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UnitUnit 33:: StrategyStrategy FormulationFormulation
UnitUnit 33::
StrategyStrategy FormulationFormulation
WhatWhat IsIs Strategy?Strategy? The term strategy is derived from a Greek word ‘Strategos’ which means
WhatWhat IsIs Strategy?Strategy?
The term strategy is derived from a Greek word
‘Strategos’ which means general ship – the actual
direction of military force, as distinct from the policy
governing its deployment. Strategy is a broad game
plant to achieve objectives. It provides direction and scope
to the organization over the long term. Literally the
word strategy means the art of the general.
StrategyStrategy:: Strategy can be defined as the management action plan for achieving the chosen objectives.
StrategyStrategy::
Strategy can be defined as the management action
plan for achieving the chosen objectives. It commits
the organization to specific products, market,
resources and technology. It specifies how the
organization will be operated, run & what
entrepreneur, competitive & functional area approach
& action will be taken to put the organization into
the desired position.
Strategy considers both means & ends. The goals &
decisions making up an organization's strategy may be
planned ahead of time or may just evolve as a pattern
in the stream of significant decisions.
StrategyStrategy:: It determines the basic long-term goals & objectives of an enterprise and the adoption
StrategyStrategy::
It determines the basic long-term goals & objectives
of an enterprise and the adoption of courses of
action and the allocation of resources necessary for
carrying out these goals.
StrategicStrategic ManagementManagement:: Strategic management is the art and science of formulating, implementing and
StrategicStrategic ManagementManagement::
Strategic management is the art and science of
formulating, implementing and evaluating cross-
functional decisions that will enable an organization
to achieve its objectives. It is the process of specifying
the organization's objectives, developing policies and
plans to achieve these objectives, and allocating
resources to implement the policies and plans to
achieve the organization's objectives.
Strategic management, therefore, combines the
activities of the various functional areas of a business
to achieve organizational objectives.
StrategicStrategic ManagementManagement:: Strategic management is a set of decisions & actions that result in
StrategicStrategic ManagementManagement::
Strategic management is a set of decisions & actions
that result in formulating & implementation of plans
designed to achieve a company’s objectives.
Because it involves long term, future oriented,
complex decision making & requires considerable
resources, top management participation is essential.
Strategic management is a three-tier process
involving corporate, business & functional level
planners, & more specific, narrow, short-term, &
actions oriented, with lower risks but fewer
opportunities for dynamic impact.
StrategicStrategic ManagementManagement:: The purpose of strategic management is to exploit and create new and different
StrategicStrategic ManagementManagement::
The purpose of strategic management is to exploit
and create new and different opportunities for
tomorrow, long range planning, in contrast, tries to
optimize for tomorrow the trends of today.
Strategic management provides overall direction to
the enterprise and is closely related to the field of
Organization Studies. In the field of business
administration it is possible mention to the "strategic
consistency.
.
StrategicStrategic ManagementManagement:: Strategic Management is simply the art of turning strategies into action.
StrategicStrategic ManagementManagement::
Strategic Management is simply the art of turning
strategies into action.
Strategy management exploits new opportunities for
tomorrow.
Well
implementation
of
corporate
to
achieve
&
maintain competitive advantage
Strategy management refers to strategic decisions &
actions of the top management.
Strategy management is known as a process of
strategy formulation, implementation, &evaluation &
control.
DIFFERENTDIFFERENT LEVELSLEVELS OFOF STRATEGYSTRATEGY CorporateCorporate OperationalOperational BusinessBusiness
DIFFERENTDIFFERENT LEVELSLEVELS OFOF
STRATEGYSTRATEGY
CorporateCorporate
OperationalOperational
BusinessBusiness
FunctionalFunctional
DIFFERENTDIFFERENT LEVELSLEVELS OFOF STRATEGY:STRATEGY: Corporate level Business level Operational or functional
DIFFERENTDIFFERENT LEVELSLEVELS OFOF
STRATEGY:STRATEGY:
Corporate
level
Business
level
Operational or
functional level
CORPORATECORPORATE LEVEL:LEVEL:  CORPORATE STRATEGY  Corporate strategy tells us primarily about the choice of
CORPORATECORPORATE LEVEL:LEVEL:
 CORPORATE STRATEGY
 Corporate strategy tells us primarily about
the choice of direction for the firm as a
whole. In a large multi business company,
however, corporate strategy is also about
managing various product lines and business
units for maximum value. Even though each
product line or business unit has its own
competitive or cooperative strategy that it
uses to obtain its own competitive advantage
in the market place, the corporation must
coordinate these difference business
strategies so that the corporation as a whole
succeeds.
