Unit-3

Corporate Parenting,
BCG- Matrix and Porters Diamond.

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Corporate Parenting
The concept Corporate Parenting views a corporation in terms of resources and capabilities that be used to build business unit value as well as generate synergies across business units. According Campbell, Goold and Alexander Multibusiness companies create value by influencing or parenting the business they own. The best parent companies create more value than any of their rivals would if they owned the same business. Those companies have what we call parenting advantage Corporate parenting generates corporate strategy by focusing on core competencies of its parent corporation and on the value created from the relationship between the parent the parent and its business.
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Developing a Corporate Strategy

According to Campbell, Goold and Alexander that the search for appropriate corporate strategy involves three analytical steps: 1. Examine each Business unit (or target firm in case of acquisition) in terms of its strategic factors. 2. Examine each Business unit (or target firm) in terms of areas in which performance can be improved 3. Analyze how well the parent corporation fits with the business unit (or target firm)

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BCG Matrix
BCG-Matrix was developed by Bruce Henderson in The year 1970 for Boston Consulting Group to help corporation analyzing their business units or Product lines. In general, for large Companies, there is always a problem of resource allocation amongst its business units in some logical/rational ways. To overcome such problem, Boston Consulting Group (BCG) has developed a Model called BCG Matrix. It also called Growth share Matrix. The BCG model requires management to plot the position of their business units (or products) against two axes: 1. Relative market share. 2. Market growth rate.
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- BCG argue that all firms in the industry face essentially the same experience curve effects. Consequently as the industry progresses the unit costs of each participant will fall. Inevitably this will lead to falling prices. The firm that survives this process will be the firm with the lowest costs which, by extension, will be the one with the highest cumulative volume. The conclusion is that domination of the market is essential for low costs and hence competitive success. Hence high relative market share is sought within the BCG matrix.

High relative share therefore brings several

1. . The enjoyment of lower unit costs and therefore higher current margins than competitors at the same price levels. 2. The ability to be a price leader- if the firm decides to cut price, others must follow to maintain their sales, but in so doing may find themselves selling at below unit costs. 3. The dominance of the market means that the product will become the benchmark product- the real thing against which others may be seen as pale imitations.

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Boston Consulting Group Matrix

Portfolio of Strategic Business Units
High 1 stars 2 question marks

Industry Growth Rate 3

cash cows

Low
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$$$
High Market Share

dogs

Low

Boston Consulting Group Matrix

1. Stars. These are products that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income. Keep and build your stars. 2. Cash Cows. These are products with a high share of a low growth market. Cash Cows generate more than is invested in them. So keep them in your portfolio of products for the time being.
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Boston Consulting Group Matrix

3. Question Marks (Problem Children). These are products with a low share of a high growth market. They consume resources and generate little in return. They absorb most money as you attempt to increase market share. 4. Dogs. These are products with a low share of a low growth market. They do not generate cash for the company, they tend to absorb it. Get rid of these products.
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Strategies to deal with

.
Stars: stars are Very competitively strong due to high relative market share, although their current results will be poor due to the need to invest considerable funds into keeping up with the market growth rate. The strategy here is to hold market share by investing sufficient to match the commitment of rivals and the requirements of the marketplace. Cash cows. These are mature products (low growth rate) which retain a high relative market share. The mature stage means that their prospects are limited to falling prices and volumes. Therefore investment will be kept under strict review and instead the priority is to maximize the value of free cash flows through a policy of harvesting the product. Harvest means to minimize additional investment in the product to maximize the case the division is spinning off. This cash can be used to support the question mark products as well as satisfy demands for dividends and interest. Holding may also be used for early-mature stage products where the market may repay the extra investment.

