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About Strategic Analysis and Choice
Strategic implementation is the last stage of
strategic management and strategic analysis and
choice are two significant constituents (elements)
of that process.
The strategy of a company refers to its all-inclusive plan or program for the purpose of
accomplishing its aims and targets in the long run.
Different types of strategies include business unit
strategy, corporate strategy, operational strategy
and others.
Strategic analysis implies the examination
of the present condition of a business and
consequently developing an appropriate business
strategy.
At the time of performing strategic analysisand arriving at strategic choices, long term goals
are fixed and different types of strategies are
chosen that are most appropriate for the mission of
the company and the variable conditions.
Strategic analysis and choice of strategies
are done with the help of a number of techniques.
If the appropriate strategy is chosen, a company
would become more efficient to establish
sustainability in competitive advantage and
maximize firm valuation.
BENEFITS OF SAC
Sustainability
To survive and succeed long-term, you
need to think and plan long-term.
Funding
Strategic analysis demonstrates an
organizations relevance and viability. It increases
your organisation's credibility. So your funding
applications are more likely to succeed.
Whole organisation approach
Looking at your external environment can
help you take a whole organisation approach. It
will help you work out how different trends might
affect different elements of your project, group or
organisation.
Without environmental analysis an organisation
doesnt consider the way things are changing
around them, so no analysis is done and you never
notice that things have moved on around you.
Paul Sullivan from Shelter
Sound goals
It is used to choose the right path is
challenging. Strategic analysis will help you make
the right decisions to make your organisation more
effective.External focus
An effective organisation can identify and
respond to opportunities and threats. Internal focus
alone is not enough.
Clear expectations
Everyone with a stake in your organisation
helps to ensure your strategy is relevant and
appropriate.
Effectiveness
Analysis will help you meet your objectives
in a smarter, more effective and savvy way. It is an
endless source of ideas that will inspire you to
innovate and improvise.
KEY FACTORS FOR SAC
Key Internal Factors
Marketing
Management
Operations/ProductionAccounting/Finance
Computer Information Systems
Research and Development
Key External Factors
Political/Governmental/Legal
Economy
Technological
Social/Demographic/Cultural/Environmental
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Competitive
Techniques Used in Strategic Analysis
The following devices or techniques are
used in the procedure of strategic analysis:
Five Forces Analysis
PEST Analysis (Political, Economic, Social
and Technological Analysis)
Market segmentation
Scenario planning
Competitor analysis
Directional policy matrix
SWOT Analysis (Strength, Weaknesses,
Opportunities, and Threats Analysis)
Critical Success Factor Analysis
Characteristics of Strategic Analysis and Choice
Following are the features of strategic analysis andchoice:
Establishment of long term goals
Producing strategy options
Choosing strategies to act on
Selecting the best option and accomplishing
mission and goals
Strategic Analysis is the process of conducting
research on the business environment within
which an organisation operates and on the
organisation itself, in order to formulate strategy.
BNET Business Dictionary
Strategic Analysis a theoretically
informed understanding of the environment in
which an organisation is operating, together with
an understanding of the organizations interaction
with its environment in order to improve
organizational efficiency and effectiveness by
increasing the organizations capacity to deployand redeploy its resources intelligently.
Professor Les Worrall, Wolverhampton Business School
Definitions of strategic analysis often
differ, but the following attributes are commonly
associated with it:
Identify and evaluate of data relevant to the
strategy formulation.
Definition of external and internal environment
should be analyzed.
Identify the range of analytical methods that can
be employed in the analysis.
Examples of analytical methods used instrategic analysis include:
**SWOT analysis
**PEST analysis
**Porters five forces analysis
**Four corners analysis
**Value chain analysis
**Early warning scans
**War gaming.
PEST ANALYSIS
PEST analysis is a scan of the external
macro-environment in which an organisation
exists. It is a useful tool for understanding thepolitical, economic, socio-cultural and
technological environment that an organisation
operates in. It can be used for evaluating market
growth or decline, and as such the position,
potential and direction for a business.
POLITICAL FACTORS
These include government regulations
such as employment laws, environmental
regulations and tax policy. Other political factors
are trade restrictions and political stability.
ECONOMIC FACTORS
These affect the cost of capital and
purchasing power of an organisation. Economic
factors include economic growth, interest rates,
inflation and currency exchange rates.
SOCIAL FACTORS
These have impact on the consumers need
and the potential market size for an organizations
goods and services.S
ocial factors include population growth, age demographics and
attitudes towards health.
TECHNOLOGICAL FACTORS
These influence barriers to entry, make or
buy decisions and investment in innovation, such
as automation, investment incentives and the rate
of technological change.
PEST factors can be classified as opportunities or
threats in a SWOT analysis. It is often useful to
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complete a PEST analysis before completing a
SWOT analysis.
It is also worth noting that the four
paradigms of PEST vary in significance depending
on the type of business. For example, social
factors are more obviously relevant to consumer
businesses or a B2B business near the consumer
end of the supply chain. Conversely, political
factors are more obviously relevant to a defence
contractor or aerospace manufacturer.
