rigor to decision-making as they would at a

session dedicated to strategic thinking. As well, the

natural tendency is to address it as an operational,

rather than strategic issue. In other cases, managers

and frontline staff wait for the board or leadership

team to make the strategic decisions.

The following outlines a rigorous, but

simple, strategic decision-making process that can

be used by anyone in the organization, from the

board to frontline staff, to address issues and

opportunities as they emerge. At a time when

organizations need to be quick, the process will

ensure you make the right choice.

To illustrate how it works, here is the

process applied to a strategic decision about a

major cut in funds.

STAGE ONE: IDENTIFY

Start by ensuring that the issue is strategic,

not operational. If the outcome will require a

significant change or have a big impact on

stakeholders, then it is likely strategic. Also,

consider whether the organizational culture hinders

the process. A culture that values flexibility,

promotes debate, insists on transparency, and

believes in inclusiveness will help with success.

Then clearly articulate the issue or opportunitywithout letting people skip to the solution. Be sure

everyone agrees with it.

STAGE TWO: REFLECT

Gather information about the issue or

opportunity. Don't allow biases about solutions to

influence the selection. Draw from a variety of

sources; sometimes perceptions are as important as

hard data. Review the information and make

observations, without arriving at decisions about

IDENTIFY

Articulate issue,

problem or opportunity

LEARN

**Gain insight,

**identify barriers,

**formulate question

ACT

Execute the

decision

SELECT

Combine and

synthesize the

alternatives,

Prioritize the option

and make the choice

REFLECT

Gather and

analyze the data

and uncover

assumption


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how to proceed. Also, uncover any board or staff

assumptions that can influence the solution. If

necessary, reframe the issue or opportunity based

on what has been learned.

STAGE THREE: LEARN

This is the creative stage. Draw from what

has been learned in the reflection stage and

formulate questions, identify barriers or

challenges, draw insights, debate possibilities, and

come up with a wide range of options. Be sure to

encourage different perspectives, promote debate,

and challenge the status quo.

STAGE FOUR: SELECT

Now make the choice. Combine and

synthesize the options and then prioritize them

using agreed-upon criteria. Think about the

implications of the prioritized choices on

resources, processes, and programs. Once thechoice is made, ensure that there is consensus and

that people are prepared to be held accountable for

it. Assign key metrics that need to be monitored to

ensure success.

STAGE FIVE: ACT

The final stage focuses on the execution of

the decision - how will it be achieved, who is

responsible, what are the timelines and how will it

be evaluated? These now become operational

decisions.

BALANCED SCORECARDBASICS

The balanced scorecard is a strategic

planning and management system that is used

extensively in business and industry, government,

and nonprofit organizations worldwide to align

business activities to the vision and strategy of the

organization, improve internal and external

communications, and monitor organization performance against strategic goals. It was

originated by Drs. Robert Kaplan (Harvard

Business School) and David Norton as a

performance measurement framework that added

strategic non-financial performance measures to

traditional financial metrics to give managers and

executives a more 'balanced' view of

organizational performance. While the phrase

balanced scorecard was coined in the early 1990s,

the roots of the this type of approach are deep, and

include the pioneering work of General Electric on

performance measurement reporting in the 1950s

and the work of French process engineers (who

created the Tableau de Bord literally, a

"dashboard" of performance measures) in the early

part of the 20th century.

The balanced scorecard has evolved from

its early use as a simple performance measurement

framework to a full strategic planning and

management system. The new balanced

scorecard transforms an organizations strategic

plan from an attractive but passive document into

the "marching orders" for the organization on a

daily basis. It provides a framework that not only

provides performance measurements, but helps

planners identify what should be done and

measured. It enables executives to truly executetheir strategies.

This new approach to strategic management was

first detailed in a series of articles and books by

Drs. Kaplan and Norton. Recognizing some of the

weaknesses and vagueness of previous

management approaches, the balanced scorecard

approach provides a clear prescription as to what

companies should measure in order to 'balance' the

financial perspective. The balanced scorecard is a

management system (not only a measurement

system) that enables organizations to clarify their

vision and strategy and translate them into action.

