1. Systems for Strategy Comparison 1

2. Strategy This is an action plan for achieving organizational objectives. Strategy is mirrored in the pattern of moves and approaches devised by management to produce the desired performance.It is the “how” of pursuing an organization’s mission and reaching target objectives. This necessity brings about the inventions of different systems (models) for strategy comparison by different organizations; each one is based on the strongest indices that are in operation in the corporation. 2

3. BCG’s (Boston Consulting Group) founder, Bruce Henderson, believed that a consultant’s job was to find “meaningful quantitative relationships” between a company and its chosen markets.In his words, “good strategy must be based primarily on logic, not . . . on experience derived from intuition.”There are different model/systems for strategy comparison, most take Henderson’s advise into consideration. Some of the models are: Growth share matrix General Electric spot light Grid Product life cycle matrix Shell directional policy matrix Market evolution matrix Ansoff Matrix 3

4. Each of these systems are adapted to suit the internal and external workings of the corporations that originated them and each of them have its own strengths and weakness, of this various systems the group shall be treating the following: BCG Growth share matrix G. E. Spotlight Grid Shell directional policy matrix Product life cycle matrix Gap analysis 4

5. BCG Growth/Share Matrix 5

6. Presentation Outline History of BCG Matrix Brief explanation of portfolio analysis BCG Matrix construction Strategy recommendations Evaluation of the tool 6

7. History of the BCG Matrix 1960’s – diversification of businesses Need for universal management tool First implementation in 1969 by Boston Consulting Group 7

8. Portfolio Analysis Strategic Business Unit (SBU) Definition Single independent operation of a company Has its own competitors One manager responsible for performance Allocation of resources over all SBUs Goals Set benchmarks Create generalized descriptions of strategic situations 8

9. Basis of the BCG Portfolio Matrix Source: Das Boston-Consulting-Group-Portfolio Dipl.-Ing. Holger Blumhof Mature Phase “Cash Cow” Sales Volume Growth Phase “Star” Decline Phase “Dog” Introductory Phase “?” Time 9

10. BCG Matrix Construction Internal measure: Relative market share Firm’s sales of the SBU .Total market’s average sales Firm’s Sales of the SBU .Strongest Competitor’s Sales External measure: Market growth Match strategy with market stage 10

11. BCG Matrix Format Vertical Axis = Relative Market Growth Split at 10% by a horizontal line Horizontal Axis = Relative Market Share Split at 1x by a vertical line Creates four quadrants in which individual SBUs are positioned as bubbles Bubble size = SBU’s total revenue 11

12. Relative Market Share High Low High Product Sales Growth Rate Low The BCG Matrix 12

13. Strategy Recommendations Investment Further Growth Maintain Market Position Cash flow Self-sustaining: Fund their own growth Require funds from other SBUs (Cash Cows) Assure the future of the company Grow into Cash Cows 13

14. Strategy Recommendations Investment Increase market share Selectively develop into Stars Cash Flow Require funds from other SBUs (Cash Cows) Unrealized future opportunities 14

15. Strategy Recommendations Investment Maintain market share Maintain capacity Cash Flow Positive cash flow Provides funding to support Stars and “?” No potential for profit growth 15

16. Strategy Recommendations Investment Divestiture strategy Reduce capacity to free up resources Cash Flow Goal of Positive Cash Flow Negative Cash Flow = Divestment No real growth opportunities 16

17. Evaluation of BCG Matrix: Cons Oversimplifies complex decisions Only 2 factors considered = creates risk Uncertainty in market and SBU definition Only considers current businesses no dynamics Does not recognize possible synergies between SBUs 17

18. Evaluation of BCG Matrix: Pros Simple and rapid Solid basis for decision-making Good measurability of market share and growth Provides information about efficient resource allocation within the organization Generator for strategic options 18

19. In Summary… As long as management understands that the BCG Growth/Share Matrix generates options which require further analysis and validation, this tool can greatly enhance strategic decision making 19

20. The General Electric Company, with the aid of the Boston Consulting Group and McKinsey and Company, pioneered the nine cell portfolio matrix. 20

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22. It is a nine-cell portfolio matrix based on two dimensions. The vertical axis represents the industry attractiveness while the horizontal axis represents the business strength or competitive position. Both axes are divided into 3 segments yielding nine cells. The nine cells are grouped into 3 zones. 22

23. The Green zone consists of the cells in the upper left corner. If a business unit falls in this zone, it is in a favorable position with relatively attractive growth opportunities. This indicates a “green light” to invest in this product/service. 23

24. The yellow zone consists of the 3 diagonal cells from the lower left to the upper right. A position in this zone is viewed as having medium attractiveness. Management must therefore exercise caution when making additional investments in this product/service.The suggested strategy also called yellow light strategy is to seek to maintain share rather than growing or reducing share. 24

25. The Red Zone consists of the 3 cells in the lower right corner. A position in the red zone is not attractive. The suggested strategy is that management should begin to make plans to exit the industry. 25

26. The vertical axis represents the industry attractiveness. It includes an analysis of: Bargaining power of the buyers Bargaining power of the suppliers Internal rivalry The threat of new entrants The threat of substitutes Nature of technology Finance Economic Circumstances Political /legal disposition 26

27. The horizontal axis represents the firm's competitive strength or ability to compete in the industry. It includes an analysis of: The value and quality of the offering Market share Staying power Experience Management capabilities Sales growth rate Market image 27

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30. It incorporates explicit consideration of a much wider variety of strategically relevant variables.

