Strategy

Strategy Models
Models

Prof. Sudip Bhattacharya

ICFAI Business School,
Calcutta
WHAT IS A BUSINESS GROUP?

Parent Company

Firm 1 Firm 5

Firm 3

Firm 2 Firm 4
 BUSINESS GROUP - DEFINITION

• A business group is known by various names in

various countries – guanxique in China, keiretsus
in Japan, chaebols in Korea, business houses in
India. They share some similar characteristics –
– Their origins can be traced back to market
imperfections existing in an economy (MRTP
Laws, Licenses & Quotas).
– High degree of centralised control
– Resource sharing.
– Formal and informal ties.
Why are businesses within one firm?
• Resources and capabilities span across
products/ business units to create value
– Economies of scope
• In the absence of scope effects, then
divestment may create value
• Logic for integration (share
competencies, core competence) is at
odds with logic of portfolio planning
(treat independently)
 Strategy Models

• Why making choices is so important?

• Why it is so hard?
• What can be done?
 Strategy Models - List
• Environment Scanning - PESTILE
• Industry & Competitive Analysis
• SWOT (TOWS)
• Experience Curve
• Value Chain Analysis
• Capability Analysis
• Portfolio Models
• Scenario Planning
• Risk Analysis
• Financial Models ( IRR & NPV, Risk vs Return,
Options)
• Game theoretic models
 External Audit
• Identification & evaluation of trends &
events beyond control of single firm
• Increased foreign competition
• Population shifts
• Aging society
• IT effect
• Computer revolution
Purpose:
• Development of Finite List:
– Opportunities
– Threats to be avoided
 Key External Forces
Five (5) broad categories:

1. Economic forces
2. Social, cultural, demographic, &
environmental forces
3. Political, governmental & legal forces
4. Technological factors
5. Competitive forces
STRATEGIC CHOICE – SUBJECTIVE FACTORS
• Commitment to past strategies - Inertia.
• Attitude towards risk.
– Risk averse managers.
– Risk prone managers.
• Degree of external dependence.
• Internal political considerations.
• Timing – Pressures, Frame, Horizon.
• Corporate culture.
• Competitive reactions.
• Organisation structure
STRATEGIC CHOICE – MACRO TIMING

Recession
(Divestment
Prosperity )
(Diversificatio
n)

Depressi
on Recovery
(Stability (Intensification
) )
STRATEGIC CHOICE – MICRO TIMING

Re-
Engineering
Growth (%)

Maturity -
Diversification
Decline -
Divestment
Growth -
Expansion

Inception -
Stability
Duration (Yrs)
Portfolio
Planning
Portfolio Planning as “Tool” in Strategy

• Aid Resource Allocation under Capital

Constraints
• Maintain Portfolio Balance
• Summary snapshot of firm’s portfolio of
businesses
• SBU Performance Objective Setting and
Assessment
• Establish incentives that match business-
level objectives (bonuses)
• SBU Strategy Setting
 Portfolio Models
• Simplify into two dimensions
– industry attractiveness
– business unit competitive position
• Provide a common framework to compare
different businesses

“I was finding it very difficult to manage and

understand so many different products and markets.
I just grabbed the portfolio planning, because it
provide me a way to organise my thinking about our
business, and the resource allocation issue facing
the total co” – CEO of a Conglomerate
 Portfolio Models - Assumption
Assumptions
market share determines competitive
position (Higher Market share Higher
Accumulated Volume Lower Cost
Higher Profitability)
firm is capital constrained
treats business units as if they are
independent i.e. no coordination
opportunities
 Portfolio Planning - Limits
• Past importance in portfolio balance & resource
allocation
 Led to unrelated diversification (rise of the
conglomerates)
• Managers found managing businesses with vastly
different strategic characteristics, missions and
mandates extremely difficult in a highly
competitive economy when speed of corporate
decision making became very important
• Value addition by the corporate HQ started
diminishing (low parenting advantage)
BCG Portfolio Planning Model
 BCG ANALYSIS – TATA GROUP - 1
• Stars – They have enormous potentials in the long
term, provided the industry growth rate continues
and the co. is able to maintain its market-share
(i.e. diversify). These Cos. are net users of
resources (Eg. TCS).

