CHAPTER FIVE

STRATEGY IN ACTION

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CHAPTER OUTLINE
Achieving superior Efficiency, Quality, innovation and customer
responsiveness by Building competitive advantage through:
Functional level strategy
Business level strategies
corporate strategy
vertical integration
Diversification
Strategic Alliances.

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Business-level strategy
Focus questions:
 What issues do firms consider when evaluating customers?

 What are the five types of business-level strategy?

 How can firms use a certain type of business-level strategy?

 What are competitive risks associated with each type of business –level strategy?

 Business-level strategy: is a strategy designed to gain competitive advantage by exploiting

core competencies in specific product market for the purpose of providing value to customers

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 A. Customers: who, what and how
 Business-level strategy – Key issues

Which good or
service to offer
Customers?

Business-level How to
Strategy manufacture or
create it?

How to
distribute it?

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 Customers: Business-level strategic issues
In selecting business-level strategy, the firm should
determine:
Who will be served? Refers to types of customers
What needs those target customers have that the firm
will satisfy? Refers to the benefits & features of
products & services
How those needs will be satisfied? Refers to core
competencies
Who: Determining the customers to serve
Firms divide customers into groups based on differences
in the customers’ needs
Customers could be broadly clustered into:
 Consumer markets or
 Industrial markets
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 This is the process of market segmentation
Market segmentation is used to cluster people with
similar needs into individual & identifiable groups
What are the basis of customer segmentation?
Customer markets:
Demographic factors: age (children, young or old
people); sex (male or female); birth & death rates etc.
Socio-economic factors: social class, income etc.
Geographic factors: cultural, regional, national
differences
Psychological factors: life style, personality traits etc.
Consumption patterns: heavy, moderate, & light users
Perceptual factors: perceptual mapping of benefits

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  Farther segmentation: Global market segmentation which
refers to customer groups across countries
 Homogenous – similar buying behavior
 Heterogeneous – different buying behavior
What: Determining which customer needs to satisfy
 Needs are related to the benefits & features of a good or
service.
 The basic need of all customers is to buy products or
services that create value for them
 Two main forms of value that products provide:
1. Low cost with acceptable features
2. Highly differentiated features with acceptable cost

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 B. Types of business-level strategy
 Business-level strategy:
 is a deliberate choice about how a firm will perform the
value chain’s primary & support activities in ways that create
unique value
 Reflects where & how the firm has an advantage over its
rivals
 Is intended to create differences b/n the firm’s position
relative those of its rivals
 Thus, the essence of a firm’s business-level strategy is choosing
to perform:
 Perform activities differently than rivals – to achieve lowest
cost or
 Perform different (valuable) activities – being able to
differentiate
 Hence, competitive advantage is achieved within some scope –
firms should prefer one of the two
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 Five Business-level Strategies

Competitive Advantage

Cost Uniqueness

Broad Target Cost L/Ship Differentiation

Competitive Scope Integrated Cost L/ship

/ Differentiation

Narrow Target Focused Cost Focused

L/ship Differentiation

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 Business-level strategies are called “generic strategies”
The five generic strategies are:
 Cost leadership
 Differentiation
 Focused cost leadership
 Focused differentiation
 Integrated cost leadership & differentiation

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 Cost leadership strategy
A cost leadership strategy is 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
 Lowest competitive price
 Features acceptable to many customers
 Relatively standardised products
 Cost saving actions required by this strategy:
 Building efficient scale facilities
 Tightly controlling production & overhead costs
 Simplifying production processes & building efficient
manufacturing facilities
 Minimising costs of sales, R&D & service
 Monitoring costs of activities provided by outsiders

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 Economies of Scope
Economies of scope occur through a firm’s ability to spread costs
associated with one element of the value chain across multiple
products, thereby reducing costs.
For example, Sharp achieves economies of scope through
spreading the costs of running their distribution networks etc
across a range of products.

