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Corporate Strategies for Growth

May 26, 2018


Corporate Business Strategy
 To be successful, a company should have a portfolio of
businesses with different growth rates and different
market shares. The portfolio composition is a function of
the balance between cash flows.

 High growth products require cash to grow and low


growth products must generate excess cash to fund the
high growth products
Four rules that determine cash flow
1. Margins and cash generated are function of market
share. Margins = High MS; (f) experience curve.
2. Growth requires cash input to finance added assets
3. High MS must be earned or bought. Buying MS requires
added incremental investments.
4. No market or product can grow indefinitely.

The payoff from growth must come from when growth slows
down, or it never will. The payoff is cash that cannot be
reinvested in that product / business.
Portfolio Matrix for
Mead Corp

Business Growth Rate (Market Growth)


www.12manage.com

Savings
high Select Divest the
Bank
a few others
Sweepstakes
Invest if needed
to create Cash Cow

low Liquidate

Bonds Mortgages

high low
Relative Position (Market Share)
Cash demands of
Cash products.
Usage
The development cycles of
product
Potential
in the
market Resource allocation and
divestment decisions

Cash Generation
Competitive Position
RELATIVE MARKET SHARE
RMS = Your business unit sales this year
Leading rival sales this year

MGR = Sales this year - Sales last year


Sales last year
Financial Position of SBUs
Stars High growth, High market share
 They may generate cash but because of fast growing
market, stars require huge investments to maintain their
lead.
 Thus net cash flow is usually modest. Attractive as they are
located in a robust industry (Porter Analysis) , are highly
competitive in the industry.
 If successful, a star will become a cash cow when the
industry matures .
CASH COWS Low growth , High market share
 They are foundation of the company and often the maturing
stars of yesterday. Key source of cash, and are specifically
the core business.
 Extract the profits by investing as little cash as possible and
generate cash that can be utilized for investment in other
business units.
 Located in an industry that is mature, not growing or
declining.
 When cash cows lose their appeal tend to move towards
deterioration
QUESTION MARKS
High growth industry, Low market share
 They require huge amount of cash to maintain or gain
market share, thus investment should be high
 They require attention to determine if the venture can be
viable.
 Most businesses start as question marks as the company
tries to enter a high growth market
DOGS Low growth, Low market share
 Dogs are the cash traps. Show accounting profits, but the profit
needs to be reinvested to maintain shares, leaving no cash
throw-off.
 High costs, poor quality, ineffective marketing, etc.
 They neither generate cash nor require huge amount of cash.
 Due to low market share, these business units face cost
disadvantages.
 Unless a dog has some other strategic aim, it should be
liquidated if there is fewer prospects for it to gain market share
Limitations
 Lifecycle stages are important factors missing; Experience
curves not factored in
 All products businesses must eventually become either
cash cows or dogs.
 The value of a product is dependent upon obtaining a
leading share of its market before growth slows down.
 High market share does not mean profits all the time.
 Dogs may help other businesses in gaining competitive
advantage. Can earn even more cash than cows sometimes
 The focus on balancing cash flows rather than other
interdependencies (Capabilities, resources, competencies)
 The emphasis on cost leadership rather than
differentiation as a source of competitive advantage.“
The BCG Matrix for ITC Ltd
Stars
Hotels ?
High •Agri business. • Food - Grocery, Snacks, Biscuits)
•eChoupal •FMCG – Body care, Hair care
•Infotech (if ITS growth is >10% pa)
•Stationary
Market
Paperboards/
Growth Packaging. Dogs
Cash Cow •Lifestyle (?)
Low •Cigarettes
(RMS ratio) = >5

High Relative Low


MS
Soaps, Cards, Stationery? What if FDI in retail comes in? In 2002 + retail
boomed and LS may be in Q, then fell to Dogs in 2008 – 11.
What is a Niche Market?
 For a niche to be a separate market
 Must have different customer segments
 Must have different product or service
 Must have different way of doing business

 A niche can be in a category like car defined as luxury,


small, sports (High priced like Ferrari, Maseretti or
ordinary like Porsche) and more such specific niche that
address the varying needs of the customers
Identifying Niche Market
 Sufficiently different to enable lower cost, or higher prices
than competitors.
 Cold drinks  Colas  Diet cola
 Highly profitable ; Generates lots of cash – The business
must sooner or later generate lost of cash, not just book
profits
 At least 10 – 15% growth PA over the next 5 years
 High power of compounding
 A business of 10 Mn with 3% growth in 10 years = 13 Mn (30%)
 A business of 10 Mn with 30% growth in 10 years = 138 Mn (1000 + %)
 Affects not only the growth but can alter the equation of market share
 Example – Redbull; Ecommerce companies?
Pitfalls of building Star Business
 If the Stars start losing market shares in an otherwise
growing market the loss can be big
 Leader can become complacent as has happened in many
cases
 Rivals can spring a surprise or two, as is seen in many
technology firms (Facebook over Orkut)
 Stars are rare, only one in a category, hence finding them
maybe a challenge
 Stars can quickly become Question Marks.
Strategy for Dogs
 Divestment  Can grow if
 Markets suddenly open up
 Retail
 Turnaround

 Financing the dog with


 Liquidation potential
 Debt
 Retrenchment  Raise equity
 Other borrowings
Return of the Cash Cow
 Excessive focus on growth and period of excessive Stars
and Q’s and no focus on Cash Cows
 A Catch 22 – Infosys (High reserves from yesteryears Cash Cows that
may have become ?? and Dogs with not many Stars in the horizon)
Some findings
 Companies circulated faster through the matrix
Share of cos.