 Corporate strategy includes decision
regarding the flow of financial and other
resources to and from a company’s product
line and business units.Through a series of
coordinating devices, a company transfers
skills and capabilities developed in one unit to
other units that need such resources
TypesTypes ofof CorporateCorporate Strategies:Strategies:  A) Growth strategies expand the company’s activities.
TypesTypes ofof CorporateCorporate Strategies:Strategies:
 A) Growth strategies expand the
company’s activities.
 B) Stability strategies make no change
to the company’s current activities.
 C) Retrenchment strategies reduce
the company’s level of activities.
 D) Combination strategies is the
combination of the above three strategies
CORPORATECORPORATE LEVELLEVEL STRATERGYSTRATERGY  Growth Strategy ◦ Seeking to increase the organization’s
CORPORATECORPORATE LEVELLEVEL STRATERGYSTRATERGY
 Growth Strategy
◦ Seeking to increase the organization’s business by
expansion into new products and markets.
 Types of Growth Strategies
◦ Concentration
◦ Vertical integration
◦ Horizontal integration
◦ Diversification
GROWTHGROWTH STRATERGIES:STRATERGIES:  Concentration: Focusing on a primary line of business and increasing the
GROWTHGROWTH STRATERGIES:STRATERGIES:
 Concentration: Focusing on a primary line of
business and increasing the number of products
offered or markets served.
 Vertical Integration: 1). Backward vertical
integration.
2). Forward vertical
integration.
 Horizontal Integration: Combining operations
with another competitor in the same industry to
increase competitive strengths.
DIVERSIFCATIONDIVERSIFCATION STRATEGY:STRATEGY:  When an industry consolidates and becomes mature, most of the
DIVERSIFCATIONDIVERSIFCATION STRATEGY:STRATEGY:
 When an industry consolidates and
becomes mature, most of the surviving firms
have reached the limits of growth using
vertical and horizontal growth strategies.
Unless the competitors are able to expand
internationally into less mature markets,
they may have no choice but to diversify
into different industries if they want to
continue growing. The two basic
diversification strategies are
 Concentric
 Conglomerate
DIVERSIFCATIONDIVERSIFCATION STRATEGY:STRATEGY:  Concentric Diversification (Related) into a related industry may be
DIVERSIFCATIONDIVERSIFCATION STRATEGY:STRATEGY:
 Concentric Diversification (Related) into a
related industry may be a very appropriate
corporate strategy when a firm has a strong
competitive position but industry
attractiveness is low. By focusing on the
characteristics that have given the company its
distinctive competence, the company uses
those very strengths as its means of
diversification. The firm attempts to secure
strategic fit in a new industry where the firm’s
product knowledge, its manufacturing
capabilities, and the marketing skills it used so
effectively in the original industry can be put
to good use.
DIVERSIFCATIONDIVERSIFCATION STRATEGY:STRATEGY:  Conglomerate Diversification (Unrelated) takes place when management
DIVERSIFCATIONDIVERSIFCATION STRATEGY:STRATEGY:
 Conglomerate Diversification (Unrelated) takes
place when management realizes that the current
industry is unattractive and that the firms lacks
outstanding abilities or skills that it could easily
transfer to related products, or services in other
industries, the most likely strategy is conglomerate
diversification – diversifying into an industry
unrelated to its current one. Rather than
maintaining a common threat throughout their
organization, strategic managers who adopt this
strategy are primarily concerned with financials
considerations of cash flow or risk reductions.