It provides feedback around both the internal

business processes and external outcomes in order

to continuously improve strategic performance and

results. When fully deployed, the balanced

scorecard transforms strategic planning from an

academic exercise into the nerve center of an

enterprise.Kaplan and Norton describe the innovation

of the balanced scorecard as follows:"The balanced

scorecard retains traditional financial measures.

But financial measures tell the story of past events,

an adequate story for industrial age companies for

which investments in long-term capabilities and

customer relationships were not critical for

success. These financial measures are inadequate,

however, for guiding and evaluating the journey


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that information age companies must make to

create future value through investment in

customers, suppliers, employees, processes,

technology, and innovation."

Adapted from Robert S. Kaplan and David

P. Norton, Using the Balanced Scorecard as a

Strategic Management System, Harvard Business

Review (January-February 1996): 76.

PERSPECTIVES

The balanced scorecard suggests that weview the organization from four perspectives, and

to develop metrics, collect data and analyze it

relative to each of these perspectives:

The Learning & Growth Perspective

This perspective includes employee

training and corporate cultural attitudes related to

both individual and corporate self-improvement. In

a knowledge-worker organization, people -- the

only repository of knowledge -- are the main

resource. In the current climate of rapid

technological change, it is becoming necessary for

knowledge workers to be in a continuous learning

mode. Metrics can be put into place to guide

managers in focusing training funds where they

can help the most. In any case, learning and growth

constitute the essential foundation for success of

any knowledge-worker organization.

Kaplan and Norton emphasize that

'learning' is more than 'training'; it also includes

things like mentors and tutors within the

organization, as well as that ease of

communication among workers that allows them to

readily get help on a problem when it is needed. It

also includes technological tools;

The Business Process Perspective

This perspective refers to internal business

processes. Metrics based on this perspective allow

the managers to know how well their business is

running, and whether its products and services

conform to customer requirements (the mission).

These metrics have to be carefully designed by

those who know these processes most intimately;

with our unique missions these are not something

that can be developed by outside consultants.

The Customer PerspectiveRecent management philosophy has shown

an increasing realization of the importance of

customer focus and customer satisfaction in any

business. These are leading indicators: if customers

are not satisfied, they will eventually find other

suppliers that will meet their needs. Poor

performance from this perspective is thus a leading

indicator of future decline, even though the current

financial picture may look good.

In developing metrics for satisfaction,

customers should be analyzed in terms of kinds of

customers and the kinds of processes for which we

are providing a product or service to those

customer groups.

The Financial Perspective

Kaplan and Norton do not disregard the

traditional need for financial data. Timely and

accurate funding data will always be a priority, and

managers will do whatever necessary to provide it.In fact, often there is more than enough handling

and processing of financial data. With the

implementation of a corporate database, it is hoped

that more of the processing can be centralized and

automated. But the point is that the current

emphasis on financials leads to the "unbalanced"

situation with regard to other perspectives. There

is perhaps a need to include additional financial-


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related data, such as risk assessment and cost-

benefit data, in this category.

STRATEGY MAPPING

Strategy maps are communication tools

used to tell a story of how value is created for the

organization. They show a logical, step-by-step

connection between strategic objectives (shown as

ovals on the map) in the form of a cause-and-effect

chain. Generally speaking, improving

performance in the objectives found in the

Learning & Growth perspective (the bottom row)

enables the organization to improve its Internal

Process perspective Objectives (the next row up),

which in turn enables the organization to create

desirable results in the Customer and Financial

perspectives (the top two rows).

BALANCED SCORECARD SOFTWARE

The balanced scorecard is not a piece of

software. Unfortunately, many people believe that

implementing software amounts to implementing a

balanced scorecard. Once a scorecard has been

developed and implemented,

however, performance management software can

be used to get the right performance information to

the right people at the right time. Automation adds

structure and discipline to implementing the

Balanced Scorecard system, helps transform

disparate corporate data into information and

knowledge, and helps communicate performance

information.

