This article is important in view of the various shortcomings that are associated with BCG portfolio evaluation. These observed weaknesses of BCG created the obvious need for more probing techniques of business strategy evaluation. These are considered in this unit. Other approaches include General Electric Motor (GE) approach and the life cycle matrix approaches, which take care of some of BCG”s weaknesses.
There
is need for other techniques of strategy evaluation. This need arises out of
the observable weaknesses or shortcomings of BCG growth share matrix.
| The life-cycle Portfolio matrix |
Evaluating Corporate Strategy by
Using More Probing Factors
a. The BCG 4-cell matrix is
based on high-low classification. This hides the fact that there are
“average” growth rates to be market
leaders may be getting stronger while others are getting weaker. A few one-time
starts or cash cows have ended up in bankruptcy. Hence, the characteristics to
assess are the trend in a firm”s relative market share, i.e., is it
gaining ground or losing ground and why? This
particular weakness of BCG can be corrected by indicating each
business”s present and future position in the matrix.
a. Bell and Hammnd (1979) particularly argue that BCG matrix is not a reliable indicator relative to investment opportunity across business units. They state that investing in a star is not necessarily more attractive than investing in a lucrative cash cow.
b. The matrix results are silent over when a question mark business is a potential winner or being likely loser. The matrix also says nothing about a shrewd investment becoming a string dog, star or cash cow.
c. The connection between relative market share and profitability is not as light as the experience curve effect implies.
d. The importance of cumulative production experience in lowering unit cost varies from industry to industry
e. A thorough assessment of the relative long-term attractiveness of business units in the business portfolio requires an examination of more than just marketing growth and relative share variables.
f. Being a market leader in a slow-growth industry is not a sure guarantee of cash status because
(i) the investment requirements of a hold-and-maintain
strategy, given the impact of information on the cost of replacing worn-out
facilities and equipment, can soak up much, if not all, of the available
internal cash flow, and
(ii) as the market matures,
competitive forces often stiffen, and ensure a vigorous battle for volume and
market share, can shrink profit margins and surplus cash flows.
| General Electric 9-cell business portfolio matrix |
each business is rated using this approach to arrive at a measure of business
strength and competitive position. The competitive values for long-term product
market attractiveness and business/competitive position are then used to plot
each business’s position in the matrix.
(1) The
vertical lines consisting of three cells at the upper left indicate that long-term
industry attractiveness and business strength/competitive position are
favourable. The businesses in these zones are given a high priority in terms of
fund allocation.
(2) The
second zone, i.e., the un-shaded zone, comprising these three cells which
usually carry medium investment allocation. The strategy to be adopted here is
hold-and maintain.
(3) The
third zone, i.e. the horizontal lines, is composed of the 3 cells in the lower
right corner of the matrix.
The
strategy prescription here is typically harvest or divest. However, in every
exceptional case, such a business can be rebuilt or repositioned using a turn
around approach.
The
9-cell GE approach has some merits. It is a 3-cell GE approach which is as
follows:
a.
It
allows for intermediate ranking between high and low, and between strong and
weak.
b.
It
considers much wider varieties
of strategically relevant variables.
c.
It
emphasis channeling of corporate resources to those businesses that combine
medium-to-high product-market attractiveness with average-to-strong business
strength or competitive position. The
fact is that the greatest probability of competitive
advantage and superior performance lies in these combinations.
In order to identify a developing winner type of
business, Hofer (1978) has developed a 15-cell matrix in which business is
plotted in terms of stage of industry evolution and competitive position. This
is supposed to be an improvement over the 9-cell GE approach. Just as in the
previous approaches the cycles represent the sizes of the industries involved
and the pie wedges denote the business market share.
In the Table above, A would appear to be a developing winner
and C would be a potential loser, E is an established winner, F is a cash cow
and G is a loser or a dog.
The strength of the lifecycle matrix is the story it
tells about the distribution of the firm”s business across the stages of
the industry evolution.
It should be noted that each of the
matrix types has its pros and cons.
Thus, there is no need to vehemently
insist on the choice of the matrix to use.
The business unit
competition position
The most important thing is to have a good analytical
accuracy and completeness in describing the firm”s current portfolio
position just for the purpose of knowing how to manage the portfolio as a whole
and get the best performance from the allocation of the corporate resources.
The construction of business portfolio matrixes has been identified as the step in evaluating diversified forms of current strategic situations. This is because of the insight and clarity they provide about the overall character of a firm”s business build up. However, business portfolio analysis does not constitute the whole corporate strategy evaluation process. A business portfolio matrix offers a snapshot comparison of different business units and some general prescriptions for the direction of the business strategy.
b. Appraise
each business unit”s strength and competitive position in its industry;
understand how each business unit ranks against
its rivals and the key factor for competitive success.
This affords corporate managers a basis for judging the business unit”s
chances for real success in its industry.
c. Identify
and compare the specific external opportunities threats and strategic issues
peculiar to each business unit”s situation.
d. Determine
the total amount of corporate financial support needed to fund each unit”s
business strategy and what corporate skills and resources could be deployed to
boast the competitive strength of the various business units.
e. Compare
the relative attractiveness of different businesses in the corporate portfolio.
This includes industry attractiveness/business strength and a look at how the
different business units compare
on various historical and projected performance
measures such as sales profit margins and return on investment.
f. Check
the overall portfolio to ascertain that the mix of the businesses are all well
balanced, i.e. there are not too many losers or question marks, not too mature business that can
slow down corporate growth. But there should be enough cash producers to
support the stars and develop winners, too few dependable profit performances
as suggested by Thompson and Strickland (1987).
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