Accumulated Experience
As a person or a firm gains experience in completing a task, they
become more efficient at doing it.
This process can occur through:
 learning or experience
 technical progress

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 Competitive risks of the cost-leadership strategy
 Processes used to produce & distribute goods or services
may become obsolete due to competitors’ innovations.
 Focus on cost reductions may occur at expense of
customers’ perceptions of differentiation encouraging
them to purchase competitors’ products & services
 Competitors, using their own core competencies, may
learn to successfully imitate the cost leader’s strategy

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 Differentiation strategy
 Definition
 A differentiation strategy is an integrated set of actions designed to
produce goods or services that customers perceive as being
different in ways that are important to them.
 The firm produces non-standardized products for customers who
value differentiated features more than they value low cost
 The ability to sell goods or services at a price that substantially
exceeds the cost of creating its differentiated features allows the
firm to outperform rivals & earn above-average returns
Potential entrants
 Can defend against new entrants because:
 Entrants’ new products must surpass proven products
 Entrants’ new products must be at least equal to performance
of proven products, but offered at lower prices

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 Differentiation strategy
Bargaining power of suppliers & buyers
• Can mitigate suppliers’ power by:
• Absorbing price increases due to higher margins
• Passing along higher supplier prices because buyers are loyal to
differentiated brand
• Can mitigate buyers’ power by:
• Well differentiated products reducing customer sensitivity to
price increases
Product substitutes
• Well positioned relative to substitutes because:
• Brand loyalty to a differentiated product tends to reduce
customers’ testing of new products or switching brands

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 Focus strategy
Definition
A focus strategy is an integrated set of actions designed to produce or
deliver goods or services that serve the needs of a particular
competitive segment
 Examples of specific market segments that can be targeted by a
focus strategy:
 Particular buyer group (e.g. youths or senior citizens)
 Different geographic markets
 Types of focused strategies:
 Focused cost leadership strategy
 Focused differentiation strategy

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 Focus strategy
 To implement a focus strategy:
 The firm must be able to complete various primary and support
value chain activities in a competitively superior manner, in
order to develop & sustain a competitive advantage and earn
above-average returns
 Competitor firms may overlook small niches
 The firm lacks resources needed to compete in the broader
market, but serves a narrow segment more effectively than
industry-wide competitors
Competitive risks of focus strategies
 A firm competing on an industry-wide basis decides to pursue the
niche market of the focuser firm
 Customer preferences in the niche market may change to more
closely resemble those of the broader market

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 Integrated cost leadership / differentiation strategy

 A firm that successfully uses the integrated cost

leadership / differentiation strategy should be in a better
position to:
 Adapt quickly to environmental changes
 Learn new skills and technologies more quickly
 Effectively leverage its core competencies while competing
against its rivals
 A commitment to strategic flexibility is necessary for
successful use of this strategy
Examples of Integrated cost leadership / differentiation
strategy
 McDonald
 Southwest Airlines/Virgin Blue
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 Competitive risks of the integrated cost
leadership/differentiation strategy

 Often involves compromises

 Becoming neither the lowest cost nor the most differentiated
firm
 Becoming ‘stuck in the middle’
 Lacking the strong commitment and expertise that
accompanies firms following either a cost leadership or a
differentiation strategy
 Earning below-average returns
 Competing at a disadvantage
 The integrated strategy is an appropriate choice for firms
possessing the core competencies to produce somewhat
differentiated products at relatively low prices

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 Implications of Business Strategy

 Strategic Group Mapping

 Firms in the same Strategic Group have two or more competitive characteristics in
common:
• Members of strategic groups often follow similar business
strategies
• Sell in same price/quality range
• Cover same geographic areas
• Be vertically integrated to same degree
• Have comparable product line breadth
• Emphasize same types of distribution channels
• Offer buyers similar services
• Use identical technological approaches
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 Implications of Business Strategy
Economies of scale are achieved when firms spread their fixed
costs over a large number of units, without encountering a new set
of fixed costs
Firms should therefore, choose appropriate technologies and plant
size to take advantage of EOS
Technical Progress
New technologies, systems of operating, improvements in
processes etc that are of a technical nature allow for the cost
structure of a firm to be reduced
For example, aircrafts are continually becoming more efficient,
allowing airlines to reap the benefits of lower costs per passenger
per kilometre flown

