STRATEGIC MANAGEMENT (KMBN 301)

UNIT 4 (PART I)

Strategic Analysis
Strategic analysis refers to the process of conducting research on a company and its operating
environment to formulate a strategy.

The process involves several common factors:

1. Identifying and evaluating data relevant to the company’s strategy

2. Defining the internal and external environments to be analyzed
3. Using several analytic methods such as Porter’s five forces analysis, SWOT analysis,
and value chain analysis

Strategic Analysis Process

Perform an environmental analysis of current strategies

Starting from the beginning, a company needs to complete an environmental analysis of its
current strategies. Internal environment considerations include issues such as operational
inefficiencies, employee morale, and constraints from financial issues. External environment
considerations include political trends, economic shifts, and changes in consumer tastes.
2. Determine the effectiveness of existing strategies

A key purpose of a strategic analysis is to determine the effectiveness of the current strategy
amid the prevailing business environment. Strategists must ask themselves questions such as:
Is our strategy failing or succeeding? Will we meet our stated goals? Does our strategy align
with our vision, mission, and values?

3. Formulate plans

If the answer to the questions posed in the assessment stage is “No” or “Unsure,” we undergo
a planning stage where the company proposes strategic alternatives. Strategists may propose
ways to keep costs low and operations leaner. Potential strategic alternatives include changes
in capital structure, changes in supply chain management, or any other alternative to a
business process.

4. Recommend and implement the most viable strategy

Lastly, after assessing strategies and proposing alternatives, we reach a recommendation.

After assessing all possible strategic alternatives, we choose to implement the most viable and
quantitatively profitable strategy. After producing a recommendation, we iteratively repeat
the entire process. Strategies must be implemented, assessed, and re-assessed. They must
change because business environments are not static.

TOOLS AND TECHNIQUES OF STRATEGIC ANALYSIS

 BCG Matrix
 Ansoff Grid
 GE Nine cell Matrix
 McKinsey’s 7S Framework

 BOSTON CONSULTING GROUP (BCG) MATRIX

Boston Consulting Group 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.

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.

                10 x                   1 x               0.1 x

1. 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.

2. 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.

3. 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.
 4. 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-

1. 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.

2. Market is not clearly defined in this model.

3. High market share does not always leads to high profits. There are high costs also
involved with high market share.

4. Growth rate and relative market share are not the only indicators of profitability. This
model ignores and overlooks other indicators of profitability.

5. At times, dogs may help other businesses in gaining competitive advantage. They can
earn even more than cash cows sometimes.

6. This four-celled approach is considered as to be too simplistic.

ANSOFF’S PRODUCT/MARKET GROWTH MATRIX

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on
whether it markets new or existing products in new or existing markets. The output from the
Ansoff product/market matrix is a series of suggested growth strategies which set the
direction for the business strategy. These are described below:
#Market penetration
Market penetration is the name given to a growth strategy where the business focuses on
selling existing products into existing markets.
Market penetration seeks to achieve four main objectives:
 Maintain or increase the market share of current products – this can be achieved by a
combination of competitive pricing strategies, advertising, sales promotion and
perhaps more resources dedicated to personal selling
 Secure dominance of growth markets
 Restructure a mature market by driving out competitors; this would require a much
more aggressive promotional campaign, supported by a pricing strategy designed to
make the market unattractive for competitors
 Increase usage by existing customers – for example by introducing loyalty schemes

A market penetration marketing strategy is very much about “business as usual”. The
business is focusing on markets and products it knows well. It is likely to have good
information on competitors and on customer needs. It is unlikely, therefore, that this strategy
will require much investment in new market research.

Market development
Market development is the name given to a growth strategy where the business seeks to sell
its existing products into new markets.
There are many possible ways of approaching this strategy, including:
 New geographical markets; for example exporting the product to a new country
 New distribution channels (e.g. moving from selling via retail to selling using e-
commerce and mail order)
 Different pricing policies to attract different customers or create new market segments

Market development is a more risky strategy than market penetration because of the targeting
of new markets.

Product development
Product development is the name given to a growth strategy where a business aims to
introduce new products into existing markets. This strategy may require the development of
new competencies and requires the business to develop modified products which can appeal
to existing markets.
A strategy of product development is particularly suitable for a business where the product
needs to be differentiated in order to remain competitive. A successful product development
strategy places the marketing emphasis on:
 Research & development and innovation
 Detailed insights into customer needs (and how they change)
 Being first to market

Diversification
Diversification is the name given to the growth strategy where a business markets new
products in new markets.
This is an inherently more risk strategy because the business is moving into markets in which
it has little or no experience.
For a business to adopt a diversification strategy, therefore, it must have a clear idea about
what it expects to gain from the strategy and an honest assessment of the risks. However, for
the right balance between risk and reward, a marketing strategy of diversification can be
highly rewarding.
GE NINE CELL MATRIX
Another popular “Corporate Portfolio Analysis” technique is the result of pioneering effort of
General Electric Company along with McKinsey Consultants which is known as the GE
NINE 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, which is a weighted composite rating
based on eight different factors. They are:

1. Market size and growth rate

2. Industry profit margins
3. Intensity of Competition
4. Seasonality
5. Product Life Cycle Changes
6. Economies of scale
7. Technology
8. Social, Environmental, Legal and Human Impacts

What does the horizontal axis represent?

