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STRATEGICMANAGEMENT
Module IIIStrategic Choice
Ramesh Bagla
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Strategic Choice Re-visit the Mission
Revise, create, or maintain mission
Set Long-Term Objectives Generate feasible alternatives
Evaluate alternatives
Choose the best strategic option
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The Strategy Formulation Framework
Stage 1: The Input StageSWOT Analysis
External Analysis Internal Analysis
Stage 2: The Matching StageRe-visit Mission and Set Long Term Objectives
Generate feasible alternative Corporate Strategies
Stage 3: The Decision StageEvaluate and Choose Corporate Strategies
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Alternatives for Growth
Alternativesfor Growth
Expansionof existingBusinesses
Diversificationinto newBusinesses
Market Penetration
Market DevelopmentProduct Development
Vertical
Integration -Forward & Backward
Related
Unrelated
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Key Questions in Strategic Choice Strategic choices need to take into accountthe environmentand build on corecompetences
Strategic choices need to take into accountthe expectations and influence ofstakeholders
Strategic directionand methodsshould buildon broad strategic choices
Resourcesand competencesshould bedeveloped to deliver and sustain the chosenstrategies
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Tools
for Formulating and ChoosingCorporate Strategies
Portfolio Analysis
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The BCG MatrixBOSTON CONSULTING GROUP (BCG)
MATRIX was developed by BRUCEHENDERSON of the BOSTON CONSULTING
GROUP IN THE EARLY 1970s. It is also known as Growth Share Matrix
According to this technique, businesses orproducts are classified as low or high performersdepending upon their market growth rate andrelative market share.
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The BCG MatrixRelative Market Share Position in the Industry
Industry
SalesGrowth Rate
(Percent)
High +20
Medium 0
Low - 20
High Medium Low
1.0 .50 0.0
Question Marks (I)
Dogs (IV)
Stars (II)
Cash Cows (III)
?
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QUESTION MARKSHigh growth, Low market share Most businesses start of as question marks.
They will absorb great amounts of cash if the
market share remains unchanged, (low).
Why question marks?
Question marks have potential to becomestar and eventually cash cow but can alsobecome a dog.
Investments should be high for questionmarks.
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STARSHigh growth, High market share Stars are leaders in business.
They also require heavy investment, tomaintain its large market share.
It leads to large amount of cashconsumption and cash generation.
Attempts should be made to hold themarket share otherwise the star willbecome a CASH COW.
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CASH COWSLow growth , High market share
They are foundation of the company and
often the stars of yesterday. They generate more cash than the
investment required.
They extract the profits by investing as little
cash as possible They are located in an industry that is
mature, not growing or declining.
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DOGSLow growth, Low market share
Dogs are the cash traps.
Dogs do not have potential to bring inmuch cash.
Number of dogs in the company shouldbe minimized.
Business is situated at a declining stage.
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Strategic Perspectives of Productsin Different Quadrants
Four different strategic perspectives
Investment Earnings
Cash-flow, and
Strategy Implications
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Question Marks Investmentheavy initial capacity
expenditures and high R&D costs
Earningsnegative to low
Cash-flownegative (net cash user)
Strategy Implications If possible to dominate segment, go after
share. If not, redefine the business orwithdraw
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Stars Investmentcontinue to invest for
capacity expansion
EarningsLow to high earnings Cash-flowNegative (net cash user)
Strategy Implications
Continue to increase market shareeven
at the expense of short-term earnings
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Cows InvestmentCapacity maintenance
EarningsHigh
Cash-flowPositive (net cashcontributor)
Strategy Implications
Maintain market share and cost leadership
until further investment becomes marginal
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Dogs Investment
Gradually reduce capacity
EarningsHigh to low
Cash-flow Positive (net cash contributor) if
deliberately reducing capacity
Strategy Implications Plan an orderly withdrawal to maximize
cash flow
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The BCG Matrix for ITC Ltd.Stars
Hotels
Paperboards/
Packaging. Agri business.
?
FMCG
Class mate
stationary
Cows
FMCG-Cigarettes
Dogs
Maybe ITC
Infotech.
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BCG Matrix - Three Paths to Success
Continuously generate cash cows and usethe cash throw-up by the cash cowsto investin the question marks that are not self-
sustaining Starsneed a lot of reinvestments and as themarket matures, stars will turn into cashcows and the process will be repeated.
