Unit – 4

Subject: Business Policy

Subject Code - F010302T

Strategic Choice

1. Strategic Choice

Strategic choice refers to the decision which determines the future strategy of a firm.
It addresses the question “Where shall we go”. Strategic choice is therefore, the
decision to select from among the grand strategies considered, the strategy which will
best meet the enterprise objectives. The decision involves the following four steps –
focusing on few alternatives, considering the selection factors, evaluating the
alternatives against these criteria and making the actual choice.

According to Pearce and Robinson, “Strategic choice is a decision which

determines the firm’s future strategy”.

Factors affecting strategic choice

 Environmental constraints
 Internal organizations and management power relationships
 Values and preferences
 Management`s attitude towards risk
 Impact of past strategy
 Time constraints- time pressure, time frame horizon ,timing of decision
 Information constraints
 Competitors reaction

Importance of Strategic Choices

Business succeeds or fails depends on the strategic choices made by the owner.
Spending large amounts of time and money introducing a product that turns out to
have a very limited market is an example of a bad strategic choice.

Anticipating a change in consumer tastes and introducing a product/service to take

advantage of that change before competitors do is an example of a good strategic
choice.

The development of business strategy takes into account that all companies must
cope with limited resources to some extent. The most successful companies can
allocate scarce resources to the projects that have the greatest positive impact on
revenue growth or improvements in productivity and efficiency that can increase profit
margins.

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2. Concept of Portfolio Balance

Portfolio balancing is the process of organizing the prioritized components into a

component mix that, when implemented, is best aligned with, and best supports the
organization's strategic plan. Portfolio step makes a major assumption that the
required balance points are usually set by the executive for allocating resources,
financial or otherwise, between the competing demands within a portfolio. These are
the demands raised by the various business units such as operations, projects, other
work, and so on.

What Is Portfolio Analysis?

When a company markets different kinds of products, its get essential for the
company to analyze each product or service separately to understand their
contribution towards the company’s profitability & income. Such analyzing is referred
to as portfolio analyzing.

What is a Strategic Portfolio?

Successful organisations make strategic choices about which activities should be

implemented to deliver their vision. These choices form the strategic portfolio.
Decisions at this level can significantly impact the success of the organisation.
Everything an organisation does is potentially part of the portfolio, including business-
as-usual activities and transformation initiatives, such as improving customer services,
driving growth or entering a new market.

Strategic Portfolio Management

Strategic Portfolio Management is about deciding where best to focus the

organisation’s finite resources in order to meet strategic objectives, considering the
business as a portfolio of activities and making tradeoffs across the portfolio. Vitally
this includes making those difficult choices of what not to do, unlocking resources to
focus on fewer, better activities – those most closely aligned with strategic success.
Once the portfolio is focused, attention needs to turn to execution. Monitoring
performance with metrics consistent with the strategic objectives ensures that
operations and strategy stay aligned.

3. Display Matrices

A. BCG Matrix

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix)

developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It
provides a graphic representation for an organization to examine different businesses
in it’s portfolio on the basis of their related market share and industry growth rates.

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It is a two dimensional analysis on management of SBU’s (Strategic Business Units).
In other words, it is a comparative analysis of business potential and the evaluation of
environment. According to this matrix, business could be classified as high or low
according to their industry growth rate and relative market share.

Relative Market Share = SBU Sales this year leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.

The analysis requires that both measures be calculated for each SBU. The dimension
of business strength, relative market share, will measure comparative advantage
indicated by market dominance. The key theory underlying this is existence of an
experience curve and that market share is achieved due to overall cost leadership.

BCG matrix has four cells, with the horizontal axis representing relative market
share and the vertical axis denoting market growth rate. The mid-point of relative
market share is set at 1.0. if all the SBU’s are in same industry, the average growth
rate of the industry is used. While, if all the SBU’s are located in different industries,
then the mid-point is set at the growth rate for the economy.

Resources are allocated to the business units according to their situation on

the grid. The four cells of this matrix have been called as stars, cash cows, question
marks and dogs. Each of these cells represents a particular type of business.