1982 (%) 2012 (%)

Cash Cows 13 9
Stars 3 5
?? 60 51
Dogs 24 35

Share of Profits

CC 53 40 Where does the cash come from?


** 6 22 Cash out on stars
?? 34 29 Invest more here; select for stars
Dogs 7 9 Maximize value if any
A new approach
 Only businesses that are large, profitable enough and
growing fast can serve as growth engines and need to get
larger share of investments
 Highly successful companies characterized by
 Prioritizing growth among business units – a healthy mix of short term
and long term growth business
 Enough cash generating businesses to fund businesses that need fund to
deliver value
 Identifying the growth engine (Honda & Google vs. Infosys, ITC)
 Market - Is the market growing? Is the business positioned optimally?
 Financial position - Is growth in the business likely to create value?
 Ownership - Are we the best owners to grow the business? Does the
business have synergies with other business in the portfolio?
Product
Product Line  Typical (internal)
 Typical (external) Market segment factors that affect
factors that affect SBU Competitive Strength of
Market Business sectors a Strategic Business
Attractiveness:
 - Market size GE / McKinsey Matrix Unit:
- Strength of assets and
- Market growth rate competencies
- Market profitability - Relative brand strength
- Pricing trends Business Unit Strength (marketing)
- Competitive intensity / - Market share
High Medium Low
rivalry  - Market share growth
- Overall risk of returns - Customer loyalty
Market Attractiveness

in the industry High - Relative cost position (cost


40% structure compared with
 - Entry barriers competitors)
Medium
- Opportunity to  - Relative profit margins
differentiate products (compared to competitors)
30%
and services - Distribution strength and
Low
 - Demand variability production capacity
- Record of technological or
- Segmentation
other innovation
- Distribution structure
 - Quality
 - Technology - Access to financial and other
development investment resources
 - Management strength
ADL Matrix

Industry life cycle stage

Embryonic Growth Mature Aging

All out push for Hold position. Hold position.


Dominant share. Hold share. Grow with industry. Hold position.
Hold position.
Competitive Position

Attempt to improve Attempt to improve Hold position. Hold position


Strong position. All out
push for share.
position.
Push for share. Grow with industry. or harvest.

Selective or all out Attempt to improve Custodial or mainte-


push for share. position. nance. Find niche Harvest, or phased
Favorable Selectively attempt Selective push and attempt to out withdrawal.
to improve position. for share. protect it.

Find niche and Phased out


Selectively push Find niche hang on,
Tenable for position. and protect it. or phased out withdrawal,
or Abandon.
Withdrawal.

Turnaround or Turnaround,
Weak Up or out. abandon. orphaned out Abandon.
withdrawal.

Lipton Treetop
LIMITATIONS
 There is no standard life cycle length.
 Determining the current industry life cycle phase is
difficult. (Post recession of 2008 -09 and a short period of growth
2010 – 2012/13, are we again heading for a slow growth period?)
 Competitors may influence the length of the life cycle.
The Internal-External Matrix
External factors evaluation
Opportunity Wt. Rating Weighted Score
1-4
Demand

Income up

Threat

US QE tapering

Rentals
Internal Factors Evaluation
Opportunity Wt. Rating Weighted
1-4 Score
Inventory T/O
fm 5 - 7
ABV 97 - 120

PSFT 25 - 50

Threat

Location

Supply lead
time
Competitive Profile Matrix
Factors Weight Rating Co. 1 Co. 2 Co. 3
1-4
Advtg

Distribution

Product Qlty

Price
competiveness
Financial Position

Market Shares

Brand Loyalty
Index
SPACE Analysis
 Stands for Strategic Position and Action Evaluation.
 A tool to help determine the appropriate strategic posture
of a firm.
 Involves plotting competitive advantage, industry strength,
financial strength, and environmental stability on a two-
dimensional graph.
 comprises a number of factors that are evaluated independently
and then combined to yield an average score.
 The resulting plot could end up favouring one of four quadrants
(the strategic postures), which are aggressive, competitive,
defensive, and conservative

Confidential
In a market which is stable Typical in a very attractive
with low growth. Focus Plotting the strategic point
industry without environmental
uncertainty. Financial strength
should be on financial
stability and product helps protect the company's
competitiveness. Common competitive advantage. Risk of
practices : prune product entry of new competition.
line, reduce costs, cash flow Common practices : explore new
improvement, protection of opportunities, acquisitions,
competitive products, new increase market share, and focus
product development, and resources on products that have
entering more attractive a competitive advantage.
markets.