Balanced Scorecard - Definition

What exactly is a Balanced Scorecard? A

definition often quoted is: 'A strategic planning and

management system used to align business

activities to the vision statement of anorganization'. More cynically, and in some cases

realistically, a Balanced Scorecard attempts to

translate the sometimes vague, pious hopes of a

company's vision/mission statement into the

practicalities of managing the business better at

every level.

A Balanced Scorecard approach is to take a

holistic view of an organization and co-ordinate

MDIs so that efficiencies are experienced by all

departments and in a joined-up fashion.

To embark on the Balanced Scorecard path

an organization first must know (and understand)

the following:

The company's mission statement

The company's strategic plan/vision

Then

The financial status of the organization

How the organization is currently structured

and operating

The level of expertise of their employees

Customer satisfaction level

The following table indicates what areas may be

looked at for improvement (the areas are not

exhaustive and are often company-specific):

BALANCED SCORECARD - FACTORS EXAMPLES

DEPARTMENT AREAS

Finance

Return On Investment,

Cash Flow, Return on Capital

Employed, Financial Results

(Quarterly/Yearly)

Internal Business

Processes

Number of activities per

function, Duplicate activities

across functions, Process

alignment (is the right process

in the right

department?) ,Process

bottlenecks ,Process

automation

Learning &

Growth

Is there the correct level of

expertise for the

job? Employee turnover Job

satisfaction

Training/Learning

opportunities

Customer

Delivery performance to

customer,

Quality performance for

customer,

Customer satisfaction rate,

Customer percentage of

market,

Customer retention rate,


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Once an organization has analyzed the

specific and quantifiable results of the above, they

should be ready to utilize the Balanced Scorecard

approach to improve the areas where they are

deficient.

The metrics set up also must

be SMART (commonly, Specific, Measurable,

Achievable, Realistic and Timely) - you cannot

improve on what you can't measure! Metrics must

also be aligned with the company's strategic plan.

A Balanced Scorecard approach generally

has four perspectives:

1. Financial

2. Internal business processes

3. Learning & Growth (human focus, or

learning and development)

4. Customer

Each of the four perspectives is inter-dependent - improvement in just one area is not

necessarily a recipe for success in the other areas.

BALANCE SCORECARD IMPLEMENTATION

Implementing the Balanced Scorecard

system company-wide should be the key to the

successful realization of the strategic plan/vision.

A Balanced Scorecard should result in:

Improved processes

Motivated/educated employeesEnhanced information systems

Monitored progress

Greater customer satisfaction

Increased financial usage

CORPORATE DEVELOPMENT

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.

For example, if a company is looking

towards non-organic growth expansion, a

corporate development group will evaluate

potential target companies. The acquisition of

small or private companies by a large corporation

is usually not conducted with the assistance of

investment bankers, but executed by the corporate

development team themselves.

The process of corporate development can also be

applied to the task of growing the company

through mergers and acquisitions. In this scenario,

the project development will involve identifying

potential target companies for acquisitions or

unions resulting in a new and more aggressive

corporation. The team will consider all possible

outcomes from any given potential merger or

acquisition and attempt to project if the action is

likely to result in positive growth or could possiblyimpair the company permanently.

There is no one tried and true formula for the

process of corporate development. The actual

structure of the corporate strategy will depend

greatly on the current circumstances of the

company and the area where the development is

desired. In most cases, the process will not be of

short duration; corporate development is usually a

process that takes place over an extended period of

time and may be adjusted or refined as the project

moves forward.

Corporate development is a term that

references the variety of planning options and

strategies that can help to move a company toward

its goals. The process of this type of strategic

development can be applied to just about any facet

of the corporations organizational structure. In

actual structure, corporate planning can involve

finding ways to fine-tune the existing structure ofthe company or expanding the companys interest

through acquisitions or mergers.

CORPORATE PORTFOLIO MANAGEMENT

Aligning the right information with the

right people to make effective corporate decisions

is one of the most common challenges facing

senior management today. When addressing capital

allocation and investment decisions, this challenge

becomes even more formidable. The most critical


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determinant of an organizations long-term value is

its ability to optimally allocate limited capital

among large projects, new markets and merger and

acquisition (M&A) decisions. Successful

organisations make large investment and capital

allocation decisions using a robust approach that

analyses each options risk-return trade-off and

reflects each options overall impact on the

existing portfolio. Poor investments, on the other

hand, can result in share price depression, lost

market share, departure of key leadership and

negative media attention.

