Unit III

Strategic Analysis and choice— Corporate level analysis (BCG, GE Ninecell,

Hofer’s product market evolution and Shell Directional policy Matrix)
Industry level analysis; Porter’s five forces model, Qualitative factors in strategic
choice.

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix)

developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It
provides a graphic representation for an organization to examine different businesses in
it’s portfolio on the basis of their related market share and industry growth rates. It is a
two dimensional analysis on management of SBU’s (Strategic Business Units). In other
words, it is a comparative analysis of business potential and the evaluation of
environment.
According to this matrix, business could be classified as high or low according to their
industry growth rate and relative market share.
Relative Market Share = SBU Sales this year/leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.
The analysis requires that both measures be calculated for each SBU. The dimension of
business strength, relative market share, will measure comparative advantage indicated
by market dominance. The key theory underlying this is existence of an experience
curve and that market share is achieved due to overall cost leadership.
BCG matrix has four cells, with the horizontal axis representing relative market share
and the vertical axis denoting market growth rate. The mid-point of relative market
share is set at 1.0. if all the SBU’s are in same industry, the average growth rate of the
industry is used. While, if all the SBU’s are located in different industries, then the
mid-point is set at the growth rate for the economy.

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 10 x 1x 0.1 x
Figure: BCG Matrix
Resources are allocated to the business units according to their situation on the grid.
The four cells of this matrix have been called as stars, cash cows, question marks and
dogs. Each of these cells represents a particular type of business.

Stars- Stars represent business units having large market share in a fast growing
industry. They may generate cash but because of fast growing market, stars require
huge investments to maintain their lead. Net cash flow is usually modest. SBU’s
located in this cell are attractive as they are located in a robust industry and these
business units are highly competitive in the industry. If successful, a star will become a
cash cow when the industry matures.

Cash Cows- Cash Cows represents business units having a large market share in a
mature, slow growing industry. Cash cows require little investment and generate cash
that can be utilized for investment in other business units. These SBU’s are the
corporation’s key source of cash, and are specifically the core business. They are the
base of an organization. These businesses usually follow stability strategies. When cash
cows loose their appeal and move towards deterioration, then a retrenchment policy
may be pursued.

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Question Marks- Question marks represent business units having low relative market
share and located in a high growth industry. They require huge amount of cash to
maintain or gain market share. They require attention to determine if the venture can be
viable. Question marks are generally new goods and services which have a good
commercial prospective. There is no specific strategy which can be adopted. If the firm
thinks it has dominant market share, then it can adopt expansion strategy, else
retrenchment strategy can be adopted. Most businesses start as question marks as the
company tries to enter a high growth market in which there is already a market-share.
If ignored, then question marks may become dogs, while if huge investment is made,
then they have potential of becoming stars.

Dogs- Dogs represent businesses having weak market shares in low-growth markets.
They neither generate cash nor require huge amount of cash. Due to low market share,
these business units face cost disadvantages. Generally retrenchment strategies are
adopted because these firms can gain market share only at the expense of
competitor’s/rival firms. These business firms have weak market share because of high
costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic
aim, it should be liquidated if there is fewer prospects for it to gain market share.
Number of dogs should be avoided and minimized in an organization.
Limitations of BCG Matrix
The BCG Matrix produces a framework for allocating resources among different
business units and makes it possible to compare many business units at a glance. But
BCG Matrix is not free from limitations, such as-
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.
Market is not clearly defined in this model.
At times, dogs may help other businesses in gaining competitive advantage. They can
earn even more than cash cows sometimes.

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GE Nine(9) Cell Matrix
GE nine-box matrix is a strategy tool that offers a systematic approach for the
multi business enterprises to prioritize their investments among the various
business units. It is a framework that evaluates business portfolio and provides
further strategic implications.

Each business is appraised in terms of two major dimensions – Market Attractiveness

and Business Strength. If one of these factors is missing, then the business will not
produce desired results. Neither a strong company operating in an unattractive market,
nor a weak company operating in an attractive market will do very well

The vertical axis denotes:

Industry attractiveness indicates how hard or easy it will be for a company to compete
in the market and earn profits. The more profitable the industry is the more attractive it

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becomes. When evaluating the industry attractiveness, analysts should look how an
industry will change in the long run rather than in the near future, because the
investments needed for the product usually require long lasting commitment.
 Long run growth rate
 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power,
buyer power, threat of substitutes and available complements
(use Porter’s Five Forces analysis to determine this)
 Industry structure (use Structure-Conduct-Performance framework to
determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation
Horizontal axis represent: Along the X axis, the matrix measures how strong, in terms
of competition, a particular business unit is against its rivals. In other words, managers
try to determine whether a business unit has a sustainable competitive advantage (or at
least temporary competitive advantage) or not.
 Total market share
 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine
this)

Your business unit strength in meeting industry’s critical success factors

(use Competitive Profile Matrix to determine this)
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Strength of a value chain (use Value Chain Analysis and Benchmarking to determine
this)
Level of product differentiation
Production flexibility

 Green zone - Suggests you to ‘go ahead’, to grow and build, pushing you
through expansion strategies. Businesses in the green zone attract major
investment.
 Yellow zone - Cautions you to ‘wait and see’ indicating hold and maintain type
of strategies aimed at stability.
 Redzone - Indicates that you have to adopt turnover strategies of divestment and
liquidation or rebuilding approach.