10 x 1x 0.1 x

Figure: BCG Matrix

1. Stars- Stars represent business units having large market share in a fast
growing industry. They may generate cash but because of fast growing market,
stars require huge investments to maintain their lead. Net cash flow is usually
modest. SBU’s located in this cell are attractive as they are located in a robust
industry and these business units are highly competitive in the industry. If
successful, a star will become a cash cow when the industry matures.

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 2. Cash Cows- Cash Cows represents business units having a large market share
in a mature, slow growing industry. Cash cows require little investment and
generate cash that can be utilized for investment in other business units. These
SBU’s are the corporation’s key source of cash, and are specifically the core
business. They are the base of an organization. These businesses usually follow
stability strategies. When cash cows loose their appeal and move towards
deterioration, then a retrenchment policy may be pursued.

3. Question Marks- Question marks represent business units having low relative
market share and located in a high growth industry. They require huge amount
of cash to maintain or gain market share. They require attention to determine
if the venture can be viable.
Question marks are generally new goods and services which have a good
commercial prospective. There is no specific strategy which can be adopted. If
the firm thinks it has dominant market share, then it can adopt expansion
strategy, else retrenchment strategy can be adopted.
Most businesses start as question marks as the company tries to enter a high
growth market in which there is already a market-share. If ignored, then
question marks may become dogs, while if huge investment is made, then they
have potential of becoming stars.

4. Dogs- Dogs represent businesses having weak market shares in low-growth

markets. They neither generate cash nor require huge amount of cash. Due to
low market share, these business units face cost disadvantages. Generally
retrenchment strategies are adopted because these firms can gain market
share only at the expense of competitor’s/rival firms.
These business firms have weak market share because of high costs, poor
quality, ineffective marketing, etc. Unless a dog has some other strategic aim,
it should be liquidated if there is fewer prospects for it to gain market share.
Number of dogs should be avoided and minimized in an organization.

Advantages of BCG Matrix

 It is simple to implement and easy to understand.

 The BCG-Matrix is helpful for managers to evaluate balance in the companies’s
current portfolio of Stars, Cash Cows, Question Marks and Dogs.
 It provides a base for management to decide and prepare for future actions.
 If a company is able to use the experience curve to its advantage, it should be
able to manufacture and sell new products at a price that is low enough to get
early market share leadership. Once it becomes a star, it is destined to be
profitable.
 Larger companies can use it for the seeking volume and experience effects. It
predicts the future actions of a company. Hence, the company can decide its
proper management strategy.

Limitations of BCG Matrix

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The BCG Matrix produces a framework for allocating resources among different
business units and makes it possible to compare many business units at a glance. But
BCG Matrix is not free from limitations, such as-

1. BCG matrix classifies businesses as low and high, but generally businesses can
be medium also. Thus, the true nature of business may not be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high costs
also involved with high market share.
4. Growth rate and relative market share are not the only indicators of
profitability. This model ignores and overlooks other indicators of profitability.
5. At times, dogs may help other businesses in gaining competitive advantage.
They can earn even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.

BCG Matrix Example: Apple

One of the most widely well known consumer product companies in the world
is Apple. The company owns several product lines that can be categorized into
different categories across the BCG Matrix. Here is a BCG Matrix example of how
some of Apple’s products could be categorized using the matrix:
Cash Cow – Once an innovative product, Apple’s laptops are no longer in a fast-
growing industry but generate healthy profits for the company
Dog – Apple’s iPods have now been cannibalized by its iPhones and should no longer
receive further heavy investment
Question Mark – Apple’s AirPods are growing extremely quickly but have yet to
dominate the market
Star – Apple’s iPhones continue to generate excess profits and the company
dominates the growing smartphone market

B. GE Matrix

The GE Matrix was created for General Electric by McKinsey in the 1970s to help
decision-makers with investment decisions about their various SBUs. It is another
“Corporate Portfolio Analysis” technique. In 1970, General Electric
(GE) engaged McKinsey & Company to consult GE in managing its large and complex
portfolio of strategic business units. McKinsey (not GE) created this framework to help
GE cope with its strategic decisions on a corporate level.

The GE Matrix is a strategic framework that helps multi-business corporations

manage portfolios and prioritize investments across products and SBUs (Strategic
Business Units). The GE Matrix looks at two factors: the competitive strength of an
SBU and the attractiveness of the market in which it operates.