Mergers,Mergers, acquisitionsacquisitions andand jointjoint venturesventures
Mergers,Mergers, acquisitionsacquisitions andand jointjoint
venturesventures
MEANINGMEANING Merger •A transaction where two firms agree to integrate their operations on a relatively
MEANINGMEANING
Merger
•A transaction where two firms agree to integrate
their operations on a relatively co-equal basis
because they have resources and capabilities that
together may create a stronger competitive
advantage.
•The combining of two or more companies,
generally by offering the stockholders of one
company securities in the acquiring company in
exchange for the surrender of their stock
•Example: Company A+ Company B= Company C.
ACQUISITIONACQUISITION  A transaction where one firms buys another firm with the intent of more
ACQUISITIONACQUISITION
 A transaction where one firms buys another
firm with the intent of more effectively using
a core competence by making the acquired
firm a subsidiary within its portfolio of
business
 It also known as a takeover or a buyout
 It is the buying of one company by another.
 In acquisition two companies are combine
together to form a new company altogether.
 Example: Company A+ Company B=
Company A.
MERGERMERGER ACQUISITIONACQUISITION COMPANY COMPANY COMPANY COMPANY A B A B Company A and Company B
MERGERMERGER
ACQUISITIONACQUISITION
COMPANY
COMPANY
COMPANY
COMPANY
A
B
A
B
Company A and Company
B together form the new
Company C
Company A buys
Company B Company A
DIFFERENCEDIFFERENCE BETWEENBETWEEN MERGERMERGER ANDAND ACQUISITIONACQUISITION:: MERGER ACQUISITION i. Merging of two
DIFFERENCEDIFFERENCE BETWEENBETWEEN MERGERMERGER ANDAND ACQUISITIONACQUISITION::
MERGER
ACQUISITION
i. Merging of two
organization in to one.
i. Buying one organization
by another.
ii. It is the mutual decision.
iii. Merger is expensive than
acquisition(higher legal
cost).
ii. It can be friendly
takeover or hostile
takeover.
iii. Acquisition is less
expensive than merger.
iv. Through merger
shareholders can increase
their net worth.
iv. Buyers cannot raise
their enough capital.
v. It is time consuming and
the company has to
maintain so much legal
issues.
v. It is faster and easier
transaction.
vi. Dilution of ownership
occurs in merger.
vi. The acquirer does not
experience the dilution
of ownership.
MERGER:WHYMERGER:WHY && WHYWHY NOTNOT WHY IS IMPORTANT PROBLEM WITH MERGER i. Increase Market Share. ii.
MERGER:WHYMERGER:WHY && WHYWHY NOTNOT
WHY IS IMPORTANT
PROBLEM WITH MERGER
i. Increase Market
Share.
ii. Economies of scale
iii. Profit for Research
and development.
i. Clash of
corporate
cultures
iv. Benefits on account
of tax shields like
carried forward
losses or unclaimed
depreciation.
ii. Increased
business
complexity
v. Reduction of
competition.
iii. Employees may
be resistant to
change
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ACQUISITION:WHYACQUISITION:WHY && WHYWHY NOTNOT WHY IS IMPORTANT PROBLEM WITH ACUIQISITION i. Increased
ACQUISITION:WHYACQUISITION:WHY && WHYWHY
NOTNOT
WHY IS IMPORTANT
PROBLEM WITH
ACUIQISITION
i. Increased market
share.
ii. Increased speed
to market
i. Inadequate
valuation of
target.
iii. Lower risk
comparing to
develop new
products.
ii. Inability to
achieve
synergy.
iv. Increased
diversification
v. Avoid excessive
competition
iii. Finance by
taking huge
debt.
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MEANINGMEANING OFOF JOINTJOINT VENTUREVENTURE Joint venture is the co operation of two or more individuals
MEANINGMEANING OFOF JOINTJOINT VENTUREVENTURE
Joint venture is the co operation of
two or more individuals or business
in which each agrees to share profit,
loss and control in a specific
enterprise.
FEATURESFEATURES OFOF JOINTJOINT VENTUREVENTURE  Joint venture is a short duration special purpose partnership. 
FEATURESFEATURES OFOF JOINTJOINT VENTUREVENTURE
 Joint venture is a short duration special purpose
partnership.