FOUR CORNERS ANALYSIS
Developed by Michael Porter, the four
corners analysis is a useful tool for analyzing
competitors. It emphasizes that the objective of
competitive analysis should always be on
generating insights into the future.
The model can be used to:Develop a profile of the likely strategy changes a
competitor might make and how successful they
may be
Determine each competitors probable response
to the range of feasible strategic moves other
competitors might make
Determine each competitors probable reaction to
the range of industry shifts and environmental
changes that may occur.
The four corners refers to four
diagnostic components that are essential to
competitor analysis: future goals; current
strategy; assumptions; and capabilities.
Many organisations carry out basic SWOT
analysis and have an appreciation for their
competitors strategies. However, motivational
factors are often overlooked and yet are generally
the key drivers of competitive behaviour.
Understanding the following fourcomponents can help predict how a competitor
may respond to a given situation.
MOTIVATION DRIVERS
Analyzing a competitors goals assists in
understanding whether they are satisfied with their
current performance and market position. This
helps predict how they might react to external
forces and how likely it is that they will change
strategy.
MOTIVATION ACTION
MOTIVATION: MANAGEMENT ASSUMPTIONS
The perceptions and assumptions that a
competitor has about itself, the industry and other
companies will influence its strategic decisions.
Analyzing these assumptions can help identify the
competitors biases and blind spots.ACTIONS STRATEGY
A companys strategy determines how a
competitor competes in the market. However,
there can be a difference between intended
strategy (the strategy as stated in annual reports,
interviews and public statements) and the realized
strategy (the strategy that the company is
following in practice, as evidenced by
acquisitions, capital expenditure and new product
development).
Where the current strategy is yielding
satisfactory results, it is reasonable to assume that
an organisation will continue to compete in the
same way as it currently does.
ACTIONS CAPABILITIES
The drivers, assumptions and strategy of
an organisation will determine the nature,
likelihood and timing of a competitors actions.
ANALYSIS DRIVERS
Financial goals
Corporate culture
Organizational structure
Leadership team
backgrounds
External constraints
Business philosophy
CURRENT STRATEGY
How the business creates
value
Where the business ischoosing to invest
Relationships and networks
the business has developed
MANAGEMENT
ASSUMPTIONS
Companys perceptions ofits strengths and weaknesses
Cultural traits
Organizational valuePerceived industry forces
Belief about competitors
goals
CAPABILITIES
Marketing skills
Ability to service channels
Skills and training to work
force
Patents and copyrights Financial strength
Leadership qualities of
CEO
COMPETITORS FUTURE STRATEGY
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However, an organizations capabilities will
determine its ability to initiate or respond to
external forces.
VALUE CHAIN ANALYSIS
Before making a strategic decision, it is
important to understand how activities within the
organisation create value for customers. One way
to do this is to conduct a value chain analysis.
Value chain analysis is based on the
principle that organisations exist to create value for
their customers. In the analysis, the organizations
activities are divided into separate sets of activities
that add value. The organisation can more
effectively evaluate its internal capabilities by
identifying and examining each of these activities.
Each value adding activity is considered to be a
source of competitive advantage.
The three steps for conducting a valuechain analysis are:
Separate the organizations operations into
primary and support activities.
Primary activities are those that
physically create a product, as well as market the
product, deliver the product to the customer and
provide after-sales support. Support activities are
those that facilitate the primary activities.
Allocate cost to each activity.
Activity cost information provides
managers with valuable insight into the internal
capabilities of an organisation.
Identify the activities that are critical to
customers satisfaction and market success.
There are three important considerations
in evaluating the role of each activity in the value
chain.
**Company mission. This influences the
choice of activities an organisation undertakes.**Industry type. The nature of the
industry influences the relative importance of
activities.
**Value system. This includes the value
chains of an organizations upstream and
downstream partners in providing products to end
customers.
Value chain analysis is a comprehensive
technique for analyzing an organizations source of
competitive advantage.
EARLY WARNING SYSTEMS
The purpose of strategic early warning
systems is to detect or predict strategically
important events as early as possible. They are
often used to identify the first scene of attack from
a competitor or to assess the likelihood of a given
scenario becoming reality.
The seven key components of an early
warning system are:
Market definition: A clear definition of the scope
of the arena to be scrutinized. For example, is the
arena a particular geographical region, brand or
market?
Open systems: An ability to capture a wide rangeof information on relevant competitors.
Filtering: Information that has been collected on
the arena needs to be filtered according to
significance. Expert interpretation is required in
order to identify particular events that signify
strategic moves or shifts.
Predictive intelligence: Using knowledge of the
forces driving a competitor to predict which
direction they are likely to take. One technique is
to build likely scenarios and actively seek the
signals that confirm the scenario. The predictions
need to be assessed for their probability of
occurring and potential impact.
Communicating intelligence: Ensuring that the
right people in an organisation receive regular
briefing on key signals.
Contingency planning: Events that have a high
potential impact or probability of occurring may
merit contingency plans, for example, a change ofstrategy or mitigating actions.