Based on where the SBU sits within the 3x3 GE Matrix, portfolio managers can
quickly answer three strategic questions:

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 1. How to allocate capital throughout the organization’s portfolio of companies?
2. What products or additional SBUs are needed in their portfolio?
3. Which SBUs should be divested?

Y-Axis

The vertical axis scores the industry attractiveness (either low, medium, or high) of
SBUs. A higher score on this axis will place an SBU higher in the GE Matrix.

X-Axis

The horizontal axis indicates the SBU's strength as either low, medium, or high. It
moves from right to left, but it goes from high to low.

Invest/Grow (Green)

SBUs in these blocks have a mixture of solid business performance and an attractive
industry. They are primed for growth and should be allocated resources and capital.

Selectivity/Earnings (Orange)

SBUs that fall within these blocks aren’t performing optimally or operate in an
unattractive industry. These business units require a more conservative approach to
either growth or divestment strategies.

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 Harvest/Divest (Red)

If an SBU is mapped in the red blocks, this indicates that a divestment/harvest

strategy should be taken. Generally, this means that a business should be closed,
further investment should be withheld, or the company should be run for cash.

How To Use GE Matrix?

1. Determine the industry attractiveness of each SBU

Calculate the market attractiveness in which each SBU operates. Remember, this is a
subjective estimate based on your understanding of the SBUs industry or sector.

Score the SBUs industry by looking at factors like:

 Market size
 Industry profitability
 Market growth potential
 Industry segmentation
 Market profitability
 Differentiation
 Market growth rate
 Level of competition

Important note: The scale you use to score SBU strength and industry
attractiveness will depend on your needs. Most businesses use a 1-10 scorecard, but
you may want to use a different range when assigning values.

2. Determine the competitive strength of each SBU

You’ll then repeat this process for each company in your portfolio. Look at the
strength of the business unit and its competitive position in the market.

Factors you can consider when working out the strength of a business unit:

 Sustainable competitive advantages (use VRIO analysis)

 Brand equity
 Customer loyalty
 Market share
 Internal competencies
 Strength of the value chain (use value chain analysis)
 Production capacity
 Product lines
 Pricing and cash flows
 Profit margin compared to competitors

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Important note: Different factors have different levels of importance. When
calculating industry attractiveness and business strength scores, you’ll need to weigh
numerous factors to reflect this.

3. Plot the information on the GE Matrix

Next, plot the values for each strategic business unit on your Matrix. Use the market
attractiveness score to plot your Y-axis position and the business strength score to
plot your X-axis position.

The location of each SBU on the 3x3 chart will indicate whether the company should
grow, hold, or harvest specific business units.

4. Identify the future direction of each SBU

The GE Matrix only provides a view of the current state of SBUs in a portfolio and
doesn’t account for other variables that may impact a business's viability. This means
that teams that use the GE Matrix must analyze business units in more detail to
understand all strategic implications.

Using different strategic analysis tools, such as SWOT analysis, Porter’s 5 Forces,
or PESTEL analysis, could help you analyze internal and external environmental
factors. This will also help you to identify potential risks in the future.

5. Choose where to invest and focus your attention

Once you have a picture of your portfolio mapped out on the GE Matrix, you’ll still
need to answer some critical questions before making decisions about SBUs.

For example, how much money should you put into a specific business unit? Does
investing in these SBUs align with your long-term strategy? Which parts of a particular
SBU should you invest in?

As Michael Porter, the father of the modern business strategy, says, “The essence of
strategy is choosing what not to do”.

At this point, you should clearly understand what your organization will focus on. This
will help your organization to stay on the right track and prevent wasting resources on
misaligned efforts.

6. Turn insights into results

With a clear idea of direction and new priorities, you should take those insights and
turn them into an actionable strategic plan.

What is the difference between the GE and the BCG Matrix?

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The GE Matrix is used by businesses to prioritize investments and looks at industry
attractiveness and SBU strength. Boston Consulting Group’s BCG Matrix is used to
deploy resources and looks at the product growth rate and market share for SBUs.

McKinsey’s GE Matrix is a visual tool designed to help portfolio

managers determine resource allocation for multi-business portfolios.

Boston Consulting Group developed a valuable strategic planning tool to help

companies prioritize their different businesses by their degree of profitability.

Along with providing an overview of business units' performance, the GE Matrix also
prescribes three strategic paths (grow, hold, and harvest) to inform strategic
decisions.

