Corporate Strategy Analysis

Techniques for the Analysis of

Corporate Strategy
Corporate strategies
• There are different types of corporate strategies. Each of
these has specific applications and, if used incorrectly, will
have a negative effect. Therefore, the application of these
corporate strategies requires careful analysis to determine
the best fit in relation to the corporate goals. (specialization,
diversification, strategic alliance, and retrenchment Abbas
2013). Others stability, specialization retrenchment,
combination and growth and others Stability,
Expansion, Retrenchment and combination
• Developing an appropriate and effective corporate strategy
requires practice. Once developed, strategies must be
evaluated. Several matrices have proven successful in
evaluating diversified portfolios, including these:
• 1. The four-cell BCG (Boston Consultant Group) Growth-
Share Matrix, Which plots industry growth rate and relative
market share. This analysis relies on the learning curve
effect and the experience curve, which result from learning
effects, economies of scale, substitution, innovation, and
value engineering.
2. The nine-cell GE Matrix, which plots long-term
attractiveness against business strength/competitive
position. Like the BCG model, the GE model yields
only general prescriptions as opposed to specific
strategies.
The BCG Matrix
• The BCG matrix evaluates two variables:
(1) the growth rate of the industry on the vertical axis, and
(2) the firm’s relative competitive position in the industry, or
its market share, on the horizontal axis.
The market-share leadership is directly related to profitability.
Based upon these two criteria, a business is plotted on the
matrix by drawing a circle in one off our possible quadrants, or
cells.
• The matrix is divided into four cells, with each cell
representing the desirability of the combination of
competitive position and growth. The four cells are labeled
stars, cash cows, question marks, and dogs. Strategists will
plot their SBU in one of the four cells, and then pursue the
appropriate strategic action.
• The BCG matrix was designed to draw attention to various business
units’ cash flows and investment levels, and to aid in the allocation of
overall financial resources.
• The goal of using the BCG matrix is to enhance the entire portfolio.
• Two disastrous sequences in the BCG scheme can occur:
(a) a business in the star quadrant can decline in to a question-mark
position and then in to a dog position, or
(b) a cash cow business can lose market share and eventually become a
dog.
• The most stringent BCG standard calls for the
dividing line between high and low relative
market share to be placed at 1.0.

• Relative market share is the ratio of a business’s

market share to the market share held by the
largest rival firm in the industry, with market
share being measured in terms of unit volume,
not dollars.
• Business units that fall to the left of this line are
leaders in their industries,

