Strategic Management Case Study 3

8/8/2019 Strategic Management Case Study 3

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BOSTON CONSULTING GROUPMATRIX ( BCG )

This technique is particularly useful for multi-divisional or multi-product companies. The divisions or products compromise theorganisations business portfolio. The composition of the portfoliocan be critical to the growth and success of the company.

The BCG matrix considers two variables, namely..

N MARKET GROWTH RATE

N RELATIVE MARKET SHARE

The market growth rate is shown on the vertical (y) axis and isexpressed as a %. The range is set somewhat arbitrarily. Theoverhead shows a range of 0 to 20% with division between lowand high growth at 10% (the original work by B Headley Strategyand the business portfolio, Long Range Planning, Feb 1977 usedthese criteria). Inflation and/or Gross National Product have some

impact on the range and thus the vertical axis can be modified torepresent an index where the dividing line between low and highgrowth is at 1.0. Industries expanding faster than inflation or GNPwould show above the line and those growing at less than inflationor GNP would be classed as low growth and show below the line.

The horizontal (x) axis shows relative market share. The share iscalculated by reference to the largest competitor in the market.Again the range and division between high and low shares is

arbitrary. The original work used a scale of 0.1, i.e. marketleadership occurs when the relative market share exceeds 1.0.

The BCG growth/share matrix is divided into four cells orquadrants, each of which represent a particular type of business.Divisions or products are represented by circles. The size of thecircle reflects the relative significance of the division/product togroup sales. A development of the matrix is to reflect the relativeprofit contribution of each division and this is shown as a pie-segment within the circle.


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The Boston Consulting Groups Growth Share Matrix

Dogs

Question MarksStars

Cash Cow

20%

18%

16%

14%

12%

10%

8%

6%

4%

2%

0

10

x

4

x

2

x

1.5

x

1

x

0.5

x

0.4

x

0.3

x

0.2

x

0.1

x

Relative Market Share

M

arketGrowthRate

Largenegative

cash flow

Largepositive

cash flow

Cash consumer

Modest cash flow

Optimum

Cash Flow

SOURCE: Adapted from Hedley (1977), p12

Cash consumerCash neutral


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Success and Disaster Sequences in the Product Portfolio

Cash Cow Dogs

Question MarksStars

MarketG

rowthRate

Relative Market Share

High

High

Low

Low

Disaster sequencesSuccess sequences


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N QUESTION MARKS

These are products or businesses, that compete in high growthmarkets but where the market share is relatively low. A new

product launched into a high growth market and with an existingmarket leader would normally be considered as a question mark.Because of the high growth environment, they can be a cashsink.

Strategic options for question marks include..

Market penetration

Market development

Product development

Which are all intensive strategies or divestment.

N STARS

Successful question marks become stars. i.e. market leaders inhigh growth industries. However, investment is normally stillrequired to maintain growth and to defend the leadership position.Stars are frequently only marginally profitable but as they reach amore mature status in their life cycle and growth slows, returnsbecome more attractive. The stars provide the basis for long termgrowth and profitability.

Strategic options for stars include..

Integration forward, backward and horizontal

Market penetration

Market development

Product development

Joint ventures


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N CASH COWS

These are characterised by high relative market share in lowgrowth industries. As the market matures the need for investment

reduces. Cash Cows are the most profitable products in theportfolio. The situation is frequently boosted by economies of scalethat may be present with market leaders. Cash Cows may be usedto fund the businesses in the other three quadrants.

It is desirable to maintain the strong position as long as possibleand strategic options include..

Product development

Concentric diversification

If the position weakens as a result of loss of market share ormarket contraction then options would include..

Retrenchment (or even divestment)

N DOGS

These describe businesses that have low market shares in slowgrowth markets. They may well have been Cash Cows. Often theyenjoy misguided loyalty from management although some Dogscan be revitalised. Profitability is, at best, marginal.

Strategic options would include..

Retrenchment (if it is believed that it could be revitalised)

Liquidation

Divestment (if you can find someone to buy!)