C. VRIO Analysis

VRIO is a business analysis framework that forms part of a firm's larger strategic
scheme, proposed by Jay Barney in 1991. VRIO Analysis and SWOT Analysis are
strategic tools used by organizations, but they have different focuses and purposes:

VRIO focuses on evaluating internal resources and capabilities to determine

sustainable competitive advantages. VRIO is an initialism for the four question
framework asked about a resource or capability to determine its competitive potential:
the question of Value, the question of Rarity, the question of Imitability
(Ease/Difficulty to Imitate), and the question of Organization (ability to exploit the
resource or capability).

 The question of value: "Is the firm able to exploit an opportunity or neutralize
an external threat with the resource/capability?"
 The question of rarity: "Is control of the resource/capability in the hands of a
relative few?"
 The question of imitability: "Is it difficult to imitate, and will there be
significant cost disadvantage to a firm trying to obtain, develop, or duplicate the
resource/capability?"
 The question of organization: "Is the firm organized, ready, and able to exploit
the resource/capability?" "Is the firm organized to capture value?" [

D. Directional Policy Matrix

The essence of strategy is that it is a choice between two or more good options. In
developing a marketing strategy the choice to be made is of which segments of the
market you should develop tactics to pursue.

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The Directional Policy Matrix (DPM) is a tool for helping you determine what your
preferred segments are. In completing a DPM you understand what you should invest
in and the direction your organisation should take. The directional policy matrix helps
you determine whether decisions made in the day-to-day running of the organisation
are in it’s best interest.

The Directional Policy Matrix measures the attractiveness of a segment and the
capability of the organisation to support that segment.

Attractiveness of a Market Segment

Evaluating the attractiveness of a segment should include but not be limited to, these
variables:

 Size of the segment (number of customers, units or Rs. sales).

 Growth rate of the segment (a very important variable)
 Profit margins of the segment to the sales organisation
 Ongoing purchasing power of the segment
 Attainable market share given promotional budget, fragmentation of the market
and competitors’ promotional expenditures.
 Required market share to break even.

Capability of the organisation

Evaluating the capability of the organization to meet the needs of the segments
should include, but not be limited to, these variables analyzed against the
competition:

 Competitive capability of the organisation against the marketing mix

(product/service, place, price and promotion).
 Access to distribution channels.
 Capital and human resource investment required to serve the segment.
 Brand association of the organisation in the eyes of the segment.
 Current market share/likely future market share.

Scoring the Directional Policy Matrix

To score the DPM you need to know the goal of your marketing strategy. This may
be, but not limited to:

1. Profit lift
2. Market share lift
3. Value of the organisation if it were for sale.

Interpreting the Directional Policy Matrix

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The directional policy matrix suggests tactics for each of nine sectors, as shown in the
figure below. The tactics for each sector descriptor are:

1. Leader – Focus your resources on segments in this sector.

2. Growth leader – Grow by focusing just enough resources here.
3. Cash Generator – Milk segments in this sector for expansion elsewhere.
4. Phased withdrawal – Move cash to segments with greater potential.
5. Custodial – Do not commit any more resources to segments in this sector.
6. Try harder –Determine if there are ways in which you can build your capability
for segments in this sector for low levels of cash.
7. Double or quit – Invest in your capability or get out of segments in this sector.
8. Divest – Liquidate or move assets used in segments in this sector as fast as you
can.

E. Ansoff Matrix

The Ansoff Matrix, often called the Product/Market Expansion Grid, is a two-by-two
framework used by management teams and the analyst community to help plan and
evaluate growth initiatives. In particular, the tool helps stakeholders conceptualize the
level of risk associated with different growth strategies.

The matrix was developed by applied mathematician and business manager H. Igor
Ansoff and was published in the Harvard Business Review in 1957. The Ansoff Matrix
is often used in conjunction with other business and industry analysis tools, such as

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the PESTEL, SWOT, and Porter’s 5 Forces frameworks, to support more robust
assessments of drivers of business growth.

Understanding the Ansoff Matrix

The Ansoff Matrix is a fundamental framework taught by business schools worldwide.

It is a simple and intuitive way to visualize the levers a management team can pull
when considering growth opportunities. It features Products on the X-axis
and Markets on the Y-axis.

