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6/29/2011 2004 Pearson Education Canada Inc. 1
Steps in Strategic Planning
Defining the
corporate mission
Setting corporate
objectives & goals
Designing the
business portfolio
Developing
business unit
strategy
Designing functional
plans (marketing, human resources,
operations, finance, MIS)
Corporate level
Business level
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Establishing Strategic Business Units
Most companies operate several businesses.
Companies too often define their businesses in terms
of products. They are in auto business or gasoline
business.
Professor Ted Levitt argued that market definitionsof a business are superior to product definitions.
A business must be viewed as a customer-satisfying
process, not a good-producing process.Products are transient (temporary), but basic needs
and customer groups endure forever.
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Establishing Strategic Business Units
A horse-carriage company will go out of business
soon after the automobile is invented, unless it
switches to making cars. Transportation is a need;
the horse and carriage, the automobile, the railroad,
the airline, and the truck are products that meet thatneed.
Levitt encourages companies to redefine their
business in term of need, not products.
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Table 4.1: Product-Oriented versus Market-Oriented Definitions of a Business
Company Product Definition Market Definition
Missouri-Pacific
Railroad
Xerox
Standard Oil
Columbia Pictures
Encyclopaedia
Carrier
Ericsson ? ?
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Table 4.1: Product-Oriented versus Market-Oriented Definitions of a Business
Company Product Definition Market Definition
Missouri-Pacific
Railroad
We run a railroad We are a people-and-goods
mover
Xerox We make copyingequipment
We help improve officeproductivity
Standard Oil We sell gasoline We supply energy
Columbia Pictures We make movies We market entertainment
Encyclopaedia We sell encyclopedias We distribute Information
Carrier We make air conditioners
and furnaces
We provide climate control
in the home
Ericsson ? ?
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Establishing Strategic Business Units
A business can be defined in terms of three dimensions:customer groups, customer needs, and technology.
For example, a company that defines its business as
designing incandescent lighting systems for television
studios would have television studios as its customer
group; lighting as its customer need; and incandescent
lighting as its technology.
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Establishing Strategic Business Units
Large companies normally manage quite different
businesses, each requiring its own strategy; General
Electric has established 49 strategic business units (SBUs).
An SBU has three characteristics:
(1) It is a single business or collection of related
businesses that can be planned separately from the rest of
the company
(2) it has its own set of competitors and
(3) it has a manager responsible for strategic planning andprofit performance who controls most of the factors
affecting profit.
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Assigning Resources to Each SBU
The purpose of identifying the companys strategic
business units is to develop separate strategies and assign
appropriate funding to the entire business portfolio.
Senior managers generally apply analytical tools toclassify all of their SBUs according to profit potential.
Two of the best-known business portfolio evaluation
models are
(i) Boston Consulting GroupModel and
(ii) General Electric Model
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The Boston Consulting Group Approach
The Boston Consulting Group (BCG), a leading
management consulting firm, developed and popularized
the growth-share matrix.
This matrix is basically a chart that had been created byBruce Henderson for the Boston Consulting Group in
1970 to help corporations with analyzing their business
units or product lines.
This helps the company allocate resources.
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The Boston Consulting Group Approach
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The Boston Consulting Group Approach
The BCG matrix method is based on the product life cycle
theory that can be used to determine what priorities shouldbe given in the product portfolio of a business unit.
To ensure long-term value creation, a company should
have a portfolio of products that contains both high-
growth products in need of cash inputs and low-growth
products that generate a lot of cash.
It has 2 dimensions: market share and market growth. The
basic idea behind it is that the bigger the market share aproduct has or the faster the product's market grows the
better it is for the company.
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The Boston Consulting Group Approach
Placing products in the BCG matrix results in 4 categories in a
portfolio of a company:
1. Stars (=high growth, high market share)
- use large amounts of cash and are leaders in the business so
they should also generate large amounts of cash.
- frequently roughly in balance on net cash flow. However if
needed any attempt should be made to hold share, because the
rewards will be a cash cow if market share is kept.
2. Cash Cows (=low growth, high market share)
- profits and cash generation should be high , and because of
the low growth, investments needed should be low. Keep
profits high.
- Foundation of a company
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The Boston Consulting Group Approach
3. Dogs (=low growth, low market share)
- avoid and minimize the number of dogs in a company.- beware of expensive turn around plans.
- deliver cash, otherwise liquidate
4.
Question Marks (= high growth, low market share)- have the worst cash characteristics of all, because high
demands and low returns due to low market share
- if nothing is done to change the market share, question
marks will simply absorb great amounts of cash and later, asthe growth stops, a dog.
- either invest heavily or sell off or invest nothing and
generate whatever cash it can. Increase market share or
deliver cash
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The Boston Consulting Group Approach
After plotting its various businesses in the growth-share
matrix, a company must determine whether the portfolio is
healthy. An unbalanced portfolio would have too many
dogs or question marks or too few stars and cash cows.
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The Boston Consulting Group Approach
The next task is to determine what objective, strategy, and
budget to assign to each SBU. Four strategies can bepursued:
1. Build: The objective here is to increase market share,
even forgoing short-term earnings to achieve this objective
if necessary. Building is appropriate for question marks
whose market shares must grow if they are to become
stars.
2. Hold: The objective in a hold strategy is to preservemarket share, an appropriate strategy for strong cash cows
if they are to continue yielding a large positive cash flow.
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The Boston Consulting Group Approach
3. Harvest: The objective here is to increase short-term
cash flow regardless of long-term effect. Harvestinginvolves a decision to withdraw from a business by
implementing a program of continuous cost retrenchment.
The hope is to reduce costs faster than any potential drop
in sales, thus boosting cash flow. This strategy is
appropriate for weak cash cows whose future is dim and
from which more cash flow is needed. Harvesting can also
be used with question marks and dogs.4. Divest: The objective is to sell or liquidate the business
because the resources can be better used elsewhere. This is
appropriate for dogs and question marks that are dragging
down company profits.
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The Boston Consulting Group Approach
Successful SBUs move through a life cycle, starting as
question marks and becoming stars, then cash cows, andfinally dogs.
Given this life-cycle movement, companies should beaware not only of their SBUs current positions in the
growth-share matrix (as in a snapshot), but also of their
moving positions (as in a motion picture).
If an SBUs expected future trajectory is not satisfactory,
the corporation will need to work out a new strategy to
improve the likely trajectory.