By incorporating a risk-return perspective

into Corporate Portfolio Management,

organisations will be better equipped to answer the

following questions:

How can risk be incorporated into the

decision making process so that multipleinvestment options are consistently evaluated?

Will the expected return in any single

investment justify the level of risk required to

pursue this option?

What is the optimal combination of

investment options to achieve our mid- and long-

term strategic objectives?

Where should I spend my next investment

dollar?

Utilizing a risk-return perspective to

support these decisions will allow a firm to sustain

growth and create long-term value. It can be

applied to a wide variety of industry examples:

**Media and technology companies

determining an appropriate business portfolio amid

technological uncertainty

**Energy companies selecting an exploration

portfolio amid political and price uncertainty

**Aerospace and automotive

manufacturers choosing between business

segments amid demand and project execution

uncertainty

**Pharmaceutical companies allocating

R&D dollars based on a portfolio view of their

pipeline

**Companies considering a make vs. buy

outsourcing decision within their supply chain

**Real estate companies determining the

right mix of geographic vs. use combinations

The business portfolio is the collection of

businesses and products that make up the

company. The best business portfolio is one that

fits the company's strengths and helps exploit the

most attractive opportunities.

The company must:

-- Analyze its current business portfolio and

decide which businesses should receive more or

less investment, and

-- Develop growth strategies for adding

new products and businesses to the portfolio,

whilst at the same time deciding when products

and businesses should no longer be retained.

The two best-known portfolio planning

methods are the Boston Consulting GroupPortfolio Matrix and the McKinsey / General

Electric Matrix. In both methods, the first step is

to identify the various Strategic Business Units

("SBU's") in a company portfolio. An SBU is a

unit of the company that has a separate mission

and objectives and that can be planned

independently from the other businesses. An SBU

can be a company division, a product line or even

individual brands - it all depends on how the

company is organized.

BOSTON CONSULTING GROUP MATRIX

The Boston Matrix assumes that if you

enjoy a high market share you will be making

money. (This assumption is based on the idea that

you will have been in the market long enough to

have learned how to be profitable, and will be

enjoying scale economies that give you an

advantage).

The question it asks is, "S

hould you beinvesting additional resources into a particular

product line just because it is making you money?"

The answer is, "not necessarily."

This is where market growth comes into

play. Market growth is used as a measure of a

market's attractiveness. Markets experiencing high

growth are ones where the total market is

expanding, meaning that its relatively easy for


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businesses to grow their profits, even if their

market share remains stable.

By contrast, competition in low growth

markets is often bitter, and while you might have

high market share now, it may be hard to retain

that market share without aggressive discounting.

This makes low growth markets less attractive.

MARKET SHARE AND MARKET GROWTH

To understand the Boston Matrix, you need

to understand how market share and market growth

interrelate.

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. The higher your market share, the higher the

proportion of the market you control.

The BCG matrix or also called BCG

model relates to marketing. The BCG model is a

well-known portfolio management tool used in

product life cycle theory. BCG matrix is often used

to prioritize which products within company

product mix get more funding and attention.

The BCG matrix model is a portfolio

planningmodel developed by Bruce Henderson of

the Boston Consulting Group in the early 1970's.

The BCG model is based on classification of

products (and implicitly also company business

units) into four categories based on combinations

ofmarket growth and market share relative to the

largest competitor.

When should I use the BCG matrix model?

Each product has itsproduct life cycle, and

each stage in product's life-cycle represents a

different profile of risk and return. In general,

a company should maintain a balancedportfolio of

products. Having a balanced product portfolio

includes both high-growth products as well as low-

growthproducts.

A high-growth product is for example a new

one that we are trying to get to some market. It

takes some effort and resources to market it, to

build distribution channels, and to build sales

infrastructure, but it is a product that is expected to

bring the gold in the future. An example of this

product would be an iPod.

