STRATEGIC MANAGEMENT-MMH 4TH.

SEMESTER/C9T//UNIT-IV

Strategic Framework: Strategic Analysis and choice, Strategic gap

analyses, Portfolio Analyses- BCG, GE, Product Market Evolution matrix,
Experience Curve, Directional Policy Matrix, Life-Cycle Portfolio Matrix,
Grand Strategy Selection Matrix.

Strategy analysis and choice focuses on generating and evaluating alternative strategies, as well
as on selecting strategies to pursue. Strategy analysis and choice seeks to determine alternative
courses of action that could best enable the firm to achieve its mission and objectives.
The firm’s present strategies, objectives, and mission together with the external and internal
audit information, provide a basis for generating and evaluating feasible alternative strategies.
The alternative strategies represent incremental steps that move the firm from its current
position to a desired future state.
Alternative strategies are derived from the firm’s vision, mission, objectives, external audit,
and internal audit and are consistent with past strategies that have worked well. The strategic
analysis discusses the analytical techniques in two stages i.e. techniques applicable at corporate
level and then techniques used for business-level strategies.
The techniques pertaining to the corporate level include BCG matrix, GE nine-cell planning
grid, Hofer’s matrix and Shell Directional Policy Matrix and the techniques for business- level
include SWOT analysis, Experience Curve Analysis, Grand strategy selection matrix, grand
strategy clusters.
The judgmental factors constitute the other aspects on the basis of which strategic choice is
made. We discuss the several factors that guide the strategists in strategic choice.

Strategic analysis at the corporate level treats a corporate body constituting a portfolio of
businesses in a corporate vase. The analysis considers the various issues regarding the several
businesses in the corporate portfolio.
The strategic options are the generic strategies of stability, expansion, retrenchment, and
combination. The corporate level strategic analysis is relevant to a multi-business corporation.
For single business entities, business-level strategic analysis would suffice.
We begin with an explanation of the corporate level analysis techniques that form a major part
of the analysis performed at the corporate level.

Strategic Gap Analysis

Strategic Gap Analysis can be understood as a strategic tool used for analyzing the gap
between the target and anticipated results, by assessing the extent of the task and the ways, in
which gap might be bridged. It involves making a comparison of the present performance
level of the entity or business unit with that of standard established previously.

Gap analysis is an excellent strategic tool used by management to identify where the company
is going and what is the expectation or the potential of the company. In essence, Gap analysis
compares the actual achievement with the potential achievement to find the gap in the existing
strategy. This gap then needs to be filled such that the company meets its own potential.
There can be many reasons that gaps exist within a company’s strategy. Most of these reasons
are because of a changing business environment. In the last decade itself, we have many
changes in the business environment. Retail market has come in leaps and bounds, internet is
taking over retail and now mobiles and smart phones are utilizing internet to get the customers
what they need at their doorstep. That is a lot of changes in a decade.

Gap Analysis is a process of diagnosing the gap between optimised distribution and integration
of resources and the current level of allocation. In this, the firm’s strengths, weakness,
opportunities, and threats are analyzed, and possible moves are examined. Alternative
strategies are selected on the basis of:

• Width of the gap

• Importance
• Chances of reduction

If the gap is narrow, stability strategy is the best alternative. However, when the gap is wide,
and the reason is environment opportunities, expansion strategy is appropriate, and if it is due
to the past and proposed bad performance, retrenchment strategies are the perfect option.

Types of Gap

The term ‘strategy gap’ implies the variance between actual performance and the desired one,
as mentioned in the company’s mission, objectives, and strategy for reaching them. It is a threat
to the firm’s future performance, growth, and survival, which is likely to influence the
efficiency and effectiveness of the company. There are four types of Gap:
 1. Performance Gap
2. Product/Market Gap: The gap between budgeted sales and actual sales is termed as
product/market gap.

3. Profit Gap: The variance between a targeted and actual profit of the company.
4. Manpower Gap: When there is a lag between required number and quality of workforce and
actual strength in the organization, it is known as manpower gap.

For different types of gaps, various types of strategies are opted by the firm to get over it.

Alternative Courses of Action

In case, gaps are discovered the company’s management has three alternatives:

• Redefine the objectives: If there is any difference between objectives and forecast, first
and foremost the company’s top executives need to check whether the objectives are
realistic and achievable or not. If the objectives are intentionally set at a high level, the
company should redefine them.
• Do nothing: This is the least employed action, but it can be considered.

• Change the strategy: Lastly, to bridge the gap between the company’s objectives and
forecast, the entity can go for changing strategy, if the other two alternatives are
considered and rejected.

Before making any change in the strategy, one must consider that the gap exists between the
present and proposed state of affairs. It is too wide to be noticed, and the organization is
encouraged to reduce it. The company’s management is of the opinion that something can be
done to reduce it.

Stages in Gap Analysis

1. Ascertain the present strategy: On what assumptions the existing strategy is based?
2. Predict the future environment: Is there any discrepancy in the assumption?
3. Determine the importance of gap between current and future environment: Are changes
in objectives or strategy required?

Whether it is anticipated sales, profit, capacity or overall performance, they are always based
on the past, and present figures and some amount of guess are also involved in it. So, the
occurrence of the gap is quite natural, but if the gap is large, then it is a point to ponder because
it might have an adverse affect on the company’s future.

