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UNIT-3 Strategies: V+Team
UNIT-3 Strategies: V+Team
UNIT-3 Strategies: V+Team
COM
UNIT-3
STRATEGIES
GE - PORTFOLIO MATRIX
Framework Summarized by Sam Mishra, MBA (MIT Sloan)
This 3 x 3 matrix is an outgrowth of a framework pioneered by General Electric (GE) in the 1970s to
assess its Strategic Business Units (SBUs) along two dimensions: industry attractiveness, and business
strength. In the figure below, three possible values of each of these two dimensions are plotted,
resulting in a nine-cell 3 x 3 matrix.
All business units of a firm can be represented by circles placed appropriately within the matrix. The
size of the circle represents the industry / market size. The market share of the SBU is represented by
the smaller sector within the circle. Thus, as you can see, this is a complex framework to evaluate an
SBU along four dimensions: market attractiveness, market size, market share, and business strength.
The cells in the nine-cell matrix are colored differently to categorize the matrix into five distinct zones
of overall business attractiveness: high (green cell), medium-high (yellow cells), medium (ocean-blue
cells), medium-low (pink cells), and low (red cell).
The strength of this framework is based on the premise that to be successful, a firm should enter
attractive markets / industries for which it has the needed business strengths to succeed. However,
over-reliance on this framework may lead to undue neglect of existing businesses. SBU owners /
managers will also be susceptible to manipulate the parameters so that their SBUs show up on the
desired high or medium-high overall attractive zones. Thus, this framework should be used with
caution while crafting strategy.
The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the
Boston Consulting Group in the early 1970's. It is based on the observation that a company's business
units can be classified into four categories based on combinations of market growth and market share
relative to the largest competitor, hence the name "growth-share". Market growth serves as a proxy
for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The
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growth-share matrix thus maps the business unit positions within these two important determinants
of profitability.
This framework assumes that an increase in relative market share will result in an increase in the
generation of cash. This assumption often is true because of the experience curve; increased relative
market share implies that the firm is moving forward on the experience curve relative to its
competitors, thus developing a cost advantage.
A second assumption is that a growing market requires investment in assets to increase capacity and
therefore results in the consumption of cash. Thus the position of a business on the growth-share
matrix provides an indication of its cash generation and its cash consumption.
Henderson reasoned that the cash required by rapidly growing business units could be obtained from
the firm's other business units that were at a more mature stage and generating significant cash. By
investing to become the market share leader in a rapidly growing market, the business unit could
move along the experience curve and develop a cost advantage. From this reasoning, the BCG Growth-
Share Matrix was born.
QUESTION MARKS:
Question marks are growing rapidly and thus consume large amounts of cash, but because they have
low market shares they do not generate much cash. The result is large net cash consumption.
A question mark (also known as a "problem child") has the potential to gain market share and become
a star, and eventually a cash cow when the market growth slows.
If the question mark does not succeed in becoming the market leader, then after perhaps years of cash
consumption it will degenerate into a dog when the market growth declines.
Question marks must be analyzed carefully in order to determine whether they are worth the
investment required to grow market share
STARS:
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Stars generate large amounts of cash because of their strong relative market share, but also consume
large amounts of cash because of their high growth rate; therefore the cash in each direction
approximately nets out.
If a star can maintain its large market share, it will become a cash cow when the market growth rate
declines.
The portfolio of a diversified company always should have stars that will become the next cash cows
and ensure future cash generation.
CASH COWS
As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market
growth rate, and thus generate more cash than they consume.
Such business units should be "milked", extracting the profits and investing as little cash as possible.
Cash cows provide the cash required to turn question marks into market leaders, to cover the
administrative costs of the company, to fund research and development, to service the corporate debt,
and to pay dividends to shareholders.
Because the cash cow generates a relatively stable cash flow, its value can be determined with
reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow
analysis.
Under the growth-share matrix model, as an industry matures and its growth rate declines, a business
unit will become either a cash cow or a dog, determined soley by whether it had become the market
leader during the period of high growth.
While originally developed as a model for resource allocation among the various business units in a
corporation, the growth-share matrix also can be used for resource allocation among products within
a single business unit. Its simplicity is its strength - the relative positions of the firm's entire business
portfolio can be displayed in a single diagram.
