Strategic Choice – Traditional Approach

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Amity Business School

STRATEGICMANAGEMENT

Module IIIStrategic 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 StageSWOT Analysis

External Analysis Internal Analysis

Stage 2: The Matching StageRe-visit Mission and Set Long Term Objectives

Generate feasible alternative Corporate Strategies

Stage 3: The Decision StageEvaluate and Choose Corporate Strategies


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Alternatives for Growth

Alternativesfor Growth

Expansionof existingBusinesses

Diversificationinto newBusinesses

Market Penetration

Market DevelopmentProduct Development

Vertical

Integration -Forward & Backward

Related

Unrelated


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Key Questions in Strategic Choice Strategic choices need to take into accountthe environmentand build on corecompetences

Strategic choices need to take into accountthe expectations and influence ofstakeholders

Strategic directionand methodsshould buildon broad strategic choices

Resourcesand competencesshould bedeveloped to deliver and sustain the chosenstrategies


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Tools

for Formulating and ChoosingCorporate Strategies

Portfolio Analysis


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The BCG MatrixBOSTON CONSULTING GROUP (BCG)

MATRIX was developed by BRUCEHENDERSON of the BOSTON CONSULTING

GROUP IN THE EARLY 1970s. It is also known as Growth Share Matrix

According to this technique, businesses orproducts are classified as low or high performersdepending upon their market growth rate andrelative market share.


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The BCG MatrixRelative Market Share Position in the Industry

Industry

SalesGrowth Rate

(Percent)

High +20

Medium 0

Low - 20

High Medium Low

1.0 .50 0.0

Question Marks (I)

Dogs (IV)

Stars (II)

Cash Cows (III)

?


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QUESTION MARKSHigh 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 becomestar and eventually cash cow but can alsobecome a dog.

Investments should be high for questionmarks.


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STARSHigh growth, High market share Stars are leaders in business.

They also require heavy investment, tomaintain its large market share.

It leads to large amount of cashconsumption and cash generation.

Attempts should be made to hold themarket share otherwise the star willbecome a CASH COW.


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CASH COWSLow 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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DOGSLow growth, Low market share

Dogs are the cash traps.

Dogs do not have potential to bring inmuch cash.

Number of dogs in the company shouldbe minimized.

Business is situated at a declining stage.


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Strategic Perspectives of Productsin 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 orwithdraw


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Stars Investmentcontinue to invest for

capacity expansion

EarningsLow to high earnings Cash-flowNegative (net cash user)


Continue to increase market shareeven

at the expense of short-term earnings


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Cows InvestmentCapacity maintenance

EarningsHigh

Cash-flowPositive (net cashcontributor)


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.

?

FMCG

Class mate

stationary

Cows

FMCG-Cigarettes

Dogs

Maybe ITC

Infotech.


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BCG Matrix - Three Paths to Success

Continuously generate cash cows and usethe cash throw-up by the cash cowsto investin the question marks that are not self-

sustaining Starsneed a lot of reinvestments and as themarket matures, stars will turn into cashcows and the process will be repeated.

As for dogs, segment the markets and nursethe dogs to health or manage for cash


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BCG Matrix - Three Paths to Failure

Over invest in cash cows and underinvest in question marks

Trade future opportunities for present cashflow

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 divestmentdecisions


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MAIN STEPS OF BCG MATRIX

Identifying and dividing a company intoSBUs.

Assessing and comparing the prospects ofeach SBU according to two criteria :1. SBUS relative market share.2. Growth rate OF SBUS industry.

Classifying the SBUS on the basis of BCGmatrix.

Developing strategic objectives for eachSBU.


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BENEFITS BCG MATRIX is simple and easy tounderstand.

It helps you to quickly and simply screen

the opportunities open to you, and helpsyou think about how you can make themost of them.

It is used to identify how corporate cash

resources can best be used to maximize acompanys future growth and profitability.


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LIMITATIONS BCG MATRIX uses only two dimensions,Relative market share and market growthrate.

Problems of getting data on market shareand market growth.

High market share does not mean profits allthe time.

Business with low market share can beprofitable too.


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CONCLUSION

Though BCG MATRIX has its limitations it is one

of the most FAMOUS AND SIMPLEST portfolioplanning matrix, used by large companieshaving multi-products. M&M and HLL are usingthe BCG MATRIX.