BCG MATRIX

The BCG matrix is a chart that had been created by Bruce Henderson for Boston Consulting
Group in 1970 to help corporations to analyse their business units or product lines. In general,
for large companies, there is always a problem of allocating resources amongst its business
units in some logical/rational ways. To overcome such problems, Boston Consulting Group
(BCG) has developed a model, which has been termed as BCG matrix.
BCG matrix is also called as ‘Growth-share matrix’, is based on two variables, viz., the rate of
growth of the product-market and the market share in that market held by the firm relative to
its competitors. This model aims at systematically identifying the main underlying strategic
characteristics of specific business segments. This model is developed to analyze the problem
of resource deployment among the business units or products of multi-business firms. BCG
matrix is based on empirical research, which analyzes products and business by market share
and market growth.
The Boston Consulting Group (BCG) has pursued and refined the concept of the experience
curve to the point where this essentially production phenomenon has strong implications for
marketing strategy. BCG matrix is considered to be an effective tool for strategy formulation.
GSM matrix is said to be capable of assigning broad product-market strategies to products on
the basis of the market growth rate and its market share relative to competitor’s product.
BCG matrix analysis helps the company to allocate resources and is used as an
analytical tool in brand marketing, product management, strategic management
and portfolio analysis. BCG matrix provides a scheme for classifying a
company’s business according to their strategic needs. Specially cash or finance
requirements.
By relating cash flow to market share and market growth, it could then determine those
products that represent opportunities for investment, those that should generate investment
funds, and those that drain funds and which should be liquidated or divested.
The underlying principle of BCG matrix is the net free cash flow of a company must be kept
positive for a company’s growth to be financed through internal funds and its debt capacity.
Company’s sustainable growth rate is then determined by the relative cash positions of its
portfolio of business. There is a need to strike a balance between cash-generating business and
cash-using business if growth is to be funded by the company.
BCG matrix is developed on the basis of two factors:
(a) Relative market share, and
(b) Business growth rate.
These two factors are used to plot all the business (products) in which the firm is involved. The
vertical axis measure the annual growth rate of the market and the horizontal axis shows the
relative market share of the firm. Each of these dimensions is divided into two categories of
high and low, making up a matrix of four cells; and the products are graphed as Stars, Question
Marks, Cash Cows and Dogs in these four cells.

Relative Market Share

CALCULATING MARKET SHARE
The market share for a particular year is calculated as follows:
Relative market share = Business unit sales (currently)
(current year) leading competitors sales
(current year)
Demarcation between high and low market share is set at 1.5. This means that if a
particular business units current sales are 1.5 times or greater than its leading competitors
sales, then the SBU is considered to have a high relative market share.
CALCULATING MARKET GROWTH RATE
Market growth rate =Total market - Total market
(current year) = (this year) (last year)
Total market (last year)
A high grow rate is taken to be over 10%.

Stars(High Growth-High Market Share):