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 Implications of Business Strategy
Superior Quality
TQM and other approaches
Some key issues:
 leadership
 consideration of all components of the value chain
 involve employees in the process, including getting ideas from
front-line employees
Superior Innovation
Why do some innovation make money?
 dominant designs
 complementary resources

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 Implications of Business Strategy
Sources of innovation:
 Internal
 Customers
 Alliances
 Boundary spanning activities
Superior Customer Responsiveness
 Know your customer
 Involve customers in changes (including innovation development)
 Create a culture of customer-focus that starts at the top of the
organisation.

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 5.2) Corporate-level Strategy

Focus Questions
What is corporate strategy?
What is diversification?
What types of diversification can be used by firms?
How can related diversification strategy create value?
How can an unrelated diversification strategy create
value?
What are the means used for diversification?
What are the analytical tools of portfolio analysis?

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 Two Levels of Strategy
1. Business-level strategy (competitive)
 In diversified firms, each business unit chooses a business-level strategy to

implement in order to achieve strategic competitiveness and earn above-average

returns
2. Corporate-level strategy (company-wide)
 A corporate-level strategy is an action taken to gain a competitive advantage through

the selection & management of a mix of businesses competing in several industries

or product markets
 A corporate-level strategy is concerned with two key questions:

 What business should the firm be in?

 How should the corporate office manage its group of businesses?

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 A. Grand Strategies
 Corporate strategies are often called grand/master strategies
 These grand strategies (major Corporate Strategies) can be:
 Growth strategy
 Stability strategy
 Defensive strategy
 Decline (retrenchment, harvesting, turn around & divestiture)
 Closure (liquidation & filing bankruptcy)
 Growth strategies are:
 Concentration
 Market development
 product development
 Innovation
 Joint venture
 Integration
 Diversification: concentric (related), horizontal, & unrelated

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 1. Concentration strategy will be appropriate when the company
concentrates on the current business
The firm directs its resources to the profitable growth of a single
product, in a single market, with a single technology
Advantages:
 Based on known competencies & same experience
 Lowest in risk & additional resources
Disadvantages:
 Steady but slow increases in growth & profitability
 Narrow range of investment options
In general, firms that use this strategy gain competitive advantage
in production skill, marketing know-how & reputation in the
market place
In fact, it refers to marketing present products with only cosmetic
modifications

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 Thus, concentration focuses on:
 Increasing present customers’ rate of usage
 Attracting competitors’ customers through price cuts
 Attracting non-users through advertising, price incentives etc.
Note: when concentration will not provide the basis for
achieving the company mission there are two options that
involve moderate cost & risk: market development & product
development
2. Market development: is selling present products in new
markets – additional region, national & international expansions
Attracting other market segments through:
 Developing product versions to appeal to other segments
 Entering other channels of distribution
 Advertising in other media

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 3. Product development: is developing new products for
present markets. This involves:
 Developing new product features:
 Modifying (change color, form, shape, etc.)
 Developing additional models & sizes (product
proliferation/produce).
Thus, it involves substantial modification of existing
products or creation of new but related items that can be
marketed to current customers through established channels.
The idea is to attract satisfied customers to new products as
a result of their positive experience with company’s initial
offering
The product development strategy is often adopted either to
prolong the life cycle of current products or to take
advantage of favorable reputation & brand name

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 Examples of product development can be:
 A revised edition of a college textbook
 A new car style
 A second formula of shampoo for oily air etc.
4. Innovation strategy: refers to original or novel ideas when firms
shift from market & product development as the basis for
profitability
Thus, the main philosophy of innovation strategy is creating a new
product life cycle, thereby making any similar existing products
obsolete
Examples of innovation can be:
 In automotive industry, manufacturing a different & new brand
of car (electric based cars)
 In photo camera industry, digital cameras instead of analog

