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CHAPTER 6 ANALYSING AND CHOOSING THE RIGHT STRATEGY Strategic analysis and choice is more complicated for corporate-level

l managers because they must create a strategy to guide a company that contains numerous business. They must exploit competitive advantage in each business and then decide how to allocate resources among those businesses. When a firms divisions compete in different industries, a separate strategy often must be developed for each business. An important element of corporate strategy is to identify ways and means of optimum deployment of resources available with a company. In general, a company may have diverse business activities in different markets involving different amounts of investments, and correspondingly bringing different returns. These returns however, are dynamic (changing with time and competition in the industry). Strategic Analysis in a Multi Business Company The Portfolio Approach: The portfolio approach charts strategy and allocates resources in multi-business companies. Each autonomous division (profit centers) of an organization makes what is called a business portfolio. When a firms divisions compete in different industries, a separate strategy often must be developed for each business. For e.g. Aditya Birla Group has multiple product lines like garments, mobile telephone, life insurance, retail business, etc. these businesses form the portfolio of Aditya Birla Group. Each of the businesses contributes at different levels to the profits of the group and differ in return on investment and related measures of profitability. Some of these business lines are cash rich and others are demanding investment depending upon the nature of business line and the business lifecycle. Portfolio analysis helps the company to optimally use the resources and to take a strategic decision as to which business to continue and which one to shed. In essence, portfolio analysis concentrates on such decision. Portfolio analysis is an important tool of strategic management. It means analyzing elements of a firm's product mix to determine the optimum allocation of its resources. The BOSTON CONSULTING GROUP MATRIX (BCG) (an important tool for portfolio analysis)

The Boston Consulting Group (BCG) created the BCG Matrix and it became one of the most well known portfolio management Decision Making Tools in the early 1970's. This analysis is based on the premise that majority of the companies carry out multiple business activities in a number of different product-market segments. Together these different businesses form the business portfolio which can be characterized by two parameters: a. Companys relative market share for the business, representing the firms competitive position, and b. The overall growth rate of that business. TWO MOST COMMON MEASURES USED IN A PORTFOLIO ANALYSIS ARE MARKET GROWTH RATE AND RELATIVE MARKET SHARE. The BCG model proposes that for each business activity within the corporate portfolio, a separate strategy must be developed depending on its location in a two-by-two matrix of high and low segments on each of the mentioned axes. Lets now discuss the two parameters of BCG relative market share & business (market) growth rate % Relative market share: is stressed on the assumption that the relative competitive position of the company would determine the rate at which the business generates cash. An organization with a high relative share of the market compared to its competitors will have higher profit margins and therefore higher cash flows. Market growth rate (%): the rate of growth of the associated industry is based on the understanding that an industrial segment with high growth rate would facilitate expansion of the operations of the participating company. It will also be relatively easier for the company to increase its market share and have profitable investment opportunities. High growth rate business provided opportunities to plough back earned cash into the business and further enhance the return on investment. The fast growing business demands more cash to finance its growth.

The basic premise in using the BCG Matrix is that the higher the market share a product has, the higher the growth rate and the faster the market for that product grows. The BCG Matrix was created in order to alleviate (reduce) the standard one-size fits all in their time. It is useful to a company to achieve balance between various categories of products a company produces.

Four segments in the BCG matrix: 1. Cash Cows (high market share, low market growth) as the term indicates, cash cows are businesses which generate large amounts of cash but their rate of growth is slow. The low rate of growth of the business implies that the cash demand for the business would be low. Thus, cash cow normally generate large cash surpluses which can be milked to provide cash requirement for running other diverse operations of the company. In terms of their future potentials, one must keep in mind that these are generally mature businesses (with low growth rate), which are reaping the benefits of the experience curve. These businesses can adopt mainly stability strategies. As Cash Cow industries lose their attractiveness and tend towards a decline, a phased retrenchment strategy may be feasible. The cash generated by cash cow is reinvested

in stars and question marks. Companies which are well-entrenched in an established market enjoy the advantages of cash cows. 2. Dogs (low market share, low market growth) Those businesses which are related to slow-growth industries and where a company has a low relative market share are termed as dogs. They neither generate nor require large amounts of cash. In terms of PLC, the dogs are usually products in late maturity or a declining stage. The experience curve for the company shows that it faces cost disadvantage due to low market share. The only possibility that company could be to gain market share at the expense of rival firms, a possibility that is remote owing to the high costs involved. So retrenchment strategies are normally suggested. But government policies may prevent retrenchment and the dogs may be artificially sustained, which explains the presence of many products in the Indian market which would fade away if left on their own. 3. Stars (high market share, high market growth) - Invest further in these - they incur high costs, but they are market leaders and should also generate lots of cash. This cell corresponds closely to the growth phase of the PLC. A company generally pursues an expansion strategy to establish a strong position with regard to a star business. In the current India, many businesses such as petrochemicals, electronics and telecommunications, fast foods, ceramic tiles, etc have high growth rate. 4. Question marks OR Problem Child (low market share, but high market growth) this business is a question mark or a problem child business. It requires high amount of cash to maintain or gain market share. Question Marks are usually new products or services which have a good commercial potential. No single set of strategy can be recommended here. If the company feels that it can obtain a dominant market share, it may select expansion strategies. Otherwise, retrenchment may be more realistic alternative. Question mark may become star if enough investment is made or they may become dogs if ignored. `


General Electric Business Screen or GE Strategic Business Planning Grid is very similar to the BCG matrix in the sense that the vertical axis represents industry attractiveness and the horizontal axis represents the company's strength in the industry or business position. The most desirable SBUs are those located in the highly attractive industries where the company has high business strength (upper left cell). One difference is that the GE approach considers more than just market growth rate and relative market share in order to determine market attractiveness and business strength. The industry attractiveness index is made up of such factors as market size, market growth, industry profit margin, amount of competition, seasonally & cyclically of demand, and industry cost structure. Business strength is an index of factors like relative market share, price, competitiveness, product quality, customer & market knowledge, sales effectiveness, and geographic advantages. Against each of the above factors, concerned business is rated on a scale of 1 to 10 and then weighted score is determined from a maximum of 10. This gives the industry attractiveness index for the business under consideration.

The industry attractiveness index is then plotted along the vertical axis and divided into low, medium and high sectors. Correspondingly, the competitive position is plotted along Horizontal axis divided into Strong, Average and weak segments. For each business in portfolio, a circle denoting the size of the industry is shown in the matrix grid (3 X 3 matrix grid) while shaded portion corresponds to the companys market share. GE rates each of its businesses every year on such a framework. Strategically, the SBUs located in the green cells in the upper left are those in which the company should invest and grow. The SBUs in the yellow cells along the diagonal running from lower left to upper right are overall medium in attractiveness. The strategy is to protect or allocate resources on a selective basis. The SBUs in the red cells on the lower right corner have low overall attractiveness. A harvest (crop) strategy should be used in the two cells just below the three-cell diagonal. These SBUs should not receive substantial new resources. The SBUs in the lower right cell should not receive any resources and should probably be divested or eliminated from an organizations portfolio.