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STRATEGIC MANAGEMENT
Module III Strategic Choice
Ramesh Bagla

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Strategic Choice
Re-visit the Mission
Revise, create, or maintain mission

Set Long-Term Objectives Generate feasible alternatives Evaluate alternatives Choose the best strategic option

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The Strategy Formulation Framework

Stage 1: The Input Stage

SWOT Analysis External Analysis Internal Analysis

Stage 2: The Matching Stage Re-visit Mission and Set Long Term Objectives
Generate feasible alternative Corporate Strategies

Stage 3: The Decision Stage

Evaluate and Choose Corporate Strategies

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Alternatives for Growth

Expansion of existing Businesses

Market Penetration Market Development Product Development

Alternatives for Growth

Vertical Integration Forward & Backward

Related Diversification into new Businesses Unrelated

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Key Questions in Strategic Choice

Strategic choices need to take into account the environment and build on core competences Strategic choices need to take into account the expectations and influence of stakeholders Strategic direction and methods should build on broad strategic choices Resources and competences should be developed to deliver and sustain the chosen strategies

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Tools for Formulating and Choosing Corporate Strategies

Portfolio Analysis

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The BCG Matrix

BOSTON CONSULTING GROUP (BCG) MATRIX was developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE EARLY 1970s. It is also known as Growth Share Matrix According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relative market share.

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The BCG Matrix

Relative Market Share Position in the Industry
High 1.0 High +20 Medium .50 Low 0.0

Stars (II)

Question Marks (I)

Industry Sales Growth Rate Medium 0 (Percent)

?
Cash Cows (III) Dogs (IV)

Low

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QUESTION MARKS
High growth, Low market share
Most businesses start of as question marks. They will absorb great amounts of cash if the market share remains unchanged, (low). Why question marks? Question marks have potential to become star and eventually cash cow but can also become a dog. Investments should be high for question marks.

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STARS
High growth, High market share
Stars are leaders in business. They also require heavy investment, to maintain its large market share. It leads to large amount of cash consumption and cash generation. Attempts should be made to hold the market share otherwise the star will become a CASH COW.

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CASH COWS Low growth , High market share

They are foundation of the company and often the stars of yesterday. They generate more cash than the investment required. They extract the profits by investing as little cash as possible They are located in an industry that is mature, not growing or declining.

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DOGS
Low growth, Low market share
Dogs are the cash traps. Dogs do not have potential to bring in much cash. Number of dogs in the company should be minimized. Business is situated at a declining stage.

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Strategic Perspectives of Products in Different Quadrants

Four different strategic perspectives Investment Earnings Cash-flow, and Strategy Implications

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Question Marks
Investmentheavy initial capacity expenditures and high R&D costs Earningsnegative to low Cash-flownegative (net cash user) Strategy Implications
If possible to dominate segment, go after share. If not, redefine the business or withdraw

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Stars
Investmentcontinue to invest for capacity expansion EarningsLow to high earnings Cash-flowNegative (net cash user) Strategy Implications
Continue to increase market shareeven at the expense of short-term earnings

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Cows
InvestmentCapacity maintenance EarningsHigh Cash-flowPositive (net cash contributor) Strategy Implications
Maintain market share and cost leadership until further investment becomes marginal

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Dogs
Investment
Gradually reduce capacity

EarningsHigh to low Cash-flow

Positive (net cash contributor) if deliberately reducing capacity

Strategy Implications
Plan an orderly withdrawal to maximize cash flow

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The BCG Matrix for ITC Ltd.

Stars Hotels Paperboards/ Packaging. Agri business. Cows FMCG-Cigarettes ? FMCG Class mate stationary Dogs Maybe ITC Infotech.