• While those falling to the right trail the market

share leader.
Introduction (Question Mark)
growth (Star)
maturity (Cash cows)
decline (Dog).
Star
• The “stars” cell (upper left) represents businesses in a high-
growth industry, with a high market share. Businesses in
this quadrant offer excellent profit and growth opportunities.
• A good strategy for a firm in this position would be to
continue its current course of action and make every effort to
maintain the status quo even though this may require
substantial investment. Stars usually require considerable
cash to support expansion of production facilities and
working capital needs. They also tend to generate a large
internal cash flow.
• These businesses are the ones the corporation will depend
upon to boost performance of the overall portfolio.
Cash cows
• The “cash cows” cell (lower left) represents businesses in a low
growth industry, but that have a relatively good competitive
position in that industry.
• These businesses are able to generate good cash flow with
relatively little investment.
• A typical strategy for these businesses is to maintain them as
cash cows for as long as possible, using the profits to finance
other endeavors.
• Thus, a business in this cell will be “milked” of its cash to
support other SBUs within the organization. A firm must guard
against a cash cow turning into a dog.
• The suggested strategy for an organization with an SBU in this
cell is to acquire cash cows, if possible
DOGS
• The “dogs” cell (lower right) represents the least desirable position of
low industry growth and low market share.
• These businesses produce low, (if any), profits.
• Businesses in the dog quadrant should be harvested, divested, or
liquidated, depending on which alternative gives the most positive cash
flow.
• Occasionally, a turnaround strategy can be used to make these
businesses profitable.
• They are in weak competitive positions and have low profit potential
associated with slow growth or impending market decline.
• Dogs usually cannot generate cash flows on a long-term basis.
 The question mark
• The “question mark” or “problem child” cell (upper right) represents
businesses with high growth potential but low market share.
• Profit potential in this quadrant is questionable.
• A company can move to either star or dog status from this tenuous
position;
• But creating a star may require considerable investment.
• However, the potential reward may be well worth the investment risk.
• Businesses in this cell must be carefully monitored. These businesses
are usually “cash hogs” because they require high investment levels to
ensure rapid growth and product development.
• The corporation has to decide whether it is worthwhile to invest in the
question-mark business.
Strength of BCG
• The BCG approach is seen to have several strengths, but it also poses
a number of weaknesses.
1. The BCG approach allows the organization’s various businesses to
be viewed as a collection of cash flows, and it is a major step
forward in understanding the financial aspects of corporate
strategy.
2. The matrix highlights the financial interactions in a corporate
portfolio to show the kinds of considerations with which an
organization must deal.
This explains why the priorities for corporate-resource allocations can
be different from business to business.
3. The matrix also provides good rationalization for both investment
and divestitures.
WEAKNESSES
1. The matrix works better in a growing economy than in a declining
economy.
2. A four-cell matrix hides the fact that many businesses are in average
growth markets or average share positions.
3. Although the categories can be useful, they can lead to
oversimplification. Not all businesses with low relative market share
are truly dogs or question marks—some have proven track records
for growth and profitability.
4. The matrix is not a reliable indicator of relative investment
opportunities across business units. The matrix does not show
whether a question-mark business is a potential winner or a
potential loser.
Thompson and Strickland provided a matrix that looks very much
like the BCG matrix.
The intention of the new matrix is to overcome some of the
limitations of the BCG model. The vertical axis represents the
company’s competitive strength, and the horizontal axis represents
the industry market growth potential.
Substituting competitive position for market share provides more
flexibility and better representation of companies with low market
share but strong competitive position
 The GE Business Screen
• The GE Business Screen is an advanced portfolio matrix
developed by General Electric for its use in determining which
SBUs or major products to keep in GE’s portfolio and which to
delete.
• The GE matrix can also be used to evaluate possible acquisitions,
mergers, and/ or new product development.
• The GE matrix eliminates the majority of the inherent
weaknesses of the BCG matrix by employing composite
measures of business strengths and industry attractiveness.
• With the GE matrix, a strategist may plot a business in any of
nine positions, as opposed to the BCG’s four positions.
• The GE matrix consists of nine cells of different colors that
indicate appropriate strategies for different businesses or
products.
• The vertical axis represents industry attractiveness while the
horizontal axis represents the strength of the business or
product.
• Both axes have high,medium, and low locations.
• Within the GE matrix, there are three grids labeled G, R, and Y.
• If a firm or product under analysis falls in an intersection within Grid
G, or a “green” cell, then an invest-and-grow strategy should be used.
• An organization or product falling in an intersection within Grid R, ora
“red” cell, should either
(1) be harvested and ultimately divested or
(2) employ a retrenchment and turn around strategy, curtail or reduce
investment in the business, and extract as much as possible before the
business is divested.
• Grid Y portrays a firm that intersects in a “yellow” cell, where the firm
or product has low business strengths but high industry
attractiveness.
• Here, the organization should employ a selectivity/earnings strategy.
• If this demonstrates good earning potential for the business, it
should receive an invest-and-grow strategy and be monitored
continually.
• If it does not prove worthwhile, it should be divested.
Advantages
• The GE model has several advantages over the BCG matrix
• First, it allows for intermediate rankings between high and
low.
• Second, it incorporates a variety of strategically relevant
variables.
• Third, it emphasizes channeling corporate resources to those
businesses that combine market attractiveness with business
strength
 WEAKNESS
• The GE model shares some weaknesses with the BCG model
• It yields only general prescriptions as opposed to specific
strategies. Although a strategy such as “hold and maintain”
may be useful as a starting point, specific approaches to
implement the strategy remain wide open.
• Further, the model fails to show when businesses are about to
emerge as winners because the product is entering the take off
stage.
• It is therefore recommended to utilize more than one model to
overcome some of these problems.
• Using one model might help managers to solve a particular
problem but overlook other possibilities.
Industry analysis
• An industry analysis usually begins with a general examination of the
forces influencing the organization.
• The objective of such a study is to use this to develop competitive
advantage of an organization to enable it to defeat its competitors.
Michael Porter’s Generic Strategies
• According to Porter, strategies allow organizations to gain competitive
advantage from three different bases:
• cost leadership, differentiation, and focus.
• Porter calls these base generic strategies.
• Cost leadership emphasizes producing standardized products at a very
low per-unit cost for consumers who are price-sensitive.
• Differentiation is a strategy aimed at producing products and services
considered unique industry wide and directed at consumers who are
relatively price-insensitive.
• Focus means producing products and services that fulfill the needs of
small groups of consumers
• Larger firms with greater access to resources typically
compete on a cost leadership and/or differentiation basis,
whereas smaller firms often compete on a focus basis.
• Porter stresses the need for strategists to perform cost-
benefit analyses to evaluate “sharing opportunities” among a
firm's existing and potential business units.
• Porter stresses the need for firms to “transfer" skills and
expertise among autonomous business units effectively in
order to gain competitive advantage.
• Cost Leadership Strategies
• A primary reason for pursuing forward, backward, and horizontal
integration strategies is to gain cost leadership benefits. But cost
leadership generally must be pursued in conjunction with
differentiation.
• cost elements affect the relative attractiveness of generic
strategies, including economies or diseconomies of scale
achieved, learning and experience curve effects, the
percentage of capacity utilization achieved, and linkages
with suppliers and distributors
• Striving to be the low-cost producer in an industry can
be especially effective when the market is composed
of many price-sensitive buyers, when there are few
ways to achieve product differentiation, when buyers
do not care much about differences from brand to
brand, or when there are a large number of buyers
with significant bargaining power. The basic idea is to
under price competitors and thereby gain market share
and sales, driving some competitors out of the market
entirely.
Differentiation Strategies