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GE Matrix Originally developed by GEs plannersdrawing on McKinseys approaches, it isalso known as the Directional Policy Matrix

Market attractiveness is based on as manyrelevant factors as are appropriate in agiven context

Business strengths assessment also madeon many factors Each SBU needs to be rated on each factor


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GE MatrixIndicators 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 MatrixIndicators 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 MatrixDepending on the location of a business withinthe Matrix, one of the following approaches issuggested:

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 LowMedium

High

Medium

LowBusinessStrength


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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 allocateresources in this business and focus on growing the businessand increase market share

Segment 2: The business is either strong but the market is notattractive or the market is strong and the business is notstrong enough to pursue potential opportunities. Decisionmakers should make judgment on how to further deal withthese SBUs. Some of them may consume too much

resources and are not promising while others may needadditional 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 SBUsand invest the resources into more promising andattractive SBUs.

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STRENGTHS

Uses more comprehensive measures / variables inassessing industry attractiveness and business strength /competitive position

Doesnt lead to as simplistic conclusions as the BCGmatrix

Nine cell approach allows for intermediate rankingsbetween high/low and strong/weak

Stresses channeling of resources to areas with thegreatest probability of achieving competitive advantageand superior performance

GE Matrix


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WEAKNESSES

Provides no real guidance on the specifics of whatstrategy 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 reallyvery subjective

Should the weights & factors used to assess industryattractiveness and business position be usedgenerically, or adjusted depending on the industry underinvestigation?

GE Matrix


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TWO DIMENSIONS

Stage of Industry / Market EvolutionEARLY DEVELOPMENT

RAPID GROWTH / TAKE-OFF

SHAKE-OUT

MATURITY / SATURATION

DECLINE / STAGNATION

Business Strength / (Competitive Position)SAME DIMENSIONS AS USED IN THE GE MATRIX

HOFER LIFE-CYCLE MARKET EVOLUTION

MATRIX


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BUSINESS STRENGTH / COMPETITIVE POSITION

STRONG AVERAGE WEAK

EARLY - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

DEVELOPMENT

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

STAGE OF RAPID GROWTH /

TAKE-OFFINDUSTRY / MARKET - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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

HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX


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ADVANTAGES

Can be used to identify and track developing winners

Illustrates how the firms businesses are distributedacross the stages of industry evolution

HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX


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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 makesinterpretation 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 basedon subjective judgments.

Determining what makes an industryattractive 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 StrategiesDirectional Strategy:

Orientation toward growth

Expand, cut back, status quo? Concentrate within current industry, diversify

into other industries?

Growth and expansion through internaldevelopment or acquisitions, mergers, or

strategic alliances?


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Stricklands Grand Strategy Selection Matrix

It is a four cell guide to selection of strategiesbased 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 grandstrategy to build value when core businessproves 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 theplanning period and the company strengths &weaknesses


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Stricklands Grand Strategy Selection MatrixOvercome Weakness

Maximize Strengths

Vertical integrationConglomeratediversification

Horizontal integrationConcentric diversificationJoint venture

Turnaround orretrenchmentDivestitureLiquidation

Concentrated growthMarket developmentProduct developmentInnovation

Internal

(redirectedresourceswithin thefirm)

External

(acquisitionor merger forresourcecapability)

II

III IV

I


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Grand Strategy

A master long term strategy thatprovides basic direction for major

actions directed towards achievinglong term business objectives


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Grand Strategies

Vertical Integration

Acquisition of firms that supply inputs orcustomers for its outputs

Conglomerate Diversification

Acquiring or entering businesses unrelated tofirms 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 petroleumdecided to acquire downstream refineries anddistribution networks.

Companies such as Shell and BP came tocontrol every step involved in bringing a drop

of oil from its North Sea or Alaskan origins toa 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 integrationof the supply chain with the special characteristics of thevirtual organisation to create virtual integration

Dell assembles computers from other firms' parts, but ithas 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 informationand a variety of loose associations it achieves much the

same aimwhat Michael Dell calls a tightly co-ordinated supply chain.

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Vertical Integration

Vertical integration is a difficult strategy forcompanies to implement successfully. It isoften expensive and hard to reverse

Upstream producers frequently integrate with

downstream distributors to secure a marketfor their output.

This is fine when times are good. But manyfirms have found themselves cutting pricessharply to their downstream distributors when

demand has fallen just so they can maintaintargeted levels of plant utilisation.

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Strategic Choice – Traditional Approach

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