Module 2 : Analyzing Company’s

internal environment
 LEVELS OF STRATEGY

 Corporate level
• Determine overall scope of the organisation
• Add value to the different business units
• Meet expectations of stakeholders
 Business level (SBU)
• How to compete successfully in particular markets
 Operational
• How different parts of organisation deliver strategy
Strategic Business UNITS (SBU’S)

The SBUs are the natural ‘grouping’ of part of a corporation. - The SBU has a range
of related products/services which has similar technologies and production processes
An SBU can be of any size or level but it must have
 a unique mission and its own set of goals and strategies
 -identifiable and a well defined set of competitors
 -an external market focus with products/services sold in similar or related
market segments
 -control of its business functions
 An SBU is managed by an SBU manager, largely as an independent unit.
 Each SBU in a particular organization should be able to operate independently
of any other SBU
Internal analysis

 Porter’s Value Chain Analysis

 BCG
 GE 9 CELL MODEL
 VRIO
Core competencies

 Capabilities that are

 valuable,
 rare,
 costly to imitate, and
 non-substitutable are core competencies.
In turn, core competencies are sources of competitive advantage for the firm over its
rivals. 
 for a capability to be a core competence, it must be valuable and unique from a
customer's point of view.
 For a competitive advantage to be sustainable, the core competence must be inimitable
and non-substitutable by competitors.
 Sustainable competitive advantage results only when all four criteria are satisfied.
Competitive Strategy

 Thinking comes from Michael Porter of Harvard

 Late 70’s developed 3 models to help us think about strategy.
 5 Force Model
 Value Chain
 Generic Strategies
Value Chain analysis

 Value chain analysis allows the firm to understand the parts of its operations
that create value and those that do not. 
 Understanding these issues is important because the firm earns above-average
returns only when the value it creates is greater than the costs incurred to
create that value.
Porter’s value chain analysis

 A firm's value chain is segmented into primary and support activities. 

-Primary activities  are involved with a product's physical creation, its sale and
distribution to buyers, and its service after the sale. 
-Support activities  provide the assistance necessary for the primary activities to
take place.
The value chain shows how a product moves from the raw-material stage to the
final customer. 
What Are the Value Creating Potentials of Primary
Activities?

 In inbound logistics as well as in outbound logistics, one can change the

materials handling systems, warehousing, inventory control systems, and the way
materials are handled and stored.
 In operations, changes can be made by altering the production processes,
materials used, machines, quality control systems, packaging, maintenance and
quality of labor involved in producing them.
 In marketing and sales, which customers are purchasing the product (and see
whether you can alter their profile to create more value), the needed advertising
strategies, selection of distribution channels, sales force quality and product
features that can lead to enhanced value, can be considered.
 In service, the level and quality of service, frequency of service needed,
warranty terms, quality of repair and the quality of service personnel are
variables in the firm's control.
Support activities

 In procurement, activities to be examined could be the procurement systems, the quickness of

response, the inventory policies and the credit policies toward vendors. This is not regarding what
materials are to be used (that comes under operations above) but the way materials, including
capital equipment are procured.
 In technology development, one could look at the R&D labs, process equipment design, basic vs.
applied research, criteria for selection of products for R&D and policies relating R&D to production.
 In human resources management, the policies relating to hiring, training, promotion and
compensation need to be looked at and benchmarked.
 Finally, the firm could look at the infrastructure that includes a whole lot of things such as general
management, planning, finance, accounting, legal support and management of relations with the
government. It also includes physical infrastructure, provision of standby power, adequate water
supply and systems for recycling and conservation of water, internal roads and quality of
maintenance of this infrastructure.
 BOSTON CONSULTING GROUP


BOSTON CONSULTING GROUP (BCG) MATRIX is developed by BRUCE
HENDERSON of the BOSTON CONSULTING GROUP IN THE
EARLY 1970’s.

 According to this technique, businesses or products are classified as low or

high performers depending upon their market growth rate and relative market
share.
 To understand the Boston Matrix you need to understand how market share
and market growth interrelate.
  
MARKET SHARE
 Market share is the percentage of the total market that is being serviced
by your company, measured either in revenue terms or unit volume terms.

 RELATIVE MARKET SHARE

 RMS = Business unit sales this year

Leading rival sales this year

 The higher your market share, the higher proportion of the market you
control.
MARKET GROWTH
RATE
 Market growth is used as a measure of a market’s
attractiveness.