31. The most important, the powerful logic of GE’s approach is its emphasis on channeling corporate resources to those business that combine medium-to-high industry attractiveness with average-to-strong business strength/competitive position, the thesis being that it is in these combinations where the greatest probability of a superior performance profit lies.29

32. Shortcomings It provides no real clues or hints as to the specific of business strategy; all that matrix analysis can suggest are general perceptions: invest-and-grow or hold-and-maintain or harvest-divest. Such prescriptions are adequate as far as corporate-level strategy formulation is concerned, but the issue of what specific type of grow-and-build or hold-and-maintain or harvest-divest strategies to use in the case of each different business remains wide open. Another weakness pointed out by Professor Hofer and Schendel is that this approach does not depict properly the positions of new businesses whose growth in new industries is at the takeoff stage. 30

33. Brief HistoryWhile General Electric and McKinsey were developing the business screen, Shell – one of the world’s largest petrochemical companies, developed a matrix, which would come to be known as the Shell Directional Policy Matrix. 31

34. systematically analyse the qualitative factors present in the organisation, which had an impact on corporate planning. Compare business sectors and company positions in a way that was independent of financial forecasts. The Shell DPM can be used to analyse different business sectors in an industry as well as competitors within a business sector Purpose of the DPM was to 32

35. The basic method of the DPM is to identify and place pointers on the horizontal and vertical axes; Horizontal axis: the main criteria by which prospects for a business may be judged to be favourable or unfavourable (favourable meaning a high profit and growth potential) 33

36. The vertical axis: The main criteria by which a company’s position in a sector may be judged to be strong or weak. 34

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38. Plot ConfigurationThe Shell DPM is traditionally made up of nine quadrants but the company recognises that although the three columns and three rows may be convenient for them, other layouts are also feasible. Some companies use a two column by two-row matrix.WeightingIn the Shell DPM, all of the factors/ criteria were given an equal weighting. This has been questioned in the past but using this weighting scheme has given good results when applied to a typical chemical product portfolio.RatingBusinesses/products are plotted on the nine-quadrant matrix in accordance to their final scores, which result in the co-ordinates on the x-axis and the y-axis. 36

39. The AssumptionsBusiness Sectorsthat there is more than one business sector. In the petro-chemical environment it is not difficult to identify a business sector as these can be acknowledged as product sectors. E.g. Crude oil, Cosmetic oils, petrol, kerosene, engine oils, diesel e.t.c.Geographical Areasthe geographical area to be used should take into consideration major area of economic movement.Forecasting PeriodFor most petroleum-based companies a time scale of 10 years is considered, as this is the effective forecasting horizon. 37

40. The Criteria for Business Sector Prospects. Profitability prospects (or attractiveness) for businesses in the petroleum sector are judged on four criteria 1. Market Growth Rate – market growth is necessary for the growth of sector profits but sectors with the highest growth rate are not necessarily those with the largest profit growth. 2. Market Quality – this is a difficult concept to quantify and to get to a rating for the sector. A number of questions must be answered – (Shell questions). 3. Industry Feedstock SituationIf the feed stocks in the sector have a strong pull towards an alternative use or are difficult to assemble in large quantities then this is a plus for sector prospects and the rating is better than average. 4. Environmental (Regulatory) AspectsBusiness sector prospects can be affected by restrictions on manufacture, transportation and marketing of a product. 38

41. The Market Quality (Shell Questions) Has the sector a record of high, stable profitability? Can margins be maintained when manufacturing capacity exceeds demand? Is the product resistant to commodity pricing behaviour? Is the technology of production freely available or is it restricted to those who developed it? Do relatively few producers supply the market? Is the market free from domination by a small group of powerful customers? Has the product high added value when converted by the customer? In the case of a new product, is the market destined to remain small enough not to attract too many producers? Is the product one where the customer has to change his formulation or even his machinery if he changes supplier? Is the product free from the risk of substitution by an alternative synthetic or natural product? A business sector rating yes on all or most of these questions would score a four or five star rating. 39

42. The Criteria forCompetitive Capabilities A company can be judged as strong, average or weak, based on one major criteria.Market PositionThe percentage share of the total market as well as the degree to which this share is secure is of primary importance. Shell looked at this factor in terms of a relative market leadership position rather than market share and rated this factor on a 5 star rating scale as follows: 40

43. Leader – 5 stars – this type of company has market leadership and technical leadership usually accompanies this. Major Producer – 4 stars – this occurs where no single company is leader but there are two to four competitors are closely placed. Viable Producer -3 stars – this type of company has a strong viable stake but falls below the top league Minor- 2 stars - businesses in this category are less than able to support research and development in the long term Negligible- 1 star – companies with a negligible position in the market fall into this category Shell used this star rating as they found that this type of visual rating system gave more visual impact than a display of numerals. Most companies omit this star rating system and use the assignment of points. 41