A cyclical process: The process of scrutinizing
information for new warning signals should never
stop. While the emphasis is on emerging threats
and opportunities, the process should be flexible
enough to tackle unexpected shorter term
developments too.
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WAR GAMING
War games are a useful technique for
identifying competitive vulnerabilities and
misguided internal assumptions about competitors
strategies.
Simulations of competitive scenarios are used to
explore the implications of changes in strategy in a
no risk environment. They also encourage new
ways of thinking about the competitive context.
War games are often particularly useful for
organisations facing critical strategic decisions.
A typical business war game has the
following characteristics:
An off-site venue
Senior managers representing a cross-functional
mix of participants
Two to three full days duration
Four or more teams of with four to eight peopleeach. Each team represents either the sponsoring
company or one of its competitors
Preparation time in which each team receives a
dossier describing the company they are
representing, and its strengths and weaknesses
Games comprise several moves or decision
rounds. Each move consists of a fixed,
predetermined amount of time ranging from a
couple of months to several years. During each
move, teams make and carry out strategic
decisions. After each move, teams assess their
positions relative to other teams.
A control team of facilitators who serve as the
board of directors. They ensure that strategic plans
are acceptable and legal. They also facilitate the
deep brief, in which participants review the merit
of each strategy.
STRATEGIC CHOICE
Many opportunities and issues that require
a strategic decision emerge outside of the annual
planning process. In some organizations, this
means that the board or staff doesnt apply the
same rigor to decision-making as they would at a
session dedicated to strategic thinking. As well, the
natural tendency is to address it as an operational,
rather than strategic issue. In other cases, managers
and frontline staff wait for the board or leadership
team to make the strategic decisions.
The following outlines a rigorous, but
simple, strategic decision-making process that can
be used by anyone in the organization, from the
board to frontline staff, to address issues and
opportunities as they emerge. At a time when
organizations need to be quick, the process will
ensure you make the right choice.
To illustrate how it works, here is the
process applied to a strategic decision about a
major cut in funds.
STAGE ONE: IDENTIFY
Start by ensuring that the issue is strategic,
not operational. If the outcome will require a
significant change or have a big impact on
stakeholders, then it is likely strategic. Also,
consider whether the organizational culture hinders
the process. A culture that values flexibility,
promotes debate, insists on transparency, and
believes in inclusiveness will help with success.
Then clearly articulate the issue or opportunitywithout letting people skip to the solution. Be sure
everyone agrees with it.
STAGE TWO: REFLECT
Gather information about the issue or
opportunity. Don't allow biases about solutions to
influence the selection. Draw from a variety of
sources; sometimes perceptions are as important as
hard data. Review the information and make
observations, without arriving at decisions about
IDENTIFY
Articulate issue,
problem or opportunity
LEARN
**Gain insight,
**identify barriers,
**formulate question
ACT
Execute the
decision
SELECT
Combine and
synthesize the
alternatives,
Prioritize the option
and make the choice
REFLECT
Gather and
analyze the data
and uncover
assumption
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how to proceed. Also, uncover any board or staff
assumptions that can influence the solution. If
necessary, reframe the issue or opportunity based
on what has been learned.
STAGE THREE: LEARN
This is the creative stage. Draw from what
has been learned in the reflection stage and
formulate questions, identify barriers or
challenges, draw insights, debate possibilities, and
come up with a wide range of options. Be sure to
encourage different perspectives, promote debate,
and challenge the status quo.
STAGE FOUR: SELECT
Now make the choice. Combine and
synthesize the options and then prioritize them
using agreed-upon criteria. Think about the
implications of the prioritized choices on
resources, processes, and programs. Once thechoice is made, ensure that there is consensus and
that people are prepared to be held accountable for
it. Assign key metrics that need to be monitored to
ensure success.
STAGE FIVE: ACT
The final stage focuses on the execution of
the decision - how will it be achieved, who is
responsible, what are the timelines and how will it
be evaluated? These now become operational
decisions.
BALANCED SCORECARDBASICS
The balanced scorecard is a strategic
planning and management system that is used
extensively in business and industry, government,
and nonprofit organizations worldwide to align
business activities to the vision and strategy of the
organization, improve internal and external
communications, and monitor organization performance against strategic goals. It was
originated by Drs. Robert Kaplan (Harvard
Business School) and David Norton as a
performance measurement framework that added
strategic non-financial performance measures to
traditional financial metrics to give managers and
executives a more 'balanced' view of
organizational performance. While the phrase
balanced scorecard was coined in the early 1990s,
the roots of the this type of approach are deep, and
include the pioneering work of General Electric on
performance measurement reporting in the 1950s
and the work of French process engineers (who
created the Tableau de Bord literally, a
"dashboard" of performance measures) in the early
part of the 20th century.
The balanced scorecard has evolved from
its early use as a simple performance measurement
framework to a full strategic planning and
management system. The new balanced
scorecard transforms an organizations strategic
plan from an attractive but passive document into
the "marching orders" for the organization on a
daily basis. It provides a framework that not only
provides performance measurements, but helps
planners identify what should be done and
measured. It enables executives to truly executetheir strategies.
