BCG

Grand Strategies

Grand Strategies Grand strategies provide basic direction for strategic

actions. They are the basis for coordinated and sustained efforts

directed towards achieving long-term business objectives.

They indicate a time period over which long-term objectives are to be achieved.

Firms involved with multiple industries, businesses, product lines or customer groups usually combine several grand strategies.

The fifteen grand principles are:1. Concentrated growth e.g. e-bay in online auction

2. Market development e.g. J&J catering to the adults, using sachets for market penetration

3. Product development e.g. personal care products from HUL, newer version of books,

4. Innovation

5. Horizontal integration

6. Vertical integration

7. Concentric diversification

8. Conglomerate diversification

9. Turnaround

10. Divestiture e.g. Sale of TOMCO by Tata, selling of cement division by L&T

11. Liquidation

12. Bankruptcy

13. Joint ventures

14. Strategic alliances

15. Consortia e.g. Mitsubishi, LG

Innovation Innovation is needed since both consumer and industrial

markets expect periodic changes and improvements in the products offered.

Firms seeking to making innovation as their grand strategy seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product.

As the products enters the maturity stage these companies start looking for a new innovation.

Innovation The underlining rationale is to create a new product life

cycle and thereby make similar existing products obsolete.

This strategy is different from the product development strategy in which the product life cycle of an existing product is extended.

• e.g. Polaroid which heavily promotes each of its new cameras until competitors are able to match its technological innovation; by this time Polaroid normally is prepared to introduce a dramatically new or improved product.

• Intel, 3M

Turnaround Sometimes the profit of a company decline due to various

reasons like economic recession, production inefficiencies and innovative breakthrough by competitors.

In many cases the management believes that such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences.

This is known as turnaround strategy.

Turnaround typically is begun with one or both of the following forms of retrenchment being employed either singly or in combination.

1. Cost reduction

• It is done by decreasing the workforce through employee attrition, leasing rather than purchasing equipment, extending the life of machinery, eliminating promotional activities, laying off employees, dropping items from a production line and discontinuing low-margin customers.

2. Asset reduction

• This includes sale of land, buildings and equipment not essential to the basic activity of the firm.

Research have showed that turnaround almost always was associated with changes in top management.

New managers are believed to introduce new perspectives, raise employee morale and facilitate drastic actions like deep budgetary cuts in established programs.

Turnaround situation The model begins with the depiction of external and

internal factors as causes of a firm's performance downturn.

When these factors continue to detrimentally impact the firm, its financial health is threatened.

Unchecked decline places the firm in a turnaround situation.

A turnaround situation represents absolute and relative to the industry declining performance of a sufficient magnitude to warrant explicit turnaround actions.

Turnaround situation

A turnaround situation represents absolute and relative to the industry declining performance of a sufficient magnitude to warrant explicit turnaround actions.

Turnaround situations may be a result of years of gradual slowdown or months of sharp decline.

For a declining firm, stabilizing operations and restoring profitability almost always entail strict cost reduction followed by shrinking back to those segments of the business that have been the best prospects of attractive profit margins.

Situation severity The urgency of the resulting threat to company survival

posed by the turnaround situation is known as situation severity.

Severity is the governing factor in estimating the speed with which the retrenchment response will be formulated and activated.

When severity is low stability can be achieved through cost reduction alone.

Situation severity When severity is high cost reduction must be

supplemented with more drastic asset reduction measures.

Assets targeted for divestiture are those determined to be underproductive.

More productive resources are protected and will become the core business in the future plan of the company.

E.g . strategy adopted by Citibank

Turnaround response

Turnaround response among successful firms typically include two strategic activities:

• Retrenchment phase

• Recovery phase

Retrenchment phase

It consists of cost-cutting and asset-reducing activities. The primary objective of this process is to stabilize the

firm's financial condition. Firms in danger of bankruptcy or failure attempt to halt

decline through cost and asset reductions. It is very important to control the retrenchment process

in a effective and efficient manner for any turnaround to be successful.

After the stability has been attained through retrenchment, the next step of recovery phase begins.

Recovery phase The primary causes of the turnaround situation will be

associated with the recovery phase. For firms that declined as a result of external problems,

turnaround most often has been achieved through creative new entrepreneurial strategies.