 Joint venture does not follow the accounting concept
'going concern'.
 The members of joint venture are known as co-
ventures.
 Joint venture is a temporary business activity.
 In joint venture, profits and losses are shared in
agreed proportion. If there is no agreement regarding
the distribution of profit, they will share profit equally.
 Joint venture is an agreement for polling of capital and
business abilities to be employed in some profitable
venture.
ADVANTAGESADVANTAGES  Accessing additional financial resources:  Sharing the economic risk with co- venturer 
ADVANTAGESADVANTAGES
 Accessing additional financial resources:
 Sharing the economic risk with co-
venturer
 Widening economic scope fast
 Tapping newer methods, technology, and
approach you do not have
 Building relationship with vital contacts
DISADVANTAGESDISADVANTAGES  Shared profit – Since you share assets, you also share the profit. 
DISADVANTAGESDISADVANTAGES
 Shared profit – Since you share assets,
you also share the profit.
 Diminished control over some important
matters - Operational control and
decision making are sometimes
compromised in joint ventures.
 Undesired outcome of the quality of the
product or project.
 Uncontrolled or unmonitored increase in
the operating cost
DifferenceDifference betweenbetween Merger,Merger,AcquisitionAcquisition && JointJoint VentureVenture  Merger
DifferenceDifference betweenbetween Merger,Merger,AcquisitionAcquisition &&
JointJoint VentureVenture
 Merger = two companies come together "permanently"
for mutual gains or to reduce competition
 Acquisition = one company buys another company
which may or may not be doing well
 Takeover = same like "acquisition", but generally a
company buys another company which is not doing well
or has gone bankrupt.
 Joint Venture = two companies come together
"temporarily" for mutual gains for a particular
project/job. after the project/job is completed the joint
venture is dissolved.
RetrenchmentRetrenchment StrategiesStrategies CorporateCorporate LevelLevel StrategiesStrategies
RetrenchmentRetrenchment StrategiesStrategies
CorporateCorporate LevelLevel StrategiesStrategies
RetrenchmentRetrenchment StrategiesStrategies
RetrenchmentRetrenchment StrategiesStrategies
RetrenchmentRetrenchment strategystrategy  A retrenchment grand strategy is followed when an organization aims at a
RetrenchmentRetrenchment strategystrategy
 A retrenchment grand strategy is
followed when an organization
aims at a contraction of its
activities through substantial
reduction or the elimination of
the scope of one or more of its
businesses in terms of their
respective customer groups,
customer functions, or alternative
technologies either singly or
jointly in order to improve its
overall performance.
ExamplesExamples ofof RetrenchmentRetrenchment strategystrategy  General Motors of the United States stopped
ExamplesExamples ofof RetrenchmentRetrenchment strategystrategy
 General Motors of the United
States stopped producing a
number of "makes" of
automobile. GM decided that
it needed to retrench by
concentrating on just a few
"makes." It hoped this would
help it return to profitability.
TurnaroundTurnaround strategiesstrategies  Turn around strategies derives their name from the action involved that
TurnaroundTurnaround strategiesstrategies
 Turn around strategies derives
their name from the action
involved that is reversing a
negative trend. There are
certain conditions or indicators
which point out that a
turnaround is needed for an
organization to survive. An
organization which faces one
or more of these issues is
referred to as a ‘sick’ company.
TurnaroundTurnaround strategiesstrategies  There are three ways in which turnarounds can be managed ◦ The
TurnaroundTurnaround strategiesstrategies
 There are three ways in which
turnarounds can be managed
◦ The existing chief executive and
management team handles the
entire turnaround strategy with
the advisory support of a
external consultant.
◦ In another case the existing team
withdraws temporarily and an
executive consultant or
turnaround specialist is employed
to do the job.
◦ The last method involves the
replacement of the existing team
specially the chief executive, or
merging the sick organization
with a healthy one.
ExamplesExamples ofof TTurnaroundurnaround strategiesstrategies  Xerox revealed a Turnaround Programme in December
ExamplesExamples ofof TTurnaroundurnaround strategiesstrategies
 Xerox
revealed a
Turnaround Programme in
December 2000, which
included cutting $1 billion in
costs, and raising up to $4
billion through the sale of
assets, exiting non-core
businesses and lay-offs.