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 However, innovation is costly & risky – few innovative ideas prove
profitable because R&D, marketing, & other costs are extremely
high
5. Joint Venture strategy: takes place when two or more companies
want to operate for success in a particular competitive environment
As an example, exploring petroleum requires the cooperation of
several companies – constructing the Alaskan pipeline
Thus, joint venture cooperative arrangements could provide:
 The necessary funds to build the pipeline
 The processing & marketing capacity to profitably handle the oil
flow
Joint venture arrangements result in joint ownership & specially it is
an important strategy to enter international markets

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  It is also important in transferring & enhancing the skills, employment,
growth & profits of local businesses
6. Integration strategy: focuses on moving to different industry level,
different product & technology but the basic market remains the same
 There are two types of integrative growths:
 Vertical integration
 Horizontal integration
 Vertical Integration
 Exists when a firm produces its own inputs (backward
integration) or owns channels of distribution of outputs (forward
integration)
 A firm pursuing vertical integration usually is motivated to
strengthen its position in its core business by gaining market
power over competitors
 Horizontal integration refers to the acquisition of similar products &
services
 The two corporate tools to achieve integrative growth are:
 Acquisition
 Internal development

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 Diversification growth strategy: refers to an attempt to change
the characteristics of the business through either of new
products, markets & technology or all the three
Diversification growth strategy is classified into three
categories:
Concentric: seeking growth with new market & product
having meaningful synergy or fit with existing business
(tapes into discs, ski sports into summer sporting)
– Related Diversification
 There is some commonality in markets, products, or technology
Horizontal: seeking growth by appealing to current market,
with new products that are technologically unrelated to present
products (hotels & tour operators)

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 Conglomerate: seeking growth by appealing to new markets
with new product that have no technology relationships to
current product – Unrelated Diversification
 Most of the acquisitions are principally done on profit
considerations
Related & Unrelated Diversification
Related diversification could be achieved through economies
of scope & market power
Economies of scope refers to sharing activities & transferring
of core competencies: operational & corporate relatedness
 The main purpose is creating value by saving costs
attributed by transferring the core competencies developed
in one business to a new (other) business

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 Operational relatedness – sharing activities:
 Require strategic control over business units
 Primary & support activities can be shared efficiently
 Its main limitation is the difficulty to explicitly differentiate
the outcomes of each firm
Corporate relatedness – transferring of core competencies:
 Corporate core competencies are complex sets of resources &
capabilities that link different businesses trough:
 Managerial & technological knowledge, experience & expertise
Market power could be gained through:
 Multi point competition
 Vertical integration

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 Market power exists when a firm is able to:
 Sell its products above the existing competitive level
 Reduce the costs of its primary & support activities below the
competitive level
 Blocking competitors through multi-point competition
Multi-point competition exists when:
 Two or more diversified firms compete in the same product
areas or geographic markets

 Multipoint competition will not create potential gains when there is

excessive competitive activity
 Therefore, firms develop mutual forbearance to create value by
engaging in less competitive rivalry

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 Unrelated diversification could be achieved through financial
economies
Financial economics refers to cost savings realized through
improved allocations of financial resources
The two value creation approaches are:
 Efficient internal capital allocations: development of portfolio
of business with different risk profiles thereby reducing the
business risk for the total corporation
 Purchasing other corporations & restructuring their assets:
buying & selling of businesses in the external market with the
intent of increasing the total value of the firm
 Therefore, selling under-performing divisions & placing the remaining
divisions under the discipline of rigorous financial controls is often
used
 Creating financial economies through the purchase of other companies
& restructuring their assets requires an understanding of significant
trade-offs

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 Managerial motives for diversification
 Diversifying managerial employment risk
 Increasing managerial compensation
These motives may lead to value reduction

B. Stability Strategy
It is also called neutral strategy: occurs when an organization is
satisfied with its current situation & wants to maintain the status
quo
Reasons for using stability strategy:
 The company is doing well “if it works, don’t fix it”
 The management wants to avoid additional hassles associated
with growth
 Resources have been exhausted because of earlier growth
strategies