This new approach to strategic management was
first detailed in a series of articles and books by
Drs. Kaplan and Norton. Recognizing some of the
weaknesses and vagueness of previous
management approaches, the balanced scorecard
approach provides a clear prescription as to what
companies should measure in order to 'balance' the
financial perspective. The balanced scorecard is a
management system (not only a measurement
system) that enables organizations to clarify their
vision and strategy and translate them into action.
It provides feedback around both the internal
business processes and external outcomes in order
to continuously improve strategic performance and
results. When fully deployed, the balanced
scorecard transforms strategic planning from an
academic exercise into the nerve center of an
enterprise.Kaplan and Norton describe the innovation
of the balanced scorecard as follows:"The balanced
scorecard retains traditional financial measures.
But financial measures tell the story of past events,
an adequate story for industrial age companies for
which investments in long-term capabilities and
customer relationships were not critical for
success. These financial measures are inadequate,
however, for guiding and evaluating the journey
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that information age companies must make to
create future value through investment in
customers, suppliers, employees, processes,
technology, and innovation."
Adapted from Robert S. Kaplan and David
P. Norton, Using the Balanced Scorecard as a
Strategic Management System, Harvard Business
Review (January-February 1996): 76.
PERSPECTIVES
The balanced scorecard suggests that weview the organization from four perspectives, and
to develop metrics, collect data and analyze it
relative to each of these perspectives:
The Learning & Growth Perspective
This perspective includes employee
training and corporate cultural attitudes related to
both individual and corporate self-improvement. In
a knowledge-worker organization, people -- the
only repository of knowledge -- are the main
resource. In the current climate of rapid
technological change, it is becoming necessary for
knowledge workers to be in a continuous learning
mode. Metrics can be put into place to guide
managers in focusing training funds where they
can help the most. In any case, learning and growth
constitute the essential foundation for success of
any knowledge-worker organization.
Kaplan and Norton emphasize that
'learning' is more than 'training'; it also includes
things like mentors and tutors within the
organization, as well as that ease of
communication among workers that allows them to
readily get help on a problem when it is needed. It
also includes technological tools;
The Business Process Perspective
This perspective refers to internal business
processes. Metrics based on this perspective allow
the managers to know how well their business is
running, and whether its products and services
conform to customer requirements (the mission).
These metrics have to be carefully designed by
those who know these processes most intimately;
with our unique missions these are not something
that can be developed by outside consultants.
The Customer PerspectiveRecent management philosophy has shown
an increasing realization of the importance of
customer focus and customer satisfaction in any
business. These are leading indicators: if customers
are not satisfied, they will eventually find other
suppliers that will meet their needs. Poor
performance from this perspective is thus a leading
indicator of future decline, even though the current
financial picture may look good.
In developing metrics for satisfaction,
customers should be analyzed in terms of kinds of
customers and the kinds of processes for which we
are providing a product or service to those
customer groups.
The Financial Perspective
Kaplan and Norton do not disregard the
traditional need for financial data. Timely and
accurate funding data will always be a priority, and
managers will do whatever necessary to provide it.In fact, often there is more than enough handling
and processing of financial data. With the
implementation of a corporate database, it is hoped
that more of the processing can be centralized and
automated. But the point is that the current
emphasis on financials leads to the "unbalanced"
situation with regard to other perspectives. There
is perhaps a need to include additional financial-
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related data, such as risk assessment and cost-
benefit data, in this category.
STRATEGY MAPPING
Strategy maps are communication tools
used to tell a story of how value is created for the
organization. They show a logical, step-by-step
connection between strategic objectives (shown as
ovals on the map) in the form of a cause-and-effect
chain. Generally speaking, improving
performance in the objectives found in the
Learning & Growth perspective (the bottom row)
enables the organization to improve its Internal
Process perspective Objectives (the next row up),
which in turn enables the organization to create
desirable results in the Customer and Financial
perspectives (the top two rows).
BALANCED SCORECARD SOFTWARE
The balanced scorecard is not a piece of
software. Unfortunately, many people believe that
implementing software amounts to implementing a
balanced scorecard. Once a scorecard has been
developed and implemented,
however, performance management software can
be used to get the right performance information to
the right people at the right time. Automation adds
structure and discipline to implementing the
Balanced Scorecard system, helps transform
disparate corporate data into information and
knowledge, and helps communicate performance
information.
Balanced Scorecard - Definition
What exactly is a Balanced Scorecard? A
definition often quoted is: 'A strategic planning and
management system used to align business
activities to the vision statement of anorganization'. More cynically, and in some cases
realistically, a Balanced Scorecard attempts to
translate the sometimes vague, pious hopes of a
company's vision/mission statement into the
practicalities of managing the business better at
every level.
A Balanced Scorecard approach is to take a
holistic view of an organization and co-ordinate
MDIs so that efficiencies are experienced by all
departments and in a joined-up fashion.
