Table of Contents
CHAPTER 1 : ENVIRONMENT & INDUSTRY ANALYSIS .................................................................... 1-4
1. EXTERNAL ANALYSIS ....................................................................................................................... 1-4
1.1 PESTEL ANALYSIS ........................................................................................................................ 1-4
1.2. PORTERS FIVE FORCES ANALYSIS ................................................................................................... 1-6
2. INTERNAL ANALYSIS ..................................................................................................................... 1-10
2.1 RESOURCES, CAPABILITIES AND CORE COMPETENCIES ...................................................................... 1-10
2.2 VRIO FRAMEWORK .................................................................................................................... 1-12
CHAPTER 2 : BUSINESS LEVEL STRATEGIES ................................................................................. 2-13
1. COST LEADERSHIP ........................................................................................................................ 2-13
2. DIFFERENTIATION......................................................................................................................... 2-14
3. DIVERSIFICATION ......................................................................................................................... 2-15
CHAPTER 3 : GLOBAL STRATEGIES .............................................................................................. 3-17
1. WHY GO GLOBAL? ....................................................................................................................... 3-17
1.1 INCREASED MARKET SIZE ............................................................................................................. 3-17
1.2 RETURN ON INVESTMENT ............................................................................................................. 3-17
1.3 ECONOMIES OF SCALE ................................................................................................................. 3-17
1.4 LOCATIONAL ADVANTAGES .......................................................................................................... 3-17
2. INTERNATIONAL ENTRY MODE ....................................................................................................... 3-17
2.1 EXPORTING ................................................................................................................................ 3-18
2.2 LICENSING ................................................................................................................................. 3-19
2.3 STRATEGIC ALLIANCES ................................................................................................................. 3-20
2.4 FRANCHISING ............................................................................................................................. 3-20
2.5 ACQUISITIONS ............................................................................................................................ 3-20
2.6 GREENFIELD INVESTMENTS........................................................................................................... 3-21
2.7 BROWNFIELD INVESTMENTS ......................................................................................................... 3-21
3. RISKS IN INTERNATIONAL ENVIRONMENT ........................................................................................ 3-21
CHAPTER 4 : THE BUSINESS MODEL CANVAS .............................................................................. 4-22
CHAPTER 5 : THE BALANCED SCORECARD ................................................................................... 5-23
1. OBJECTIVES, MEASURES, TARGETS, AND INITIATIVES .......................................................................... 5-24
2. BALANCED SCORECARD AS A STRATEGIC MANAGEMENT SYSTEM ......................................................... 5-24
CHAPTER 6 : FIVE ELEMENTS OF STRATEGY ................................................................................ 6-25
CHAPTER 7 : MCKINSEY 7S MODEL .............................................................................................. 7-27
CHAPTER 8 : BLUE OCEAN STRATEGY .......................................................................................... 8-30
1. RED OCEAN STRATEGY VS. BLUE OCEAN STRATEGY ........................................................................... 8-30
2. FOUR ACTIONS FRAMEWORK ......................................................................................................... 8-31
1-2
1-3
1. External Analysis
1.1 PESTEL Analysis
1. Political: These factors determine the extent to which a government may influence the
economy or a certain industry. [For example] a government may impose a new tax or duty
due to which entire revenue generating structures of organizations might change. Political
factors include tax policies, Fiscal policy, trade tariffs etc. that a government may levy
around the fiscal year and it may affect the business environment (economic
environment) to a great extent.
2. Economic: These factors are determinants of an economys performance that directly
impacts a company and have resonating long term effects. [For example] a rise in the
inflation rate of any economy would affect the way companies price their products and
services. Adding to that, it would affect the purchasing power of a consumer and change
demand/supply models for that economy. Economic factors include inflation rate, interest
rates, foreign exchange rates, economic growth patterns etc. It also accounts for the FDI
(foreign direct investment) depending on certain specific industries whore undergoing
this analysis.
