Nofe,Edward E.

03/09/11
BST 3 MWF (12:30-13:30)

EVALUATE A DIVERSIFIED COMPANY’S STRATEGY

STEP 1: Identify present corporate strategy

STEP 2: Use business portfolio matrixes to analyze firm’s business portfolio\
STEP 3: Compare long-term attractiveness of each industry firm has diversified into
STEP 4: Compare competitive strength of firm’s business units
STEP 5: Rate business units on basis of historical performance & future prospects
STEP 6: Assess each business unit’s compatibility with corporate strategy & determine value of
strategic fit relationships
STEP 7: Rank business units in terms of priority for new capital investment & decide on general
strategic posture
STEP 8: Decide if new strategic moves are needed to improve overall performance

BCG GROWTH-SHARE MATRIX:

This product portfolio matrix classifies product lines into four categories. The BCG
models suggests that organizations should have a healthy balance of products within their
range. The Boston Consultancy Group classified these products as following:

Two variables used:

1. INDUSTRY GROWTH RATE - Plotted on vertical axis

2. RELATIVE MARKET SHARE - Plotted on horizontal axis

CONSTRUCTING A BCG GROWTH-SHARE MATRIX INDUSTRY GROWTH RATE

“High growth” businesses are in industries growing faster than economy “Low growth”
businesses are in industries growing slower than economy

QUESTION MARKS / PROBLEM CHILDREN / CASH HOGS

 Operate in a high growth market but have low relative market share -- Upper right cell of
matrix
 Rapid industry market growth makes businesses attractive, but low relative share
positions raise questions about future potential
 Cash needs are high & internal cash generation is low, making them cash hogs

Cash Hogs- a business is a cash hog when its internal cash flows are inadequate to fully fund its
need for working capital and new capital investment the parent company has to continually pump
in capital to “feed the hog” Strategic options Aggressively invest in attractive cash hogs Divest
cash hogs lacking long-term potential
Cash Cow - business generates cash surpluses over and above what is needed to sustain its
present market position Such businesses are valuable because surplus cash can be used to Pay
corporate dividends Finance new acquisitions Invest in promising cash hogs Strategic objective:
Fortify and defend present market position--keep the business healthy.

Cash Cows - Situated in low growth market but have high relative market share -- Lower left cell
of matrix Can generate cash surpluses over & above that needed for reinvestment & growth in
business Valuable portfolio holding because they can be “milked” for cash to Pay corporate
dividends & overhead Finance new acquisitions Invest in young stars or problem children

Cash Cows should not be “harvested” but maintained in healthy position for long-term cash flow
Weak cash cows may become candidates for harvesting & eventual divestiture

The goal is to FORTIFY and DEFEND a cash cow’s market position while efficiently
generating dollars to reallocate to business investments elsewhere!

DOGS - Situated in low growth market & have low relative market share -- Lower right cell of
matrix Have weak competitive position & low profit potential Unable to generate attractive cash
flows on a long-term basis

DOGS - Harvest Divest or spin off Liquidate or close down Strategy Prescriptions

STARS - Have strong competitive positions in rapidly growing industries Are major contributors
to corporate revenue & profit growth May or may not be cash hogs Basic Concept

STARS - Market leaders situated in high growth market with high relative market share -- Upper
left cell of matrix Offer excellent growth opportunities Offer excellent profit opportunities Vary
as to whether they are Self-sustaining or Require infusions of investment funds from corporate
parent
STRATEGY IMPLICATIONS OF GROWTH-SHARE MATRIX:

 Draws attention to cash flow & investment characteristics of various types of businesses
 Encourages strategists to view diversified firm as collection of cash flows & cash
requirements
 Explains why priorities for corporate resource allocation can be different for each
business
 Success sequence -- Question mark to young star to self-supporting star to cash cow
 Two disaster sequences
o Star’s position erodes to problem child & then falls to a dog
o Cash cow loses leadership & becomes a do

WEAKNESSES OF GROWTH-SHARE MATRIX

 Four-cell matrix hides fact that many businesses

o Are in “average” growth rate markets and
o Have “average” relative market share positions
 Misleading simplification to categorize businesses into just four types
 Matrix doesn’t identify which businesses offer best investment opportunities
 Being a leader in a slow-growth industry does not guarantee cash cow status
 Assessment of relative long-term attractiveness of business units requires examining
more than
o Industry growth and
o Relative market share
 Connection between relative market share & profitability is not as tight as experience
curve effect implies
o Many firms with small relative market shares are very profitable

PROCEDURE: RATING INDUSTRY ATTRACTIVENESS

Step 1: Select factors to compare long-term attractiveness of each industry
Step 2: Assign weights to each attractiveness factor
Step 3: Rate each industry on each attractiveness factor, using scale of 1 to 10
Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry

PROCEDURE: RATING BUSINESS POSITION/COMPETITIVE STRENGTH

Step 1: Select factors to compare competitive strength of each business unit
Step 2: Assign weights to each competitive strength factor
Step 3: Rate each business on each competitive strength factor, using scale of 1 to 10
Step 4: Calculate weighted ratings; sum to get overall business unit attractiveness rating for each
business