For firms that declined as a result of internal problem, turnaround has been mostly achieved through efficiency strategies.

Recovery is achieved when economic measures indicate that the firm has regained its predownturn levels of performance.

Turnaround Strategy

Changing the Leadership

The Main The Main Steps of TurnaroundSteps of Turnaround

Turnaround Strategy

Redefining the Strategic Focus


Turnaround Strategy

Asset Sales and Closures


Turnaround Strategy

Improving Profitability


Turnaround Strategy

Acquisitions


BCG Matrix &

GE Nine Cell Planning Grid

BCG MATRIX– A concept developed by the Boston Consulting

Group that evaluates SBUs with respect to the dimension of business growth rate and market share.

– Mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage

– ALSO CALLED AS PORTFOLIO STRATEGY

Reviewing the Corporate Portfolio

Portfolio Planning Identifying SBUs Assessing and Comparing SBUs

• Relative Market Share• Relative Growth Rate

Formulating Business-Level Strategy

It is a strategy formulation within the strategic business unit in which the concern is how to compete.

The same three GRAND strategies (growth, stability, and retrenchment) apply at the business level, but they are accomplished through competitive actions rather than the acquisition or divestment of business divisions.

Portfolio Strategy

26

BCG Matrix

The BCG MatrixHigh

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Stars

1. Stars(=High growth, high market share) The business has high market share compared to

competitors and it is doing business in high-growth market

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.

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The BCG Matrix

Cash Cows

2.Cash Cows(=low growth, high market share)

– The market is not very attractive – low market growth rate, however the business has high market share compared to competitors.

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 BCG Matrix

Dogs

3. Dogs(=low growth, low market share)

– This business has low market share and operates in low-growth market.

Avoid and minimize the number of dogs in a company. Beware of expensive ‘turn around plans’. Deliver cash, otherwise liquidate

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The BCG Matrix

???? ????Question Marks

Question Marks (= high growth, low market share)

– The business unit has low market share compared to competitors, however it is doing business in high-growth market.

– 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, as the 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 BCG Matrix

???? ????Question Marks

Cash Cows

Dogs

Stars

Analysis of Your Enterprise Position

Stars Cash Cows

Question Marks

Dogs

High growthHigh share

Low growthHigh share

High growthLow share

Low growthLow share

Business is likely to generate enough cash to be self sustaining.

Business can be used to support other business units.

defend & maintain

Business requires a lot of cash to maintain market share.

invest more cash

or, divest

Business is a cash trap.

focus on short term avoid risky project limited future

Reviewing the Corporate Portfolio

Strategic Implications• Cash Surplus from Cash Cows Used to Support

Question Marks and Stars• Question Marks Divested• Exit Industry Where SBU is a Dog• Firm with Insufficient Cash Cows, Stars, or

Question Marks Should Consider Acquisitions and Divestments

Limitations of B C G Model:

Defining a market, measuring share and growth rate difficult. In the matrix average growth rate & average market share not

recognized. The relationship between market share and profitability

underlying the BCG matrix – the experience curve effect -varies across industries and market segments.

The BCG matrix is not particularly helpful in comparing relative investment opportunities across different business units in the corporate portfolio.

Strategic evaluation of a set of business requires examination of more than relative market shares and market growth.

It oversimplifies the four classifications.

G E nine cell planning grid

Introduction GE came up with the multifactor portfolio matrix in the

1970’s for the assessment of their SBU’s.

It is similar to BCG matrix

Vertical axis represents industry attractiveness and the horizontal axis represents the company’s strength in the industry or business position

G E Nine cell planning grid

The General Electrical company is highly admired for the sophistication, maturity& quality of its planning system.

It uses a 3×3 matrix called the General Electric’s Stoplight matrix to guide the allocation of resources.

BUSINESS

STRENGTH

weak

average

strong

Industry AttractivenessHigh Medium Low

General Electric’s Nine-cell (multi-factor) Port-folio Matrix

0

1000

Invest/grow

Selectivity/earning

Harvest/divest

legend

G E Nine cell planning grid This matrix calls for evaluating the business of a firm in

terms of two key uses: Business Strength : How strong is the firm vis-à-vis its

competitors ? Industry strength : What is the attractiveness or potential

of the industry ?