 MGR = Individual sales - individual sales

this year last year
Individual sales last year

 Markets experiencing high growth are ones where the

total market share available is expanding, and there’s
plenty of opportunity for everyone to make money.
THE BCG GROWTH-SHARE
MATRIX
 It is a portfolio planning model which is based on the observation
that a company’s business units can be classified in to four
categories:
 Stars
 Question marks
 Cash cows
 Dogs

 It is based on the combination of market growth and market share

relative to the next best competitor.
STARS
High growth, High market share
 Stars are leaders in business.
 They also require heavy investment, to maintain its large market
share.
 It leads to large amount of cash consumption and cash generation.
 Attempts should be made to hold the market share otherwise the star
will become a CASH COW.
CASH COWS
Low growth , High market share

 They are foundation of the company and often the stars of yesterday.
 They generate more cash than required.
 They extract the profits by investing as little cash as possible
 They are located in an industry that is mature, not growing or
declining.
DOGS
Low growth, Low market share

 Dogs are the cash traps.

 Dogs do not have potential to bring in much cash.
 Number of dogs in the company should be minimized.
 Business is situated at a declining stage.
QUESTION MARKS
High growth , Low market share

 Most businesses start of as question marks.

 They will absorb great amounts of cash if the market share remains
unchanged, (low).
 Why question marks?
 Question marks have potential to become star and eventually cash
cow but can also become a dog.
 Investments should be high for question marks.
 WHY BCG MATRIX ?

To assess :
 Profiles of products/businesses
 The cash demands of products
 The development cycles of products
 Resource allocation and divestment decisions
MAIN STEPS OF BCG MATRIX

 Identifying and dividing a company into SBU.

 Assessing and comparing the prospects of each SBU according to two criteria :
1. SBU’S relative market share.
2. Growth rate OF SBU’S industry.
 Classifying the SBU’S on the basis of BCG matrix.
 Developing strategic objectives for each SBU.
 BENEFITS

 BCG MATRIX is simple and easy to understand.

 It helps you to quickly and simply screen the opportunities open to you, and
helps you think about how you can make the most of them.
 It is used to identify how corporate cash resources can best be used to
maximize a company’s future growth and profitability.
 LIMITATIONS

 BCG MATRIX uses only two dimensions, Relative market share and market
growth rate.
 Problems of getting data on market share and market growth.
 High market share does not mean profits all the time.
 Business with low market share can be profitable too.
BCG Matrix for Patanjali
Unilever BCG Matrix
 BCG MATRIX

 What these four categories demonstrate is that businesses with diverse

portfolios such as Unilever’s require a balance of Star, Cash Cow and Problem
Child brands because markets are constantly developing, maturing and
ultimately declining (as demonstrated by the Product Lifecycle theory).
 The journey of any product/brand is likely to follow the journey of Problem
Child – Star – Cash Cow – Dog and the key to clever marketing is prolonging the
Star and Cash Cow stages for as long as possible whilst minimizing Dog brands
 Though BCG MATRIX has its limitations it is one of the most FAMOUS AND
SIMPLE portfolio planning matrix ,used by large companies having multi-
products.
Strategic implication of the BCG matrix
 The strategies for the overall portfolio products are concerned
with the issue of balance, I.e. is the portfolio of products
balanced internally in terms of the following?

 Are there a sufficient number of „cash cows” to support those

other products in the portfolio which are at stages of their
lifecycles when they are require cash?

 Are there „questions-marks” which have resonable prospects of

becoming future stars and which do not , at present, constitute
a disproportionate drain on current cash flow?

 Are there an appropriate number of „stars” which will provide

sufficient cash generation when the current cash cows are no
longer able to fulfill this role?

 Are there any „dogs” and if so why?

 Four criteria of sustainable competitive advantage

Table 3.4 The four criteria of sustainable competitive advantage

Valuable Capabilities •Help a firm neutralize threats or exploit
opportunities
Rare Capabilities •Are not possessed by many others
Costly-to-Imitate Capabilities •Historical: A unique and a valuable
organizational culture or brand name
•Ambiguous cause: The causes and uses of a
competence are unclear
•Social complexity: Interpersonal relationships,
trust, and friendship among managers, suppliers,
and customers
Non-substitutable Capabilities •No strategic equivalent
VRIO framework

 The tool was originally developed by Barney, J. B. (1991) in his work ‘Firm Resources and
Sustained Competitive Advantage’, where the author identified four attributes that firm’s
resources must possess in order to become a source of sustained competitive advantage.
 According to him, the resources must be
 valuable,
 rare,
 imperfectly imitable and
 non-substitutable..
 VRIO analysis stands for four questions that ask if a resource is: valuable? rare? costly to
imitate? And is a firm organized to capture the value of the resources?
 A resource or capability that meets all four requirements can bring sustained competitive
advantage for the company
VRIO FRAMEWORK
 GE 9 Cell Model

GE-McKinsey nine-box matrix

 is a strategy tool that offers a systematic approach for the multi business corporation to prioritize its investments
among its business units.