44. The Shell DPMModel Use and ApplicabilityThe key words in the different zones indicate different strategies for businesses/products falling within these areas. It must be pointed out that Shell found the zones to be of irregular shape, with no hard and fast boundaries, they shade into one another and in some cases they overlap. 42

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46. Major Advantage The general technique of this model can be applied to any business with separate identifiable sectors even though it was developed for the petro-chemical industryThis model works well in the petroleum industry but adaptations should be made when using it outside the industry. 44

47. Model weaknesses The Shell DPM has been used in different industries and some practical problems have been raised. 1. There is a need to change the questions for companies not in the petroleum industry and the questions regarding the factors should be customised for the company doing the analysis. 2. Shell advocated equal weightings for the criteria on each of the axes. This worked for Shell but other companies may feel that certain factors are more important than others and therefore the weights should be adjusted accordingly 3. The environment was the fourth factor on the business sector prospects axis yet Shell often left this factor out altogether. Environment can be a very important factor as it deals with the wider question of risk 4. When using the Shell DPM methodology, it was found that the star rating system added very little value and a point’s allocation rating was superior. 45

48. PRODUCT LIFE CYCLE ANALYSIS 46

49. A company’s position and strategy must change as the product, market and competitors change over the product life cycle.There is a predictable relationships among the various stages in product or business unit life cycles on one hand, and certain elements of strategy on the other. To say a product has a life cycle is to assert four things: Product has a limited life Product sales pass through distinct stages, each posing different challenging opportunities and problem to the organization Profit rise and fall at different stages of the product life cycle. Products require different marketing. Financing manufacturing purchasing and human resources strategies in life cycle stage. 47

50. SALES Preintroduction PRODUCT LIFE CYCLE SHOWING SALES & PROFIT TREND 48

51. PREINTRODUCTIONThis has to do with new product development. New product development starts with: Idea generation Idea screening Concept development and strategy Concept testing Marketing strategy Product development (prototyping) Market Testing Commercialization 49

52. The product life-cycle Sales value Introduction Low sales Low growth Low profits or losses Few competitors High promotional expenditure 0 Time 50

53. The product life-cycle Sales value IntroductionLow sales Low growth Low profits or losses Few competitors High promotional expenditure GrowthHigh, increasing sales and higher profits Entry ofcompetitors Stable price Stable promotional expenditure 0 Time 51

54. The product life-cycle Sales value MaturityStatic but high sales and profits Emphasis on low costs Fight for market share with established competition Flanker products are introduced IntroductionLow sales Low growth Low profits or losses Few competitors High promotional expenditure GrowthHigh, increasing sales and higher profits Entry ofcompetitors Stable price Stable promotional expenditure 0 Time 52

55. The product life-cycle Sales value Decline Declining sales Declining profit or losses Exit of competitors Reduced promotional expenditure Reduced price IntroductionLow sales Low growth Low profits or losses Few competitors High promotional expenditure GrowthHigh, increasing sales and higher profits Entry ofcompetitors Stable price Stable promotional expenditure MaturityStatic but high sales and profits Emphasis on low costs Fight for market share with established competition Flanker products are introduced 0 Time 53

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58. Conclusion: USING PORTFOLIO ANALYSISPROS AND CONS STRENGTHS ENCOURAGES TOP MANAGEMENT TO EVALUATE EACH LINE OF BUSINESS SEPARATELY, AND TO SET OBJECTIVES AND ALLOCATE RESOURCES TO EACH. IT STIMULATES THE USE OF EXTERNALLY-ORIENTED DATA TO SUPPLEMENT MANAGEMENT’S JUDGMENT RAISES THE ISSUE OF CASH FLOW AVAILABILITY FOR USE IN EXPANSION AND GROWTH GRAPHICALLY COMMUNICATES THE MIX OF BUSINESSES THE FIRM HAS INVESTED IN WEAKNESSES DEFINING PRODUCT / MARKET SEGMENTS IS DIFFICULT IT SUGGESTS STANDARD STRATEGIES THAT CAN MISS OPPORTUNITIES OR BE IMPRACTICAL PROVIDES AN ILLUSION OF SCIENTIFIC RIGOR, WHEN POSITIONS ARE REALLY BASED ON SUBJECTIVE JUDGMENTS VALUE-LADEN TERMS (cow, dog) LEAD TO SIMPLISTIC STRATEGIES AND SELF-FULFILLING PROPHESIES ITS NOT ALWAYS CLEAR WHAT MAKES AN INDUSTRY ATTRACTIVE OR WHERE A PRODUCT IS IN ITS LIFE CYCLE NAIVELY FOLLOWING PORTFOLIO PRESCRIPTIONS MAY REDUCE PROFITS –DOGS CAN MAKE MONEY! 56

59. Addendum “The most important contribution of management in the 20th century was the fifty-fold increase in the productivity of the manual worker in manufacturing”Peter Drucker “The most important contribution management needs to make in the 21st century is similarly to increase the productivity of the knowledge worker”Peter Drucker 57