To embark on the Balanced Scorecard path
an organization first must know (and understand)
the following:
The company's mission statement
The company's strategic plan/vision
Then
The financial status of the organization
How the organization is currently structured
and operating
The level of expertise of their employees
Customer satisfaction level
The following table indicates what areas may be
looked at for improvement (the areas are not
exhaustive and are often company-specific):
BALANCED SCORECARD - FACTORS EXAMPLES
DEPARTMENT AREAS
Finance
Return On Investment,
Cash Flow, Return on Capital
Employed, Financial Results
(Quarterly/Yearly)
Internal Business
Processes
Number of activities per
function, Duplicate activities
across functions, Process
alignment (is the right process
in the right
department?) ,Process
bottlenecks ,Process
automation
Learning &
Growth
Is there the correct level of
expertise for the
job? Employee turnover Job
satisfaction
Training/Learning
opportunities
Customer
Delivery performance to
customer,
Quality performance for
customer,
Customer satisfaction rate,
Customer percentage of
market,
Customer retention rate,
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Once an organization has analyzed the
specific and quantifiable results of the above, they
should be ready to utilize the Balanced Scorecard
approach to improve the areas where they are
deficient.
The metrics set up also must
be SMART (commonly, Specific, Measurable,
Achievable, Realistic and Timely) - you cannot
improve on what you can't measure! Metrics must
also be aligned with the company's strategic plan.
A Balanced Scorecard approach generally
has four perspectives:
1. Financial
2. Internal business processes
3. Learning & Growth (human focus, or
learning and development)
4. Customer
Each of the four perspectives is inter-dependent - improvement in just one area is not
necessarily a recipe for success in the other areas.
BALANCE SCORECARD IMPLEMENTATION
Implementing the Balanced Scorecard
system company-wide should be the key to the
successful realization of the strategic plan/vision.
A Balanced Scorecard should result in:
Improved processes
Motivated/educated employeesEnhanced information systems
Monitored progress
Greater customer satisfaction
Increased financial usage
CORPORATE DEVELOPMENT
Corporate Development refers to the
planning and execution of a wide range of
strategies to meet specific organizational
objectives. The kinds of activities falling under
corporate development may include initiatives
such as recruitment of a new management team,
plans for phasing in or out of certain markets or
products, establishing relationships with strategic
business partners, identifying and acquiring
companies, securing financing, divesting of assets
or divisions, increasing intellectual property
assets and so on.
For example, if a company is looking
towards non-organic growth expansion, a
corporate development group will evaluate
potential target companies. The acquisition of
small or private companies by a large corporation
is usually not conducted with the assistance of
investment bankers, but executed by the corporate
development team themselves.
The process of corporate development can also be
applied to the task of growing the company
through mergers and acquisitions. In this scenario,
the project development will involve identifying
potential target companies for acquisitions or
unions resulting in a new and more aggressive
corporation. The team will consider all possible
outcomes from any given potential merger or
acquisition and attempt to project if the action is
likely to result in positive growth or could possiblyimpair the company permanently.
There is no one tried and true formula for the
process of corporate development. The actual
structure of the corporate strategy will depend
greatly on the current circumstances of the
company and the area where the development is
desired. In most cases, the process will not be of
short duration; corporate development is usually a
process that takes place over an extended period of
time and may be adjusted or refined as the project
moves forward.
Corporate development is a term that
references the variety of planning options and
strategies that can help to move a company toward
its goals. The process of this type of strategic
development can be applied to just about any facet
of the corporations organizational structure. In
actual structure, corporate planning can involve
finding ways to fine-tune the existing structure ofthe company or expanding the companys interest
through acquisitions or mergers.
CORPORATE PORTFOLIO MANAGEMENT
Aligning the right information with the
right people to make effective corporate decisions
is one of the most common challenges facing
senior management today. When addressing capital
allocation and investment decisions, this challenge
becomes even more formidable. The most critical
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determinant of an organizations long-term value is
its ability to optimally allocate limited capital
among large projects, new markets and merger and
acquisition (M&A) decisions. Successful
organisations make large investment and capital
allocation decisions using a robust approach that
analyses each options risk-return trade-off and
reflects each options overall impact on the
existing portfolio. Poor investments, on the other
hand, can result in share price depression, lost
market share, departure of key leadership and
negative media attention.
By incorporating a risk-return perspective
into Corporate Portfolio Management,
organisations will be better equipped to answer the
following questions:
How can risk be incorporated into the
decision making process so that multipleinvestment options are consistently evaluated?
Will the expected return in any single
investment justify the level of risk required to
pursue this option?
What is the optimal combination of
investment options to achieve our mid- and long-
term strategic objectives?
Where should I spend my next investment
dollar?
Utilizing a risk-return perspective to
support these decisions will allow a firm to sustain
growth and create long-term value. It can be
applied to a wide variety of industry examples:
**Media and technology companies
determining an appropriate business portfolio amid
technological uncertainty
**Energy companies selecting an exploration
portfolio amid political and price uncertainty
**Aerospace and automotive
manufacturers choosing between business
segments amid demand and project execution
uncertainty
**Pharmaceutical companies allocating
R&D dollars based on a portfolio view of their
pipeline
**Companies considering a make vs. buy
outsourcing decision within their supply chain
**Real estate companies determining the
right mix of geographic vs. use combinations
The business portfolio is the collection of
businesses and products that make up the
company. The best business portfolio is one that
fits the company's strengths and helps exploit the
most attractive opportunities.