Star represents those products, which have successfully passed the introduction stage and are
on the path of growth. They are self sufficient for cash requirements i.e. cash generated is
almost equal to cash used. Stars are the products that are rapidly growing with large market
share. They earn high profits but they require substantial investment to maintain their dominant
position in a growing market.
Stars are usually profitable and would be the future cash cows. Since the stars are growing
rapidly and have the advantage of already having achieved a high share of the market, they
provide the firms best profit and growth opportunities. Successful resource deployment beyond
cash requirements could lead to a superior market share when industry growth potential falls
off.
Resources should be allocated to these units to grow faster than the competition in sales and
profits. Stars are leaders in the business and generate large amounts of cash. The stars will
entail huge cash outflows to maintain the market share and to ward off competition. The firm
will start feeling the experience curve effect.
Overtime, all growth slows. Therefore, stars eventually become cash cows if they hold their
market share. If they fail to hold market share, they become dogs. Star is a market leader (i.e.
high market share) in a high growth market. Stars are market leaders typically at the peak of
their product life cycle and are usually able to generate enough cash to maintain their high
share of the market.
When their market growth rate slows, stars become cash cows. The star generally pursues a
growth strategy to establish a strong competitive position. Stars reinvest large amounts of
revenues to further refine and improve the product.
Stars hold prices down to capture a larger share of the market and to discourage the entry of
competitors. Since the stars are growing rapidly and have the advantage of already having
achieved a high share of the market, they provide the firms best profit and growth opportunities.
Cash Cows(Low Growth-High Market Share):
A cash cow produces a lot of cash for the company. The company does not have to finance for
capacity expansion as the market’s growth rate has slowed down. Since, a cash cow is a market
leader; it enjoys economies of scale and higher profit margins. When a market’s annual growth
rate falls, a star becomes a cash cow if it still has the largest relative market share.
The important strategic feature of cash cows is that they are generating high cash returns, which
can be used to finance the stars or for use elsewhere in the business. Cash cows have a strong
market position in the industry that have matured. In comparison with the position of the star
performer, cash cows can expect little serious competition because of their relatively low
expected industry growth rate.
Competitors will not expect to launch any offensive competitive strategy program in the
absence of significant industry potential. Cash cows are units with high market share in a slow-
growing industry. Cash cows are ideal for providing the funds needed to pay dividends and
debts, recover overheads and supply of funds for investment in other growth areas. Cash cows
are established, successful and need less investment to maintain their market share.
The cash cows are in the declining stage of their life cycle, the surplus cash generated by them
will be invested in new question marks. Cash cows are more valuable in a portfolio because
they can be ‘milked’ to provide cash for other riskier and struggling businesses. The strategy
employed in respect of cash cows without having long-term prospects is to harvest i.e. to
increase short-term cash flow without considering the long-term effects.
Question Marks (High Growth-Low Market Share):
The question mark is also called as ‘problem child’ or ‘wildcat’. Question marks are the
products/businesses whose relative market share is low but have high growth potential. The
area question mark identifies those products which are at introduction stage in the market and
the cash generated is less than cash used for these products.
Their competitive position is weak but they work for long-term profit and growth. These
products require additional funds to improve their market share so that the question mark
becomes a star. This strategy may even necessitate foregoing short-term profits. If the firm is
unsuccessful in uplifting a question mark to a position star, divestment strategy can be
appropriate.
If no improvement is made in market share, question marks will absorb large amount of cash
and later, as the growth stops, turn into dogs. If the question mark business becomes successful,
it becomes a star. A question mark denotes a new entrant into the market and growth prospects
will be tremendous but will have a very low market share and its success or failure cannot be
judged easily.
If question marks are left unattended, they are capable of becoming cash traps. Question marks
are yet to establish their competitive viability although they usually operate in a rapidly
growing market. Therefore, they require huge cash outflow. Strategy must be evolved whether
to try for a star or hold the current position or divest. Question marks must be analyzed carefully
in order to determine whether they are worth the investment required to achieve market share.
A decision needs to be taken about whether the product justifies considerable expenditure in
the hope of increasing its market share, or whether it should be allowed to die quietly. Most
businesses start off as a question mark in that the company tries to enter a high-growth market
in which there is already a market leader. A question mark require a lot of cash for setting up
additional plant and equipment and hire more personnel to keep up with the fast-growing
market to overtake the market leader.
Dogs(Low Growth-Low Market Share):
Dogs describe company business that has weak market shares in low-growth markets. Products
with low market share and limited growth potential are referred to as dogs. The prospects for
such products are bleak. It is better to phase them out rather than continue with them. Dogs
should be allowed to die or should be killed off. Although they will show only a modest net
cash outflow or even a modest cash inflow, they are cash traps.
They provide a poor return on investment and not enough to achieve the organization’s target
rate of return. These units are typically ‘break-even, generating barely enough cash to maintain
the market share. Though owning a break-even unit provides the social benefit of providing
jobs and possible synergies that assist other business units, from financial point of view such a
unit is worthless, not generating cash for the company.
They depress the company’s overall ‘return on assets ratio’, used by the investors, financial
institutions and banks in judging how well the company is being managed. Since Dogs hold
little promise for the future and may not even pay their own way, they are prime candidates for
divestiture. The only way for dog is to increase its rate of sales growth by taking sales away
from competitors.
Question marks unable to obtain a dominant market share by the time the industry growth rate
inevitably slows become dog.
The feasible strategies are:
(a) Invest more money to see whether the market share can be increased.
(b) Harvest whatever can be extracted and then close down.
(c) Divest by selling or hiving off the business unit.
(d) Minimize the number of dogs in a company.
(e) As soon as they stop delivering, they should be phased-out or otherwise liquidated.
(f) Expensive turnaround plans should be avoided.
In some industries, dogs provide a platform for the development of future stars, act as loss
leaders or help to complete a product range, to kill competition, for tax planning etc.
Other Classification of SBUs:
Infants – Products in an early stage of development.
Warhorse – Products that have been cash cows in the past and still making acceptable sales and
profits even now.
Dodos – Products with low share, negative growth and negative cash flow.
Strategic Alternatives:
For a Strategic Business Unit (SBU), there are four strategic alternatives are suggested:
(a) Build – To increase the SBU’s market share, even foregoing short-term earnings to achieve
this.
(b) Hold – To preserve the SBU’s market share.
(c) Harvest – To increase the SBU’s short-term cash flow regardless of the long-term effect.
(d) Divest – To sell or liquidate the business because resources can be better used elsewhere.
Problems in Using BCG Matrix:
The BCG matrix is criticised for the following reasons:
(a) It does not talk about profitability at all.
(b) It fails to correctly define market share and market growth.
(c) It ignores competition factors and trends in markets.
(d) It considers only two factors viz., market growth rate and market share, ignoring all other
factors.
(e) It does not say how long a product will continue in each phase.
(f) It fails to consider globalization factor, where markets are not limited to a particular area or
place.
(g) It encourages strategy development for general use rather than specific criteria.
(h) It implies assumptions about mechanism of corporate financing and market behaviour that
are either unnecessary or false.
(i) It overlooks other important strategic factors that are a function of the external competitive
environment.
(j) It does not provide direct assistance in company with different businesses in terms of
investment opportunities.
(k) Its focus is on cash flow, whereas organizations may be more interested in ROI.
(l) It does not depict the position of business that are about to emerge as winner because the
product is entering the takeoff stage,
(m) It neglects small competitors that have fast growing market shares.
(n) It fails to consider that, a business with a low market share can be profitable too.
(o) A high market share does not necessarily lead to profitability all the time.
(p) Market growth is not the only indicator for attractiveness of a market.
(q) It does not offer guidance for inter unit comparisons.
(r) An SBUs profitability, cash flow and industry attractiveness not always be closely related
to market share and growth rate.
The BCG matrix cannot be used in isolation. It is a rough model, and the originators of the
matrix modified it over time to include, for example, the concept of a ‘cash dog’ which has a
low share of a low growth market but still earns a nice profit. The BCG matrix is not a tool for
increasing profits. It is an analytical model suggesting guidelines for cross subsidization. BCG
matrix does not talk about profits at all; it is useful in increasing cash flow situation.
The application BCG matrix to strategic decision making is in the manner of the diagnostic
rather than a prescriptive aid. BCG model evaluates a firm’s products, business and/or profit
centres as separate entities. Decisions are made for each entity pertaining to its market share
and existing or potential growth rate of the industry.
The BCG matrix helps in forecasting cash flow situations. It also helps to make product mix
decisions. An ideal business portfolio (mix of businesses) as envisaged by the BCG matrix
would be one with largest number of cash cows and stars and only a few question marks and
dogs. The matrix combines market growth rate and market share, and thus directly relates to
the experience curve.
BCG matrix provides analysis in determining the competitive position and this can be
translated into strategy. It helps the managers ‘balance the flow of cash resources among their
various businesses. This sort of analysis enables a company to assess its competitive standing
and enables to decide future resources allocation for its product portfolio.

