Question based on Anna University SM Solved Assignment and other course
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Formulating a consistent organizational strategy in large, diversified companies is very complicated, because a number of different business level strategies need to be coordinated to achieve overall organizational objectives. An organization may simultaneously seek growth through the acquisition of new businesses, employ a stability strategy for some of its existing businesses, and divest itself of other businesses. Business portfolio models are designed to help managers deal with this problem. The portfolio models help a company understand and consider changes in its portfolio of businesses, and also about allocation of resources among the different business elements. The two primary models are the BCG Growth-Share Matrix and the GE Business Screen. These models consider and display on a two-dimensional graph each major SBU (strategic business unit) in terms of some measure of its industry attractiveness and its relative competitive strength.
1 BCG’s Growth – Share Matrix
The Boston Consulting Group, a leading management consulting firm, developed and popularized a strategy formulation approach called the Growth – Share matrix. The basic idea underlying this approach is that a firm should have a balanced portfolio of businesses such that some generate more cash than they use and can thus support other businesses that need cash to develop and become profitable. The role of each business is determined on the basis of two factors: the growth rate of its market and the share of that market that it enjoys.
The vertical axis indicates the market growth rate and it ranges from -20 to + 20. It represents the annual growth percentage of the market (current or forecasted ) in which the business operates. The horizontal axis indicates market share dominance or relative marker share. It is computed by dividing the firm’s market share (in units) by the market share of the largest competitor. High and low growth combined with high and low market share can be shown with help of four cells. These cells represent particular types of businesses, each of which has a particular role to play in the overall business portfolio. These cells are :
- Question Marks (businesses that operate in a high-growth market but have low relative market share). Most businesses start off as question marks, in that they enter a high – growth market in which there is already a market leader. A question mark generally requires the infusion of a lot of funds. It has to keep adding plant, equipment, and personnel to keep up with the fast growing market, and if it wants to overtake the leader. The term question mark is well chosen, because the organization has to think hard about whether to keep investing funds in the business or to get out.
- Stars (businesses that operate in a high-growth market and have high relative market share). They are question mark businesses that have become successful. Stars are often cash using rather than cash generating, though they are usually profitable over time. The organization has to spend a great deal of money keeping up with the market’s rate of growth and fighting off competitors’ attacks.
- Cash Cows (businesses that operate in a low growth market but have high relative market share). Businesses in markets whose annual growth rate is less than 10 percent but that still have the largest relative market share are called cash cows. They produce a lot of cash for the organizations. The organization need not invest much in such businesses because the market’s growth rate is low. Being the market leader, the business enjoys economies of scale and higher profit margins. The organization uses its cash-cow businesses to support its other businesses.
- Dogs (businesses that operate in a low growth market and have low relative market share). They typically generate low profits or losses, although they may bring in some cash. Such businesses frequently consume more management time than they are worth and need to be phased out. However, an organization may have good reasons to hold onto a dog, such as an expected turnaround in the market growth rate or a new chance at market leadership.
After each of an organization’s businesses is plotted on the growth – share matrix, the next step isto evaluate whether the portfolio is healthy and well balanced. A balanced portfolio has a number of stars and cash cows and no too many questions marks or dogs. This balance is important because the organization needs cash not only to maintain existing businesses but also to develop new businesses. Depending on the position of each business, four basic strategies can be formulated:
- Build Market Share: This strategy is appropriate for question marks that must increase their share in order to become stars. For some businesses, short-term profits may have to be forgone to gain market share and future long-term profits.
- Hold Market Share: This strategy is appropriate for cash cows with strong share positions. The cash generated by mature cash cows is critical for supporting other businesses and financing innovations. However, the cost of building share for cash cows is likely to be too high to be a profitable strategy.
- Harvest: Harvesting involves milking as much short-term cash from a business as possible, even allowing market share to decline if necessary. Weak cash cows that do not appear to have a promising future are candidates for harvesting, as are question marks and dogs.
- Divest: Divesting involves selling or liquidating a business because the resources devoted to it can be invested more profitably in other businesses. This strategy is appropriate for those dogs and question marks that are not worth investing in to improve their positions.
2. GE Multi-factor Port folio matrix
The process for developing this matrix is as follows:
- Each of an organization’s businesses is plotted in the matrix on two dimensions, industry attractiveness and business strength. Each of these two major dimensions is a composite measure of a variety of factors. To use this approach, an organization must determine what factors are most critical for defining industry attractiveness and business strength.
The factors associated with industry attractiveness are: market size and growth rate, industry profit margin, competitive intensity, seasonality, cyclicality, economies of scale, technology and social environment, environmental and legal impacts.
The factors associated with business strength are: relative market share, profit margin, ability to compete on price and quality, knowledge of customers and market, competitive strengths and weaknesses, technological capabilities, and calibre of management.
- Next step is to weight each variable on the basis of its perceived importance relative to the other factors (hence the total of the weight must be 1.0). On a scale of 1 to 5, it has to be indicated that how low or high the business scores are on that factor.
- Businesses falling in the cells that form a diagonal from lower left to upper right are medium strength businesses that should be invested in only selectively. Businesses in the cells above and to the left of this diagonal are the strongest; they are the ones for which the company should employ an invest and grow strategy. Businesses in the cells below and to the right of the diagonal are low in overall strength and are serious candidates for a harvest or divest strategy.
This approach has several advantages over the growth-share matrix.
- It provides a mechanism for including a host of relevant variables in the process of formulating strategy.
- The two dimensions of industry attractiveness and business strength are good criteria for rating potential business success.
- The approach forces managers to be specific about their evaluations of the impact of particular variables on overall business success.