As for dogs, segment the markets and nursethe dogs to health or manage for cash
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BCG Matrix - Three Paths to Failure
Over invest in cash cows and underinvest in question marks
Trade future opportunities for present cashflow
Under invest in the stars
Allow competitors to gain share in a high
growth market Over milk the cash cows
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WHY BCG MATRIX ?
To assess :
Profiles of products/businesses
The cash demands of products The development cycles of products
Resource allocation and divestmentdecisions
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MAIN STEPS OF BCG MATRIX
Identifying and dividing a company intoSBUs.
Assessing and comparing the prospects ofeach SBU according to two criteria :1. SBUS relative market share.2. Growth rate OF SBUS industry.
Classifying the SBUS on the basis of BCGmatrix.
Developing strategic objectives for eachSBU.
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BENEFITS BCG MATRIX is simple and easy tounderstand.
It helps you to quickly and simply screen
the opportunities open to you, and helpsyou think about how you can make themost of them.
It is used to identify how corporate cash
resources can best be used to maximize acompanys future growth and profitability.
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LIMITATIONS BCG MATRIX uses only two dimensions,Relative market share and market growthrate.
Problems of getting data on market shareand market growth.
High market share does not mean profits allthe time.
Business with low market share can beprofitable too.
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CONCLUSION
Though BCG MATRIX has its limitations it is one
of the most FAMOUS AND SIMPLEST portfolioplanning matrix, used by large companieshaving multi-products. M&M and HLL are usingthe BCG MATRIX.
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GE Matrix Originally developed by GEs plannersdrawing on McKinseys approaches, it isalso known as the Directional Policy Matrix
Market attractiveness is based on as manyrelevant factors as are appropriate in agiven context
Business strengths assessment also madeon many factors Each SBU needs to be rated on each factor
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GE MatrixIndicators of Industry Attractiveness Market size
Market growth rate
Cyclicality
Barriers to entry and exit Industry profitability
Technology
Regulation
Workforce availability
Social and environmental issues Political and legal issues
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GE MatrixIndicators of SBU Strengths Market Share
Sales force
Marketing strengths
R&D Manufacturing facilities
Distribution
Financial resources
Managerial competence
Competitive position in terms image, breadth of product line,quality, reliability, customer service etc.
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GE MatrixDepending on the location of a business withinthe Matrix, one of the following approaches issuggested:
1. Invest to grow
2.Invest selectively and manage for earnings
3.Harvest or divest for resources
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GE Matrix
Industry Attractiveness
High LowMedium
High
Medium
LowBusinessStrength
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GE Matrix Segment 1: This is the best segment. The business is strong
and the market is attractive. The company should allocateresources in this business and focus on growing the businessand increase market share
Segment 2: The business is either strong but the market is notattractive or the market is strong and the business is notstrong enough to pursue potential opportunities. Decisionmakers should make judgment on how to further deal withthese SBUs. Some of them may consume too much
resources and are not promising while others may needadditional resources and better strategy for growth.
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GE Matrix Segment 3: This is the worst segment. Businesses in
this segment are weak and their market is not attractive.Decision makers should consider either repositioning
these SBUs into a different market segment, develop
better cost-effective offering, or get rid of these SBUsand invest the resources into more promising andattractive SBUs.
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STRENGTHS
Uses more comprehensive measures / variables inassessing industry attractiveness and business strength /competitive position
Doesnt lead to as simplistic conclusions as the BCGmatrix
Nine cell approach allows for intermediate rankingsbetween high/low and strong/weak
Stresses channeling of resources to areas with thegreatest probability of achieving competitive advantageand superior performance
GE Matrix
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WEAKNESSES
Provides no real guidance on the specifics of whatstrategy to follow its too general
Cant spot units that are about to become winners
because their industries are entering the takeoff stage
Use of numeric estimates seems objective, but is reallyvery subjective
Should the weights & factors used to assess industryattractiveness and business position be usedgenerically, or adjusted depending on the industry underinvestigation?
