Corporate Strategy

LECTURE NO. 14 – BCG MATRIX

BUSINESS STRATEGY – 22 JUNE 2023

PREPARED BY R. JOOMUN – BUSINESS STRATEGY– UOM 1

Strategic Develop Vision
and Mission
Analysing the
Internal
Statements Environment
Management Strategy

Process Analysis

Analysing the
Establish Long-
External
Term Objectives
Environment

Formulating Organisational
Formulating Functional
International Structure &
Business Strategy Strategies
Strategy Culture
Strategy
Strategy
Implementation
Formulation / Evaluation

Formulating Generate, Measure and Completed

Leadership and
Corporate Evaluate and Evaluate In progress
Change
Strategy Select Strategies Performance
Not started

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 Lecture Outline
1. Recap on last lecture, In the headlines.
2. The Portfolio matrix: BCG Matrix
3. Means of growth : Organic Development, M&A, Strategic Alliance

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 In next lecture (First Semester)
1. How do firms achieve growth? Means/Methods of growth: Organic, Alliance, M & A.
2. Managing corporate portfolio : BCG Growth-Share Matrix, GE/McKinsey Matrix…….
3. How to analyse case studies in strategic management courses? In the next semester, we will
focus more (during the tutorials) on case studies.

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Last lecture - Key Messages
An effective corporate strategy increases a firm’s chances to gain and sustain a
competitive advantage. By formulating corporate strategy, strategic leaders make
important choices along three dimensions that determine the boundaries of the
firm:
▪The degree of vertical integration—in what stages of the industry value chain to
participate.
▪The type of diversification—what range of products and services to offer.
▪The geographic scope—where to compete.

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In the headlines

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In the headlines
Coffee Meets Olive Oil

Origin Story
Coffee and olives are not as
different as they may
seem. From the cafés of Milan
to the ancient olive groves of
Sicily and coffee fields of Costa
Rica – experience the journey
that has brought two of nature’s
most transcendent ingredients
together to create Oleato.

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In the headlines (Local)
Bénéfices des conglomérats : Entre étonnement et incompréhension

• CIEL group results as at end of 31 Dec 2022 IBL

• Net Profit: Rs 2 Billion • Regional market development : Naivas
(Supermarket chain in Kenya)
• Group Turnover: Rs 18 Billion
• Performance: 61% by its commercial / retailing
• Contributed by the good performance of its Hotel divisions (Winners / Brand Activr, In Tribecca)
(Revenge tourism) and textile activities, which
contribute to 59% of its revenues. ENL
• Hotel: 100% growth to turnover of Rs 4.1.Billion, • Net profit: RS 947 m (180% growth)
contribute 33% of profit (Group) • Hotels (73% of profits, Rs 689 m)
«le groupe récolte les fruits de • Axess, Decathlon
sa stratégie à long terme et se
veut en bonne voie pour
améliorer sensiblement ses
résultats cette année» CEO

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Check your understanding
1. Distinguish between vertical integration and
diversification?
2. What is economies of scale? What is economies of
scope? Provide some examples.

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Economies…..
Economies of scale
• When a firm’s average cost per unit
decreases as its output increases.
(Rothaermel)
• Reductions in unit costs that result
from an increase in the output of a
single product. (Grant)
PREPARED BY R. JOOMUN – BUSINESS STRATEGY– UOM
Economies of scope
• Savings that come from producing two
(or more) outputs or providing
services at less cost than producing
each individually, through using same
resources & technology. (Rothaermel)
• Cost economies that arise from
increasing output of multiple
products. (Grant)
10
Trends – Scope of the firms changes over time
Diversification – More or less? Integration
Since around 1980. Vertical integration improve co-
1. “Refocus on core business”: ordination and reduce risks.
Philips 1. Full or partial vertical
2. “More diversification”: integration.
Microsoft, Apple, Tata, Tesco, 2. De-integration. For e.g.
Google…. Pharmaceuticals
3. Outsourcing
Strategic choices

Johnson, et. al.

Strategic directions and corporate-level strategy

Johnson, 2020: 238

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Portfolio matrices
Designed to determine:
• The balance of business portfolios
• Attractiveness of businesses in terms of individual strengths and
profit potential of their industries
• The ‘fit’ the businesses have with each other in terms of synergies.

Portfolio matrix: GE/Mc Kinsey matrix, BCG’s Growth-Share matrix, The Heartland matrix….
Restructuring
Restructuring describes the process of reorganizing and divesting
business units and activities to refocus a company to leverage its core
competencies more fully.
Corporate executives can restructure the portfolio of their firm’s
businesses, much like an investor can change a portfolio of stocks.
How do we manage a multi-business firm in ways that generate as much
value as possible?
 The BCG or growth/share matrix (1)
Competitive advantage
measured by RMM:
RMM = SBU market share(or
revenues) compared to that of
its largest competitor

Industry attractiveness
measured by
Market growth (%)
The BCG or growth/share matrix (2)

A star is a business unit which has a high market share in a

growing market.
A question mark (or problem child) is a business unit in a
growing market, but it does not yet have a high market share.
A cash cow is a business unit that has a high market share in
a mature market.
A dog is a business unit that has a low market share in a
static or declining market.
BCG Matrix

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Strategy recommendations

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Which strategies?

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 Note:
• Size of circle rep the
proportion of revenue
generated by SBU
• Pie chart rep the proportion
of the profit generated by
SBU

Source: David

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The BCG or growth / share matrix (3)
Problems with the BCG matrix:
▪Definitional vagueness
▪Capital market assumptions
▪Motivation problems (in ‘dogs’)
▪Self-fulfilling prophecies
▪Ignores commercial linkages (ignores synergy)
Summary
Many corporations comprise several, sometimes many, business units.
Corporate strategy involves the decisions and activities above the level
of business units. It is concerned with the scope of the organisation.
Corporate parents may seek to add value by adopting different parenting
roles: the portfolio manager, the synergy manager or the parental
developer.
There are several portfolio models to help corporate parents manage
their businesses, of which the most well known is the BCG matrix.
Divestment and outsourcing should be considered as well as
diversification, particularly in the light of relative strategic capabilities and
the transaction costs of opportunism.