The GE McKinsey Matrix:

In the 1970s, General Electric (GE) commissioned McKinsey & Company to develop a
portfolio analysis matrix for screening its business units. This matrix or GE Matrix is a
variant of the Boston Consulting Group (BCG) portfolio analysis.

GE nine-box matrix is a strategy tool that offers a systematic approach for the multi business
enterprises to prioritise 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 matrix is of 3X3, where Y-axis measures the
attractiveness of the market and X-axis measures the strength of the business unit.

Market attractiveness

Market attractiveness talks about the perks the potential market holds for the
company. Therefore, before diversification, a company has to check certain
components of the market. These include the following:

a) Size of the market

b) Structure of the industry
c) Competitors
d) Entry and exit barriers
e) Product life cycle
f) Demand
Example– Reliance Group, led by DhirubhaiAmbani, started back in 1966 and was mainly
functioning in the infrastructure, power and communications sector. In 2006, the company
took a turn when they started Reliance Fresh.
Now, why is it that from selling electricity and gadgets Reliance directly came down to
selling potatoes and tomatoes?
Are these decision taken by marketers just out of the blue?
Well, a study of 33 markets across the country has analysed that the retailers of the
vegetables and dairy items are selling at a profit of 48.8% than the wholesale prices.
India is one of the top 5 retail markets in the world and retail trade holds about 10% of our
GDP.
Reliance Fresh, which now has about 700 outlets in the 93 cities, has been tapping the
potential retail market of the country.
It even plans to invest 3.5 billion dollars in the coming years to optimise their operations.

Business strength

Every business has to run along with its competitors. Along with that, it needs to capitalize on
its core competencies to create a sustainable advantage.
Internal as well as external factors help the company to define their position in a competitive
setup.
Internal factors – product differentiation, the company’s market share, assets, R & D services,
customer loyalty programmes etc.
External factors – Competitors, Government regulations, the economic condition of the
market, external parts of the value chain.
Example – How many of us remember Foodle?
For the many who may not remember, it was a brand extension of Horlicks, back in 2010.
The company launched the product with an idea of making a healthy alternative to Maggi
noodles.
But despite aggressive marketing and promotions, the brand still couldn’t gather a
considerable market share.
If the product falls in the Green (Go) section i.e. if the business position is strong and industry
is at least medium in attractiveness, the strategic decision should be to expand, to invest and
grow.
If the business strength is low but industry attractiveness is high, the product is in the
Amber/Yellow zone. It needs caution.
A product is Red (Stop) zone indicates that the business strength is low and so is industry
attractiveness.
The appropriate strategy in this case should be retrenchment, divestment or liquidation.
The SBUs in the ‘Green’ section maybe said to belong to the category of stars’ or ‘cash cows’
in BCG matrix.
Those in ‘Red’ zone are like ‘dogs’ and those in the Yellow or Amber zone are like ‘question
marks’.
Each factor is assigned as a weight which is appropriate to industry or company.
The table below suggests some strategies to be adopted as per the GE 9 cell
matrix:

Business Industry Attractiveness

 Strength High Medium Low
High Premium : Selective: Protector/Refocus:
-Invest for growth -Invest for growth -Selectively for
-Provide maximum -Invest heavily in earnings
investment selected segments -Defend strengths
-Diversify -Share ceiling

Medium Challenge: Prime : Restructure:

-Invest for growth -Selectively invest -Harvest or Divest
-Build selectively -segment market -Provide essential
on strengths only -Make contingency commitments
-Avoid plans -Shift to more
vulnerability attractive segment
Low Opportunistic : Opportunistic : Harvest/Divest:
-Selectively invest -Preserve for harvest -Exit from market or
for earning -Boost cash flow out prune
-Ride Market
product

• Advantages
(i) Helps to prioritize the limited resources in order to achieve the best returns.
(ii)The performance of products or business units becomes evident.
(iii)It’s more sophisticated business portfolio framework than the BCG matrix.
(iv)Determines the strategic steps the company needs to adopt to improve the performance of
its business portfolio.

• Disadvantages
(i)Needs a consultant or an expert to determine industry’s attractiveness and business unit
(ii)strength as accurately as possible.
(iii)It is expensive to conduct.
(iv)It doesn’t take into account the harmony that could exist between two or more business
units.

The strategy alternatives suggested for these four SBUs are: build A; hold B; hold/harvest C;
and divest D.
SBU A requires to implement growth strategies or Green-light strategy.
SBU B requires to implement stability strategies or Yellow-light strategy.
SBU C requires to implement turnaround strategy or Yellow-light strategy.
SBU D requires to implement divestment strategy or Red-light strategy.
Based on the combinations the following strategies are made:
Go ahead winner Expansion
Wait and see Average Stability
Stop Loser Divestment

A firm with a number of products can identify each of them in one of the 9 cells based on the
particular cell, where a product is located, different strategies can immediately be suggested.

Hofer’s Product-Market Evolution Matrix:

According to this model, a firm’s business is positioned in a 15-cell matrix based on two major
variables viz., stage of production-market development and the competitive position. Charles
W. Hoffer has suggested a further refinement of GE/Mckinsey portfolio matrix by identifying
companies, particularly new in businesses, that are about to accelerate their growth. This matrix
is also called ‘life-cycle portfolio matrix. An illustrative graph representing Hofer’s matrix is
given in the following figure provides potential strategies for different units placed in the
matrix.
Hofer’s matrix reflects the stage of development of the product or market. Business units are
placed on a grid showing their stage of product-market evolution and their competitive
position. Circles represent the industry and the pie wedges represent the market share of the
business unit. Hoffers evolution matrix are useful to develop strategies that are appropriate at
different stages of the product life cycle.
In Hofer’s matrix, the vertical axis represents the stages of product-market evolution and
horizontal axis represents the SBU’s competitive position. In this matrix, three stages of
competitive position of SBU (viz., strong, average and week) are shown on horizontal axis.
The vertical axis shows the industry’s state in the evolutionary life cycle, starting with initial
development and passing through the growth, competitive shake-out, maturity, saturation and
decline stages.