GE Matrix
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TWO DIMENSIONS
Stage of Industry / Market EvolutionEARLY DEVELOPMENT
RAPID GROWTH / TAKE-OFF
SHAKE-OUT
MATURITY / SATURATION
DECLINE / STAGNATION
Business Strength / (Competitive Position)SAME DIMENSIONS AS USED IN THE GE MATRIX
HOFER LIFE-CYCLE MARKET EVOLUTION
MATRIX
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BUSINESS STRENGTH / COMPETITIVE POSITION
STRONG AVERAGE WEAK
EARLY - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
DEVELOPMENT
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
STAGE OF RAPID GROWTH /
TAKE-OFFINDUSTRY / MARKET - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SHAKE-OUT
EVOLUTION- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
MATURITY /SATURATION
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -DECLINE /
STAGNATION - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
ONLY ONE DIMENSION IS DIFFERENT FROM THE GE Matrix
Except for the Stage of Market Evolution, this model is identical to the GE Business Screen
HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX
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ADVANTAGES
Can be used to identify and track developing winners
Illustrates how the firms businesses are distributedacross the stages of industry evolution
HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX
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Advantages of Portfolio Analyses Encourages top management to evaluate
each business individually; to set
objectives; and consider resources. It stimulates use of external data to
supplement managements judgment.
Its graphic representation makesinterpretation and communication easier.
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Limitations of Portfolio Analysis Defining product/market segments isnt
easy.
Using standard strategies may miss
opportunities or be impractical. Providing an illusion of scientific rigor
masks the reality that positions are basedon subjective judgments.
Determining what makes an industryattractive isnt always possible.
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Corporate Strategies
Three Key Issues:
Firms directional strategy
Firms portfolio strategy
Firms parenting strategy
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Corporate Directional Strategies
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Corporate StrategiesDirectional Strategy:
Orientation toward growth
Expand, cut back, status quo? Concentrate within current industry, diversify
into other industries?
Growth and expansion through internaldevelopment or acquisitions, mergers, or
strategic alliances?
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Stricklands Grand Strategy Selection Matrix
It is a four cell guide to selection of strategiesbased upon
1. whether the business is operating from a
position of strength or weakness
2. whether to rely on its own resources or to
acquire resources via merger or acquisition
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Stricklands Grand Strategy Selection Matrix
The Matrix helps in the selection of a grandstrategy to build value when core businessproves successful
Two basic criteria for selection are,
- the principal purpose of the grand strategy
- the choice of an internal or external emphasis
Thus the selection is guided by conditions of theplanning period and the company strengths &weaknesses
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Stricklands Grand Strategy Selection MatrixOvercome Weakness
Maximize Strengths
Vertical integrationConglomeratediversification
Horizontal integrationConcentric diversificationJoint venture
Turnaround orretrenchmentDivestitureLiquidation
Concentrated growthMarket developmentProduct developmentInnovation
Internal
(redirectedresourceswithin thefirm)
External
(acquisitionor merger forresourcecapability)
II
III IV
I
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Grand Strategy
A master long term strategy thatprovides basic direction for major
actions directed towards achievinglong term business objectives
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Grand Strategies
Vertical Integration
Acquisition of firms that supply inputs orcustomers for its outputs
Conglomerate Diversification
Acquiring or entering businesses unrelated tofirms current products, markets or technologies
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Vertical Integration Some of the best known examples of vertical
integration have been in the oil industry. In the 1970s and 1980s, many companies
that were primarily engaged in exploration
and the extraction of crude petroleumdecided to acquire downstream refineries anddistribution networks.
Companies such as Shell and BP came tocontrol every step involved in bringing a drop
of oil from its North Sea or Alaskan origins toa vehicle's fuel tank.
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Vertical Integration The idea of vertical integration was taken a step further
by Dell Computer
Michael Dell combined the traditional vertical integrationof the supply chain with the special characteristics of thevirtual organisation to create virtual integration
Dell assembles computers from other firms' parts, but ithas relationships with those firms that are more binding
than the traditional links between buyer and supplier.
It does not own them in the way of the vertically
integrated firm, but through exchanges of informationand a variety of loose associations it achieves much the
same aimwhat Michael Dell calls a tightly co-ordinated supply chain.
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Vertical Integration
Vertical integration is a difficult strategy forcompanies to implement successfully. It isoften expensive and hard to reverse
Upstream producers frequently integrate with
downstream distributors to secure a marketfor their output.
This is fine when times are good. But manyfirms have found themselves cutting pricessharply to their downstream distributors when
demand has fallen just so they can maintaintargeted levels of plant utilisation.
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