Subsequently, in August
2001, Mulcahy was made
CEO. Xerox continued to
report losses in 2001, but it
returned to profit in 2002
and continued to report
profits in 2003.
DivestmentDivestment strategystrategy  A divestment strategy involves the sale or liquidation of a portion of
DivestmentDivestment strategystrategy
 A
divestment
strategy
involves
the
sale
or
liquidation of a portion of
business,
or
a
major
division.
DivestmentDivestment strategystrategy  TATA group is a highly diversified entity with a range of businesses
DivestmentDivestment strategystrategy
 TATA
group
is
a
highly
diversified
entity
with
a
range
of
businesses
under its fold. They identified their non
core
businesses
for
divestment.
TOMCO was divested and sold to
Hindustan
Levers
as
soaps
and
a
detergent was not considered a core
business for the Tatas.
LiquidationLiquidation StrategyStrategy  A retrenchment strategy which is considered the most extreme and
LiquidationLiquidation StrategyStrategy
 A retrenchment strategy
which is considered the most
extreme and unattractive is
the liquidation strategy,
which involves closing down
a firm and selling its assets. It
is considered as the last
resort because it leads to
serious consequences such
as loss of employment for
workers and other
employees, termination of
opportunities where a firm
could pursue any future
activities and the stigma of
failure.
ExamplesExamples ofof LiquidationLiquidation StrategyStrategy  JC Penney recently sold its Eckerd chain of drugstores
ExamplesExamples ofof LiquidationLiquidation StrategyStrategy
 JC Penney recently sold its
Eckerd chain of drugstores to
focus on the corporation’s core
business of department stores
and Internet and catalog sales.
Studies show that between 33
per cent and 50 per cent of all
acquisitions are later divested.
BusinessBusiness--LevelLevel Strategies:Strategies:  A strategy that seeks to determine how an organization should
BusinessBusiness--LevelLevel Strategies:Strategies:
 A strategy that seeks to determine
how an organization should
compete in each of its SBUs
(strategic business units).
 At Business-level ALLOCATION
of re-sources among Functional-
level an COORDINATE with the
Corporate level to the
ACHIEVEMENT of the Corporate
level OBJECTIVES.
BusinessBusiness--LevelLevel StrategiesStrategies(cont’d)(cont’d)  Cost leadership: Attaining, then using the
BusinessBusiness--LevelLevel StrategiesStrategies(cont’d)(cont’d)
 Cost leadership: Attaining, then using the
lowest total cost basis as a competitive
advantage.
 Differentiation: Using product features or
services to distinguish the firm’s offerings from
its competitors.
 Market focus: Concentrating competitively on
a specific market segment.
BusinessBusiness--LevelLevel StrategyStrategy Business-level strategy: an integrated and coordinated set of commitments
BusinessBusiness--LevelLevel StrategyStrategy
Business-level strategy: an integrated and
coordinated set of commitments and actions the
firm uses to gain a competitive advantage by
exploiting core competencies in specific product
markets
TheThe CentralCentral RoleRole ofof CustomersCustomers In selecting a business-level strategy, the firm determines 1.