SBU A with average competitive position and in development stage holds out prospects for
future development deserves expansion and desired financial resources to be allotted to exploit
the opportunities.
SBU B with strong competitive position and in growth stage requires to adopt growth strategies
to make it a future winner.
SBU C with weak competitive position which is in growth stage of the industry should give lot
of attention and requires a careful formulation of marketing strategies to make it more
competitive in the industry.
SBU D with moderately strong position is in the shake-out stage can be probable with close
attention and careful marketing strategy formulation. This may also requires adoption of
growth strategies.
SBU E with average competitive position and in maturity stage of the industry needs to adopt
stability strategies.
SBU F with moderately strong competitive position and is in the maturity stage of the industry
life cycle, needs the stability, harvest and retrenchment strategies need to be adopted. No
further funds to be invested in this SBU. The market strategies require to hold the market
position without fall.
SBU G with moderately weak competitive position and is in the decline state of the industry
life cycle need to be divested immediately to arrest any cash loss since it is in a position of
loosing. Revival of this SBU is not suggested. The Hofer’s product-market evolution matrix
displays business portfolio of an international firm with relative greater degree of accuracy and
completeness.
The Hofer’s matrix considered the following variables:
(a) Market and Consumer Behaviour Variables Like:
i. Buyer needsii. Purchase frequencyiii. Buyer concentrationiv. Market segmentationv. Market
sizevi. Elasticity of demandvii.Buyer loyaltyviii. Seasonality and cyclicality
(b) Industry Structure Variables Like:
i. Uniqueness of the productii. Rate of technological change in product designiii. Type of
productiv. Number of equal productsv. Barriers to entryvi. Degree of product
differentiationvii.Transportation and distribution costsviii. Price/cost structureix. Experience
curvex. Degree of integrationxi.Economy of scale etc.
(c) Competitor Variables Like:
i. Degree of specialization within the industryii. Degree of capacity utilizationiii. Degree of
seller concentrationiv. Aggressiveness of competition
(d) Supplier Variables Like:
i. Degree of supplier concentration.ii. Major changes in availability of raw materials
(e) Broader Environment Variables:
i. Interest ratesii. Money supplyiii. GNP trendiv. Growth of populationv. Age distribution of
populationvi. Life cycle changes
(f) Organizations Variables Like:
i. Quality of products ii. Market shareiii. Marketing intensityiv. Value addedv. Degree of
customer concentration etc.
Hofer developed descriptive propositions for each stage of product life cycle.
For example- in the maturity stage of the product life cycle, Hofer identified the following
major determinants of business strategy:
(a) Nature of buyer needs
(b) Degree of product differentiation
(c) Rate of technological change in the process design
(d) Ratio of market segmentation
(e) Ratio of distribution costs to manufacturing
(f) Value added
(g) Frequency with which the product is purchased
Hofer, thereafter formulated normative contingency hypothesis using the above major
determinants.
An example for the maturity stage is when:
(a) Degree of product differentiation is low.
(b) The rate of buyer needs is primarily economic.
(c) Rate of technological change in process design is high.
(d) Purchase frequency is high.
(e) Buyer concentration is high.
(f) Degree of capacity utilization is low.
Then the business firms should:
(1) Allocate most of their R&D funds to improvements in process design rather than to new
product development.
(2) Allocate most of their plant and equipment expenditures to new equipment purchases.
(3) Seek to integrate forward or backward in order to increase the value they added to the
product.
(4) Attempt to improve their production scheduling and inventory control procedures in order
to increase their capacity utilization.
(5) Attempt to segment the market.
(6) Attempt to reduce their raw material unit costs by standardizing their product design and
using interchangeable components throughout their product line in order to qualify for volume
discount.

Experience Curve Analysis:

The concept of experience curve refers to systematic unit-cost reductions that have been
observed to occur over the life of a product. According to the experience curve concept, unit
cost declines as a firm accumulates experience in terms of a cumulative volume of production.
It implies that larger firms in an industry are likely to have lower unit costs as compared to
smaller firms, thereby gaining a competitive cost advantage. Learning effects, economies of
scale, product redesign and technological improvements underlie the experience curve
phenomenon.
In other words, a company increases the accumulated volume of its output over time; it is able
to realise both economies of scale and learning effect. As a result, unit cost falls with increases
in accumulated output.
The experience curve is significant from strategic choice point of view. It suggests that
increasing a company’s product volume and market share will also bring cost advantages over
the competition.

Figure 11.7 explains that company A down the experience curve has a cost advantage over
company B. The concept of experience curve is more relevant in those industries that are
engaged in the mass-production of standardiSed output. If a firm desires to gain more efficiency
and attain low cost position, it must ride down the experience curve and achieve cost
advantages over its competitors.
For example Japanese semiconductor companies used such tactics to ride down the experience
curve and gain a competitive advantage over their U.S. rivals in the market for DRAM chips.
Hill and Jones warn companies that go further down the experience curve, should not become
complacent about its cost advantages.
They give three reasons why companies should not become complacent about their efficiency-
based cost advantages derived from experience effects:
i. Neither learning effects nor economies of scale go on forever; the experience curve is like to
bottom out at some point. Further unit-cost reduction from learning effects and economies of
scale will be difficult to derive. Other firms will also be able to reduce their costs and equalize
with the cost leader.
Therefore, establishing a sustainable competitive advantage must involve strategic factors as
better customer, responsiveness, product quality, or innovation in addition to the minimization
of production costs by utilizing existing technologies.
ii. The development of new technologies may turn competitive cost advantages of experience
effects obsolete.
iii. High volume does not necessarily give a company a cost advantage.