• Differentiation Strategies
• Different strategies offer different degrees of differentiation.
Differentiation does not guarantee competitive advantage, especially
if standard products sufficiently meet customer needs or if rapid
imitation by competitors is possible.
• A differentiation strategy should be pursued only after a careful study
of buyers’ needs and preferences to determine the feasibility of
incorporating one or more differentiating features into a unique
product that features the desired attributes.
• A risk of pursuing a differentiation strategy is that the unique product
may not be valued highly enough by customers to justify the higher
price. When this happens, a cost leadership strategy easily will defeat
a differentiation strategy.
• Another risk of pursuing a differentiation strategy is that competitors
may develop ways to copy the differentiating features quickly.
Focus Strategies

• A successful focus strategy depends on an industry segment that is of

sufficient size, has good growth potential, and is not crucial to the
success of other major competitors. Strategies such as market
penetration and market development offer substantial focusing
advantages.
• Midsize and large firms can effectively pursue focus-based strategies
only in conjunction with differentiation or cost leadership-based
strategies.
• All firms in essence follow a differentiated strategy. Because only one
firm can differentiate itself with the lowest cost, the remaining firms
in the industry must find other ways to differentiate their products.
• Focus strategies are most effective when consumers have
distinctive preferences or requirements and when rival
firms are not attempting to specialize in the same target
segment.
• Risks of pursuing a focus strategy include the possibility
that numerous competitors will recognize the successful
focus strategy and copy it.
• An organization using a focus strategy may concentrate
on a particular group of customers, geographic markets,
or on particular product-line segments in order to serve a
well-defined but narrow market better than competitors
who serve a broader market.
Porter’s five forces model
• Industry analysis is often undertaken by using the structure
proposed by Michael Porter, often called Porter’s five forces
model because it identifies five basic forces that can act on
the organization.
• Porter’s five forces mode of industry structure analysis is a
useful approach to formulating business level strategies, ie
strategies to compete in the market place
• Porter’s five forces model consists of the following forces:-
i. The bargaining power of suppliers
ii. The bargaining power of buyers
iii. The threat of new entrants
iv. The threat of substitute products/services
v. The extent of competitive rivalry.