A low-growth product is for example an

established product known by the market.

Characteristics of this product do not change much,customers know what they are getting, and the

price does not change much either. This product

has only limited budget for marketing. The is the

milking cow that brings in the constant flow of

cash. An example of this product would be regular

Colgate toothpaste.

The BCG matrix reaches further behind

product mix. Knowing what we are selling helps

managers to make decisions about what priorities

to assign to not only products but also company

departments and business units.

Placing products in the BCG matrix results

in 4 categories in a portfolio of a company:

BCG STARS (high growth, high market share)

Successful question marks become stars.

i.e. market leaders in high growth industries.

However, investment is normally still required to

maintain growth and to defend the leadershipposition. Stars are frequently only marginally

profitable but as they reach a more mature status in

their life cycle and growth slows, returns become

more attractive. The stars provide the basis for

long term growth and profitability.

Strategic options for stars include.

**Integration forward, backward and

horizontal

**Market penetration


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**Market development

**Product development

**Joint ventures

Stars are defined by having high market

share in a growing market.

Stars are the leaders in the business but

still need a lot of support for promotion a

placement.

If market share is kept, Stars are likely to

grow into cash cows.

The company goes for expansion strategy

for further expanding the business unit

BCG CASH COWS (low growth, high market

share)

These are characterized by high relative

market share in low growth industries. As the

market matures the need for investment reduces.Cash Cows are the most profitable products in the

portfolio. The situation is frequently boosted by

economies of scale that may be present with

market leaders. Cash Cows may be used to fund

the businesses in the other three quadrants.

It is desirable to maintain the strong

position as long as possible and strategic options

include.


**Concentric diversification

**If the position weakens as a result of loss

of market share or market contraction then options

would include,Retrenchment(or even divestment)

Cash cows are in a position of high

market share in a mature market.

If competitive advantage has been

achieved, cash cows have high profit margins and

generate a lot of cash flow.

The company goes for stability strategy

for sustain the business unit in the market

Because of the low growth, promotion and

placement investments are low.

Investments into supporting

infrastructure can improve efficiency and increase

cash flow more.

Cash cows are the products that

businesses strive for.

BCG DOGS (low growth, low market share)

These describe businesses that have low

market shares in slow growth markets. They may

well have been Cash Cows. Often they enjoy

misguided loyalty from management although

some Dogs can be revitalized. Profitability is, at

best, marginal.

Strategic options would include.

**Retrenchment (if it is believed that it

could be revitalized)

**Liquidation

**Divestment (if you can find someone to

buy!)

**Successful products may well move from

question mark though star to Cash Cow and finally

to Dog. Less successful products that never gain

market position will move straight from question

mark to Dog.

Dogs are in low growth markets and havelow market share.

Due To low growth, high market share the

company may take decision or divestment or

liquidation

Dogs should be avoided and minimized.

Expensive turn-around plans usually do

not help.

BCG QUESTION MARKS (high growth, low

market share)

These are products or businesses that

compete in high growth markets but where the

market share is relatively low. A new product

launched into a high growth market and with an

existing market leader would normally be

considered as a question mark.

Because of the high growth environment,

they can be a cash sink. Strategic options for

question marks include..

**Market penetration

**Market development


**Which are all intensive strategies or

divestment?

These products are in growing markets but

have low market share at the introductory stage.

Question marks are essentially new

products where buyers have yet to discover them.


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The marketing strategy is to get markets

to adopt these products.

Question marks have high demands and

low returns due to low market share.

These products need to increase their

market share quickly or they become dogs.

The best way to handle Question marks is

to either invest heavily in them to gain market

share or to sell the

BENEFITS

BCG MATRIX is simple and easy to

understand.

It helps you to quickly and simply screen

the opportunities open to you, and helps

you think about how you can make the

most of them.

It is used to identify how corporate cashresources can best be used to maximize a

companys future growth and profitability.

LIMITATION

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.