Successful products may well move from question mark thoughstar to Cash Cow and finally to Dog. Less successful products thatnever gain market position will move straight from question mark toDog.


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The BCG is simple and useful technique for strategic analysis. It isconvenient for multi-product or multi-divisional companies. Itfocuses on cash flow and is useful for investment and marketing

decisions.

One should not however, ignore the limitations of the technique.

Definition (qualitative and quantitative) of the market issometimes difficult.

It assumes that market share and profitability are directlyrelated.

The use of high and low to form four categories is toosimplistic.

Growth rate is only one aspect of industry attractiveness andhigh growth markets are not always the most profitable.

It considers the product or business in relation to the largestplayer only. It ignores the impact of small competitors whosemarket share is rising fast.

Market share is only one aspect of overall competitiveposition.

It ignores interdependence and synergy.

Companies will frequently search for a balanced portfolio, since..

Too many stars may lead to a cash crisis

Too many Cash Cows puts future profitability at risk

And too many question marks may affect current profitability.

Group exercise..Using the data provided construct a BCG and answer the followingquestions,Has the company a balanced portfolio?

From the BCG what do you see as strengths and why?Propose generic strategies for each division or product.


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GE

BUSINESS

SCREEN(GEBS)

BCG Exercise

Consider a multi-divisional / product organisationUsing the following data construct a BCG matrix

321Division / Product

Sales million

No. of Competitors

Sales of Market leaders million

Market Growth (%)

Total Market million

Industry/Product Profitability

% sales

0.4

6

0.8, 0.7, 0.4

16

2.3

8

1.8

20

1.8,1.8,1.2

18

12.2

6

1.7

16

1.7,1.3,0.9

8

8.4

9

3.

Is the company balanced?Identify strengths and weaknesses of company

Propose strategies for each division/product


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The nine-cell matrix was developed by General Electric with theassistance of McKinsey. As with the BCG it comprises a matrix of 2dimensions.

(a) Industry attractiveness(b) Business strength / competitive postion

In contrast to the BCG, the GEBS includes much more input than simplyindustry growth rate and relative market share to assess theattractiveness of the industry and the competitive position of thebusiness unit.

Industry attractiveness will include such factors as

Market growth rateIndustry profitabilityIndustry sizePricing practices

Business strength may include such factors as

ProfitabilityTechnological positionSize

Individual products or business units (SBU) are plotted as circles. Thearea of the circles is proportional to the industry size (in term of sales),The shaded pie represents the market share for each product or SBU.

The procedure for assessing industry attractiveness and businessstrength / competitive position is similar to that of IFE/EFE/CPMcomputations. In both cases it involves four steps.

1. Industry attractiveness

(a) Select key attractiveness criteria

(b) Weigh each criterion in terms of relative importance in achievingcorporate objectives.(0 1.0 and total with equal 1.0)

(c) Rate the industry on these criteria1 = very unattractive5 = very attractive

(d) Calculate weighted score (see table 1)


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2. Business strength / competitive position

(a) Identify key factors for success in the industry

(b) Weigh each success factor in terms of its relativeimportance to profitability (or some other measure ofsuccess such as achieving corporate objectives)

(c) Rate the product / SBU on each factor

1 = very weak competitive position5 = very strong competitive position

(d) Calculate weighted score (see table 2)

3. Plot current or SBU portfolio

4. Plot the firms future portfolio

Future attractiveness and competitive position should beassessed (of forecasting, scenario projections) and the newportfolio examined to determine whether it is improving or

deteriorating. Is there a performance gap between the projectedand desired portfolios

.. the strategic gap.

Shell Directional Policy Matrix

Very similar to the GE Business screen and was developedindependently by Shell and is used extensively by Europeanfirms.

Hofer Product / Market Evolution Matrix

One of the shortcomings of the GE Screen is that it does noteffectively display the impact of new products or SBUs indeveloping industries.