It indicates business strength or in other words competitive position, which is again a
weighted composite rating based on seven factors as listed below:

1. Relative market share

2. Profit margins
3. Ability to compete on price and quality
4. Knowledge of customer and market
5. Competitive strength and weakness
6. Technological capability
7. Caliber of management

The nine cells of the GE matrix are grouped on the basis of low to high industry
attractiveness, and weak to strong business strength. Three zones of three cells each are made,
indicating different combinations represented by green, yellow and red colors. So it is also
called ‘Stoplight Strategy Matrix’, similar to the traffic signal.
The 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 cautions you to ‘wait and see’ indicating hold and maintain type of strategies aimed
at stability.

Red indicates that you have to adopt turnover strategies of divestment and liquidation or
rebuilding approach.

There are 3 main strategies in the GE McKinsey matrix which are grow, hold and harvest.

GE McKinsey matrix strategies

Grow – If the business unit is strong against a strong attractiveness, you grow the business.
This means, that you are ready to invest a higher percentage of your resources in these
businesses. These business units have high market attractiveness and high business unit
strength. They are most likely to be successful if backed up with more resources. The
quadrants marked in green are the places where you can grow your business.

Hold – If the business unit strength or attractiveness is average, than you hold the business as
it is. It might be that the market is dropping in value, or that there is much high competition
which the business unit will be hard put to catch up. In both the cases, the business unit might
not give optimum returns even if resources are invested. Thus, in this case, you wait and hold
the business unit to see if the market environment changes or if the business unit gains
importance in the market as compared to other players.

Harvest – If the business unit or market has become unattractive, than you either sell or
liquidate the business or you can hold it for any residual value that it has. This strategy is
used in the GE McKinsey matrix when the business unit strength is weak and the market has
lost its attractiveness. The best measure in this case is to harvest the weak businesses and
reinvest the money earned into business units which are in growth.

Thus, based on the GE McKinsey matrix, you can manage your product portfolio efficiently
and can take the right decision of grow, hold or harvest for your products.

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.

MCKINSEY 7S MODEL
McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert
Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since
the introduction, the model has been widely used by academics and practitioners and remains
one of the most popular strategic planning tools. It sought to present an emphasis on human
resources (Soft S), rather than the traditional mass production tangibles of capital,
infrastructure and equipment, as a key to higher organizational performance. The goal of the
model was to show how 7 elements of the company: Structure, Strategy, Skills, Staff, Style,
Systems, and Shared values, can be aligned together to achieve effectiveness in a company.
The key point of the model is that all the seven areas are interconnected and a change in one
area requires change in the rest of a firm for it to function effectively.

In McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’ areas.
Strategy, structure and systems are hard elements that are much easier to identify and manage
when compared to soft elements. On the other hand, soft areas, although harder to manage, are the
foundation of the organization and are more likely to create the sustained competitive advantage.

7S FACTORS

Hard S Soft S

Strategy Staff
Structure Systems
Style Skills
Shared Values

Strategy is a plan developed by a firm to achieve sustained competitive advantage and

successfully compete in the market. What does a well-aligned strategy mean in 7s McKinsey
model? In general, a sound strategy is the one that’s clearly articulated, is long-term, helps to
achieve competitive advantage and is reinforced by strong vision, mission and values. But it’s
hard to tell if such strategy is well-aligned with other elements when analyzed alone. So the
key in 7s model is not to look at your company to find the great strategy, structure, systems
and etc. but to look if its aligned with other elements. For example, short-term strategy is
usually a poor choice for a company but if its aligned with other 6 elements, then it may
provide strong results.

Structure represents the way business divisions and units are organized and includes the
information of who is accountable to whom. In other words, structure is the organizational
chart of the firm. It is also one of the most visible and easy to change elements of the
framework.

Systems are the processes and procedures of the company, which reveal business’ daily
activities and how decisions are made. Systems are the area of the firm that determines how
business is done and it should be the main focus for managers during organizational change.

Skills are the abilities that firm’s employees perform very well. They also include capabilities
and competences. During organizational change, the question often arises of what skills the
company will really need to reinforce its new strategy or new structure.

Staff element is concerned with what type and how many employees and organization will
need and how they will be recruited, trained, motivated and rewarded.

Style represents the way the company is managed by top-level managers, how they interact,
what actions do they take and their symbolic value. In other words, it is the management style
of company’s leaders.

Shared Values are at the core of McKinsey 7s model. They are the norms and standards that
guide employee behavior and company actions and thus, are the foundation of every
organization.

STRATEGIC CHOICE

The decision to select from among the grand strategies considered, the strategy which will
best meet the enterprise objectives. The decision involves focusing on a few alternatives,
considering the selection factors, evaluating the alternatives against these criteria and making
the actual choice.

Process
 Focusing on strategies alternatives
 Analyzing the strategies alternatives
 Evaluating the strategies alternatives
 choosing the strategies alternatives