PAN African e-Network Project

MFC
STRATEGIC MANAGEMENT

Semester – 3
Session - 3

Mr. Suraj Prakash

HOFER’S MATRICES
 BUSINESS PORTFOLIO
ANALYSIS
• The analysis methods of the business
portfolio analysis are used in order to
identify and examine the various strategic
alternatives that must be approached at
corporate level.
 POTENTIAL BENEFITS

• It encourages the promotion of competitive

analysis at the level of strategic business units.
• Selective earmarking of financial resources by
means of identification of strategic issues and by
means of adoption of a standardized and
objective negotiation process.
• It helps to reduce risks, increases concentration
and involvement
 (COMPETITIVE POSITION)
(STAGE OF
EVOLUTION)
STRONG AVERAGE WEAK
DEVELOP

GROWTH

SUPER
GROWTH

MATURITY

DECLINE

HOFER’S MATRICES
 Contd…..

• Strategic business unit ”A” seems to be a potential

”Star”. It holds a large market share, it is in the stage of
life cycle development and has a strong competitive
position on the market. As such, unit ”A” represents a
potential candidate in the competition for corporate
resource competition.
• Investments in unit ”B” must take into account the fact
that although it has a strong market position, its market
share is quite small. strategy that may contribute to the
increase of market share must be developed, thus
accounting for the future necessary investment.
 Contd……

• Unit ”C” has a small market share, and it holds a

competitively weak position and it entered a small
market whose development is underway. For the unit ”C”
a strategy residing in the elimination from the market
must be applied, so that the investment for the first two
units may be favored.
• Unit ”D” is characterized by a strong competitive position
on the market and it holds a large market share. In this
case, it is recommended that investments be made with
a view to maintaining the current position on the market.
On the lung run, it will become a “Cash Cow”.
 Contd……

• Unit ”E” together with unit ”F” are included into the “Cash
Cow” category and they should be capitalized on
because of great cash flows that they generate.
• Unit ”G” is included into the “Dogs” category and the
management thereof is recommended, with a view to
generating short-term cash flows in as much as it is
possible. Nevertheless, on the long term, the strategy of
limitation or liquidation on the market must be selected.
 Advantages of Hofer’s Matrices

• It provides an image regarding the manner of distribution

of the businesses undertaken by a company during
specific stages of a life cycle.
• The company may predict how the present portfolio will
develop in the future.
• It manages to divert the management’s attention from
the corporate level and focus on potential strategies
specific to the strategic business unit.
 Disadvantages

• Identification of Key Success Factors.

• Weight assignment to different Key Success
Factors can be difficult.
• Managers tend to underestimate their
weaknesses and overestimate their strengths.
Directional Policy
Matrix
 Characterize Your Enterprise

The expert system will position your enterprise on the chart

based upon your description of:
– Supplier Bargaining Power
– Threat of Substitutes
– Threat of New Entrants
– Competitive Rivalry
– Buyer Bargaining Power
– Product Quality
– Product Value
– Relative Market Share
– Reputation
– Customer Loyalty
– Staying Power
– Experience
• You can trace through the supporting analysis and its
conclusions, adjusting your input until you are satisfied
your description accurately characterizes your
enterprise.
 Analysis of Your Enterprise Position
Invest Grow Harvest Divest
 High Market  High Market  Low Market  Low Market
Attractiveness Attractiveness Attractiveness Attractiveness
 High Business  Low Business  High Business  Low Business
Strengths Strengths Strengths Strengths
 This is the  You are in an  In this quadrant  Think carefully about
ideal quadrant. uncomfortable you have high what you are doing to
 Your strengths quadrant. strengths in a be in this quadrant.
are directed at a  The market potential market that has  The market is not
highly is attractive but you lost its particularly attractive
attractive do not have the attractiveness in and your business
market. business strengths terms of future strengths are below
 Invest your necessary for being potential. average here.
best resources really successful.  It is still good for  Keep in this segment
in those parts  The options facing near term profits, only if it supports a
of your you are either to take so maintain the more profitable part
business which what you can while it position for as of your business (for
are in this is still possible or to long as possible. instance, if this
quadrant. invest in building a segment completes a
better competitive product line range) or
position. if it absorbs some of
 You must be selective the overhead costs of
in your efforts here, a more profitable
as this segment will segment.
cost you to invest in
every aspect of the
business.
 Shell Directional Policy
Matrix
• Another refinement upon the Boston Matrix
• Along the horizontal axis are prospects for
sector profitability, and along the vertical axis is
a company's competitive capability
• The location of a Strategic Business Unit (SBU)
in any cell of the matrix implies different strategic
decisions
• However decisions often span options and in
practice the zones are an irregular shape and do
not tend to be accommodated by box shapes.
Instead they blend into each other.
 Each of the zones is described as follows:

o Leader - Major resources are focused upon the SBU

o Try Harder - Could be vulnerable over a longer period of time,
but fine for now
o Double or Quit - Gamble on potential major SBU's for the future
o Growth - Grow the market by focusing just enough resources
here
o Custodial - Just like a cash cow, milk it and do not commit any
more resources
o Cash Generator - Even more like a cash cow, milk here for
expansion elsewhere
o Phased Withdrawal - Move cash to SBU's with greater potential
o Divest - Liquidate or move these assets on a fast as you can
 Best Use
The DPM shows
• Markets categorized based on a scale of attractiveness
to the organisation
• The organisation’s relative strengths in each of these
markets
• The relative importance of each market
Brief History
• This Directional Policy Matrix uses the GE multi-factor
approach using the same fundamental ideas as the
Boston Consulting Group Matrix.
• It provides for Market attractiveness on the y-axis and
Relative Strength on the x-axis. The matrix is traditionally
a four-box matrix but can also be a nine-box matrix.
Model Use and Applicability
 Model Weaknesses

• Quadrant names
McDonald initially labeled the different quadrants as
those in the Boston Consulting Group matrix and
received a lot of criticism from this. These labels created
confusion. More recently he merely refers to these
positions but does not label the quadrants as they were
in the past.
• Products-for-markets
This concept is confusing to many people and limits the
analysis.
 Strategic Emphasis
• The McDonald DPM like other models of portfolio analysis attempts
to define a firm’s strategic position and strategy alternatives. The
accepted level at which a firm can be analysed using the DPM is
that of strategic business unit.
• Professor Malcolm McDonald of the Cranfield School of
Management developed the matrix to define Business Strengths in
terms of Critical Success Factors (CSF’s). A critical success factor
represents something that a company must do right in the eyes of
the customer.
• For the first time the business strengths are looked at from the
customer’s point of view and are therefore more objective. In the
past defining the factors was a very subjective exercise from the
company’s point of view. The Business Strengths in this matrix are
relative strengths (relative to the best in the market)
• The DPM can be used at any level in the organisation and for any
kind of SBU.
 Summary
• Was developed to overcome the limitations seen in the BCG matrix and to
simplify the Shell directional policy and GE matrices, which both illustrated a
nine box matrix.
• This matrix provides for Market attractiveness on the y-axis and Relative
Business Strength on the x-axis and is made up of four quadrants (but nine
quadrants can also be used).
• Business Strengths are defined in terms of Critical Success Factors
(CSF’s).
• Factors on both matrices are weighted and scored. Relative strength on the
x-axis is included in the mathematical calculation of the co-ordinates.
• The circles are placed in any one of five positions on the matrix each with a
specific generic strategy or guideline for management. These are
– Invest for growth
– Maintain market position, manage for earnings
– Selective
– Manage for cash
– Opportunistic development
• This matrix is a good one to use if the organisation wishes to assess the
competitors relative to themselves as it allows for a good analysis of the
strengths and weaknesses of the competitors from the customers point of
view.
 Presentation
on
General Electric (GE) Matrix
Roadmap For The Presentation

ROADMAP
STRATEGIC PLANNING

BCG & GE MATRIX

ABOUT GE

CLASSIFICATION

STRATEGIES

BCG v/s GE

CASE STUDY
 Strategic Planning
 It is the management task
concerned with the growth
and future of business
enterprise.