The fifteen-cell matrix developed by Hofer goes someway toaddressing this limitation. The Hofer matrix has axes of

(a) competitive position(b) stage of product / market evolution


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Table 1An example of an Industry Attractiveness Assessment Matrix

ATTRACTIVENESS CRITERIA WEIGHT* RATING ** WEIGHTEDSCORE

Size 0.15 4 0.60

Growth 0.12 3 0.36

Pricing 0.05 3 0.15

Market diversity 0.05 2 0.10

Competitive structure 0.05 3 0.15

Industry profitability 0.20 3 0.60

Technical role 0.05 4 0.20

Inflation vulnerability 0.05 2 0.10Cyclicality 0.05 2 0.10

Customer financials 0.10 5 0.50

Energy impact 0.08 4 0.32

Social GO 4 -

Environmental GO 4 -

Legal GO 4 -

Human 0.05 4 0.20

1.00 3.38

* Some criteria may be of a GO/NO GO type. For example, many firmsprobably would decide not to invest in industries that are viewednegatively by our society, such as gambling, even if it were both legaland very profitable to do so.

** 1 (very unattractive ) through 5 (highly attractive)


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Table 2An example of a Business Strength / Competitive PositionAssessment Matrix for an SBU

KEY SUCCESS FACTORS WEIGHT* RATING ** WEIGHTEDSCORE

Market share 0.10 5 0.50

SBU growth rate X 3 -

Breadth of product line 0.05 4 0.20

Sales distribution effectiveness 0.20 4 0.80

Propriety and key account advantages X 3 -

Price competitiveness X 4 -

Advertising and promotion effectiveness 0.05 4 0.20

Facilities location and newness 0.05 5 0.25Capacity and productivity X 3 -

Experience curve effects 0.15 4 0.60

Raw materials cost 0.05 4 0.20

Value added X 4 -

Relative product quality 0.15 4 0.60

R&D advantages/position 0.05 4 0.20

Cash throw-off 0.10 5 0.50

Calibre of personnel X 4 -

General image 0.05 5 0.25

1.00 4.30

* For any particular industry, there will be some factors that, whileimportant in general, will have little or no effect on the relativecompetitive position of firms within that industry. It is usually better todrop such factors from the analysis than to assign them very lowweights.

** 1 (very weak competitive position) through 5 (very strong competitiveposition)


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PORTFOLIO ANALYSIS 2

The General Electric/McKinsey & Co. Business Screen Matrix(a.k.a. The Internal External Matrix)

STRONG

LOSER

-harvest or

divest

AVERAGE WEAK

QUESTIONMARK

-hold and

maintain

WINNER

- grow and

build

WINNER

- grow and

build

WINNER

- grow and

build

LOSER

-harvest or

divest

LOSER

-harvest or

divest

AVERAGE

-hold and

maintain

PROFITPRODUCER

-hold and

maintain

HIGH

MEDIUM

LOW

INDUSTRY

ATTRACTIVENESS

(External factor

evaluation total

weighted scores)

BUSINESS STRENGTH /

COMPETITIVE POSITION

(Internal factor evaluation total

weighted scores)

4.0

3.0

1.02.03.04.0


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THE INTERNAL EXTERNAL (IE) MATRIX

The IE matrix positions the companys businesses in a nine cell

matrix. It is an improvement on the BCG and is similar to the GEBusiness Screen. As with the BCG it uses two criteria to determineposition.

INTERNAL STRENGTH (as measured by IFE)

And

INDUSTRY ATTRACTIVENESS (as measured by EFE)

The individual products / divisions are represented as circles. Aswith the BCG the size of the circles and the pie slices thereinreflect the relative significance of each business in terms of salesand profit.

The horizontal axis reflecting internal strength is divided into

Weak (1.0 1.99)

Average (2.0 2.99)

Strong (3.0 3.99)

The vertical axis reflecting industry attractiveness is dividedsimilarly

Low (1.0 1.99)

Medium (2.0 2.99)

High (3.0 3.99)


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The IE Matrix requires more information than the BCG and is felt tobe a more rigorous technique although it is much more dependanton value judgements of the strategist(s) in the preparation of theIFE and EFE.