The concept of markets within the Ansoff framework can mean different things. For
example, it could be a jurisdiction or geography (i.e., the North American market); it
could also mean customer segments (i.e., target market/demographic).

The Matrix is used to evaluate the relative attractiveness of growth strategies that
leverage both existing products and markets vs. new ones, as well as the level of risk
associated with each.

Each box of the Matrix corresponds to a specific growth strategy. They are:

1. Market Penetration – The concept of increasing sales of existing products into

an existing market
2. Market Development – Focuses on selling existing products into new markets
3. Product Development – Focuses on introducing new products to
an existing market
4. Diversification – The concept of entering a new market with
altogether new products.

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 Market Penetration

The least risky, in relative terms, is market penetration.

When employing a market penetration strategy, management seeks to sell more of its
existing products into markets that they’re familiar with and where they have existing
relationships. Typical execution strategies include:

 Increasing marketing efforts or streamlining distribution processes

 Decreasing prices to attract new customers within the market segment
 Acquiring a competitor in the same market

Consider a consumer packaged goods business that sells into grocery chains.
Management may seek greater penetration by amending pricing for a large chain in
order to secure incremental shelf space not just for packaged food products but also
for several lines of its pet food products, too.

Market Development

A market development strategy is the next least risky because it does not require
significant investment in R&D or product development. Rather, it allows a
management team to leverage existing products and take them to a different market.
Approaches include:

 Catering to a different customer segment or target demographic

 Entering a new domestic market (regional expansion)
 Entering into a foreign market (international expansion)

Product Development

A business that firmly has the ears of a particular market or target audience may look
to expand its share of wallet from that customer base. Think of it as a play on brand
loyalty, which may be achieved in a variety of ways, including:

 Investing in R&D to develop an altogether new product(s).

 Acquiring the rights to produce and sell another firm’s product(s).
 Creating a new offering by branding a white-label product that’s actually
produced by a third party.

An example might be a beauty brand that produces and sells hair care products that
are popular among women aged 28-35. In an effort to capitalize on the brand’s
popularity and loyalty with this demographic, they invest heavily in the production of a
new line of hair care products, hoping that the existing target market will adopt it.

Diversification

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In relative terms, a diversification strategy is generally the highest risk endeavor; after
all, both product development and market development are required. While it is the
highest risk strategy, it can reap huge rewards – either by achieving altogether new
revenue opportunities or by reducing a firm’s reliance on a single product/market fit
(for whatever reason).

There are generally two types of diversification strategies that a management team
might consider:

1. Related Diversification – Where there are potential synergies that can be

realized between the existing business and the new product/market.

An example is a producer of leather shoes that decides to produce leather car seats.
There are almost certainly synergies to be had in sourcing raw materials, although the
product itself and the production process will require considerable investment in R&D
and production.

2. Unrelated Diversification – Where it’s unlikely that any real synergies will be
realized between the existing business and the new product/market.

Let’s work on the leather shoe producer example again. Consider if management
wanted to reduce its overall reliance on the (highly cyclical) consumer discretionary
high-end shoe business, they might invest heavily in a consumer packaged goods
product in order to diversify.

F. (PIMS) Model

The Profit Impact of Market Strategy (PIMS) program is a project that uses
empirical data to try to determine which business strategies make the difference
between success and failure. It is used to develop strategies for resource allocation
and marketing. Some of the most important strategic metrics are market share,
product quality, investment intensity and service quality (all measured by PIMS and
strongly correlated with financial performance). One of the emphasized principles is
that the same factors work identically across different industries.
Profit Impact of Marketing Strategy or PIMS is an ongoing study of strategies that
drive business profitability, cash flows, and revenues and help companies gaining and
sustaining competitive advantage in the industry.
It is quite an in-depth study carried out my companies and cover several concepts and
issues before a company comes out with PIMS. The study helps a company to identify
and quantify several variables like market share, profit share, product quality,
investment and service quality etc. After the study is carried out and after the findings
of the study the company can know what strategy to adopt so that it earns profits out
of it. PIMS is carried out as a US research service of 3000 business units of 500 firms.
These studies are documented and the findings are kept in a record.