Directional Policy Matrix:

The Directional Policy Matrix (DPM) is developed by Shell Chemicals, U.K. It is another
portfolio model helps the companies in identifying one balanced business portfolio. The model
is positioned in 3 x 3 matrix. The vertical axis represents the company’s competitive capability
graded in three classes viz., weak, average and strong. The horizontal axis represents the
business sector prospects which are categorized into unattractive, average and attractive.
The competitive capability of the company is determined on the basis of three factors, such as
market position, production capability and product research and development. The profitability
prospects of a business are determined on the basis of market growth rate, market quality and
environmental prospects. The DPM is an aid to the top management in strategic planning for a
conglomerate with diverse position in terms of their prospects and competitive capabilities.

(1) Divestment:
In the first quadrant, the companies competitive capabilities are weak and its business prospects
are also unattractive. The SBU will be in a position cash outflow and will be a looser. This
represents ‘dog position in BCG matrix. The situation is not likely to improve in future.
Therefore, the investments should be withdrawn immediately by divestment. The resources so
released can be properly used elsewhere.
(2) Phased Withdrawal:
The competitive capability of this SBU is weak and its business sector prospects are average.
The investment in these SBUs should be withdrawn in a phased manner. The company may
adopt harvest strategy in these SBUs, without any further new investments in these businesses.

(3) Double or Quit:

The business prospects are attractive but the company’s capability is weak in this area of
business. The company has two options to remedy the situation i.e.- (a) invest more to exploit
the prospects of the business sector, (b) if not possible to better the situation, it is suggested to
quit such business altogether.
(4) Phased Withdrawal:
The SBU falling quadrant (4) has unattractive prospects of the business sector in which the
company’s competitive capability is average. The company should withdraw from this business
gradually in a phased manner by adopting harvest strategy.
(5) Custodial:
The prospects of the business sector is average in this SBU and the company’s competitive
capability is also average. It is suggested to hold the position with little support or investment
from outside the SBU. When the position is clearer, either the SBU can continue in such
business or withdraw the investment by focusing on other profitable business.
(6) Try Harder:
The business sector prospects are attractive for the SBU, but the company’s competitive
capability is average. These SBUs need additional resources to strengthen their capabilities.
Niche is the suitable strategy in these situations. Lot of efforts are required to tap the prospects
of the business sector.
(7) Cash Generation:
The business sector prospects are bleak but the SBUs competitive capability is strong, which
make the SBU to generate cash inflow with its internal strength. Very little additional
investments maybe allowed for such SBUs but expansion programs should not be undertaken
unless the industry attractiveness is improved substantially.

(8) Growth:
 The SBU’s industry attractiveness is average and the company’s competitive capability is
strong in this area. This requires infusion of additional funds to support product innovation,
R&D activities, capacity expansion etc. They should adopt growth strategies in this situation
with caution. The sales promotion and advertising will enable the company to increase its
market share.
(9) Market Leadership:
The SBU’s business sector prospects are attractive and the company’s competitive capabilities
is also strong. The company can adopt offensive strategies to increase its market share and
attain market leadership through innovations, capacity additions and R&D experiments. The
economies of scale will also help in attaining cost leadership also. The company can apply
growth strategies to such SBUs.

Life Cycle Portfolio matrix

Product Life cycle Matrix in Strategic Management. The product life cycle portfolio matrix is
specifically designed to deal with the criticisms that the BCG matrix ignores products that are
new, and that it overlooks markets with a negative growth rate, i.e. markets that are in decline.

The growth pattern for many products follows an s-shaped curve, from an
introductionstage,through growth, then reaching maturity and eventually declining when the
productis being replaced with substitutes. A similar life cycle can be observed for whole
industries .The product life cycle concept has several uses, notably for marketForecasting. This
emphasises the product analysis andbusiness planning implications of the product life cycle
concept.From the introduction to the withdrawal of a product, customer, demand,
marketing,competitive and resource factors generally follow a pattern that is driven by the
productlife cycle. Knowing where a product is in the product life cycle allows you to
anticipateand plan for the next stage. The following Chart summarises the product life cycle
characteristics and
the impact on strategy.

Product Life Cycle characteristics and strategies

INTRODUCTION GROWTH MATURITY DECLINE
Users/sales Few Increasing rapidly Setting in Declining
Costs High R&D,unitcost,and launching cost Falling Declining production costs, but stabilising
rapidly,utilisation,scale and higher marketing costs.
experience effects
Competitors Few New entrants,innovators consolidation Some exit
may sell out.
Marketing Successful introduction, gain opinion leader endorsement Build market share by Retain customers,get customers Further reduce costs and
objective focussing on new to switch,renewals and exploit productsor brand
customers and creating upgrades,extend life
distinct brand image cycle,increase frequency of
usenew product
uses,costreduction
Product Basic,littlevariety,quality not high,frequent design changes Increasing variety and Stable,standardisation,some Declining variety, no
features,good quality and tinkering,eg.’new improved xyz” further development
reliability.
Prices High,price-skimming strategy,Introductory offers Falling slowly,supply Falling rapidly,discounts,price Stabilising,increasing in
constraints may keep prices competition latedecline stage
high
Promotion Promote Mass market advertising, Focus on brand and its Scaled down brand
product,buildawareness,usereducationmpressrelations,high increased focus of brand advantages,loyalty, promotion
advertising to sales ratio bundling,affinity
Place Specialist retailers,dealers who can give advice,exclusivity Mass market Mass market channels, Phase out mrginaloutlets,
deals channels,large multiples large multiples,power of some multiples may de-
channels increases list
Cash flow Negaative Break-Even Positive Positive but declining
Profitability Losses Profitable Margins decline,but offset by Declining margins,
volume offset by low
depreciationcharges,
possible write-downs.
Risk High business risk Low demand side risk, but Low business risk, Low business risk,
cash flow risks cyclical Labour conflict in
factor impact unionised industries.