TheThe CentralCentral RoleRole ofof CustomersCustomers
In selecting a business-level strategy, the
firm determines
1. who it will serve
2. what needs those target customers have
that it will satisfy
3. how those needs will be satisfied
ManagingManaging RelationshipsRelationships WithWith CustomersCustomers  Customer relationships are strengthened by
ManagingManaging RelationshipsRelationships WithWith
CustomersCustomers
 Customer relationships are strengthened by
offering them superior value
◦ help customers to develop a new competitive advantage
◦ enhance the value of existing competitive advantages
FiveFive GenericGeneric StrategiesStrategies CompetitiveCompetitive AdvantageAdvantage CostCost UniquenessUniqueness
FiveFive GenericGeneric StrategiesStrategies
CompetitiveCompetitive AdvantageAdvantage
CostCost
UniquenessUniqueness
CostCost
DifferentiationDifferentiation
LeadershipLeadership
IntegratedIntegrated CostCost
Leadership/Leadership/
DifferentiationDifferentiation
FocusedFocused CostCost
LeadershipLeadership
FocusedFocused
DifferentiationDifferentiation
Competitive Scope ScopeCompetitive
NarrowNarrow
BroadBroad
targettarget
targettarget
CostCost LeadershipLeadership StrategyStrategy An integrated set of actions designed to produce or deliver goods or
CostCost LeadershipLeadership StrategyStrategy
An integrated set of actions designed to produce or
deliver goods or services at the lowest cost, relative
to competitors with features that are acceptable to
customers
◦ relatively standardized products
◦ features acceptable to many customers
◦ lowest competitive price
CostCost LeadershipLeadership StrategyStrategy Cost saving actions required by this strategy: ◦ building efficient
CostCost LeadershipLeadership StrategyStrategy
Cost saving actions required by this strategy:
◦ building efficient scale facilities
◦ tightly controlling production costs and
overhead
◦ minimizing costs of sales, R&D and service
◦ building efficient manufacturing facilities
◦ monitoring costs of activities provided by
outsiders
◦ simplifying production processes
DifferentiationDifferentiation StrategyStrategy An integrated set of actions designed by a firm to produce or deliver
DifferentiationDifferentiation StrategyStrategy
An integrated set of actions designed by a firm to
produce or deliver goods or services (at an
acceptable cost) that customers perceive as
being different in ways that are important to
them
◦ price for product can exceed what the firm’s target
customers are willing to pay
◦ nonstandardized products
◦ customers value differentiated features more than
they value low cost
DifferentiationDifferentiation StrategyStrategy  Value provided by unique features and value characteristics 
DifferentiationDifferentiation StrategyStrategy
 Value provided by unique features and value
characteristics
 Command premium price
 High customer service
 Superior quality
 Prestige or exclusivity
 Rapid innovation
DifferentiationDifferentiation StrategyStrategy Differentiation actions required by this strategy: ◦ developing new
DifferentiationDifferentiation StrategyStrategy
Differentiation actions required by this strategy:
◦ developing new systems and processes
◦ shaping perceptions through advertising
◦ quality focus
◦ capability in R&D
◦ maximize human resource contributions
through low turnover and high motivation
FocusedFocused BusinessBusiness--LevelLevel StrategiesStrategies A focus strategy must exploit a narrow target’s
FocusedFocused BusinessBusiness--LevelLevel
StrategiesStrategies
A focus strategy must exploit a narrow target’s
differences from the balance of the industry by:
◦ isolating a particular buyer group
◦ isolating a unique segment of a product line
◦ concentrating on a particular geographic market
◦ finding their “niche”
PortfolioPortfolio AnalysisAnalysis (PA)(PA)  PA is a technique used to analyse organisations in relation to
PortfolioPortfolio AnalysisAnalysis (PA)(PA)
 PA
is
a
technique
used
to
analyse
organisations in relation to their environments
 Portfolio (set, collection, assortment, range,
group)
 A
biz
portfolio
may
be
any collection of
brands
/
products,
markets,
branches
/
divisions, income generating assets, e.t.c
 PA is usually applied to firms with multiple
SBUs (more than one product/services,
customer categories, markets , divisions)
PAPA IntroductionIntroduction–– Cont.Cont.  Helps managers in taking decisions regarding which SBUs to allocate
PAPA IntroductionIntroduction–– Cont.Cont.
 Helps managers in taking decisions regarding
which SBUs to allocate more or less resources
to at a given strategic point in time
 After portfolio analysis firm makes an informed
strategic choice e.g.
◦ To have a balanced portfolio (minimize risk
and maximize return) of all portfolios
◦ To actively deploy a retrenchment strategy
PortfolioPortfolio AnalysisAnalysis Models:Models:  Have been developed by large firms in developed world, mostly
PortfolioPortfolio AnalysisAnalysis Models:Models:
 Have been developed by large firms in developed
world, mostly named against their inventors
 Are applicable even to smaller firms with multiple
SBUs.