Advantages
 Helps to prioritize the limited resources in order to achieve the best returns.
 The performance of products or business units becomes evident.
 It’s more sophisticated business portfolio framework than the BCG matrix.
 Determines the strategic steps the company needs to adopt to improve the
performance of its business portfolio.
Disadvantages
 Needs a consultant or an expert to determine industry’s attractiveness and
business unit strength as accurately as possible.
 It is expensive to conduct.
 It doesn’t take into account the harmony that could exist between two or more
business units.

Hofer’s product market evolution

Hofer’s Product/Market Evolution Matrix Charles Hofer has proposed a three-by-five
matrix where businesses are plotted in terms of their product/market evolution and the
comeptitive position. Relative sizes of industries are shown by circles wherein in the
market share of the company is shaded
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A business in the Developmet or Growth stage has a potential to be a Star. If the
market share is large in these growth oriented stages, more resources must be invested
to develop competitive position. But if market share is low, a strategy to improve the
same must be developed. If the industry is relatively small and market share is low
despite high growth stage, management must consider divesting and redeploying
resources in other more competitive businesses.
A business in the Shake-out or Maturity stage has a potential to be a Cash Cow.
Investments could be made to maintain high market share.
A business in Decline stage with a low market share would be a Dog business. Though
in the short run it may generate cash, in the long run, however, it should be considered
for divestment or liquidation.

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Industry level analysis; Porter’s five forces model
Porter's Five Forces is a business analysis model that helps to explain why various
industries are able to sustain different levels of profitability.

The Five Forces model is widely used to analyze the industry structure of a company as
well as its corporate strategy. Porter identified five undeniable forces that play a part in
shaping every market and industry in the world, with some caveats. The five forces are
frequently used to measure competition intensity, attractiveness, and profitability of an
industry or market.
A) The bargaining power of suppliers

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When the input elements provided by the supplier constitute a large proportion of the
total cost of the product to the buyer, the potential bargaining power of the supplier is
greatly increased. In general, suppliers who meet the following conditions will have
stronger bargaining power.
 The supply-side industry is for some companies that have a relatively stable

market position and are not plagued by fierce competition in the market.
 Supply-side products have certain characteristics, buyers are difficult to convert,

or conversion costs are too high

 The supplier facilitates forward integration, or otherwise impose an additional

cost to the production process

(B) The bargaining power of buyers

Buyers mainly influence the profitability of existing companies in the industry through
their ability to lower prices and requirements to provide higher product or service
quality. In general, buyers who meet the following conditions have strong bargaining
power:
The total number of buyers is small, and each buyer purchases a large amount and
accounts for a large percentage of the seller’s sales
The seller’s industry consists of a large number of relatively small companies
The purchaser purchases a standardized product, and it is economically feasible to
purchase the product from multiple vendors at the same time.
Suppliers facilitate forward integration, while buyers find it difficult to combine or
integrate backward.

(C) Threats of new entrants

New entrants, while bringing new production capacity and new resources to the
industry, hope to win a place in the market that has already been divided by existing
companies. This may cause competition with existing companies in raw materials and
market share, resulting in the existing industry. The level of corporate profits is
reduced, even threatening survival.

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The severity of competitive entry threats depends on two factors: the size of the
barriers to entry into new areas and the expected response of existing businesses to
entrants.
Barriers to entry mainly include the following factors:
 Economies of scale
With the expansion of business scale, the industrial characteristics of the decline
in unit product costs, the higher the industry’s lowest effective scale, the greater
the barriers to entry.
 Differentiation degree
Differentiation refers to the unique targeting of products and services to customer
needs. The higher the difference, the greater the barrier to entry.
 Conversion cost
The conversion cost of a customer or buyer refers to the extra cost that the
customer must pay to change the supplier.
 Technical obstacles
Includes patented technology, proprietary technology, and learning curve.
 Control of sales channels
The company’s self-built distribution channels, good partnerships, and
reputation, brands, etc.
 Policy and Law
National policies protect certain industries, such as the financial industry.

(D) Threats of Substitutes

Two companies in different industries may generate competing products because of the
products they produce are alternative products.
 Increased selling price and profitability of existing products will be limited due to

the existence of alternatives that can be easily accepted by users.

 Due to the intrusion of alternatives, existing companies must improve product

quality or reduce costs.

 The intensity of competition from producers of alternative products is affected by

the cost of the conversion of product buyers.

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(E) Competition among existing competitors in the industry
Enterprises in most industries are closely linked to each other’s interests.
As part of their overall strategy, their goal is to make their own companies more
competitive than their competitors. There are conflicts and confrontations, often
manifested in prices, advertising, product introductions, and after-sales services.
Features of the Porter Five Forces Tool
Porter Five Forces provides tools for in-depth analysis of the company’s
industry, helping companies understand the competitive environment, correctly
grasp the five competitive forces facing the company and formulate a strategy that is
beneficial to the company’s competitive position. In general, the Potter Five Forces
model has the following characteristics:
 Competition-oriented

 Studying existing industries

 Pay attention to the profit potential of the industry

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