Introduction :The introduction stage is the period before sales start to increase exponentially.
It is the riskiest stage and requires most management effort. The business will have already
committed substantial resources. Despite convincing market research, the product may fail the
test of the real market. There is still the opportunity to fine-tune the marketing mix or even
relaunch the product. If there are early signs of success and sufficient resources are available,
managers may opt for penetration pricing, thereby driving up volume and capturing market
share before competitors enter the market. However, this increases risk and failure will be
catastrophic.

Growth: A rapid acceleration of sales signals the start of the growth stage, which can be divided
into the accelerating growth stage and the decelerating growth stage. In the accelerating growth
stage, the incremental year-on-year sales increase. In the decelerating growth stage, sales are
still growing but year-on-year incremental sales decline. The dividing point between the two
is the point of inflection in the s-shaped product life cycle curve. As the business changes to
become more volume driven, the risks profile changes. Demand for the product is now proven
and competitors enter the market. The expansion requires investment in capacity and working
capital. The early growth stage may coincide with the highest funding requirement. Many
businesses fail during the expansion stage, not because they are unprofitable but because they
become insolvent. A strategy for a smaller entrepreneur may be to sell out to a larger, later
entrant. The rationale for seeking a buy-out is not just access to resources. The introduction
stage and the growth stage require different kinds of organisation and skills. Indeed, many
business plans have an explicit exit strategy, seeking to sell out once the business is in the early
growth stage. In the early growth stage the focus is usually on winning new customers. This
stage is crucial to positioning the product as a market leader. In the late growth stage more
attention is given to customer retention.

Maturity: At this stage the focus shifts to a fight for market share and cost reduction. Some
consolidation may take place. Because growth objectives remain, businesses may seek to
increase sales through a higher repeat sales rate, increased frequency of use or finding new uses
for an existing product. For example, faced with declining sales in an ageing market, Cognac
producers started to promote drinking Cognac on ice (much to the horror of traditionalists) as
an aperitif rather than a digestif. This rejuvenated Cognac by making it attractive to younger
drinkers and gave Cognac a new use.
 Decline: When decline sets in, the time for consolidation is probably past. The least efficient
competitors will gradually exit the market. Management is likely to focus on cost reduction in
order to maintain profitability despite declining sales. Some assets may be reallocated.
Businesses can become highly cash generating, because capital investment is low and some
working capital is freed up. A re-reorganisation and change of management style are likely. In
moribund, large, unionised businesses it may be extremely difficult to exit profitably because
exit costs are high. Demand for some products does not die away completely but settles down
at a low level. This can constitute an extremely profitable niche business.

Product life cycle and competitive position

Arthur D. Little, a management consulting firm, suggested using the product life cycle analysis
in combination with the competitive position. This yields pointers as to what strategies should
be pursued for the business or the sbu (Chart 8.3). In this analysis, the product life cycle stages
are replaced by industry maturity stages – embryonic, growth, mature and ageing – which
correspond to the product life cycle stages identified above. The competitive position is
measured as dominant, strong, favourable, tenable and weak. A dominant position implies a
near monopoly whereas a weak position means that a business’s long-term survival is
threatened as a result of low market share. Conceptually, the matrix is similar to the growth-
share matrix and directional policy matrix (see below), inasmuch as the market growth rate is
an indication of industry maturity and market share is one factor in determining the business
position. The strategies suggested by the industry maturity/competitive position matrix are also
similar to the implication of the directional policy matrix and are discussed in more detail
below. The fact that strategic choice is more complex than the strategies suggested by the
matrix analysis is captured by the fact that each box contains multiple options in descending
order of suitability. There may well be overriding reasons, not captured by the two-factor
matrix, for a business to pursue one strategy rather than another.

Industry Maturity : Competitive position Matrix

EMBRYONIC GROWTH MATURE AGEING

DOMINANT Fast growth Fast Growth Defend Defend
Start-up Attain Cost Position, Position,
leadership Attain Cost Focus,
COMPETITIVE POSITIONS

Renew leadership, Renew,

Defend Renew, fast Grow
Position Growth with
Industry
STRONG Start-up Fast grow (i) Attain Find
Differentiate Catch up Cost Niche,
Fast growth Attain cost Leadership, Hold
Leadership Renew, Niche,
Differentiate Focus (ii) Hang in,
Differentiate, Grow
Grow with with
Industry Industry,
Harvest
 FAVOURABLE Start-up Differentiate (i) Harvest, Retrench,
Differentiate focus Hang in, Turn
focus Catch up Find Niche, Around
Fast Growth Grow with Hold Niche
Industry (ii) Renew,
Turn
Around,
Differentiate
focus, Grow
with
Industry
TENABLE Start-up (i) Harvest, Harvest, Divest,
Grow with Catch up, Turn Retrench
Industry Focus Hold Niche, Around,
Hang in, Find Niche,
Find Niche Retrench
(ii) Turn
Around
Focus,
Grow with
Industry
WEAK Find niche Turn Withdraw Withdraw
Catch up Around Divest
Grow with retrench
Industry

Grand Strategy

It is good for companies to know which strategies they should or should not develop. There are
multiple ways of finding out. Among other things, a kind of SWOT analysis that looks at the
business’s internal strengths and weaknesses as well as the external opportunities and threats
may be of help.