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Question marks (Problem children). These products are in a high growth market which means that it is early in the product life cycle and therefore has the potential to repay present investment over its life cycle. Indeed the high market growth rate means that the firm will already be investing considerable sums in it. The low relative market share, however, means that this business unit is unlikely to survive in the long run because it will have a lower cost competitor. Management must decide between investing considerably more in the product to build its market share or shutting it down now before it absorbs any further investment which it will never repay. Investing to build can include: Price reductions; Additional promotion & securing of distribution channels; Acquisition of rivals; Product modification.

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Dogs come into being from two directions: Former cash cows that have lost market share due to managements refusal to invest in them; Former question marks which still had a low relative share when the market reached maturity. In either case the BCG recommends divestment of the product or division. This can mean selling it to a rival, or shutting it down to liquidate its assets for investment in more promising business units. In deciding whether or not to divest a dog, the following considerations should be taken into account:

Dogs:

(a) Whether the dog still provides a positive contribution or not. (b) What is the opportunity cost of the assets it uses? For example, the contribution from products that could be made using its factory or the interest on the net proceeds from liquidation of the SBU. (c) The impact on the rest of the portfolio that would result from divesting the SBU.
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Boston Consulting Group Matrix

Key Each circle represents one of the firms business units Size of circle represents the relative size of the business unit in terms of revenue

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BENEFITS OF THE BCG MATRIX

BCG model is helpful for managers to evaluate balance in the firms current portfolio of Stars, Cash Cows, Question Marks and Dogs.

It provides a base for management to decide and prepare for future actions.
The model is simple and easy to understand. LIMITATIONS OF THE BCG MATRIX :

High market share is not the only success factor.

There is no clear definition of what constitutes . The model uses only two dimensions market share and growth rate. This may tempt management to emphasize a particular product, or to divest prematurely. The model neglects small competitors that have fast growing market shares.

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Porters National Diamond Framework

FACTOR CONDITIONS

DEMAND CONDITIONS

RELATING AND SUPPORTING INDUSTRIES

STRATEGY, STRUCTURE, AND RIVALRY

1. 2. 3. 4.

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FACTOR CONDITIONSHome grown resources/capabilities more important than natural endowments. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

Porters Diamond Model

Michael E. Porter introduced a diagramthe Porter diamondthat has become very well known
It

Focuses on four central aspects of the home base, which Porter views as the determinants of competitive advantage

Factor conditions

Demand conditions
Related and supporting industries Firm strategy, structure, and rivalry

Main

argument: Nations are most likely to succeed in industries or industry segments where the national diamond is most favorable

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Factor conditions
Porter

considers labor, land, natural resources, and physical capital to be basic factors that are largely inherited important from Porters point of view are advanced factors that are created which include

More

Sophisticated infrastructure
Labor educated and trained in very specific ways Focused research institutions

Porter

also makes a distinction between

Generalized factorscan be used in a number of different industries Specialized factorstailored for use in specific industries

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Demand conditions

It Stresses three aspects in the home base

Demand

composition

Sophisticated,

demanding, and anticipatory (anticipates trends in global demand) home demand contributes to firms success

Demand

size and pattern of growth

Large,

rapidly-growing, and early home demand are positive aspects of the home base of internationalization more home demand is synchronized with international demand trends, the more it contributes to firms competitiveness

Degree The

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Related and supporting industries

Supplying

industries in the home base has several advantages in downstream industries

Efficient,

early, rapid, and sometimes preferential access to the most cost-effective inputs
coordination

Ongoing

Innovation

and upgrading

competitive domestic supplier industry is better than relying on well-qualified foreign suppliers.

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Firm strategy, structure, and rivalry

Firm

strategy, structure, and rivalry

One

country differs from another with regard to managerial systems and philosophies and with regard to capital markets environments that allow firms to take a long-term view contribute positively to competitiveness of a large number of competing firms or rivals in the domestic industry

Institutional

Presence

Competition among firms is necessary for allocative efficiency in a market system, but domestic rivalry contributes to dynamic, technological efficiency

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The role of government

The role of government in Porter's Diamond Model is "acting as a catalyst and challenger; it is to encourage or even push - companies to raise their aspirations and move to higher levels of competitive performance " . They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.