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 C. Defensive Strategy
Could be classified into decline & closure strategies
It can be used as a short-term solution to:
 Reverse a negative trend
 Overcome a crisis or problem situation
Reasons:
 The company faced financial problems – certain parts of the
organization are doing poorly
 The company forecasts hard times ahead related to:
 Challenges from new competitors & products
 Changes in government regulations

 Owners are tired of the business or have to have an opportunity

to profit substantially by selling
Decline strategy includes:
 Retrenchment, harvesting, turn around & divestiture

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 a. Retrenchment strategy will be used when the company wants to
reduce its operations – primarily, by reducing product lines
 The main purpose of retrenchment is economizing through cutting
production costs
b. Harvesting occurs when future growth appears doubtful or not
cost effective – the main reason could be because of new
competition or changes in consumer preferences
 In this case the firm limits additional investment & expenses but
maximizes short-term profit & cash flow through maintaining market
share over the short-run
Conditions for harvesting strategy:
 The business is not a major contributor of sales, stability, or prestige to the
organization
 The management may use the freed-up resources for other attractive
uses

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 c. Turn -around strategy is designed to reverse a negative trend &
get the organization back on the track or profitability – a
temporary measure until things improve
Major actions should be taken are:
Reducing the size of operations
 Eliminating low-margin products
 Selling machineries
 Laying off employees

Cutting back employee compensation or benefits

Replacing higher-paid employees with lower-paid employees
Leasing rather than buying equipment
Cutting back marketing expenses

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 d. Divestiture strategy occurs when an organization sells or divests
or dislocate itself of a business or part of a business – previous
diversification is not successful (weak growth prospects & poor
profitability)
Moreover, when the firm is highly indebted – it might prefer to
survive by selling some of its businesses by raising sufficient
capital to:
 Increase the performance of the remaining businesses
 Settle its debt – liquidity
Closure strategy consists of liquidation & filing of bankruptcy
a. Liquidation occurs when an entire company is either sold or
dissolved either by choice or force
When by choice, it can be because the owners are tired of the
business or near retirement; the organization’s future prospect is
not good and sell at this time

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 When by force, the decision often occurs because of a
deteriorated financial condition:
 Such circumstances leave the seller in a weak bargaining
position or by court decision
 It is the last resort measure & generally is forced by financial
institutions

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 5.3) Acquisitions & Mergers
 Acquisition, Merger & Joint venture are called means of diversification –
related & unrelated
 Merger – a strategy through which two or more firms agree to
integrate/married their operations on a relatively co-equal basis
 Therefore, in merger, a single new company will be established with
new name, organizational structure, issuing new stock & other changes
 However, the shareholders of the former firms will become shareholders
of the new enlarged organization
 Acquisition – a strategy through which one firm buys a controlling of
100% interest in another firm with the intent of making the acquired
firm a subsidiary business within its portfolio. Therefore, an acquisition
is a marriage of unequal partners with one organization buying the
other
 The shareholders of the acquired firm cease to be owners of the
acquiring company – unless payment is effect in terms of shares

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  What are the main reasons of an acquisition or merger strategy?
 The main reasons why firms use these strategies is to achieve strategic
competitiveness & earn above average returns
 These can be achieved through increasing the market value of the stock –
synergistic effect
 There could be other reasons:
 Securing or protecting sources of raw materials/components
 To gain access to distribution channels
 To make use of underutilized resources of the company
 To increase market power – horizontal, vertical & related acquisitions
 To avoid excessive competition (intense rivalry; changing competitive
scope: automotive – financial, computer, electronics & satellite
systems
 To enter a new market, offer new products & avoiding cost of new
product development (Acquisition as substitute for innovation)
 To overcome entry barriers etc. (Cross-boarder acquisitions)