Common in an industry Typical in a company with a


which is unattractive definite competitive advantage in
where the company lacks a very attractive industry with
financial strength and some environmental uncertainty.
lacks a competitive Critical to this company is
product. Focus on product financial strength. Common
competitiveness. practices : acquire financial
Common practices : resources to increase
retreat from the market, marketing effort, increase
discontinue products with sales force, expand/improve
low profitability, product offerings, productivity
aggressive cost cutting investments, cost reduction, or
measures, cut capacity, merge with cash-rich
halt or reduce further company.
investment.
Confidential
Quantitative Strategic
Stage 3: Planning Matrix
The Decision Stage (QSPM)

Choosing the best strategy


Steps to form a QSPM
1. The overall strategic management analysis is used
to identify key strategic factors. This can be done
using the EFE & IFE matrix.
2. Formulation of the type of the strategy done
using the SWOT analysis,
SPACE matrix analysis, BCG matrix model,
3. Attractiveness Scores (AS) how each factor is important or
attractive to each alternative strategy.
4. Total Attractiveness Scores are defined as the product of
multiplying the weights (step 3) by the Attractiveness Scores
(step 4) in each row.
Key strategies from SWOT, SPACE,
BCG are done sequentially to arrive QSP MATRIX (QSPM)
at the best score Total Attractiveness Scores
STRATEGIC ALTERNATIVES
Market Product Horizontal
Attractiveness Scores
Penetration Developm ent Integration
CRITICAL SUCCESS FACTORS Wgt. AS TAS AS TAS AS TAS
OPPORTUNITIES
1. Better relations w ith the present government. 0.10 4 0.40 3 0.30 2 0.20
2. Reach out to the youth market. 0.10 3 0.30 4 0.40 2 0.20
3. Reach out to the low er income markets not
reached by the broadsheet. 0.15 4 0.60 2 0.30 3 0.45
4. Better new spaper technology. 0.05 - - - - - -
5. Digital advertising services. 0.05 - - - - - -
THREATS
1. Television. 0.15 4 0.60 3 0.45 2 0.30
2. High new sprint costs. 0.10 - - - - - -
3. Decline in new spaper readership. 0.15 3 0.45 4 0.60 2 0.30
4. Slow dow n in the economy. 0.10 3 0.30 4 0.40 2 0.20
5. Internet and on-line publications. 0.05 3 0.15 2 0.10 1 0.05
STRENGTHS
1. Good editorial quality. 0.15 4 0.60 3 0.45 2 0.30
2. High readership ratings. 0.05 4 0.20 3 0.15 2 0.10
3. Continued market leadership. 0.10 4 0.40 3 0.30 2 0.20
4. Strong loyalty of staf f to the company. 0.10 - - - - - -
5. Uited Board of Directors and good leadership. 0.15 3 0.45 4 0.60 2 0.30
WEAKNESSES
1. Prof it margin squeeze. 0.15 2 0.30 3 0.45 4 0.60
2. No. 2 in classif ieds. 0.05 1 0.05 2 0.10 3 0.15
3. Lack of shared corporate culture. 0.10 2 0.20 3 0.30 1 0.10
4. Resistance to change. 0.05 - - - - - -
5. Lack of Entrepreneurial Spirit
33 HILDA L.0.10 -
TEODORO - - - - -
TOTAL 2.00 5.00 4.90 3.45
Sun Microsystem
 In 1998 decided to move entire company on to the Internet,
simultaneously pursuing over 100 initiatives,
uncoordinated but each based on anticipated trend
 Five online stores – Software store, Java store, education
store, service store, add-o component store
 Different systems, different content, search engines, and
navigation protocol
 Confused the customers, no unified strategy
 e-Commerce, Apps, Google, IT services firms
New take on Portfolio Strategy
Common assumption: The value creation potential can be assessed by its market
position within its industry together with the overall attractiveness of the industry.
The evolution of e-business remain unpredictable.

Classic Portfolio Approach Internet Portfolio Planning


 Used in markets that are more  Used in Internet sectors that are still
mature and predictable evolving
 Reliance on longer. 5 – 10 year  A more rapid and iterative portfolio
planning cycle strategy required
 Emphasis on trade-off between  Emphasis on measuring an
industry growth and market opportunity’s viability against
position company fit
 Frequently used at corporate  Valid at corporate and business level
level  Useful tool for new venture
 Less effective for new business innovation and validation
creation  More comprehensive capital
 Bias towards capital allocation allocation of financial, human, and
intellectual assets
The Internet Portfolio Map
Viability 0 Points 100 Points
Market Value Least (<$10 Mn) Most (> $1Bn)
Potential
Time to positive Most (> 5 Yrs) Least (< 1 Yr)
Cash Flow
Personnel Most (> 20 Fewest (< 5
Requirement People) People)
Funding Highest (> $ 35 Lowest (< $ 3
Requirement Mn) Mn)

Viability: Potential payoffs (Quantitative) – Market value Potential, Time to positive


cash flow, Personnel requirement, Funding requirement,

Fit: an investment potential to dovetail with a company’s existing processes,


capabilities and culture (Qualitative: H, M, L) – Alignment with core capabilities,
alignment with other company initiatives, Fit with organizational structure, fit with
company's culture and values, ease of technical implementation