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Criticism

Criticism on Porter's national diamond model resolves around a number of assumptions that underlie it. As described by Davies and Ellis: "sustained prosperity may be achieved without a nation becoming 'innovation-driven', strong 'diamonds' are not in place in the home bases of many internationally successful industries and inward foreign direct investment does not indicate a lack of 'competitiveness' or low national productivity".

Porter generalised from the American case; for developing countries the model may be wrong.

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Portfolio Analysis

Meaning of Business Portfolio: a business portfolio is

the collection of strategic business units or product lines that make a corporation. The optimal business portfolio is one that fits perfectly to the companys strengths and helps to exploit the most attractive market.

In portfolio analysis, top management views its product lines and business units as series of investments from which it expects a profitable return. Two most popular portfolio analysis techniques are there. The BCG Growth share matrix and GE Nine cell matrix. Objectives of Portfolio Analysis: To analyze the current business portfolio and decide which SBU or Product line should receive more or less investments. To Develop growth strategies for adding new products and business to the portfolio. To decide which product or business should no longer be remained.

1.

2.

3.

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Steps in portfolio approach

1. 2.

Define the business unit or product line. Classify these SBUs or product lines on a portfolio grid according to the competitive position and attractiveness. Using the framework, assign strategic mission to each unit for growth and financial objectives. factors affecting Portfolio Analysis

3.

1.
2. 3.

Mission, Vision, Objectives, goals of the organisation

The value system of the promoters and expectations of the investors. The risk taking capacity of the management

4.
5. 6.

The stage of PLC.

The golobalisation and Liberalisation policies. The external competitive environment. resource availability.

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Advantages of portfolio analysis

1. 2. 3. 4.

Helps in strategy formulation Provides rationale behind corporate planning for investment or divestment.

It provides guidelines in allocating corporate resources.

It conveys information about performances of individual business units or product lines It helps in taking strategic decision It helps in the analysis of strengths and weakness. It suggests flexible solutions of various problems. Limitations of portfolio analysis: It can be a difficult task to analyze each individual business unit or product line.

5. 6. 7.

1. 2. 3. 4.

It is time consuming
It is very difficult to define the product or market segment It is very difficult to decide in which stage of PLC is the product line simple matrix models are not very accurate.

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GE Nine cell Matrix

General Electronics with the help of McKinsey & Company Consulting firm, developed a more complicated matrix with Nine Cell called GE Nine cell matrix. Four steps are followed to analyse the portfolio
1. 2. 3.

Selecting criteria for rating industry. Selecting the key factors needed for the success of each factors Plot a matrix structure

4.

Plot firms future portfolio.

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GE Nine Cell Portfolio Matrix

Components of Industry attractiveness Nature of rivalry Number, Size & strength of competitors, Strength of buyers and sellers Ease of New Entrants Economic Factors Price wars

Market saturation or growth, Capital intensity, Profitability

Components of Business strength Cost advantage, Quality image, Manufacturing flexibility,

Delivery speed, Liquidity,

Profitability,

Skillful personnel

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GE Nine Cell Matrix

Based on the subjective assessments on the levels of market attractiveness and business strengths, each SBU falls in one of the NINE different cells of strategic option.

Industry Attractiveness
High Medium Selective Growth Grow or Let Go Harvest Low Grow or Let Go Harvest Divest

Business
Strength

High

Invest and Grow Selective Growth

Medium

Grow or Let Go Low

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Strategic Implications of the G.E. 9-Cell Matrix

SBUs in 3 upper left cells get top investment priority
SBUs in 3 middle diagonal cells merit steady investment to maintain & protect their industry positions SBUs in 3 lower right cells are candidates for harvesting or divestiture
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Advantages of G.E. 9Cell Matrix

Allows for intermediate rankings between high & low and between strong & weak

Incorporates a wider variety of strategically relevant variables than the BCG matrix
Stresses the channeling of corporate resources to SBUs with the greatest potential for competitive advantage & superior performance

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Weaknesses of G.E. 9Cell Matrix

Provides no guidance on specifics of SBU strategy Only suggests general strategic posture -aggressive expansion, fortify-&-defend, or harvest/divest Doesnt address the issue of strategic coordination across related SBUs Tends to obscure SBUs about to take off or crash & burn -- static, not dynamic
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The 10 Stages of Corporate Life Cycle / stages of development

1.