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 PIMS seeks to address some of the basic things in a comprehensive way. The things
which it seeks to address are that of the company’s strategy and what is its future
operations will likely be. It addresses how the profit is driven in a company and what
is its profit rate. It also suggests how the companies can improve its strategies in
order to stay competitively ahead in the market.
PIMS is also being criticised by many people and organisations alike. They say that
this study was carried out on the 500 firms which are hugely traditional industries.
Also, the critique suggest that the data is quite old and was carried out on only big
companies and left out the old companies. They claim that not always high market
shares translates into high profit margins. Though there are critiques PIMS study still
stands the test of time.

G. Hofer’s Product-Market Evolution Matrix

According to this model, a firm’s business is positioned in a 15-cell matrix based

on two major variables viz., stage of production-market development and the
competitive position. Charles W. Hoffer has suggested a further refinement of
GE/Mckinsey portfolio matrix by identifying companies, particularly new
businesses, that are about to accelerate their growth. This matrix is also called
‘life-cycle portfolio matrix’. An illustrative graph representing Hofer’s matrix is
given in figure 9.6, it provides potential strategies for different units placed in the
matrix.

Hofer’s matrix reflects the stage of development of the product or market.

Business units are placed on a grid showing their stage of product -market
evolution and their competitive position. Circles represent the industry and the pie
wedges represent the market share of the business unit. Hoffers evolution matrix
are useful to develop strategies that are appropriate at different stages of the
product life cycle.

In Hofer’s matrix, the vertical axis represents the stages of product -market
evolution and horizontal axis represents the SBU’s competitive position. In this
matrix, three stages of competitive position of SBU (viz., strong, average and
week) are shown on horizontal axis. The vertical axis shows the industry’s state in
the evolutionary life cycle, starting with initial development and passing through
the growth, competitive shake-out, maturity, saturation and decline stages.

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SBU A with average competitive position and in development stage holds out
prospects for future development deserves expansion and desired financial
resources to be allotted to exploit the opportunities.

SBU B with strong competitive position and in growth stage requires to adopt
growth strategies to make it a future winner.

SBU C with weak competitive position which is in growth stage of the industry
should give lot of attention and requires a careful formulation of marketing
strategies to make it more competitive in the industry.

SBU D with moderately strong position is in the shake-out stage can be probable
with close attention and careful marketing strategy formulation. This may also
requires adoption of growth strategies.

SBU E with average competitive position and in maturity stage of the industry
needs to adopt stability strategies.

SBU F with moderately strong competitive position and is in the maturity stage of
the industry life cycle, needs the stability, harvest and retrenchment strategies
need to be adopted. No further funds to be invested in this SBU. The market
strategies require to hold the market position without fall.

SBU G with moderately weak competitive position and is in the decline state of the
industry life cycle need to be divested immediately to arrest any cash loss since it
is in a position of loosing. Revival of this SBU is not suggested. The Hofer’s
product-market evolution matrix displays business portfolio of an internationa l
firm with relative greater degree of accuracy and completeness.

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The Hofer’s matrix considered the following variables:

Variable # (a) Market and Consumer Behaviour Variables Like:

i. Buyer needs
ii. Purchase frequency
iii. Buyer concentration
iv. Market segmentation
v. Market size
vi. Elasticity of demand
vii. Buyer loyalty
viii. Seasonality and cyclicality

Variable # (b) Industry Structure Variables Like:

i. Uniqueness of the product

ii. Rate of technological change in product design
iii. Type of product
iv. Number of equal products
v. Barriers to entry
vi. Degree of product differentiation
vii. Transportation and distribution costs
viii. Price/cost structure
ix. Experience curve
x. Degree of integration
xi. Economy of scale etc.

Variable # (c) Competitor Variables Like:

i. Degree of specialization within the industry

ii. Degree of capacity utilization
iii. Degree of seller concentration
iv. Aggressiveness of competition

Variable # (d) Supplier Variables Like:

i. Degree of supplier concentration

ii. Major changes in availability of raw materials

Variable # (e) Broader Environment Variables:

i. Interest rates
ii. Money supply
iii. GNP trend
iv. Growth of population
v. Age distribution of population
vi. Life cycle changes

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Variable # (f) Organizations Variables Like:
i. Quality of products
ii. Market share
iii. Marketing intensity
iv. Value added
v. Degree of customer concentration etc.
Hofer developed descriptive propositions for each stage of product life cycle.