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  However, acquisition & merger strategies are not free of risk
 The main problems in achieving success are:
 Integration difficulties:
 incompatibility of cultures,
 different financial & control systems, management styles,
 lack of effective communication,
 the status of executives of the acquired firm)
 Inadequate evaluation:
 Lack of complete knowledge about the acquired firm
 Paying too much – facing financial risk
 Tax consequences of the transaction
 Extraordinary debt – affects investments on R&D, training &
marketing, leads to bankruptcy,
 Inability to achieve synergy:
 Assets of the firms are non-complementary
 Core competencies could not be integrated
 Loss of key personnel of the acquired firm

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  Too much diversification:
 Leads to financial control rather than strategic control
 Leads to divestiture those underperforming firms
 Lack of internal R&D activities – hinders innovations

 Too large:
 Additional costs to manage the larger firm – undermines the benefits of
efficiency created by economies of scale
 Leads to bureaucratic control (to ensure consistency of decisions &
actions) – relatively rigid & standardized
 Leads to less innovation – detrimental effect on performance

 Managers overly focus on acquisitions

 Requires substantial managerial time & energy
 Fail to assess acquisitions objectively

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 Restructuring
• Definition
• A strategy through which a firm changes its set of
businesses or financial structure
• The failure of an acquisition strategy is often the driver
of a restructuring strategy
• Restructuring strategy may occur due to changes in the
external or internal environments of the firm
• Restructuring strategies:
• Downsizing, down-scoping.

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 Portfolio Analysis
How to plan a corporate portfolio?
 The business portfolio is the collection of businesses (SBUs) & products that
make up the company. An SBU:
 Is a unit of the company that has a separate mission & objectives
 Can be a company division, a product line or even individual brands
 It all depends on how the company is organized
 The best business portfolio is one that fits the company’s strengths & helps
exploit the most attractive opportunities
 There are different types of portfolio techniques/matrixes in use, the most well
known of which are:
 The Boston Consulting Group – BCG-Matrix (Hedley, 1977)
 The General Electric Screen – GE-Matrix (Hofer and Schendel, 1978)
 Regardless of the type of matrix used, companies must:
 Analyse their current business portfolios & decide which businesses
should receive more or less investment
 Develop growth strategies for adding new businesses to the portfolio,
whilst at the same time deciding which businesses should no longer be
retained

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 The Boston Consulting Group Matrix
 The BCG is also known as the The Growth-Share Matrix
or Product Portfolio Matrix
 It helps to identify the cash flow requirements of different
businesses in a company’s portfolio
 The BCG matrix has three main steps:
 Dividing the company into SBUs – identification
 Assessing the prospects of each SBU & comparing them by means
of a matrix
 Developing strategic objectives for each SBU
 Identifying Strategic Business Units - According to the
BCG:
 a company must create an SBU for each economically distinct
business area in which it operates
 a company defines its SBUs in terms of its product markets

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  Assessing and Comparing SBUs – the whole portfolio
 The criteria of assessing SBUs:
 The SBU’s relative market share / relative competitive strength
 The growth rate of the SBU’s industry / stages of the industry life-
cycle
 Relative Market Share is the ratio of an SBU’s market share to the market
share held by the largest rival company in the industry
 A share greater than the largest competitor is considered high
 A share less than the largest competitor would be rated a low
 Note: Only the largest competitor would have a high share
 Industry / Market growth rate is the percentage growth of the market in
the most recent year: 10% is the cut-off point b/n high & low growth
 In the BCG-Matrix:
 The vertical axis represents the rate of industry growth, an
important environmental factor – if the industry is growing, there
are favourable prospects
 The horizontal axis shows that market share relative to that of
the biggest competitor, an indicator of strength in the market
place

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 BCG explanation
Classifies Products into four simple categories:
Stars – products in markets experiencing high growth
rates with a high or increasing share of the market
 Potential for high revenue growth
Cash Cows:
High market share
Low growth markets – maturity stage of PLC
Low cost support
High cash revenue – positive cash flows

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 contd

01/02/2023 SM C-5 53
 contd
Dogs:
Products in a low growth market
Have low or declining market share (decline stage of PLC)
Associated with negative cash flow
May require large sums of money to support
 Is your product starting to embarrass your company?