 It provides the route map for

the firm and helps to take
decision in the future with a
greater awareness
 BCG & GE Matrix
Relative Position
(Market Share) Business Strength

Market Attractiveness
Market Growth
 About GE Matrix

 Developed by McKinsey & Company in

1970’s.
 GE is a model to perform business
portfolio analysis on the SBU’s.
 GE is rated in terms of ‘Market
Attractiveness & Business Strength’
 It is an Enlarged & Sophisticated version
of BCG.
 Classification
Business Strength
Strong Medium Weak
5.00
High
Market Attractiveness

3.67
Medium

2.33
Low

5.00 3.67 2.33 1.00

 Market Attractiveness

 Annual market growth rate

 Overall market size
 Historical profit margin
 Current size of market
 Market structure
 Market rivalry
 Demand variability
 Global opportunities
 Business Strength
 Current market share
 Brand image
 Brand equity
 Production capacity
 Corporate image
 Profit margins relative to
competitors
 R & D performance
 Managerial personal
 Promotional effectiveness
 Strategies
 Protect Position
• Invest to grow
• Effort on maintaining strength

 Invest to Build
• Challenge for leadership
• Build selectively on strength

 Build Selectively
• Invest in most attractive segment
• Build up ability to counter competition
• Emphasize profitability by raising productivity
 Strategies
 Protect & Refocus
• Manage for current earning
• Defend strength
 Selectivity for Earning
• Protect existing program
• Investments in profitable segments
 Build Selectively
• Specialize around limited strength
• Seek ways to overcome weaknesses
• Withdraw if indication of sustainable
growth are lacking
 Strategies
 Limited Expansion for Harvest
• Look for ways to expand
without high risk
 Manage for Earnings
• Protect position in profitable segment
• Upgrade product line
• Minimize investment
 Harvest
• Sell at time that will maximize cash value
• Cut fixed costs and avoid investment
meanwhile
 Factors Underlying Market
Attractiveness
Factors Weight Rating Value =
(1 –5) (Weight * Rating)
Resource availability 0.20 2.5 0.5
Overall market size 0.15 3 0.45

Annual Market growth rate 0.20 3 0.6

Profitability 0.15 3 0.45

Competitive intensity 0.10 2.5 0.25

Technological requirements 0.20 2.5 0.5

Total 1.0 2.75

 Factors Underlying
Market Strength
Factors Weight Rating Value =
(1 –5) (Weight * Rating)

Market share 0.15 5 0.75

New product development 0.10 3.5 0.35

Brand Image 0.10 4 0.40

Sales force 0.15 3 0.45

Pricing 0.15 3 0.45

Distribution capacity 0.10 4.5 0.45

Product quality 0.10 4.5 0.45

R&D Performance 0.15 3 0.45

Total 1.0 3.75

 Classification
Business Strength
Strong Medium Weak
5.00
High
Market Attractiveness

3.67
Medium

2.33
Low

5.00 3.67 2.33 1.00

Case Study
 Overview
High Business Strengths Low

High
Market Attractiveness

Attractive

Moderate
Attractive

Unattractive

Low
 Case Study of TATA

 TATA

• IT (Information Technology) : TCS

• Consumer Durable : Automobiles,
Titan etc.
•Textiles : Tata Fabrics, West Sides etc
 GE Matrix For TATA
High Business Strengths Low
High
IT
Market Attractiveness

Consumer
Durables

Low Textiles
 BCG v/s GE
BCG GE
Market
Market Growth
Attractiveness
Market share Market strength

4 cell 9 cell
Multi Business
Multi Products
Units
Primary tools Secondary tools
 Strategy Analysis & Choice
Grand Strategy Matrix

• Popular tool for formulating alternative

strategies
• Based on two evaluative dimensions
 Competitiveposition
 Market growth
 Grand Strategy Matrix
RAPID MARKET GROWTH
Quadrant II Quadrant I
• Market development • Market development
• Market penetration • Market penetration
• Product development • Product development
• Horizontal integration • Forward integration
• Divestiture • Backward integration
• Liquidation • Horizontal integration
WEAK • Concentric diversification STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV POSITION
• Retrenchment • Concentric diversification
• Concentric diversification • Horizontal diversification
• Horizontal diversification • Conglomerate
• Conglomerate diversification
diversification • Joint ventures
• Liquidation

SLOW MARKET GROWTH

 Strategy Analysis & Choice
Grand Strategy Matrix

• Quadrant II
 Evaluate present approach seriously
 How to change to improve competitiveness
 Rapid market growth requires intensive strategy
 Strategy Analysis & Choice
Grand Strategy Matrix

• Quadrant III
 Compete in slow-growth industries
 Weak competitive position
 Drastic changes quickly
 Cost and asset reduction indicated (retrenchment)
 Strategy Analysis & Choice