The objective of such analysis is to investigate how the

organization needs to form its strategy in order to develop
opportunities in its environment and protect itself against
competition and other threats
1. Bargaining power of suppliers
• Almost every organization has suppliers of raw materials or services
which are used to produce the final goods and services. The suppliers
are key stakeholders to the organization.
• Bargaining power of suppliers constitutes their ability, individually or
collectively, to force an increase in the prices of goods and services or
make the buyers(purchasers) accept a lower quality of goods or
service levels.
• Michael Porter suggested that the suppliers are more powerful under
the following conditions:-
a) If there is only one or a few suppliers and buyers are many
b) If there are no substitute for the supplies they are offering (if there are
no substitute products)
c) If a supplier can potentially undertake the value added process of the
organization; this could pose a real threat to the survival of the
organization
d) If the supplier’s prices form a large part of the total costs of the
organization; automatically bargaining power of the supplier will
increase.
e) If the need is urgent and cannot be postponed
f) If the supplier has the knowledge of the buyer, ie knows its
strengths and weaknesses
g) When the buyer is critically dependent on the products of the
supplier
h) When the buyer buys in small quantities and therefore is not
important to the supplier
i) When switching costs from one supplier to another is high
2. Bargaining power of buyers
• In this model, Porter used the term buyers to describe what might
also be called the customers or purchasers.
• Bargaining power of buyers constitutes their ability, individually or
collectively, to force a reduction in price of good or services, demand
a higher quality or better services or to seek more value for their
purchases in any way.
• The higher the bargaining power of buyers constitutes a negative
feature for existing and new entrants in the industry and vice versa
• Buyers have more bargaining power under the following conditions:-
a) If buyers are in a monopolistic or semi-monopolistic position; this
means the supplier has a little option but to negotiate with a buyer
because there are a few alternative buyers around, the supplier will
clearly be in weak position
b) When there are substitute products; which means the buyer can
easily switch from one to another suppliers without problems
b) If there are many suppliers
c) When few buyers place large orders individually.
d) If the need is not urgent and can be postponed
e) If the buyer knows the supplier
f) If the supplier is anxious about the deal
g) When the switching costs of buyer from one supplier to another is
low
3. The threat of new entrants
• New entrants are firms that are interested in investing in the industry
to share the growth prospects.
• New entrants come into a market place when the profit margins are
attractive and the barriers to entry are low.
• New entrants may cause comparatively lesser sales volume and
revenues and lower the returns of all the firms in the industry.
• The attraction of high profitability is clear and so the major strategic
issue is that of barriers to entry into a market.
• There are seven major sources of barriers to entry;-
a) Economies of scale in production and sale of products leading to
lower costs for existing firms:- that means unit cost of production
may be reduced as the absolute volume per period is increased.
Such cost reduction occurs in many industries and present barriers
because they mean that new entrants has to come in on a large
scale in order to achieve the low cost levels of those already
present in business.
b) Product differentiation:- branding, customer knowledge/loyalty,
special levels of service etc may create barriers by forcing new
entrants to spend extra funds or take longer to become established
in the market.
c) Capital requirement:- entry into some market may involve major
investment in technology, plants, distribution, service outlets, etc
the ability to rise such funds and the risks associated with such
outlays of capital will deter (discourage) some companies (new
entrants).
d) Switching costs:- when the buyer is satisfied with his existing
product or service, it is obviously difficult to switch that buyer to a
new entrant. The cost of making the switch would naturally fall to
the new entrant and will present a barrier to entry.
e) Access to distribution channel;- it is not enough to produce quality
products, it must be distributed to customers through channels
that may be controlled by companies already in the market.
f) Experience gives early entrants into an industry an advantage in
terms of costs and or customer or supplier loyalty.
g) Government policy:- for many years governments have enacted
legislations to protect companies and industries at domestic
markets, such legislations could be monopolies in
telecommunications, health, utilities, gas, electricity, etc this would
act as barrier to entry for other firms in the market
4. Threat of substitutes
• Substitute products are those that apparently are different, but they
satisfy the same set of customer needs, such as coffee and tea.
• The availability of substitute products constitutes a negative
competitive force in an industry.
• Industries which have no close substitute are more attractive than
those that have one or more of such substitutes.
• A firm in an industry having no close substitute can charge a higher
price and earn a higher return.
• Occasionally, substitute products render a product in an industry
redundant (no longer needed or useful and can be omitted without
loss of meaning or function).
• For instance the introduction of synthetic fiber caused sisal to lose its
importance in the market and Tanzania as a sisal producer lost
millions and billions of sales.
5. The extent of competitive rivalry
(rivalry among competitors)
• This refers to the extent of competition within organisations with
similar products and services aimed at the same customer group.
• A segment is unattractive if it already contain numerous, strong and
aggressive competitors.
• Some markets are more competitive than others. In highly
competitive markets, companies engage in regular and extensive
monitoring of key competitor companies. For example:-
Examining price changes and balancing any significant move
immediately
Examining any rival product change in great details and attempt new
initiatives immediately
Attempting to poach the employees
Watch investments in new competing plant and having regular
drivers to reduce their own cost levels