GENERAL ELECTRIC MATRIX [GEC]

The GE matrix cross-references market

attractiveness and business position using three

criteria for each high, medium and low. The

market attractiveness considers variables relating

to the market itself, including the rate of marketgrowth, market size, and potential barriers to

entering the market, the number and size of

competitors, the actual profit margins currently

enjoyed, and the technological implications of

involvement in the market. The business position

criteria look at the businesss strengths and

weaknesses in a variety of fields. These include

its position in relation to its competitors, and the

businesss ability to handle product research,

development and ultimate production. It also

considers how well placed the management is to

deploy these resources.

The matrix differs in its complexity

compared with the Boston Consulting Group

matrix. Superimposed on the basic diagram are a

number of circles. These circles are of variable size

the size of each represents the size of each market.

Within each circle is a clearly defined segment

which represents the businesss market share

within that market. The larger the circle, the larger

the market, and the larger the segment, the larger

the market share.

The GE/McKinsey Matrix is a nine-cell (3

by 3) matrix used to perform business portfolio

analysis as a step in the strategic planning process.

The McKinsey/GE Matrix overcomes a

number of the disadvantages of the BCG Box.Firstly, market attractiveness replaces market

growth as the dimension of industry attractiveness,

and includes a broader range of factors other than

just the market growth rate. Secondly, competitive

strength replaces market share as the dimension

by which the competitive position of each SBU is

assessed.


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The GE/McKinsey Matrix identifies the

optimum business portfolio as one that fits

perfectly to the company's strengths and helps to

exploit the most attractive industry sectors or

markets.

Thus, the objective of the analysis is to

position each SBU on the chart depending on the

SBU's Strength and the Attractiveness of the

Industry Sector orMarket on which it is focused.

Each axis is divided into Low, Medium and High.

Factors that Affect Market Attractiveness

Whilst any assessment of market

attractiveness is necessarily subjective, there are

several factors which can help determine

attractiveness. These are listed below:

Market SizeMarket growth

Market profitability

Pricing trends

Competitive intensity / rivalry

Overall risk of returns in the industry

Opportunity to differentiate products and

services

Segmentation

Distribution structure (e.g. retail, direct,

wholesale

Factors that Affect Competitive Strength

Factors to consider include:

Strength of assets and competencies

Relative brand strength

Market share

Customer loyalty

Relative cost position (cost structure

compared with competitors)

Distribution strength Record of technological or other

innovation

Access to financial and other investment

resources

The three cells at the top left hand side of

the matrix are the most attractive in which to

operate and require a policy of investment for

growth these are usually coloured green.

The three cells running diagonally

from left to right have a medium attractiveness,

are coloured yellow and the management of

businesses within this category should be more

cautious and with a greater emphasis being

placed on selective investment and earning

retention.

The three cells at the bottom right hand

side are the least attractive, therefore coloured

red and management should follow a policy of

harvesting and / or divesting unless the relative

strengths can be improved.

Grow / Penetrate

These businesses are a target for

investment, they have strong business strengths,

are in attractive markets and they should therefore

have high returns on investment and competitive

advantage. They should receive financial andmanagerial support to maintain their strong

position and to continue contributing to long-term

profitability. It may enhance the Seek dominance,

Grow, Maximise investment

Invest for Growth

Businesses here are in very attractive

industries but have average business strength.

They should be invested in to improve their long-

term competitive position. It may enhance the

evaluation potential for leadership via

segmentation, Identify weaknesses, Build

strengths

Selective Investment or Divestment

These businesses are in very attractive

markets but their business strength is weak.