Examples are shown below:
 The B.C.G model (Growth/Share matrix)
 The G.E Multi-directional model (competitive
strengths/Attractiveness matrix)
 Contribution Margin Analysis (how much profit
margin does that biz portfolio contribute?)
BostonBoston ConsultingConsulting GroupGroup (BCG)(BCG) ModelModel  This is the most popular business portfolio
BostonBoston ConsultingConsulting GroupGroup (BCG)(BCG) ModelModel
 This is the most popular business portfolio
matrix
 It analyses the business portfolio in relation
to market share and market / industry
growth
 The above 2 variables (share & growth)
range from low to high
 A SBU is positioned in the model and the
firms strategy is guided by the SBU’s
positioning.
The BCG(Boston Consulting Group) model Stars Question High marks Industry/ market growth rate Cash cows
The BCG(Boston Consulting Group) model
Stars
Question
High
marks
Industry/
market
growth rate
Cash cows
Dogs
Low
High
Low
Relative market share
BCGBCG SectionsSections Stars  Business with a high market share and high growth rate 
BCGBCG SectionsSections
Stars
 Business with a high market share and
high growth rate
 Generate huge sums of money
 Require huge sums of money to cope
with growth
Cash Cows
 Businesses with low growth but high
market share
 Generate huge sums of money at low
cost
 Are used to develop and promote new
businesses (they are “milked”)
BCGBCG SectionsSections –– Cont.Cont. Dogs  Have low market share in an aged industry 
BCGBCG SectionsSections –– Cont.Cont.
Dogs
 Have low market share in an aged industry
 The strategy is, normally to sell them off.
Question marks (Fledglings)
 Sometimes called problem children (they
need to be grown).
 They generate low cash but need a lot to
tap the high growth rate.
 They can be grown into stars, resources
allowing.
 Too much commitment to question marks
can lead lead to liquidity problems.
TheThe GeneralGeneral ElectricsElectrics (GE)(GE) ModelModel  This analyses ◦ Long term industry attractiveness and
TheThe GeneralGeneral ElectricsElectrics (GE)(GE) ModelModel
 This analyses
◦ Long term industry attractiveness and
◦ Business competitive strength
 These factors are assigned weights / ratings
based on their perceived importance
 The business is rated on each of the factors
 A combined rating is determined (factor
importance rating combined with the
business rating on the factor)
 Each business result is plotted on a 2-
dimensional matrix
IndustryIndustry attractivenessattractiveness DeterminantsDeterminants  Market growth and size  Industry
IndustryIndustry attractivenessattractiveness DeterminantsDeterminants
 Market growth and size
 Industry profitability
 Seasonality
 Porter's five forces
 Technology & Capital requirements
 Economies of scale
 Emerging opportunities and weakness
 etc
CompetitiveCompetitive StrengthsStrengths DeterminantsDeterminants  Relative market share  Production capacity
CompetitiveCompetitive StrengthsStrengths DeterminantsDeterminants
 Relative market share
 Production capacity
 Company Image
 Profit margins
 Technological capabilities
 R & D strengths
 Market and customer knowledge
 Employee commitment
 Etc.
GEGE NineNine CellCell MatrixMatrix
GEGE NineNine CellCell MatrixMatrix
GE Nine Cell Matrix The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used
GE Nine Cell Matrix
The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix
used to perform business portfolio analysis as a step in
the strategic planning process.
The GE/McKinsey Matrix identifies the optimum
business portfolio as one that fits perfectly to the
company's strengths and helps to explore the most
attractive industry sectors or markets.
The objective of the analysis is to position each SBU
on the chart depending on the SBU's Strength and the
Attractiveness of the Industry Sector or Market on which
it is focused. Each axis is divided into Low, Medium and
High, giving the nine-cell matrix as depicted below.
GE Nine Cell Matrix  Different factors can be used to define Industry Attractiveness. Like:-
GE Nine Cell Matrix
 Different factors
can be used to define Industry Attractiveness.