Limitations
The growth-share matrix once was used widely, but has since faded from popularity as more
comprehensive models have been developed. Some of its weaknesses are:
Market growth rate is only one factor in industry attractiveness, and relative market share is only one
factor in competitive advantage. The growth-share matrix overlooks many other factors in these two
important determinants of profitability.
The framework assumes that each business unit is independent of the others. In some cases, a
business unit that is a "dog" may be helping other business units gain a competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market. A business unit may
dominate its small niche, but have very low market share in the overall industry. In such a case, the
definition of the market can make the difference between a dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a
corporation's business portfolio at a glance, and may serve as a starting point for discussing resource
allocation among strategic business units.
SWOT ANALYSIS
SWOT analysis (alternately SLOT analysis) is a strategic planning method used to evaluate the
Strengths, Weaknesses/Limitations, Opportunities, and Threats involved in a project or in a business
venture. It involves specifying the objective of the business venture or project and identifying the
internal and external factors that are favorable and unfavorable to achieve that objective. The
technique is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s
and 1970s using data from Fortune 500 companies.
Setting the objective should be done after the SWOT analysis has been performed.
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This would allow achievable goals or objectives to be set for the organization.
Strengths: characteristics of the business, or project team that give it an advantage over others
Weaknesses (or Limitations): are characteristics that place the team at a disadvantage relative to
others
Opportunities: external chances to improve performance (e.g. make greater profits) in the
environment
Threats: external elements in the environment that could cause trouble for the business or project
Identification of SWOTs is essential because subsequent steps in the process of planning for
achievement of the selected objective may be derived from the SWOTs.
First, the decision makers have to determine whether the objective is attainable, given the SWOTs. If
the objective is NOT attainable a different objective must be selected and the process repeated.
The aim of any SWOT analysis is to identify the key internal and external factors that are important to
achieving the objective. These come from within the company's unique value chain. SWOT analysis
groups key pieces of information into two main categories:
The internal factors may be viewed as strengths or weaknesses depending upon their impact on the
organization's objectives. What may represent strengths with respect to one objective may be
weaknesses for another objective. The factors may include all of the 4P's; as well as personnel, finance,
manufacturing capabilities, and so on. The external factors may include macroeconomic matters,
technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or
competitive position. The results are often presented in the form of a matrix.
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SWOT analysis is just one method of categorization and has its own weaknesses. For example, it may
tend to persuade companies to compile lists rather than think about what is actually important in
achieving objectives. It also presents the resulting lists uncritically and without clear prioritization so
that, for example, weak opportunities may appear to balance strong threats. It is therefore advisable to
combine a SWOT analysis with portfolio analyses such as the GE/McKinsey matrix [2] or COPE
analysis[3].
It is prudent not to eliminate too quickly any candidate SWOT entry. The importance of individual
SWOTs will be revealed by the value of the strategies it generates. A SWOT item that produces valuable
strategies is important. A SWOT item that generates no strategies is not important.
Using SWOT to analyse the market position of a small management consultancy with specialism in
HRM.[8]
PEST analysis is concerned with the key external environmental influences on a business.
The acronym stands for the Political, Economic, Social and Technological issues that could affect the
strategic development of a business.
Identifying PEST influences is a useful way of summarising the external environment in which a
business operates. However, it must be followed up by consideration of how a business should
respond to these influences.
The table below lists some possible factors that could indicate important environmental influences for
a business under the PEST headings:
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sector) income;
COMBINATION
STABILITY RETRENCHMENT
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Technology related
Conglomerate/Unrelated
Corporate strategy helps to exercise the choice of direction that an organization adopts. There
could be a small business firm involved in a single business or a large, complex and diversified
conglomerate with several different businesses. The corporate strategy in both these cases would
be about the basic direction of the firm as a whole.
Stability strategies:
Types of stability
No change Strategy
Profit Strategy
Expansion strategies:
The corporate strategy of expansion is followed when an organization aims at high growth
by substantially broadening the scope of one or more of its businesses in terms of their respective
customer groups, customer functions and alternative technologies singly or jointly in order to
improve its overall performance.
Concentration
Integration
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Diversification
Internationalization
Cooperation
Concentration
Expansion concentration is often the first preference strategy for company. The simple reason for
this is that a company that familiar with an industry would naturally like to invest more in known
business rather than unknown ones.