The Grand Strategy Matrix is a handy tool as well, when it comes to formulating feasible
strategies. Grand Strategy Matrix has grown into a powerful tool for coming up with alternative
strategies. The model is based on two dimensions plotted along a vertical and a horizontal axis;
the vertical axis represents market growth, varying from slow to fast growth. The horizontal
axis represents the organisation’s competitive position, which may range from weak to very
strong. These data combine to create four quadrants, in which organisations can be positioned
so that selecting suitable strategies can be easily researched. Both a company’s current growth
and its competitive status count as important factors. The model also allows businesses that are
split into multiple divisions to formulate a best strategy for each of those divisions (product
groups).

Grand Strategy Matrix: 4 Quadrants

According to the Grand Strategy Matrix, companies and/or divisions may be subdivided into
the four quadrants. Using the matrix, a company will gain insight into feasible strategies, which
can be mapped out in the quadrants in order of attractiveness. The eventual goal is to choose a
fitting strategy that fits the company’s market and its competitive position. The Grand Strategy
Matrix helps analyse this clearly. Each of the quadrants is explained in more detail below.

Quadrant 1 – Strong competitive position & Fast market growth

Companies that are located in this first quadrant of the Grand Strategy Matrix usually have an
excellent strategic position. Apart from active and fast growth in the market, they also have a
strong position relative to the competition.

Compared to Ansoff’s growth matrix, such companies would do very well to proceed to market
penetration, market development, and product development. Market penetration is about using
expansion to position oneself even better on the market. For example, by opening new
subsidiaries with the same assortment. Using market development, these companies will be
able to aim at other markets and/or target audiences, increasing their reach. Product
development should not be left out either; a new assortment provides more customers and more
returns.

In addition, strategies such as forward, backward, or related integration fit into this quadrant.
Forward integration involves a company taking over the activities of a customer; backward
integration involves taking over the activities of a supplier from the production chain, and
related integration is about taking over the activities from a fellow company from the same
industry. Even diversification is an option, which involves taking over the activities from a
fellow company from a different industry. Think, for example, of a cotton importer taking over
the tasks of a coffee importer.

The idea behind all the strategies listed above is that companies will focus more on their own
business operations, as well as strengthen their competitive basis. The integration strategies,
however, should never come at the expense of the company’s own core business. It’s wise to
keep thinking about the current competitive advantage, which is why companies should prevent
losing focus of the competitive advantage they have built painstakingly over time.

Quadrant 2 – Weak competitive position & Fast market growth

For companies in this second Grand Strategy Matrix quadrant, it’s a good idea to seriously
evaluate the current approach. Although their growth may be strong and large, their competitive
position is weakening and they are under threat of being pushed out of the market by other
companies. They are not able to compete effectively.

Apart from the market development, market penetration, and product development mentioned
in the previous quadrant, horizontal integration is also highly suitable as a useful strategy in
the second quadrant. Because the market is growing fast, an intensive horizontal integration
strategy helps, in which companies concentrate on attracting activities that form a nice addition
to their current core business. In such a case, a service station may consider opening a small
supermarket in addition to their petrol business, with which they can offer extra service to their
customers.

If horizontal integration is not a possibility, it would be wise to sell off part of the organisation
(or divisions). Decentralisation may be another possibility. In that case, the focus no longer lies
on the whole organisation, but is divided over smaller segments. If the chance of the
competition winning is high, a company may decide to be bought in an acquisition. Otherwise,
the only remaining options will be folding or insolvency.

Quadrant 3 – Weak competitive position & Slow market growth

This is the least favourite quadrant of the Grand Strategy Matrix. For companies, after all, it
means that are faced with vicious competition on the one hand and with a market growth that’s
faltering on the other hand. Only drastic measures, adjustments, and changes will be able to
save such companies and prevent further demise or impending liquidation.

First of all, a wise strategy would be to move to wholesale cost reduction, which in most cases
will result in enormous austerity measures, reorganisation, discontinuation of product groups,
and employees being laid off. Should austerity measures fail to achieve an effect, forms of
diversification may offer a last hope. Despite requiring some investment, spreading the product
range can lead to increased returns. For example, a chemist may consider generating some
additional income by moving into dry cleaning as well. Such cases are referred to as unrelated
diversification. If the chemist decides to sell specific medications, in cooperation with the
pharmacy next door, we are talking about related diversification.

Should all of the above strategies fail to have an effect, selling or bankruptcy are the only
remaining options.

Quadrant 4 – Strong competitive position & Slow market growth

A strong competitive position is very enjoyable to companies. The slow market growth offers
options for finding creative solutions and creating a new market for products and services.
Diversification, such as mentioned in Ansoff’s growth matrix, is a good option. Offering new
products and/or services on a new market leads to an increase in market growth. For example,
a supermarket will suffer when many consumers choose to have fresh meal boxes delivered
and no longer get their groceries from the shop as a result. To the supermarket, such a product
is new. Offering products online also allows them to reach a new target audience. When the
supermarket chooses to sell fresh meal boxes online, that would be an example of
diversification. Nonetheless, this comes at the cost of a considerable investment. Companies in
this Grand Strategy Matrix quadrant usually have the capacity and the means for this.
Engaging in partnerships in the form of a joint venture is another possible strategy that fits this
Grand Strategy Matrix quadrant. A characteristic feature of such partnerships is that both
companies continue to exist and each of them profits from the other’s strength. The partnership
between KLM and North West Airlines is a good example of this. Their joint venture gives
them an advantage in the form of sharing landing rights, purchasing catering, and sharing
overhead costs.

Market Share
In the first quadrant of the Grand Strategy Matrix, it’s mostly about stimulating companies to
grow fast and maintain their competitive position. In the other three quadrants of the Grand
Strategy Matrix, it’s about achieving the best position and increasing their market share. On
the one hand, this can be done by researching new markets; on the other hand, by offering new
products. It’s up to the board and management to decide on such drastic strategic choices. The
Grand Strategy Matrix gives a good and clear image of both the health and the future prospects
of a company. Nonetheless, one should always take unforeseen factors and complications in
the business world into consideration.