For example- in the maturity stage of the product life cycle, Hofer
identified the following major determinants of business strategy:

(a) Nature of buyer needs

(b) Degree of product differentiation
(c) Rate of technological change in the process design
(d) Ratio of market segmentation
(e) Ratio of distribution costs to manufacturing
(f) Value added
(g) Frequency with which the product is purchased
Hofer, thereafter formulated normative contingency hypothesis using the above
major determinants.

An example for the maturity stage is when:

(a) Degree of product differentiation is low.

(b) The rate of buyer needs is primarily economic.
(c) Rate of technological change in process design is high.
(d) Purchase frequency is high.
(e) Buyer concentration is high.
(f) Degree of capacity utilization is low.

Then the business firms should:

(1) Allocate most of their R&D funds to improvements in process design rather
than to new product development.
(2) Allocate most of their plant and equipment expenditures to new equipment
purchases.
(3) Seek to integrate forward or backward in order to increase the value they
added to the product.
(4) Attempt to improve their production scheduling and inventory control
procedures in order to increase their capacity utilization.
(5) Attempt to segment the market.
(6) Attempt to reduce their raw material unit costs by standardizing their product
design and using interchangeable components throughout their product line in
order to qualify for volume discount.

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H. Market Life Cycle-Competitive Strength Matrix

BCG matrix has failed to consider the wide range of factors affecting cash flow
beyond market growth and market share. The market life cycle-competitive
strength matrix is a 16 cell matrix introduces the four stages of market life cycle
viz., introduction, growth, maturity, decline on horizontal axis and competitive
strength of SBU is analyzed as high, moderate and low on vertical axis.

Competitive strength is the overall subjective rating, based on a wide range of

factors regarding the likelihood of gaining and maintaining a competitive
advantage. The matrix considers multiple factors in assessing competitive strength
of each SBU. This matrix is developed to identify ‘developing winners’ as well as
‘potential losers’. The total area of the matrix is segregated into three zones viz.-
push, caution and danger.

In SBUs falling under ‘Push zone’, the company can invest aggressively and adopt
growth strategies. These SBUs generate sufficient cash flow and potential winners
can be identified.

In SBUs falling under ‘Caution zone’, the company can invest cautiously, requires
careful analysis and decision making; and adopt stability strategies.

In SBUs falling under ‘Danger zone’, the company should stop further investment
and adopt retrenchment strategies like harvest, divest and liquidation.

The units falling in the ‘Push zone’ represents Stars and Cash Cows. The SBUs or
products coming under Caution represent question marks. The remaining units
falling in Danger zone represents Dogs.

Competitive Strength of SBU (vertical axis.); Introduction, Growth, Maturity,

Decline on horizontal axis.

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4. Factors contributing to business strength as well as industry
attractiveness.

What is the difference between industry attractiveness and business strength?

Business strength is influenced by market share, brand image, profit margins,

customer loyalty, technological capability and so on. On the other hand, industry
attractiveness is influenced by drivers such as pricing trends, economies of scale,
market size, market growth rate, segmentation, distribution structure, etc

What assesses industry attractiveness and business strength?

Porter's five forces is important because it helps you evaluate the attractiveness of
your industry and the potential for profitability. An attractive industry is one where the
forces are weak, meaning that there is low competition, high entry barriers, low
substitution threats, low buyer power, and low supplier power.

What is the industry attractiveness?

An attractive industry is one which offers the potential for profitability. If a company
uses Porter's 5 forces industry analysis and concludes that the competitive structure
of the industry is such that there is an opportunity for high profits, then the company
can elect to enter that industry or market.

What are the factors that affect industry attractiveness?

It depends on various factors, such as the demand, competition, growth, profitability,

and risks of the market. To measure market attractiveness, you can use different tools
and frameworks, such as the Porter's Five Forces, the PESTEL analysis, the BCG
matrix, or the GE-McKinsey matrix.

Why is industry attractiveness important?

The more attractive a market, the higher the potential profits. Companies in the
process of considering entries into new industries or markets conduct a number of
analyses to determine whether or not such a move would be good for the business

What is industry attractiveness test?

The Attractiveness Test addresses if the new market is appealing for the company to
enter in the first place. It's an important question because diversification is only
capable of generating value for the business if the new market being entered is
capable of generating revenues greater than the cost of entering.