GE-McKinsey
 is a framework that evaluates business portfolio, provides further strategic implications and helps to prioritize the
investment
needed for each business unit (BU).
Indicators of SBU Strength
and Market Attractiveness
Market Attractiveness/SBU Strength Matrix
Strategy Guidelines Based on Directional Policy Matrix
GE 9 CELL Model

 In 1970s, General Electric was managing a huge and complex portfolio of

unrelated products and was unsatisfied about the returns from its investments in
the products. At the time, companies usually relied on projections of future cash
flows, future market growth or some other future projections to make
investment decisions, which was an unreliable method to allocate the resources.
 Therefore, GE consulted the McKinsey & Company and as a result the nine-box
framework was designed.
 The nine-box matrix plots the BUs on its 9 cells that indicate whether the
company should invest in a product, harvest/divest it or do a further research on
the product and invest in it if there’re still some resources left.
 The BUs are evaluated on two axes: industry attractiveness and a competitive
strength of a unit.
 Industry attractiveness

 Industry attractiveness consists of many factors that collectively determine the

competition level in it. There’s no definite list of which factors should be included to
determine industry attractiveness, but the following are the most common: [1]
 Long run growth rate
 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat of
substitutes and available complements (use Porter’s Five Forces analysis to determine this)
 Industry structure (use Structure-Conduct-Performance framework to determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation
Business strength

 The following factors determine the competitive strength of a business unit:

 Total market share
 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine this)
 Your business unit strength in meeting industry’s critical success factors (use 
Competitive Profile Matrix to determine this)
 Strength of a value chain (use Value Chain Analysis and Benchmarking to determine this)
 Level of product differentiation
 Production flexibility
Determine industry attractiveness of each business unit

 Step 1. Make a list of factors. The first thing you’ll need to do is to identify,
which factors to include when measuring industry attractiveness. We’ve
provided the list of the most common factors, but you should include the
factors that are the most appropriate to your industries.
 Assign weights. Weights indicate how important a factor is to industry’s
attractiveness. A number from 0.01 (not important) to 1.0 (very important)
should be assigned to each factor. The sum of all weights should equal to 1.0.
 Rate the factors. The next thing you need to do is to rate each factor for each
of your product or business unit. Choose the values between ‘1-5’ or ‘1-10’,
where ‘1’ indicates the low industry attractiveness and ‘5’ or ‘10’ high
industry attractiveness.
 Calculate the total scores. Total score is the sum of all weighted scores for
each business unit. Weighted scores are calculated by multiplying weights and
ratings. Total scores allow comparing industry attractiveness for each
business unit.
 Business Unit 1 Business Unit 1 Business Unit 2 Business Unit 2

Factor Weight Rating Weighted Score Rating Weighted Score

Industry growth 0.25 3 0.75 4 1

rate

Industry size 0.22 3 0.66 3 0.66

Industry 0.18 5 0.90 1 0.18

profitability

Industry structure 0.17 4 0.68 4 0.68

Trend of prices 0.09 3 0.27 3 0.27

Market 0.09 1 0.09 3 0.27

segmentation

Total score 1.00 - 3.35 - 3.06

Determine the competitive strength of each business
unit

 Make a list of factors. Choose the competitive strength factors from our list or
add your own factors.
 Assign weights. Weights indicate how important a factor is in achieving
sustainable competitive advantage. A number from 0.01 (not important) to
1.0 (very important) should be assigned to each factor. The sum of all weights
should equal to 1.0.
 Rate the factors. Rate each factor for each of your product or business unit.
Choose the values between ‘1-5’ or ‘1-10’, where ‘1’ indicates the weak
strength and ‘5’ or ‘10’ powerful strength.
 Calculate the total scores.
Competitive Strength (1/2)

Business Unit 1 Business Unit 1 Business Unit 2 Business Unit 2

Factor Weight Rating Weighted Rating Weighted

Score Score
Market share 0.22 2 0.44 2 0.44

Relative 0.18 3 0.48 2 0.38

growth rate

Company’s 0.14 3 0.42 1 0.14

profitability

Brand value 0.10 1 0.10 2 0.20

VRIO 0.20 1 0.20 4 0.80

resources

CPM Score 0.16 2 0.32 5 0.80

Total score 1.00 - 1.96 - 2.74

Industry/Competitive Environment

 Michael E. Porter’s Five Forces Model the concept of industry environment as

integral to strategic thought and business planning.
 The five forces shape competition in an industry.
 The framework helps strategic managers link remote factors to their effects on a
firm’s operating environment.
Five Forces Driving Industry Competition