G E’s Nine-cell Planning Grid:

Business Strength: Industry Attractiveness:

Relative market share Market Size and growth rate Profit margins Industry Profit margins Ability to compete on Competitive intensity

price and quality Seasonality Knowledge of customer Cyclical

and market Economies of scale Competitive strength and Technology

weaknesses Social, environmental, legal, Technological capabilities and human impacts Caliber of management


The commitment of resources to various business is guided by how they are rated in terms of above two dimensions.

Business which are favorably placed justify substantial commitment of funds.

Business which are unfavorably placed call for divestment.

And business which are placed in between quality for modest investment.


More advanced than BCG matrix in three ways:

Market growth is replaced be market attractiveness

Market share is replaced by competitive strength

GE uses 6 step approach (BCG-2*2, GE -3*3)

Attractiveness include Broader range of factors other than market growth rate.

Depending on the product characteristics, different parameters can select to measure market attractiveness.

Market attractiveness factors MARKET SIZE MARKET GROWTH MARKET PROFITABILITY PRICING TRENDS COMPETITIVE INTENSITY OPPORTUNITY TO DIFFERENTIATE PRODUCTS

AND SERVICES DISTRIBUTOIN STRUCTURE (EG: RETAIL, DIRECT,

WHOLESALE)

Factors that affect competitive strength

STRENGTH OF ASSETS AND COMPETENCIES

RELATIVE BRAND STRENGTH

MARKET SHARE

CUSTOMER LOYALTY

RELATIVE COST POSITION

DISTRIBUTION STRENGTH

RECORD OF TECHNOLOGICAL AND OTHER INNOVATION

ACCESS TO FINANCIAL AND OTHER INVESTMENT RESOURCES

Plotting the Information:

1. Select factors to rate the industry for each product line or business unit. Determine the value of each factor on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor.

Industry attractiveness = factor value1 x factor weighting1

+ factor value2 x factor weighting2

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.

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+ factor valueN x factor weighting N

2. Select the key factors needed for success in each of the product line or business unit. Determine the value of each key factor in the criteria on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor.

Business strengths/competitive position = key factor value1 x factor weighting1

+ key factor value2 x factor weighting2

.

.

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+ key factor value N x factor weighting N

3. Plot each product line's or business unit's current position on a matrix.

4. The individual product lines or business units is identified by a letter and plotted as circles on the GE Business Screen.

5. The area of each circle is in proportion to the size of the industry in terms of sales. The pie slice within the circles depict the market share of each product line or business unit.

6. Plot the firm's future portfolio assuming that present corporate and business strategies remain unchanged. This is shown as an arrow which starts from the circle representing the current position and the tip of the arrow will be the tentative center of the future circle.

Strategic Implications

• Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows:

1. Grow strong business units in:

– attractive industries

– average business units in attractive industries

– strong business units in average industries.

1. Hold average business units in:

– average industries

– strong businesses in weak industries

– weak business in attractive industries.

2. Harvest weak business units in:

– unattractive industries

– average business units in unattractive industries

– weak business units in average industries.

The McKinsey MatrixCompetitive PositionCompetitive Position

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Good Medium PoorHigh

Medium

Low

Winner

Winner

Winner

ProfitProducer

AverageBusiness

QuestionMark

Loser

LoserLoser

There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry.

GE business screen represents an improvement over the more simple BCG growth-share matrix.

Limitations

• It presents a somewhat limited view by not considering interactions among the business units

• It neglects to address the core competencies leading to value creation

• Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.

Protect positionInvest at maximumDigestible rateConcentrate effort on maintaining strength

Invest to buildBuild selectively on strengthsReinforce vulnerable areasChallenge for leadership

Build selectivelySeek ways to overcome weaknessesSpecialize around limited strengths

Build selectivelyInvest heavily in most attractive segmentsEmphasize profitability by raising productivity

Manage for earningsProtect existing business Concentrate investments in segments with good profits, low risk

Limited expansion

Rationalize operations

Protect and refocusManage for current earningsDefend strength

Manage for earnings- Protect position in most profitable segments

DivestSell at time that will maximize cash value cut fixed cost Avoid investment

Industry

attractiveness

high

medium

low

strong Average weak

competitive strength

Strategies for SBU at different quadrants

BCG

Documents

Transcript of BCG