Corporate

Strategy

Portfolio Approach
0 Resource allocation in multi-business firms

(business portfolios)
0 Which business should be given more
attention??
0 Are able to add new business or product
lines? How??
0 Important during diversification strategies--during investments
0 A strategy formulation technique
0 Two important tools BCG Matrix and GE
Matrix (McKinsey/General Electric)
0 Balancing Portfolio---(i) Cashflow, (ii) Growth,
(iii) Profitability, and (iv) risk

BCG Matrix

STAR
0 HIGH GROWTH = HIGH MARKET SHARE
0 Large market share in a fast growing industry
0 Needs high investment to maintain the lead
0 Net cashflow generally modest, but can

generate very high cash flow (based on

investment)
0 Attractive SBU as industry is growing------so
management can make additional
investment for additional return
0 Star become cash cow when industry will be
mature (growth rate falls)
EX. ITC Hotels, Agribusiness, papers (ITC-IBD)

Cash Cow
0 Low Market Growth + High Market Share
0 Generate high cash flow (than they

consume)but future growth is lower as the

industry is slow growing>>>> high return on
assets
0 Strategy>>>> make low investment to
generate cash which should be invested in
other SBU
0 Ex.. ITC Cigarette

Question Mark
0 Low Market Share + High Growth rate
0 Require huge amount of cash to maintain

/gain market share

0 >>>analyze if the SBU can be viable..
0 No specific strategy, but if viable ..follow
expansion strategy, otherwise follow
retrenchment strategy
0 Provides new product and service.. So most
firms start SBU as question mark
0 New FMCG products of ITC

Dogs
0 Small market share + Low Growth
0 Neither generate good cash nor require high

investment
0 Generally follow retrenchment strategy
0 Low market share because of high costs, poor
quality, ineffective marketing, etc.
0 Firms should avoid Dogs

BCG Matrix
Strategy
Relative Market Share
High

High
Market
Growth
Rate
Low

Low

Stars

Question Marks

(High Investment, Generate

Good Liquidity,
Good Future)

(bring nothing, need

more cash for market
share)

Cash Cows

Dogs

(realize good liquidity,

finance other SBU, Future is
stagnant)

(difficult to survive,
think of
decommissioning)

BCG Matrix with Product Life

Cycle

Product Life Cycle

GE Matrix
0 Industry Attractiveness-Business Strength Matrix

Derived from BCG Matrix with modifications

0 Industry attractiveness replaces market growth.
Industry Attractiveness includes a broader range of
factors other than only the market growth rate that can
determine the attractiveness of an industry / market.
0 Competitive strength replaces market share to assess
the competitive position of each SBU. Competitive
strength includes a broader range offactors other than
only the market .
0 GE Matrix is a 3X3 matrix, unlike the 2X2 BCG Matrix

Factors of Industry Attractiveness and

Business Strength
Industry Attractiveness

Business Strength

Nature of competitive revelry

Cots Position

Bargaining Power of suppliers

Level of Differentiation

Threat of substitutes/new
entrants

Response Time

Economic Factors

Financial Strength

Financial Norms

Human Assets

Socio-political Considerations

Public Approval

GE Matrix
Business Strength
High

Industry Attractiveness

Mediu
m

Low

Strong

Average

Weak

Premium

Selective

Protect/refocus

Invest for Growth

Invest for growth

Provide maximum
investment
Diversity worldwide
Consolidate position
Accept moderate near term
profit
Seek to dominant

Invest heavily in selected

segment
Share ceiling
Seek attractive new
segment to apply
strength

Selectively invest
for earning
Defend strength and
refocus attractiveness
Monitor for harvest or
divestment timing
Consider acquisition

Challenge

Prime

Restructure

Invest for growth

Selectively invest for

earning

Harvest for divest

Build selectively on
strength
Define implication of
leadership challenge
Avoid Vulnerability-fill
weakness

Segment market
Make contingency plan
for vulnerability

Opportunistic

Opportunistic

Selectively invest for

earning

Preserve for harvest

Ride market and maintain

overall position
Seek niches, specialization
Seek opportunities to

Act to preserve or boost

cash flow
Seek opportunistic sale or
rationalize to increase
strength

Provide no essential
commitment
Position for
divestment
Shift to more
attractive segment

Harvest or
Divest
Exist from market or
prune product lines
Determine timing to
maximize present
value

BCGs Strategic Environment

Matrix
Size of Advantage

Source of Advantage

Small
Man
y

Few

Fragmented Business
Typically involves differentiated
products with low brand loyalty, easily
replicated technology, minimum scale
economics
ActionSkill in focused market
segment, typically geographic, ability
to respond quickly to changes, low
cost.
Example: Real estate

Stalemate Business
Very competitive situation
Action - skills in operational efficiency,
low overhead, and cost management
Example: Paper

Big
Specialization Business
Action differentiation- product
designing, branding, innovation, first
mover, scale
Example: Pharmaceuticals, luxury
cars

Volume Business
Results from scale economics
Example: supermarkets,
Microprocessors

Limitations of Portfolio Approach

0 Silence on how value being created across

business units-----only relationship between

them is cash
0 Address each business as standalone entity,
ignores common core competency and
internal synergies
0 Accurate measurement of matrix
classification is not very easy
0 Relates between market share and
profitability what about experience
curve?? Experience curve varies across
industries and market segment
0 Portfolio approach portray notions that firms
needed to be self-sufficient in capital.. What
about if firm raise capital from capital

Synergy Approach
0

Each core competency should provide a

relevant competitive advantage to the
intended businesses
0 Businesses in the portfolio should be
related in ways that make the companys
core competencies beneficial
Example: is the RD competency applicable to
all SBU???

Multi-Business Synergy
Three Major Forms

The Parenting Framework

0

The parenting framework

perspective sees multi-business
companies as creating value by
influencingor parentingtheir
businesses
The best parent companies create
more value than any of their rivals do
or would if they owned the same
businesses
To add value, a parent must improve
its businesses
9-17

Parenting Advantage

10 Sources of Parenting Opportunities

0
0
0
0
0
0
0
0
0
0

Size & Age

Management
Business Definition
Predictable Errors
Linkages
Common capabilities
Specialized expertise
External relations
Major decisions
Major changes

The Patching Approach

Patching is the process by which corporate

executives routinely remap businesses to

match rapidly changing market opportunities
It can take the form of adding, splitting,
transferring, exiting, or combining chunks of
businesses
Patching is not seen as critical in stable,
unchanging markets
When markets are turbulent and rapidly
changing, patching is seen as critical to the
creation of economic value in a
multibusiness company

9-20

Proponents of
Patching
View traditional corporate strategy as creating

defensible strategic positions for business units by

acquiring or building valuable assets, wisely allocating
resources to them, and weaving synergies among
them
In volatile markets, they argue, this traditional
approach results in business units with strategies that
are quickly outdated and competitive advantages
rarely sustained beyond a few years
As a result, strategic analysis should center on
strategic processes more than strategic
positioning
In these volatile markets, patchers strategic analysis
focuses on making quick, small, frequent changes in
parts of businesses and organizational processes

9-21