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 contd
Problem Child (Question mark)
 Products having a low market share in a high growth
market
 Need money spent to develop them
 May produce negative cash flow
 Potential for the future?
 Problem children
worth spending
good money on?

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 The BCG - Matrix
 Stars: The leading SBUs in a company’s portfolio. They offer attractive long-
term profit & growth opportunities – still growing but not generating high
profit
 Question marks: can become a star if nurtured properly. To become a
market leader, a question mark requires substantial net injections of cash – it
is cash hungry

 Cash cows: are cost leaders in their industries. The capital investment
requirements of cash cows are not substantial – such businesses generate a
strong positive cash flow
 Dogs: are unlikely to generate a positive cash flow & may become cash hogs.
They may require substantial capital investments just to maintain their low
market share

Strategic Implications of the BCG-Matrix

 The cash surplus from any cash cows should be used to support the
development of selected question marks & nurture stars
 The long-term objective is to consolidate the positions of stars and turn
favoured question marks into stars, thus making the company’s portfolio
more attractive

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 Strategic Implications of the BCG-Matrix
 Question marks with the weakest or most uncertain long-term prospects
should be divested to reduce demands on a company’s cash resources
 Dogs having reached the end of their useful life, are generally best put to
sleep unless they are still performing a useful function – not merely making
a contribution to overheads
 Thus, the company should exit from any industry where the SUB is a
dog
 The portfolio must be balanced – when there are sufficient cash cows,
stars & question marks
 If the company lacks sufficient number of these businesses, it should
consider acquisitions & new ventures to build a more balanced portfolio
 Thus, a portfolio should contain enough:
 Stars & question marks to ensure a healthy growth & profit outlook for
the company
 Cash cows to support the investment requirements of the stars &
question marks

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 Industry Attractiveness – Competitive Strength matrix
(GE-Matrix)
 The GE Nine-Cell Planning Grid is an adaptation of the BCG
approach that attempts to overcome some of the limitations of BCG
 In the GE-Screen, the two main dimensions are presented by: Industry
(product-market) Attractiveness & Business (competitive) Strength
 Furthermore, each of the company’s business units is rated on
multiple sets of strategic factors within each axis of the grid:
 Factors identified as enhancing Industry Attractiveness:
 Sales/market growth

 Size & industry profitability

 Demand cyclicality

 Social, environmental, legal, etc.,

 Competition: Porter’s Five-force model

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 Industry Attractiveness – Competitive Strength matrix
 Factors identified as enhancing business/competitive strength:
 Market share
 Profit margin
 Customer & market knowledge
 Technological know-how & management caliber
 Brand image
 Cost structure distinctive competencies etc.
 Thus, in contrast to the BCG, the GE uses composite measures
 Accordingly, quantitative measures of industry attractiveness &
business strength are used to plot location of each business in
matrix

 The calculation is done subjectively by identifying the two

dimensions
 First, the strategist has to identify those important factors
contributing much to industry attractiveness & business strength

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 Industry Attractiveness – Competitive Strength matrix
 These examples illustrate how one business within a corporate portfolio
might be assessed using the GE planning grid
 It is a matter of management judgment:
 What should be included or excluded as a factor
 How it should be rated & weighted
 What matters is, after rating & weighting all strategic business units, they will
be positioned in the nine cells accordingly
 Each business unit appears as a circle in its respective cell & position
 Area of a circle is positioned to size of business as a percent of company
revenues or
 Area of a circle can represent relative size of industry with pie slice
showing the company’s market share.

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 GE Industry Attractiveness-Competitive
Strength Matrix

Business Unit Competitive Strength

10.0 Strong 6.7 Average 3.3 Weak 1.0
Industry Attractiveness

High

6.7

Medium

3.3

Low

1.0
High priority for investment Medium priority for investment
Low priority for investment
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