• Question Marks – They have potentials in the long

term, provided the company is able to build up on
its market-share (i.e. MP / MD / PD), which
remains a big ? These businesses are also net
users of resources, but their risk profile is higher
than the stars (Eg. Trent, Tata Telecom).
 BCG ANALYSIS – TATA GROUP - 2
• Cash Cow – These are matured businesses, and
the co. dominates the industry ahead of
competition (i.e. stability). Given that the
growth potential in the business is low, they are
generators of resources. However, cash cows
may also need to invest provided the industry
takes an upswing (Eg. Tata Motors, Tata Chem,
TISCO).

• Dogs – They are a drag on the group, and they

lack on competencies to take on competition and
are basically cash traps (Eg. Nelco, Tata
Pharma). Groups prefer to dispose such
businesses (i.e. divest).
 GE/McKinsey Matrix
Business Unit Position
Low Med High

Low HARVEST
Industry Attractiveness

Med HOLD

High BUILD
 GE-Mckinsey – Matrix - 2

Distinctive Capabilities

Strong Medium Weak

Low Med Hig

Diversify(++)
Intensify (+) Stabilit
Attractiveness

Intensify(+) Stabilit Harvest(-)

Industry

Stabilit Harvest(-) Divest (- -)

y
 GE/McKinsey Matrix (Criteria)
INDUSTRY ATTRACTIVENESS SBU POSITION
• Market Size • Market Position
(MS, Rel. MS)
• Market Growth
• Competitive
• Industry Profitability Position
• Cyclicality • Relative
• Inflation recovery (ability to Profitability (Top
cover cost increases thro’ 3-4 competitors)
productivity gain & price hke • Brand Strength
• Importance of overseas • Customer Loyalty
market
 ARTHUR’ D. LITTLE Matrix

Inception Growth Maturity Decline

DominantInvest Consolidate Hold

Strong Improve

Competitive
Favourable
Selective Harvest

Position
Tenable Niche

WeakAbandon Divest

Industry Life-Cycle
SHELL – DIRECTIONAL POLICY MATRIX (DPM)

Business Sector Prospects

Attractive Average Unattractive
Distinctive Capabilities

Market Generate
Strong Leadership Growth
Cash

Try Phased
Average Harder Custodial
Withdrawal
Double
Phased
Weak Or Expand Divest
Withdrawal
Quit
 New BCG Model

Many
Fragmented Specialisation
No. of
Approaches

Stalemate Volume
Few

Small Large
Size of the Advantage
Portfolio Models vs Financial Models

• Portfolio models led to diversification

while financial valuation models ‘unwound’
prior diversification efforts

• Value-based models (DCF, ROE, Hurdle

rates) evaluate which entities (projects)
are profitable and deserve additional
investments
Range of Financial Tools
 IRR and NPV
Strengths Weaknesses
• focus on the • Forces a focus on “the
quantifiable costs & numbers”
benefits of the • Neglects the role of
project uncertainty
• Allows for easy ranking • Neglects strategic
and comparison considerations
• Ignores
interdependency
between projects
Options Approach to Corporate Investments
• “Real” options – sequential, irreversible
investments made under conditions of uncertainty
• Value of a project may stem in large part from
the future opportunities that it creates
• “Real” options give the firm the right (not the
obligation) to invest in subsequent business
opportunities
• Thinking of investments as options values
uncertainty more appropriately
• Delaying investment until there is can be more
value
 When is thinking of a project as an
“option” likely to be fruitful?

• When the future is very uncertain

• When investing now will create unique

opportunities for the firm

• When failing to invest now means that it

will be very expensive to invest later
 Realization of Uncertainty

Stage 1
State-setting Investment
Stage 2
Subsequent Investment Decision

Payoff to the stage 2 decision is contingent on stage 1

investments
 Limitations of Financial Models
• Logic of shared competencies (synergy)
suggests that [implicit] decomposition of DCF
may be inappropriate

• The valuation tool uses the forecasts of sales,

cash flow, etc. – following a predetermined
fixed path – highly questionable in an
uncertain environment

• Fail to answer – how does the corporate HQ.

contribute to create value?
A great place to begin but a terrible place to finish?
 Strategy Models in Making Choices:
Summary
• Financial tools are critically important, but should not
substitute for strategic thinking

• Growth Projects may create options - so that

paradoxically the more uncertainty there is, the more
valuable they may be

• Choices of Growth Projects must be made as a

portfolio, so that different projects are explicitly
traded off against each other

• It may be important to consider the robustness of a

strategy: what will happen if the world of a strategy
looks very, very different?
THANK YOU!