Grand Strategy Matrix

• Quadrant IV
 Strong competitive position
 Slow-growth industry
 Diversification indicated to more promising growth
areas
 Strategy Analysis & Choice
Quantitative Strategic Planning Matrix
(QSPM)
• Comprises Stage 3 of the analytical
framework
• Analytical technique designed to determine
the relative attractiveness of feasible
alternative actions.
• Uses input from Stage 1 and Stage 2
 Strategy Analysis & Choice

Quantitative Strategic Planning Matrix

(QSPM)
• Tool for objective evaluation of alternative
strategies
• Based on identified external and internal
crucial success factors
• Requires good intuitive judgment
 QSPM Strategic Alternatives

Key External Factors Weight Strategy 1 Strategy 2 Strategy 3

Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems
 Strategy Analysis & Choice

QSPM

• List the firm’s key external opportunities

& threats; list the firm’s key internal
strengths and weaknesses
• Assign weights to each external and
internal critical success factor
 Strategy Analysis & Choice
QSPM

• Examine the Stage 2 (matching)

matrices and identify alternative
strategies that the organization should
consider implementing
• Determine the Attractiveness Scores
(AS)
 Strategy Analysis & Choice

QSPM

• Compute the total Attractiveness

Scores
• Compute the Sum Total Attractiveness
Score
 Strategy Analysis & Choice
QSPM
Positives:
• Sets of strategies examined
simultaneously or sequentially
• Requires the integration of pertinent
external and internal factors in the
decision-making process
 Strategy Analysis & Choice
QSPM
Limitations:
• Requires intuitive judgments and
educated assumptions
• Only as good as the prerequisite
inputs
 Key Terms & Concepts

• Aggressive quadrant • Competitive quadrant

• Attractiveness Scores • Conservative quadrant
(AS) • Culture
• Board of Directors • Decision stage
• Boston Consulting • Defensive quadrant
Group (BCG) Matrix • Directional vector
• Business portfolio
• Dogs
• Cash cows
• Environmental Stability
• Champions (ES)
• Competitive Advantage • Financial Strength (FS)
(CA)
 Key Terms & Concepts
• Grand Strategy Matrix • Question marks
• Halo error • Relative market share
• Industry Strength (IS) position
• Input stage • SO strategies
• Internal-External (IE) • ST strategies
Matrix
• Stars
• Long-term objectives
• Strategic Position and
• Matching
Action Evaluation
• Matching stage
(SPACE) Matrix
• Quantitative Strategic
Planning Matrix • Strategy-formulation
(QSPM) framework
 Key Terms & Concepts

• Sum total attractiveness • Total Attractiveness

scores Scores (TAS)
• Threats-Opportunities- • WO strategies
Weaknesses-Strengths • WT strategies
(TOWS) Matrix
4.How valuable a low-cost leader's cost advantage is depends on
A. Whether it is easy or inexpensive for rivals to copy the low-cost
leader's methods or otherwise match its low costs
B. How easy it is for the low-cost leader to gain the biggest market
share
C. The aggressiveness with which the low-cost leader pursues
converting the cost advantage into the absolute lowest possible
costs
Answer:a
6.A low-cost leader can translate its low-cost advantage over
rivals into superior profit performance by
A. Cutting its price to levels significantly below the prices of
rivals
B. Either using its low-cost edge to under price competitors and
attract price sensitive buyers in large enough numbers to
increase total profits or refraining from price-cutting and using
the low-cost advantage to earn a bigger profit margin on each
unit sold
C. Going all out to use its cost advantage to capture a dominant
share of the market
Answer:b
7.The major avenues for achieving a cost advantage over rivals
include
A. Revamping the firm's value chain to eliminate or bypass some
cost-producing activities and/or out-managing rivals in the
efficiency with which value chain activities are performed
B. Having a management team that is highly skilled in cutting
costs
C. Being a first-mover in adopting the latest state-of-the-art
technologies, especially those relating to low-cost manufacture
Answer:a
8.A competitive strategy of striving to be the low-cost provider is
particularly attractive when
A. Buyers are not very brand-conscious
B. Most rivals are trying to be best-cost providers
C. There are many ways to achieve product differentiation that
have value to buyers
D. Buyers are large and have significant power to bargain down
prices; buyers use the product in much the same ways; and
buyers have low switching costs
Answer:d
 INTERNATIONAL STRATEGIC
ALLIANCES
A strategic alliance is an agreement between two or more parties to pursue a
set of agreed upon objectives needed while remaining independent
organizations. This form of cooperation lies between mergers and acquisitions
and organic growth. Strategic alliances occurs when two or more organizations
join together to pursue mutual benefits.