Three broad groupings of cells can be made, namely

1, 2 and 4 where the appropriate strategies might be GROW ANDBUILD. In generic terms such strategies would include

INTENSIVEMarket penetration

Market development

Product development

INTEGRATIVEBackward integration

Forward integration

Horizontal integration

The prescription for cells 3, 5 and 7 is likely to be HOLD ANDMAINTAIN and might include

Market penetrationAnd

Product development

Finally, cells 6, 8 and 9, which are characterised by a relatively

weak competitive position in a hostile environment, would suggestthe appropriate strategies are either HARVEST or DIVEST.

Successful companies will endeavour to build a portfolio ofbusinesses in or around cell 1 in the IE matrix.

(Individual exercise: Using IFE and EFE scores, construct an IE

matrix for your organisation and derive some strategic proposalsfor your products / divisions)


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An Exam le of an IE Mat

THE IFE TOTAL WEIGHTED SC

High3.0 to 4.0

Medium2.0 to 2.99

Low1.0 to 1.99

Strong3.0 to 4.0

Average2.0 to 2.99

1.0

2.0

3.0

4.03.0 2.0

THE EFE

TOTAL

WEIGHTED

SCORES

12

3

50%

20%

25%


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T h e I n t e r n a l E x t e r n a l M

THE EFETOTAL

WEIGHTEDSCORES

THE IFE TOTAL WEIGHTED

High3.0 to 4.0

Medium2.0 to 2.99

Low1.0 to 1.99

Strong3.0 to 4.0

Average2.0 to 2.99

1.0

2

2.0

3.0

3.04.0

I II

IV V

VII VIII

Grow and build

Hold and maintain


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SWOT/TOWS Matrix

The analysis brings together the key elements of the internal

auditing. The analysis involves answering two questions.

N Where are the major opportunities and threats?

N How can we capitalise on our strengths and reduce ourweaknesses?

The first question relates to the environment and the second toresources. The matrix construction involves the listing of key

threats, opportunities, weaknesses and strengths (IFE, EFE) andthen matching the factors to generate four different groups ofstrategic options, namely .

N SO where internal strength(s) are matched to externalopportunities.

N WO aimed at improving internal weaknesses by exploitingexternal opportunities.

N ST where the organisation uses its strengths to avoid orreduce the impact of external threats.

N WT where defensive strategies are adopted to reduceinternal weaknesses and avoid external threats.

Unlike the portfolio (e.g. BCG) or directional (e.g. Shell) matrices, itis suggested that specific rather than generic strategies are

generated from the exercise.

(individual exercise . Construct a TOWS matrix and generateSO, WO, ST and WO strategies for your organisation)


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SWOT Evaluation (Current)

Current

Aims and

Objectives

WEAKNESSESSTRENGTHS

OPPOR

TUNITIES

THR

EATS

SO Decisions WO Decisions

ST Decisions WT Decisions


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TOWS Analysis

Developed from ideas ofH Weihrich, 1982

OPPORTUNITIES THREATSFUTURE

STRENGTHS

WEAKNESSES

STRATEGY

STRATEGY

STRATEGY

STRATEGY

Aims, objectivesand policies asdeveloped fromTOWS analysis

As identified byscenarioprojectiontechniques

As identified byscenarioprojectiontechniques

To fend off thefuture threat

To grasp thefutureopportunity

Calculated asnecessary tofutureperformance

To be eradicatedor to beprevented

To ensure thatfutureopportunities arenot lost

To avoid orpre-empt thefuture threat


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Grand Strategy Mix (GSM)

The Grand Strategy Mix (GSM) would appear to be growing inpopularity as a tool for formulating strategic alternatives. The

matrix considers two parameters, namely

N COMPETITIVE POSITION

N MARKET GROWTH

(cf BCG, GEBS and IE matrices)

Competitive position could be measured by an IFE. The matrix canbe used for both organisations or SBUs. The matrix showsappropriate strategies for the organisation or business unit inorder of attractiveness.

