The Organization and Its Environment 2

Business Policy

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Please note that these slides are not intended as a substitute

to reading the recommended text for this course.

Why carry out a portfolio analysis – benefits and limitations

BCG Matrix

GE Nine cell Planning Grid

Rationale for strategic cost analysis

Value chain

Chapters 3 & 7 : Johnson, Scholes & Whittington

Objectives

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A company can be visualised as a portfolio of products (typically reside within a SBU) with different characteristics that determine their market positions.

– These characteristics are related to market variables and not to the physical attributes

Analytical tools are needed for classifying businesses by profit potential, for decisions on whether to build, maintain, harvest, or

divest individual SBUs.

Portfolio Models

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Once classified, four alternative objectives can be pursued for each SBU:

– Build: increase market share.

– Maintain/hold: preserve market share.

– Harvest: increase short-term cash flow.

– Divest: sell or liquidate.

SBU Decisions

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Various Portfolios / Strategic Business Units (SBUs)

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Boston Consulting Group (BCG)

Analyzes business opportunities according to growth rate and market share

Product strength in the market

measure of

market

attractiveness Dominant position;

growing industry

Poor position;

growing industry

Dominant position;

low-growth industry

Poor position; low-

growth industry

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Stars - Stars are high growth products competing in markets where they are relatively strong compared with the competition

– Often they need heavy investment to sustain their growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows.

Portfolio Models - BCG

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Cash Cows - Cash cows are low-growth products with a relatively high market share. These are mature, successful products with relatively little need for investment – Diet Coke / Lynx / Pampers

– They need to be managed for continued profit -

Question marks - Question marks are products with low market share but which operate in higher growth markets. This suggests that they have potential, but may require substantial investment in order to grow market share at the expense of more powerful competitors – Cherry Coke / Angry Birds

– Management have to think hard about "question marks" - which ones should they invest in? Which ones should they allow to fail or shrink?

Portfolio Models - BCG

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Dogs - Unsurprisingly, the term "dogs" refers to products that have low relative share in unattractive, low-growth markets – car line ends

– Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance.

Portfolio Models - BCG

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BCG Example

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Cash Flows Across Businesses in BCG Portfolio Model

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Applying the BCG Matrix

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Resource Allocation: The GE Nine-Cell Matrix

Bu

sin

es

s’s

co

mp

eti

tive

po

sit

ion

/ s

tre

ng

hts

High

Low

Medium

Industry attractiveness

High Medium Low

1 1 2

1 2 3

2 3 3

1 Invest/grow

2 Selective investment/ maintain position

3 Harvest/divest 12

Factors to assess competitive position (measures how strong, in terms of competition, a particular business unit is against its rivals) – Relative share – Customer loyalty – Margins – Distribution – Technology – Marketing skills – Patents

Factors to assess industry attractiveness (Industry attractiveness indicates how hard or easy it will be for a company to compete in the market and earn profits) – Size – Growth – Competitive intensity – Price levels – Profitability – Technological

sophistication – Government regulations

A tool for allocating resources in diversifies companies

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Value Chain Analysis

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Value Chain – Primary Activities

Operations – Plant layout

– Production control system

– Level of automation in production processes

Marketing / Sales

– Sales promotions and

advertising

– Alternative distribution

channels

– Brand loyalty of

customers

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Inbound Logistics – Materials control system

– Inventory control system

– Raw material handling and warehousing

Outbound Logistics

–Timeliness and efficiency

of finished products delivery

–Warehousing of finished

products

Service –Handling of customer

complaints

–Warranty and guarantee

policies

Value Chain – Support Activities

Human Resources

– An organization would

manage recruitment and

selection, training and

development, and

rewards and

remuneration.

Procurement

– Responsible for all

purchasing of goods,

services and materials.

– The aim is to secure the

lowest possible price for

purchases of the highest

possible quality 16

Firm Infrastructure – It includes the

Management Information System (MIS), and other mechanisms for planning and control such as the accounting department.

Technology Development –Companies need to

innovate to reduce costs and

to protect and sustain

competitive advantage. This

could include Internet

marketing activities, lean

manufacturing

Margin’ implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain.

Organization needs to be able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.

Margin

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Inbound logistics – Sourcing coffee from diverse coffee beans producers with whom they have great relationships and built up efficient supply chain management system.

Operations – They have operation in 60 countries with their stores being modelled on company operated stores and licensed stores.

Outbound logistics – Most of its product mix are sold in-store and some through large box retailers. Payment around source through point of sale, prepaid Starbucks Cards and mobile payments.

Marketing and Sales – Traditionally, investment in marketing activities have not be significant and relied mainly on the growing reputation of premium quality product mix and superior customer services to give the ‘Starbucks Experience’ to drive customers to their stores and products.

Service - Starbucks has a reputation for providing supreme level of customer services to their consumers.

Starbucks Value Chain – Primary Activities

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Firm Infrastructure. They have well designed, aesthetically pleasing stores. They have efficient level of finance, accounting and legal departments to support the firm’s infrastructure.

Human Resource Management – Great benefits, employee empowerment and amazing corporate culture makes Starbucks drive efficient management of human capital.

Technology development – Investments in innovative technologies like the well like mobile app.

Procurement – Starbucks procures its products from a diverse group of supplier and has fixed contracts with some of the suppliers.

Starbucks Value Chain – Support Activities

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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.

Problems of getting data on market share and market growth.

High market share does not mean profits all the time.

Business with low market share can be profitable too.

Limitation of the BCG Matrix

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It can get quite complicated and cumbersome with the increase in businesses

Though industry attractiveness and business strength appear to be objective, they are in reality subjective judgements that may vary from one person to another

It cannot effectively depict the position of new business units in developing industry

Limitations of the GE 9 Cell Matrix

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