Partners may provide the strategic alliance with resources such as products,
distribution channels, manufacturing capability, project funding, capital
equipment, knowledge, expertise, or intellectual property. The alliance is a
cooperation or collaboration which aims for a synergy where each partner
hopes that the benefits from the alliance will be greater than those from
individual efforts. The alliance often involves technology transfer (access to
knowledge and expertise), economic specialization,[1] shared expenses and
shared risk.
International Strategic Alliances

• Why use alliances?

• Options for creating partnerships
• How to make alliances work
Basic Approach to Globalization

• Create a competitive advantage

• Establish geographic scope
• Select global strategy
• Create alliances
Creating a Competitive Advantage

• Every successful strategy is rooted in the

establishment of a competitive advantage

• Most competitive advantages take the

form of either:
– Differentiation
– Low Costs
Tracking Profitability and Market Share

Profit

BMW Toyota
Mercedes Honda

Chrysler

Market Share
 Advantages of Differentiation
• Perceived uniqueness
• Better match with customer needs
• Ability to target profitable niches
• Any aspect is fair game:
– Quality, features, reliability, …
 Advantages of Size
• Costs are typically related to volume

Unit
Costs

Market Share
 Extending Competitive Advantage
to Global Markets
• Increase market share
• Increase return on investment
• Economies of scale
• Location
• Raw materials, Lower cost labor,
Key customers, Energy,
Transportation, etc.
Strategies for Global Competition
• “Global Strategies” (Honda, Sony)
– Products are standardized across national markets
– Decisions regarding business-level strategies are
centralized in the home office
– Strategic business units (SBU) are assumed to be
interdependent
– Emphasizes economies of scale
– Often lacks responsiveness to local markets
 Strategies for Global
Competition
• “Multi domestic” Strategies (Philips)
– Strategy and operating decisions are
decentralized to strategic business units in each
country
– Products and services are tailored to local markets
– Business units in one country are independent of
each other
– Assumes markets differ by country or regions
– Focus on competition in each market
– Prominent strategy among European firms due to
broad variety of cultures and markets in Europe
 International Trends
• Liability of foreignness
– Legitimate concerns about the relative
attractiveness of global strategies
– Global strategies not as prevalent as
once thought
– Difficulty in implementing global
strategies
• Regionalization
– Focusing on particular region(s) rather
than on global markets
– Better understanding of the cultures,
legal and social norms
 Entry Modes

Equity Non-Equity

Wholly Owned
Joint Venture Export Contractual
Subsidiary

Minority EJV Greenfield Direct Licensing

Collaboration w/o
Majority EJV Acquisition Indirect
Equity

R&D
Cash Neutral EJV
Contracts
 Selecting an Entry Mode

• Exporting High Cost, Low Control

• Licensing Low cost, low risk, little control, low

returns

• Acquisition Quick access, high cost, complex

deals, problems of integration

• New subsidiary Complex, costly, risky, time consuming,

maximum control, high potential

• Strategic Alliances ?
 Strategic Alliance
• A primary type of cooperative strategy in
which firms combine some of their
resources and capabilities to create a
mutual competitive advantage
– Involves the exchange and sharing of
resources and capabilities to co-develop or
distribute goods and services
– Requires cooperative behavior from all
partners
 Strategic
Alliances

Equity Non-Equity
Exchange Exchange

Collaboration
Joint Venture
without Equity

Cash-Neutral
One-Way
Exchange of
Equity Purchase Assets

Mutual
Co-Branding
Equity Purchase
Why use Alliances?
Profitability and Market Share Example

Profit

BMW
MercedeXs Toyota
Honda

Chrysler

Market Share
 Problems in Alliances
• Partner may act opportunistically
• Partner may misrepresent competencies
brought to the partnership
• Partner fails to make committed
resources and capabilities available to
other partner
• Partner may make investments that are
specific to the alliance while the other
partner does not
 Conclusion

There is always a better strategy than

the one you have; you just haven't
thought of it yet
– Sir Brian Pitman, former CEO of Lloyds TSB,
Harvard Business Review, April 2003
Thank You
Please forward your query

To: surajamity@yahoo.com