QUADRANT 1 (SO)

Strong strategic position. Strong competitive position in a highgrowth market. It would seem logical for such organisations toconcentrate on their current markets and products, e.g.

MARKET DEVELOPMENT

MARKET PENETRATION PRODUCT DEVELOPMENT

There may be reasons why an organisation or business unit wouldwish to change, e.g.

Utilise excess resources (physical, financial, human) byINTEGRATION

Limited product portfolio may suggest CONCENTRIC

DIVERSIFICATION for future security.

QUADRANT 2 (WO)

Opportunities exist for growth in Quadrant 2 but the organisationsin this quadrant are ineffective (Resources?, Products?,Management? etc). The first option must surely be an INTENSIVEstrategy bur other options include HORIZONTAL integration. If theorganisation is unable to find the competitive advantage to exploit

the market growth DIVESTMENT or even LIQUIDATION areoptions.


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QUADRANT 3 (WT)

Organisations in this quadrant have a weak competitive position

and compete in slow growth industries. The options are obviouslyDIVESTMENT or LIQUIDATION but RETRENCHMENT or evenDIVERSIFICATION could be considered if exit costs wereunacceptable.

QUADRANT 4 (ST)

Organisations with competitive strength but operate in low growth

industries. Preferred option is to move into a more attractiveindustry by CONCENTRIC, HORIZONTAL or CONGLOMERATEDIVERSIFICATION.


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The Grand Strategy matrix

QUADRANT I

1. Market developm2. Market penetratio3. Product developm4. Forward integratio5. Backward integra

6. Horizontal integra Concentric

Diversification

QUADRANT II

1. Market development2. Market penetration3. Product development4. Horizontal integration5. Divestment

Liquidation

QUADRANT III

1. Retrenchment2. Concentric diversification3. Horizontal diversification

4. Conglomeratediversification

5. Divestment

Liquidation

QUADRANT IV

1. Concentric divers2. Horizontal diversi3. Conglomerate

diversification Joint ventures

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAKCOMPETITIVE

POSITION

- 6 - 3


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Some Matching Tools in Strategy Formulation

7.1 SPACE (After Fred David)

The Strategic Position and Action Matrix was developed by Rowe, Mason andDickel (Strategic Management and Business Policy a methodical approach,Addison Wesley 1982). It is a matching tool that indicates what general typeof strategy and organisation should follow..

AGGRESSIVE CONSERVATIVE DEFENSIVE COMPETITIVE

The technique involves the production of a vector on a matrix where the axesrepresent

Financial strength (FS) Competitive advantage (CA)

that are both internal dimensions and

Environmental stability (ES) Industry Strength (IS)

that are external dimensions

The steps in the construction of the matrix are ..

a. Select a set of variables that reflect the internal and externaldimensions (see David P 214)

b. Assign a rating to each variableFS and IS will be between +1 and +6 where +1 is the worst situationand +6 the best.ES and CA will be between 1 and 6 where 1 is the best situation

and 6 the worst.c. Compute the average score for each dimension (ie FS, CA, IS, ES)d. Plot the average scores for each dimension on the relevant axese. Add the scores on the x axis and plot the result

Add the scores on the y axis and plot the resultf. Finally, draw a directional vector from the origin through the

intersection point.


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The vector will lie in one of the four quadrants

AGGRESSIVE strategies that might include ..

Market penetration Market development Product development Integration Diversification

CONSERVATIVE strategies that might include..

Market penetration Market development

Product development Concentric diversification

DEFENSIVE strategies that might include

Retrenchment Divestment Concentric diversification

COMPETITIVE strategies that might include..

Integration Market penetration Market development Product development Joint venture


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PORTFOLIO ANALYSIS:

The Strategic Position and Action Evaluation (SPACE) matrix

Documents

Strategic Management Case Study 3