The company must:
-- Analyze its current business portfolio and
decide which businesses should receive more or
less investment, and
-- Develop growth strategies for adding
new products and businesses to the portfolio,
whilst at the same time deciding when products
and businesses should no longer be retained.
The two best-known portfolio planning
methods are the Boston Consulting GroupPortfolio Matrix and the McKinsey / General
Electric Matrix. In both methods, the first step is
to identify the various Strategic Business Units
("SBU's") in a company portfolio. An SBU is a
unit of the company that has a separate mission
and objectives and that can be planned
independently from the other businesses. An SBU
can be a company division, a product line or even
individual brands - it all depends on how the
company is organized.
BOSTON CONSULTING GROUP MATRIX
The Boston Matrix assumes that if you
enjoy a high market share you will be making
money. (This assumption is based on the idea that
you will have been in the market long enough to
have learned how to be profitable, and will be
enjoying scale economies that give you an
advantage).
The question it asks is, "S
hould you beinvesting additional resources into a particular
product line just because it is making you money?"
The answer is, "not necessarily."
This is where market growth comes into
play. Market growth is used as a measure of a
market's attractiveness. Markets experiencing high
growth are ones where the total market is
expanding, meaning that its relatively easy for
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businesses to grow their profits, even if their
market share remains stable.
By contrast, competition in low growth
markets is often bitter, and while you might have
high market share now, it may be hard to retain
that market share without aggressive discounting.
This makes low growth markets less attractive.
MARKET SHARE AND MARKET GROWTH
To understand the Boston Matrix, you need
to understand how market share and market growth
interrelate.
Market share is the percentage of the total
market that is being serviced by your company,
measured either in revenue terms or unit volume
terms. The higher your market share, the higher the
proportion of the market you control.
The BCG matrix or also called BCG
model relates to marketing. The BCG model is a
well-known portfolio management tool used in
product life cycle theory. BCG matrix is often used
to prioritize which products within company
product mix get more funding and attention.
The BCG matrix model is a portfolio
planningmodel developed by Bruce Henderson of
the Boston Consulting Group in the early 1970's.
The BCG model is based on classification of
products (and implicitly also company business
units) into four categories based on combinations
ofmarket growth and market share relative to the
largest competitor.
When should I use the BCG matrix model?
Each product has itsproduct life cycle, and
each stage in product's life-cycle represents a
different profile of risk and return. In general,
a company should maintain a balancedportfolio of
products. Having a balanced product portfolio
includes both high-growth products as well as low-
growthproducts.
A high-growth product is for example a new
one that we are trying to get to some market. It
takes some effort and resources to market it, to
build distribution channels, and to build sales
infrastructure, but it is a product that is expected to
bring the gold in the future. An example of this
product would be an iPod.
A low-growth product is for example an
established product known by the market.
Characteristics of this product do not change much,customers know what they are getting, and the
price does not change much either. This product
has only limited budget for marketing. The is the
milking cow that brings in the constant flow of
cash. An example of this product would be regular
Colgate toothpaste.
The BCG matrix reaches further behind
product mix. Knowing what we are selling helps
managers to make decisions about what priorities
to assign to not only products but also company
departments and business units.
Placing products in the BCG matrix results
in 4 categories in a portfolio of a company:
BCG STARS (high growth, high market share)
Successful question marks become stars.
i.e. market leaders in high growth industries.
However, investment is normally still required to
maintain growth and to defend the leadershipposition. Stars are frequently only marginally
profitable but as they reach a more mature status in
their life cycle and growth slows, returns become
more attractive. The stars provide the basis for
long term growth and profitability.
Strategic options for stars include.
**Integration forward, backward and
horizontal
**Market penetration
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**Market development
**Product development
**Joint ventures
Stars are defined by having high market
share in a growing market.
Stars are the leaders in the business but
still need a lot of support for promotion a
placement.
If market share is kept, Stars are likely to
grow into cash cows.
The company goes for expansion strategy
for further expanding the business unit
BCG CASH COWS (low growth, high market
share)
These are characterized by high relative
market share in low growth industries. As the
market matures the need for investment reduces.Cash Cows are the most profitable products in the
portfolio. The situation is frequently boosted by
economies of scale that may be present with
market leaders. Cash Cows may be used to fund
the businesses in the other three quadrants.
It is desirable to maintain the strong
position as long as possible and strategic options
include.
**Product development
**Concentric diversification
**If the position weakens as a result of loss
of market share or market contraction then options
would include,Retrenchment(or even divestment)
Cash cows are in a position of high
market share in a mature market.
If competitive advantage has been
achieved, cash cows have high profit margins and
generate a lot of cash flow.
The company goes for stability strategy
for sustain the business unit in the market
Because of the low growth, promotion and
placement investments are low.
Investments into supporting
infrastructure can improve efficiency and increase
cash flow more.
Cash cows are the products that
businesses strive for.