Like:-
Market Size, Market Growth Rate,
Demand variability, Industry
Profitability, Competitive Rivalry, Global Opportunities, Entry and
exit barriers,
(PEST)
Capital requirement, Macro environmental Factors
 Different factors can also be used to define SBU Strength. Like:-
Market Share, Distribution Channel Access, Financial Resources,
R&D Capability, Brand equity, Production Capacity, Knowledge of
customer and market, Caliber of management. Relative cost
position
 The factors and their relative weightings are selected. The rating
values for each factor are entered for each SBU and Industry.
GE Nine Cell Matrix Industry Business Unit Strength Attractiveness Strong Average Weak High Grow Grow
GE Nine Cell Matrix
Industry
Business Unit Strength
Attractiveness
Strong
Average
Weak
High
Grow
Grow
Hold
Medium
Grow
Hold
Harvest
Low
Hold
Harvest
Harvest
GE Nine Cell Matrix  Grow – Business units that fall under grow attract high
GE Nine Cell Matrix
 Grow – Business units that fall under grow attract high
investment. Firms may go for product differentiation or Cost
leadership. Huge cash is generated in this phase. Market
leaders exist in this phase.
 Hold – Business units that fall under hold phase attract
moderate investment. Market segmentation, Market
penetration, imitation strategies are adopted in this phase.
Followers exist in this phase.
 Harvest - Business units that fall under this phase are
unattractive. Low priority is given in these business units.
Strategies like divestment, Diversification, mergers are
adopted in this phase.
Market Attractiveness  Annual market growth rate  Overall market size  Historical profit margin
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  Production capacity  Corporate image
Business Strength
 Current market share
 Brand image
 Production capacity
 Corporate image
 Profit margins relative
to competitors
 R & D performance
 Promotional
effectiveness
GE Nine Cell Matrix Strength a) It allows intermediate ratings between high and low and
GE Nine Cell Matrix
Strength
a) It allows intermediate ratings between high and low and
between strong and week.
b) It helps in channeling the corporate resources to business
and achieving competitive advantage and superior
performance.
c) It helps in better strategic decision making and better
understanding of business scope.
Weakness
a)It tends to obscure business that are become to winners
because their industries are entering at exit stage.
b)Assessment of business in terms of two factors is not fair.
EXAMPLEEXAMPLE OFOF GEGE NINENINE CELLCELL MATRIXMATRIX
EXAMPLEEXAMPLE OFOF GEGE NINENINE CELLCELL MATRIXMATRIX
AboutAbout MarutiMaruti UdyogUdyog  Founded in 1981  Products are Maruti 800, Omni, Alto,SX4,Swift
AboutAbout MarutiMaruti UdyogUdyog
 Founded in 1981
 Products are Maruti 800, Omni, Alto,SX4,Swift
Desire,Swift,A-star, Gypsy,Wagon R,Ritz,others.
 Vision – “The Leader in the Indian Automobile
Industry, Creating Customer Delight and
Shareholder’s Wealth;a Pride of India”
 Core Values : Our Core Values drive us in every
endeavour-
 Customer Obession,
 fast, Flexible & first mover,
 Innovation & creativity
 Networking & Partnership
 Openess & Learning
THTHANKANK YOUYOU
THTHANKANK
YOUYOU
 GE matrix is divided in 9 cells. Successful SBUs in GE matrix require high
 GE matrix is divided in 9 cells. Successful SBUs in GE matrix require high
market attractiveness and strong competitive positions.The matrix further
can be divided into 3 zones.
◦ Cell 1, 2, 4 (Invest/Grow): Strategic business units in these cells are
successful.They should be given priority in portfolio (i.e. invest and grow).
More investment should be allocated for growth.
◦ Cell 3, 5,7 (Grow/Let go): SBUs in these cells have medium success and
attractiveness.They should be included on selective basis for investment. It
means the company should pursue selectivity and manage for earnings.
◦ Cell 6, 8,9 (Harvest/Divest):These cells have low success and
attractiveness.They should be divested or closed down. It means company
should give serious thought to harvesting/producing or divesting these
business units.
 GE model helps managers to select strategies.The positioning
of SBUs in the cells is judgmental. Moreover unattractive SBUs are not
necessarily to be unprofitable. GE model provides broad strategy guidelines
only.