Courtship. Would-be founders focus on ideas and future possibilities,

making and talking about ambitious plans. Courtship ends and infancy beginswhen the founders assume risk.

Infancy. The founders' attention shifts from ideas and possibilities to results. The
need to make sales drives this action-oriented, opportunity-driven stage. Nobody pays much attention to paperwork, controls, systems, or procedures. Founders work 16hour days, six to seven days a week, trying to do everything by themselves.

Go-Go. This is a rapid-growth stage. Sales are still king. The found ersbelieve they
can do no wrong. Because they see everything as an opportunity, their arrogance leaves their businesses vulnerable to flagrant mistakes. They organize their companies around people rather than functions; capable employees can--and do-wear many hats, but to their staff's consternation, the founders continue to make every decision.

Adolescence. During this stage, companies take a new form. The founders hire
chief operating officers but find it difficult to hand over the reins. An attitude of us (the old-timers) versus them (the COO and his or her supporters)hampers operations. There are so many internal conflicts, people have little time left to serve customers. Companies suffer a temporary loss of vision.

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Prime. With a renewed clarity of vision, companies establish an even

balance between control and flexibility. Everything comes together. Discipline yet innovative, companies consistently meet their customers' needs. New businesses sprout up within the organization, and they are decentralized to provide new life-cycle opportunities.

Stability. Companies are still strong, but without the eagerness of their earlier
stages. They welcome new ideas but with less excitement than they did during the growing stages. The financial people begin to impose controls for short-term results in ways that curtail long-term innovation. The emphasis on marketing and research and development wanes.

Aristocracy. Not making waves becomes a way of life. Outward signs of

respectability--dress, office decor, and titles--take on enormous importance. Companies acquire businesses rather than incubate start-ups. Their culture emphasizes how things are done over what's being done and why people are doing it. Company leaders rely on the past to carry them into the future.

Recrimination. In this stage of decay, companies conduct witch-hunts to find out

who did wrong rather than try to discover what went wrong and how to fix it. Cost reductions take precedence over efforts that could increase revenues. Backstabbing and corporate infighting rule. Executives fight to protect their turf, isolating themselves

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from their fellow executives.

Bureaucracy. If companies do not die in the previous stage--maybe they

are in a regulated environment where the critical factor for success is not how they satisfy customers but whether they are politically an asset or Liability--they become bureaucratic. Procedure manuals thicken, paper work abounds, and rules and policies choke innovation and creativity. Even customers--forsaken and forgotten--find they need to devise elaborate strategies to get anybody's attention.

Death. This final stage may creep up over several years, or it may arrive
suddenly, with one massive blow. Companies crumble when they can not generate the cash they need; the outflow finally exhausts any inflow.

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STAGES OF Corporation Development

A successful corporation tends to follow a pattern of structural development as they grow and expand. Their growth can be seen in four major stages. Stage -01.

Simple structure: it is typified with the entrepreneur who promotes the enterprise.

The entrepreneur is prime decision maker

A little formal structure of organisation Managerial functions of planning, organising, staffing, directing and controlling are very limited Strengths include: flexible and dynamic structure, Weakness is too much dependence on entrepreneur

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Stage II FUNCTIONAL STRUCTURE: Transition to functional structure Larger structural form

Stage-III Divisional Structure Stage- IV Beyond SBUs

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