BCG DOGS (low growth, low market share)
These describe businesses that have low
market shares in slow growth markets. They may
well have been Cash Cows. Often they enjoy
misguided loyalty from management although
some Dogs can be revitalized. Profitability is, at
best, marginal.
Strategic options would include.
**Retrenchment (if it is believed that it
could be revitalized)
**Liquidation
**Divestment (if you can find someone to
buy!)
**Successful products may well move from
question mark though star to Cash Cow and finally
to Dog. Less successful products that never gain
market position will move straight from question
mark to Dog.
Dogs are in low growth markets and havelow market share.
Due To low growth, high market share the
company may take decision or divestment or
liquidation
Dogs should be avoided and minimized.
Expensive turn-around plans usually do
not help.
BCG QUESTION MARKS (high growth, low
market share)
These are products or businesses that
compete in high growth markets but where the
market share is relatively low. A new product
launched into a high growth market and with an
existing market leader would normally be
considered as a question mark.
Because of the high growth environment,
they can be a cash sink. Strategic options for
question marks include..
**Market penetration
**Market development
**Product development
**Which are all intensive strategies or
divestment?
These products are in growing markets but
have low market share at the introductory stage.
Question marks are essentially new
products where buyers have yet to discover them.
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The marketing strategy is to get markets
to adopt these products.
Question marks have high demands and
low returns due to low market share.
These products need to increase their
market share quickly or they become dogs.
The best way to handle Question marks is
to either invest heavily in them to gain market
share or to sell the
BENEFITS
BCG MATRIX is simple and easy to
understand.
It helps you to quickly and simply screen
the opportunities open to you, and helps
you think about how you can make the
most of them.
It is used to identify how corporate cashresources can best be used to maximize a
companys future growth and profitability.
LIMITATION
BCG MATRIX uses only two dimensions,
Relative market share and market growth
rate.
Problems of getting data on market share
and market growth.
High market share does not mean profits all
the time.
Business with low market share can be
profitable too.
GENERAL ELECTRIC MATRIX [GEC]
The GE matrix cross-references market
attractiveness and business position using three
criteria for each high, medium and low. The
market attractiveness considers variables relating
to the market itself, including the rate of marketgrowth, market size, and potential barriers to
entering the market, the number and size of
competitors, the actual profit margins currently
enjoyed, and the technological implications of
involvement in the market. The business position
criteria look at the businesss strengths and
weaknesses in a variety of fields. These include
its position in relation to its competitors, and the
businesss ability to handle product research,
development and ultimate production. It also
considers how well placed the management is to
deploy these resources.
The matrix differs in its complexity
compared with the Boston Consulting Group
matrix. Superimposed on the basic diagram are a
number of circles. These circles are of variable size
the size of each represents the size of each market.
Within each circle is a clearly defined segment
which represents the businesss market share
within that market. The larger the circle, the larger
the market, and the larger the segment, the larger
the market share.
The GE/McKinsey Matrix is a nine-cell (3
by 3) matrix used to perform business portfolio
analysis as a step in the strategic planning process.
The McKinsey/GE Matrix overcomes a
number of the disadvantages of the BCG Box.Firstly, market attractiveness replaces market
growth as the dimension of industry attractiveness,
and includes a broader range of factors other than
just the market growth rate. Secondly, competitive
strength replaces market share as the dimension
by which the competitive position of each SBU is
assessed.
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The GE/McKinsey Matrix identifies the
optimum business portfolio as one that fits
perfectly to the company's strengths and helps to
exploit the most attractive industry sectors or
markets.
Thus, the objective of the analysis is to
position each SBU on the chart depending on the
SBU's Strength and the Attractiveness of the
Industry Sector orMarket on which it is focused.
Each axis is divided into Low, Medium and High.
Factors that Affect Market Attractiveness
Whilst any assessment of market
attractiveness is necessarily subjective, there are
several factors which can help determine
attractiveness. These are listed below:
Market SizeMarket growth
Market profitability
Pricing trends
Competitive intensity / rivalry
Overall risk of returns in the industry
Opportunity to differentiate products and
services
Segmentation
Distribution structure (e.g. retail, direct,
wholesale
Factors that Affect Competitive Strength
Factors to consider include:
Strength of assets and competencies
Relative brand strength
Market share
Customer loyalty
Relative cost position (cost structure
compared with competitors)
Distribution strength Record of technological or other
innovation
Access to financial and other investment
resources
The three cells at the top left hand side of
the matrix are the most attractive in which to
operate and require a policy of investment for
growth these are usually coloured green.
The three cells running diagonally
from left to right have a medium attractiveness,
are coloured yellow and the management of
businesses within this category should be more
cautious and with a greater emphasis being
placed on selective investment and earning
retention.
The three cells at the bottom right hand
side are the least attractive, therefore coloured
red and management should follow a policy of
harvesting and / or divesting unless the relative
strengths can be improved.