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BCG Matrix - Three Paths to Success

Continuously generate cash cows and use the cash throw-up by the cash cows to invest in the question marks that are not selfsustaining Stars need a lot of reinvestments and as the market matures, stars will turn into cash cows and the process will be repeated. As for dogs, segment the markets and nurse the dogs to health or manage for cash

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BCG Matrix - Three Paths to Failure Over invest in cash cows and under invest in question marks
Trade future opportunities for present cash flow

Under invest in the stars

Allow competitors to gain share in a high growth market

Over milk the cash cows

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WHY BCG MATRIX ?

To assess : Profiles of products/businesses The cash demands of products The development cycles of products Resource allocation and divestment decisions

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MAIN STEPS OF BCG MATRIX

Identifying and dividing a company into SBUs. Assessing and comparing the prospects of each SBU according to two criteria : 1. SBUS relative market share. 2. Growth rate OF SBUS industry. Classifying the SBUS on the basis of BCG matrix. Developing strategic objectives for each SBU.

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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 cash resources can best be used to maximize a companys future growth and profitability.

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LIMITATIONS
BCG MATRIX uses only two dimensions, Relative market share and market growth rate. Problems of getting data on market share and market growth. High market share does not mean profits all the time. Business with low market share can be profitable too.

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CONCLUSION
Though BCG MATRIX has its limitations it is one of the most FAMOUS AND SIMPLEST portfolio planning matrix, used by large companies having multi-products. M&M and HLL are using the BCG MATRIX.

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GE Matrix
Originally developed by GEs planners drawing on McKinseys approaches, it is also known as the Directional Policy Matrix Market attractiveness is based on as many relevant factors as are appropriate in a given context Business strengths assessment also made on many factors
Each SBU needs to be rated on each factor

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GE Matrix
Indicators of Industry Attractiveness
Market size Market growth rate Cyclicality Barriers to entry and exit Industry profitability Technology Regulation Workforce availability Social and environmental issues Political and legal issues

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GE Matrix
Indicators of SBU Strengths
Market Share Sales force Marketing strengths R&D Manufacturing facilities Distribution Financial resources Managerial competence Competitive position in terms image, breadth of product line, quality, reliability, customer service etc.

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GE Matrix
Depending on the location of a business within the Matrix, one of the following approaches is suggested: 1. Invest to grow 2.Invest selectively and manage for earnings 3.Harvest or divest for resources

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GE Matrix
Industry Attractiveness
High Medium Low

High

Business Strength

Medium

Low

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GE Matrix
Segment 1: This is the best segment. The business is strong and the market is attractive. The company should allocate resources in this business and focus on growing the business and increase market share Segment 2: The business is either strong but the market is not attractive or the market is strong and the business is not strong enough to pursue potential opportunities. Decision makers should make judgment on how to further deal with these SBUs. Some of them may consume too much resources and are not promising while others may need additional resources and better strategy for growth.

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GE Matrix
Segment 3: This is the worst segment. Businesses in this segment are weak and their market is not attractive. Decision makers should consider either repositioning these SBUs into a different market segment, develop better cost-effective offering, or get rid of these SBUs and invest the resources into more promising and attractive SBUs.

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GE Matrix
STRENGTHS

Uses more comprehensive measures / variables in assessing industry attractiveness and business strength / competitive position Doesnt lead to as simplistic conclusions as the BCG matrix Nine cell approach allows for intermediate rankings between high/low and strong/weak Stresses channeling of resources to areas with the greatest probability of achieving competitive advantage and superior performance

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GE Matrix
WEAKNESSES

Provides no real guidance on the specifics of what strategy to follow its too general Cant spot units that are about to become winners because their industries are entering the takeoff stage Use of numeric estimates seems objective, but is really very subjective Should the weights & factors used to assess industry attractiveness and business position be used generically, or adjusted depending on the industry under investigation?