Market Penetration
Market Development
Product Development
Integration
Integration basically means combining activities on the basis of the value chain related to
the present activity of a company.
Types of integration
Vertical integration
Horizontal Integration
1. Horizontal integration:
A firm is said to follow horizontal integration if it acquires another firm that produces
the same type of products the same type products with similar production
process/marketing practices.
2. Vertical integration:
Vertical integration means the degree to which a firm operates vertically in multiple
locations on an industry’s value chain from extracting raw materials to manufacturing
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and retailing. Vertical integration occurs when a company produces its own inputs or
disposes of its own outputs.
Related diversification:
In related diversification the firm enters into a new business activity, which is linked in a
company’s existing business activity by commonality between one or more components of each
activity’s value chain.
Unrelated diversification:
In unrelated diversification, the firm enters into new business area that has no obvious
connection with any of the existing business. It is suitable, if the company “score functional skills
are highly specialized and have few applications outside the company’s core business.
Concentric diversification:
Internationalisation:
It is a type of expansion strategies that require organizations to market their product and services
beyond the domestic or national market.
Type of Internationalisation
International Strategy
Multidomestic Strategy
Global Strategy
Transnational Strategy
Cooperation
The term ‘cooperation’ expenses the idea of simultaneous competition and cooperation
among rival firms for mutual benefits.
Types of cooperative
Mergers(Combination)
Horizontal Mergers
Vertical Merger
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Concentric Merger
Conglomerate Merger
Reverse Merge
Acquisition/Takeover Strategy
Amalgamation
Acquisitions/Takeovers
Sale of Assets
Joint Venture
o Competitive Tactics
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Generic Strategies;
A company competitive strategy consists of the business approach and initiative it undertakes
to attract customer and fulfill their expectation, to withstand competitive pressure and to
strengthen is market position.
o Differentiation(Differentiation/broad target)
Competitive Tactics
Strategy gives rise to tactics and thus, “tactics may be thought of as a sub-strategy.”
Timing Tactics
Offensive Strategy
Defensive Strategy
Cooperative Strategies
Meaning:
A firm’s strategy can be defined as the action managers take to attain the gaol of the firms. For
most firms, a principle goal is to be highly profitability. To be profitability in a competitive global
environment, a firm must pay continual attention to both reducing the costs of value creation and
to different it’s product offering so that consumer are willing to pay more for the product than it
costs to produce it.
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High
Company Company C
A
Company B
Low
Scale of Entry
Corporate
StrategicDevelopment
Alliance refers to the planning and execution of a wide range of strategies to meet
specific organizational objectives. The kinds of activities falling
Counterunder
Tradecorporate 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.
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When the company is in more than one business, it can select more than one strategic
alternative depending upon the demand of the situation prevailing in the different portfolios. It
is necessary to analyse the position of different business of the business house which is done
by corporate portfolio analysis.
1) To analyse its current business portfolio and decide which business should receive more or
less investment.
2) To develop growth strategies, for adding new business to the portfolio; and
DCG Matrix
High
Select a few
20% Remain Diversified
15%
Stars Invest Questions Marks
10%
Liquidate
Cash cows Dogs
Low5%
1) Stars
2) Cash cows
4) Dogs.
Nine cells of GE grid are dividing into three zones and depicted by different colours:
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1) Invest/Expand
2) Select/Earn
3) Harvest/Divest
1) Heartland Businesses
2) Edge-of-heartland Businesses
3) Ballast Businesses
5) value-trap Businesses
Strategic Analysis and Choice (SAC) seek to determine alternative courses of action that
could best enable the achieve its mission and objectives. The firm’sPresent strategies,
objectives and mission coupled with information gathered through external and internal
analysis provide a basis for generating and evaluating feasible alternative strategies.
Industry Analysis;
Strategies Performance
Make Recommendations
Sustainability
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Sound goals
Funding
External Focus
Clear Expectations
Effectiveness
Lack of skill
Cynicism
Relevance
Force of Habit
Strategic choice:
The decision to select from among grand strategies considered, the strategy
which will best meet the enterprise objectives. The decision involves focusing on a few
alternative considering the selections the selections factors evaluating the alternatives
against these criteria, and making the actual choice”.
Objective
factors
Subjective factors
FACTORS AFFECTING STRATEGIES CHOCE
External Constraints
Information Constraints
Competitors Reaction
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