Market attractiveness

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 Market attractiveness refers to how desirable and profitable a market is for your
business. It depends on various factors, such as the demand, competition, growth,
profitability, and risks of the market. To measure market attractiveness, you can use
different tools and frameworks, such as the Porter's Five Forces, the PESTEL analysis,
the BCG matrix, or the GE-McKinsey matrix. These tools help you assess the external
and internal factors that affect your market, and compare your market with other
alternatives.

How to use Porter's five forces to assess your industry attractiveness?

To assess the attractiveness of your industry using Porter's five forces, you must first
identify the relevant industry and define its scope and boundaries. This could include
a specific product category, geographic market, or customer segment. Then, analyse
each of the five forces and rate them as high, medium, or low based on the evidence
and data you have gathered from industry reports, market research, customer
surveys, or supplier interviews. After that, create a diagram or table that summarizes
the results of your analysis and shows the relative strength of each force, using a
scale of 1 to 5, where 1 is very weak and 5 is very strong. Finally, interpret the
implications of your analysis and identify the opportunities and threats for your
business, such as through a SWOT analysis to highlight your strengths, weaknesses,
opportunities, and threats based on the five forces.

How to use Porter's five forces to identify your competitive advantage?

Porter's five forces can be used to identify your competitive advantage and how to
maintain it. Your competitive advantage is what makes you stand out from your
competitors and more appealing to your customers. To identify your competitive
advantage, you should ask yourself: what are the sources of your competitive
advantage? Could it be a unique value proposition, a devoted customer base, a
powerful brand, a superior technology, or a lower cost structure? Additionally, you
should consider how sustainable your competitive advantage is. Can your competitors
easily imitate, match, or surpass your advantage? How can you protect your
advantage from being weakened or diluted? Lastly, you should think about how you
can enhance your competitive advantage. Could you improve your value proposition,
increase customer loyalty, strengthen your brand, innovate your technology, or
reduce your costs? By asking yourself these questions, you can gain a better
understanding of your competitive advantage and how to sustain it.

How to Identify Your Company's Strengths and Weaknesses

1. Start with a SWOT analysis. ...

2. Consult with others. ...
3. Closely monitor customer complaints. ...
4. Match your business against the competition. ...
5. Join a peer advisory board.

Industry Attractiveness

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This factor refers to the ease with which the business unit will be able to accrue profit in
the industry. When evaluating the business along this dimension, consider the long term
growth potential, industry size, industry profitability, entry and exit barriers, etc.
Furthermore, evaluate the power of suppliers and buyers as well as any
other environmental factors that could influence industry attractiveness.

In addition, consider your product or service, how they change over time, pricing
and labor requirements. It is important to consider all these dimensions, focusing on the
distant future. This is because investments require a long-term, rather than a short-term,
commitment.

The vertical axis of this matrix – Industry Attractiveness – is divided into High, Medium
and Low. Industry attractiveness represents the profit potential of the industry for a
business to enter and compete in that industry. The higher the profit potential, the more
attractive is the industry. An industry’s profitability is affected by the current level of
competition and future changes in the competitive landscape. When evaluating industry
attractiveness, evaluate how an industry will change in the long run rather than in the
short-term.

Competitive Strength
When evaluating a business unit along this dimension, consider how it fares relative to its
competitors within the industry. Some factors that can help a business assess its
competitive advantage in an industry are:

 Market share it commands

 Market share growth potential
 Brand awareness
 Profit margins of the business
 Customer loyalty and satisfaction
 Uniqueness of its products or services

If the business has a competitive edge, consider whether its competitiveness is

sustainable in the long-term or only temporary. Finally, if the business has a sustainable
competitive advantage, determine the duration that it can leverage its position in the
industry.

The horizontal of this matrix – Competitive Strength – is divided into High, Medium and
Low. This dimension measures the business’s competitiveness among its rivals. This
dimension indicates the business’s ability to compete in that industry. A business’s
strengths give it an advantage over its rivals.

These strengths are often referred to as unique selling points (USP’s), firm-specific
advantages (FSA’s) or as sustainable competitive advantages.

In addition to a business’s competitive position today, it’s important to look its sustained
competitiveness in the long run.

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