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HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX

TWO DIMENSIONS

Stage of Industry / Market Evolution

EARLY DEVELOPMENT RAPID GROWTH / TAKE-OFF SHAKE-OUT MATURITY / SATURATION DECLINE / STAGNATION

Business Strength / (Competitive Position)

SAME DIMENSIONS AS USED IN THE GE MATRIX

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HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX

BUSINESS STRENGTH / COMPETITIVE POSITION
STRONG AVERAGE WEAK -----------------------------------------------------------

EARLY DEVELOPMENT

STAGE OF INDUSTRY / MARKET

RAPID GROWTH / TAKE-OFF -----------------------------SHAKE-OUT

EVOLUTION
-----------------------------MATURITY / SATURATION -----------------------------DECLINE / STAGNATION -----------------------------ONLY ONE DIMENSION IS DIFFERENT FROM THE GE Matrix Except for the Stage of Market Evolution, this model is identical to the GE Business Screen

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HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX

ADVANTAGES

Can be used to identify and track developing winners Illustrates how the firms businesses are distributed across the stages of industry evolution

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Advantages of Portfolio Analyses

Encourages top management to evaluate each business individually; to set objectives; and consider resources. It stimulates use of external data to supplement managements judgment. Its graphic representation makes interpretation and communication easier.

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Limitations of Portfolio Analysis

Defining product/market segments isnt easy. Using standard strategies may miss opportunities or be impractical. Providing an illusion of scientific rigor masks the reality that positions are based on subjective judgments. Determining what makes an industry attractive isnt always possible.

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Corporate Strategies
Three Key Issues: Firms directional strategy Firms portfolio strategy Firms parenting strategy

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Corporate Directional Strategies

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Corporate Strategies
Directional Strategy:
Orientation toward growth
Expand, cut back, status quo? Concentrate within current industry, diversify into other industries? Growth and expansion through internal development or acquisitions, mergers, or strategic alliances?

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Stricklands Grand Strategy Selection Matrix

It is a four cell guide to selection of strategies based upon 1. whether the business is operating from a position of strength or weakness 2. whether to rely on its own resources or to acquire resources via merger or acquisition

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Stricklands Grand Strategy Selection Matrix

The Matrix helps in the selection of a grand strategy to build value when core business proves successful Two basic criteria for selection are, - the principal purpose of the grand strategy - the choice of an internal or external emphasis Thus the selection is guided by conditions of the planning period and the company strengths & weaknesses

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Stricklands Grand Strategy Selection Matrix

Overcome Weakness

Internal (redirected resources within the firm)

Turnaround or retrenchment Divestiture Liquidation

II I III IV

Vertical integration Conglomerate diversification

Concentrated growth Market development Product development Innovation

Horizontal integration Concentric diversification Joint venture

External (acquisition or merger for resource capability)

Maximize Strengths

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Grand Strategy A master long term strategy that provides basic direction for major actions directed towards achieving long term business objectives

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Grand Strategies
Vertical Integration Acquisition of firms that supply inputs or customers for its outputs Conglomerate Diversification Acquiring or entering businesses unrelated to firms current products, markets or technologies

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Vertical Integration
Some of the best known examples of vertical integration have been in the oil industry. In the 1970s and 1980s, many companies that were primarily engaged in exploration and the extraction of crude petroleum decided to acquire downstream refineries and distribution networks. Companies such as Shell and BP came to control every step involved in bringing a drop of oil from its North Sea or Alaskan origins to a vehicle's fuel tank.
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Vertical Integration
The idea of vertical integration was taken a step further by Dell Computer Michael Dell combined the traditional vertical integration of the supply chain with the special characteristics of the virtual organisation to create virtual integration Dell assembles computers from other firms' parts, but it has relationships with those firms that are more binding than the traditional links between buyer and supplier. It does not own them in the way of the vertically integrated firm, but through exchanges of information and a variety of loose associations it achieves much the same aimwhat Michael Dell calls a tightly coordinated supply chain.

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Vertical Integration
Vertical integration is a difficult strategy for companies to implement successfully. It is often expensive and hard to reverse Upstream producers frequently integrate with downstream distributors to secure a market for their output. This is fine when times are good. But many firms have found themselves cutting prices sharply to their downstream distributors when demand has fallen just so they can maintain targeted levels of plant utilisation.
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