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
The Main
Steps of Turnaround

✔ Changingthe
Leadership
Turnaround Strategy
The Main
Steps of Turnaround

✔ Redefining the Strategic

Focus
 Turnaround Strategy
The Main
Steps of Turnaround

✔ Asset
Sales and
Closures
Turnaround Strategy
The Main
Steps of Turnaround

✔ Improving
Profitability
 Turnaround Strategy
The Main
Steps of Turnaround

✔ 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

BCG
Matrix

26
 The BCG Matrix
High
Industry Growth Rate

Low
High Low
Relative Market Share
High Stars
Industry Growth Rate

Low
High Low
Relative Market Share
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.
 The BCG Matrix
High
Industry Growth Rate

Low Cash Cows

High Low
Relative Market Share
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
 The BCG Matrix
High
Industry Growth Rate

Dogs

Low
High Low
Relative Market Share
 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
 The BCG Matrix
High Question Marks

?? ??
Industry Growth Rate

Low
High Low
Relative Market Share
 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.
 The BCG Matrix
High Stars Question Marks

?? ??
Industry Growth Rate

Dogs

Low Cash Cows

High Low
Relative Market Share
 Analysis of Your Enterprise Position

Stars Cash Cows Question

Marks
Dogs
High growth Low growth High growth Low growth
High share High share Low share Low share

Business is Business can be Business Business is a cash

likely to used to requires a lot trap.
generate support other of cash to • focus on short term
enough cash business maintain • avoid risky project
to be self units. market • limited future
sustaining. • defend & share.
maintain • invest more
cash
• or, divest
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.
 legend
Harvest/divest General Electric’s Nine-cell (multi-factor) Port-
folio Matrix
Invest/grow
Selectiv Industry Attractiveness
ity/earni High Medium Low
ng 0
100 B
U
S
stron
I
g
N
E
S
S
averag
e S
T
R
E
N
G
weak T
H

0
 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:
 Relative market share
 Profit margins
 Ability to compete on
price and quality
 Knowledge of customer
and market
 Competitive strength and
weaknesses
 Technological capabilities
 Caliber of management
Industry Attractiveness:
Market Size and growth rate
Industry Profit margins
Competitive intensity
Seasonality
Cyclical
Economies of scale
Technology
Social, environmental, legal,
and human impacts
 G E Nine cell planning grid
◆ 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.
 G E Nine cell planning grid
◆ 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
.
.
.
+ 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
.
.
.
+ 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.

1. Harvest weak business units in:

– unattractive industries
– average business units in unattractive industries
– weak business units in average industries.
The McKinsey Matrix
Competitive Position
Good Medium Poor
High Winner Question
Industry Attractiveness
Winner
Mark

Medium Winner Average Loser

Business

Low Profit Loser Loser

Producer
◆ 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.
 strong Average weak
I Protect position Invest to build Build selectively
Invest at maximum Build selectively on Seek ways to overcome
n h Digestible rate strengths weaknesses
d ig Reinforce vulnerable Specialize around limited
Concentrate effort on
u h maintaining strength areas strengths
st Challenge for leadership

r
m
y Build selectively Manage for earnings Limited expansion
e
Invest heavily in most Protect existing
a d attractive segments business Rationalize operations
tt i Emphasize profitability by Concentrate
r u raising productivity investments in segments
a m with good profits, low
risk
ct
iv Protectand refocus Manage for earnings Divest
l
e Manage for current earnings - Protect position in Sell at time that will
o most profitable segments maximize cash value
n Defend strength
w  cut fixed cost
e
 Avoid investment
ss
competitive strength
Strategies for SBU at different
quadrants