Grow / Penetrate
These businesses are a target for
investment, they have strong business strengths,
are in attractive markets and they should therefore
have high returns on investment and competitive
advantage. They should receive financial andmanagerial support to maintain their strong
position and to continue contributing to long-term
profitability. It may enhance the Seek dominance,
Grow, Maximise investment
Invest for Growth
Businesses here are in very attractive
industries but have average business strength.
They should be invested in to improve their long-
term competitive position. It may enhance the
evaluation potential for leadership via
segmentation, Identify weaknesses, Build
strengths
Selective Investment or Divestment
These businesses are in very attractive
markets but their business strength is weak.
Investment must be aimed at improving the
business strengths. These businesses will
probably have to be funded by other businesses in
the group as they are not self-funding. Onlybusinesses that can improve their strengths should
be retained if not they should be divested. It
may lead Specialize Seek niches, Consider
acquisitions
Selective Harvest or Investment
Businesses in this box have good
business strength in an industry that is losing its
attractiveness. They should be supported if
necessary but they may be self-supporting in cash
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flow terms. Selective harvesting is an option to
extract cash flow but this should be done with
caution so as not to run down the business
prematurely. It may leads the Identification
growth segments, invest strongly Maintain
position elsewhere
Segment and Selective Investment
Businesses with average business
strengths and in average industries can improve
their positions by creative segmentation to create
profitable segments and by selective investment
to support the segmentation strategy. The
business needs to create superior returns by
concentrating on building segment barriers to
differentiate themselves. It may enhance Identify
growth segments, Specialize, Invest selectively
Controlled Exit or Harvest
Businesses with weak business strengthsin moderately attractive industries are candidates
for a controlled exit or divestment. Attempts to
gain market share by increasing business
strengths could prove to be very expensive and
must be done with caution, It may enhance
Specialize, Seek niches, Consider exit
Harvest for Cash Generation
Strong businesses in unattractive markets
should be net cash generators and could provide
funds for use throughout the rest of the portfolio.
Investment should be aimed at keeping these
businesses in a dominant position of strength but
over investment can be disastrous especially in a
mature market. Be aware of competitors trying to
revitalize mature industries. It may enhance
Maintain overall position, Seek cash flow, Invest
at maintenance level
Controlled Harvest
They have average business strengths inan unattractive market and the strategy should be
to harvest the business in a controlled way to
prevent a defeat or the business could be used to
upset a competitor. It may enhance Prune lines,
Minimise investment, Position to divest
Rapid Exit or AttackBusiness
These businesses have neither strengths
nor an attractive industry and should be exited.
Investments made should only be done to fund
the exit. It may enhance Trust leaders
statesmanship
Go after competitors cash generators, Time exit
and divest
DECISIONMATRIX/SELECTION MATRIXA decision matrix is a chart that allows a
team or individual to systematically identify,
analyze, and rate the strength of relationships
between sets of information. The matrix is
especially useful for looking at large numbers of
decision factors and assessing each factors relative
importance.
When to use it:
A decision matrix is frequently used during
quality planning activities to select product/service
features and goals and to develop process steps and
weigh alternatives. For quality improvement
activities, a decision matrix can be useful inselecting a project, in evaluating alternative
solutions to problems, and in designing remedies.
How to use it:
Identify alternatives. Depending upon the
teams needs, these can be product/service
features, process steps, projects, or potential
solutions. List these across the top of the matrix.
Identify decision/selection criteria. These key
criteria may come from a previously prepared
affinity diagram or from a brainstorming activity.
Make sure that everyone has a clear and common
understanding of what the criteria mean. Also
ensure that the criteria are written so that a high
score for each criterion represents a favorable
result and a low score represents an unfavorable
result. List the criteria down the left side of the
matrix.
Assign weights. If some decision criteria are
more important than others, review and agreebased on appropriate weights to assign (e.g., 1 2, 3).
Design scoring system. Before rating the
alternatives, the team must agree on a scoring
system. Determine the scoring range (e.g., 1 to 5 or
1, 3, 5) and ensure that all team members have a
common understanding of what high, medium, and
low scores represent.
Rate the alternatives. For each alternative,
assign a consensus rating for each decision
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criterion. The team may average the scores from
individual team members or may develop scores
through a consensus-building activity.
Total the scores. Multiply the score for each
decision criterion by its weighting factor. Then
total the scores for each alternative being
considered and analyze the results.
CRITERION WEIGHT ALTERNATIVE
A B C
Potential
Impact on
Company
Performance
33 X 3 = 9 1 X 3 =
3 5 X 3=15Ease to
Implement1 3 X 1 = 3 1 X 1= 1 3 X 1 = 3
Benefit/Cost
Relationship 2 3 X 2 = 6 3 X 2 =6 5 X 2=10Speed ofImplementati
on
1 5X 1 = 5 1 X 1 =
1 3 X 1 = 3Acceptance
by
Associates1
3 X 1 = 3 3 X 1= 3 5 X 1 = 5Negative
Impact on
Environment2 5 X 2=10
3 X 2 =
6 3 X 2 = 6Negative
Impact onHealth &
Safety
2 3 X 2 = 6 1X 2 = 2 5 X 2=10
Total
rating42 22 52
Scoring: 5 = high, 3 = medium, 1 = low