Investment must be aimed at improving the

business strengths. These businesses will

probably have to be funded by other businesses in

the group as they are not self-funding. Onlybusinesses that can improve their strengths should

be retained if not they should be divested. It

may lead Specialize Seek niches, Consider

acquisitions

Selective Harvest or Investment

Businesses in this box have good

business strength in an industry that is losing its

attractiveness. They should be supported if

necessary but they may be self-supporting in cash


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flow terms. Selective harvesting is an option to

extract cash flow but this should be done with

caution so as not to run down the business

prematurely. It may leads the Identification

growth segments, invest strongly Maintain

position elsewhere

Segment and Selective Investment

Businesses with average business

strengths and in average industries can improve

their positions by creative segmentation to create

profitable segments and by selective investment

to support the segmentation strategy. The

business needs to create superior returns by

concentrating on building segment barriers to

differentiate themselves. It may enhance Identify

growth segments, Specialize, Invest selectively

Controlled Exit or Harvest

Businesses with weak business strengthsin moderately attractive industries are candidates

for a controlled exit or divestment. Attempts to

gain market share by increasing business

strengths could prove to be very expensive and

must be done with caution, It may enhance

Specialize, Seek niches, Consider exit

Harvest for Cash Generation

Strong businesses in unattractive markets

should be net cash generators and could provide

funds for use throughout the rest of the portfolio.

Investment should be aimed at keeping these

businesses in a dominant position of strength but

over investment can be disastrous especially in a

mature market. Be aware of competitors trying to

revitalize mature industries. It may enhance

Maintain overall position, Seek cash flow, Invest

at maintenance level

Controlled Harvest

They have average business strengths inan unattractive market and the strategy should be

to harvest the business in a controlled way to

prevent a defeat or the business could be used to

upset a competitor. It may enhance Prune lines,

Minimise investment, Position to divest

Rapid Exit or AttackBusiness

These businesses have neither strengths

nor an attractive industry and should be exited.

Investments made should only be done to fund

the exit. It may enhance Trust leaders

statesmanship

Go after competitors cash generators, Time exit

and divest

DECISIONMATRIX/SELECTION MATRIXA decision matrix is a chart that allows a

team or individual to systematically identify,

analyze, and rate the strength of relationships

between sets of information. The matrix is

especially useful for looking at large numbers of

decision factors and assessing each factors relative

importance.

When to use it:

A decision matrix is frequently used during

quality planning activities to select product/service

features and goals and to develop process steps and

weigh alternatives. For quality improvement

activities, a decision matrix can be useful inselecting a project, in evaluating alternative

solutions to problems, and in designing remedies.

How to use it:

Identify alternatives. Depending upon the

teams needs, these can be product/service

features, process steps, projects, or potential

solutions. List these across the top of the matrix.

Identify decision/selection criteria. These key

criteria may come from a previously prepared

affinity diagram or from a brainstorming activity.

Make sure that everyone has a clear and common

understanding of what the criteria mean. Also

ensure that the criteria are written so that a high

score for each criterion represents a favorable

result and a low score represents an unfavorable

result. List the criteria down the left side of the

matrix.

Assign weights. If some decision criteria are

more important than others, review and agreebased on appropriate weights to assign (e.g., 1 2, 3).

Design scoring system. Before rating the

alternatives, the team must agree on a scoring

system. Determine the scoring range (e.g., 1 to 5 or

1, 3, 5) and ensure that all team members have a

common understanding of what high, medium, and

low scores represent.

Rate the alternatives. For each alternative,

assign a consensus rating for each decision


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criterion. The team may average the scores from

individual team members or may develop scores

through a consensus-building activity.

Total the scores. Multiply the score for each

decision criterion by its weighting factor. Then

total the scores for each alternative being

considered and analyze the results.

CRITERION WEIGHT ALTERNATIVE

A B C

Potential

Impact on

Company

Performance

33 X 3 = 9 1 X 3 =

3 5 X 3=15Ease to

Implement1 3 X 1 = 3 1 X 1= 1 3 X 1 = 3

Benefit/Cost

Relationship 2 3 X 2 = 6 3 X 2 =6 5 X 2=10Speed ofImplementati

on

1 5X 1 = 5 1 X 1 =

1 3 X 1 = 3Acceptance

by

Associates1

3 X 1 = 3 3 X 1= 3 5 X 1 = 5Negative

Impact on

Environment2 5 X 2=10

3 X 2 =

6 3 X 2 = 6Negative

Impact onHealth &

Safety

2 3 X 2 = 6 1X 2 = 2 5 X 2=10

Total

rating42 22 52

Scoring: 5 = high, 3 = medium, 1 = low

Stm Unit III

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