3. Social: These factors scrutinize the social environment of the market, and gauge
determinants like cultural trends, demographics, population analytics etc. An example for
this can be buying trends for Western countries like the US where there is high demand
during the Holiday season.
4. Technological: These factors pertain to innovations in technology that may affect the
operations of the industry and the market favorably or unfavorably. This refers to
automation, research and development and the amount of technological awareness that
a market possesses.
5. Environmental: These factors include all those that influence or are determined by the
surrounding environment. This aspect of the PESTLE is crucial for certain industries
particularly for example tourism, farming, agriculture etc. Factors of a business
environmental analysis include but are not limited to climate, weather, geographical
location, global changes in climate, environmental offsets etc.
6. Legal: These factors have both external and internal sides. There are certain laws that
affect the business environment in a certain country while there are certain policies that
companies maintain for themselves. Legal analysis takes into account both of these angles
and then charts out the strategies in light of these legislations. For example, consumer
laws, safety standards, labor laws etc.
The following diagram summarizes the way to conduct PESTEL Analysis:
1-4
Political
Economic
Social
Govenment Regulation
Exchange Rate
Literacy Rate
Taxation
Unemployment Rate
Demographics
Governmental Decisions
Consumers' Trust
Sex Ration
Consumer Protection
Carbon footprint
Labour Laws
Access to internet
Environmental
Regulations
Employee Statutory
Benets
Mobile Telephony
penetration
Example 1: PESTEL Analysis of a Pharmaceutical Company
Indian Institute of Management Raipur
1-5
1.2. Porters Five Forces Analysis
Bargaining Power of Suppliers
Brand Reputation
Geographical Coverage
Product/Service Quality
level
Number of Suppliers
Geographical Factors
Barriers to Entry
Ease of entry/exit
Product differentiation
Initial Capital Requirement
Routes to market
Cost disadvantages
Government policies
Rivalry
Number and Size of firms
Industry size and trends
Fixed vs. Variable cost
Differentiation vs. Cost
Leadership strategy
Threat of Substitutes
Alternates price/quality
Market Distribution
changes
Fashion and trends
1-6
Barriers to entry
New entrants to an industry bring new capacity, the desire to gain market share, and oftensubstantial resources.
If barriers to entry are high and newcomers can expect sharp retaliation from the entrenched
competitors, obviously the newcomers will not pose a serious threat of entering.
1-7
It is dominated by a few companies and is more concentrated than the industry it sells
to.
Its product is unique or at least differentiated, or if it has built up switching costs.
It is not obliged to contend with other products for sale to the industry. For instance, the
competition between the steel companies and the aluminum companies to sell to the
can industry checks the power of each supplier.
It poses a credible threat of integrating forward into the industrys business. This
provides a check against the industrys ability to improve the terms on which it
purchases.
The industry is not an important customer of the supplier group. If the industry is an
important customer, suppliers fortunes will be closely tied to the industry, and they will
want to protect the industry through reasonable pricing and assistance in activities like
R&D and lobbying.
1-8
Threat of Substitutes
By placing a ceiling on prices it can charge, substitute products or services limit the potential of
an industry. Unless it can upgrade the quality of the product or differentiate it somehow (as via
marketing), the industry will suffer in earnings and possibly in growth.
Manifestly, the more attractive the price-performance trade-off offered by substitute products,
the firmer the lid placed on the industrys profit potential. Sugar producers confronted with the
large-scale commercialization of high-fructose corn syrup, a sugar substitute, are learning this
lesson today.
Substitutes not only limit profits in normal times; they also reduce the bonanza an industry can
reap in boom times. In 1978 the producers of fiberglass insulation enjoyed unprecedented
demand as a result of high-energy costs and severe winter weather. But the industrys ability to
raise prices was tempered by the plethora of insulation substitutes, including cellulose, rock
wool, and Styrofoam. These substitutes are bound to become an even stronger force once the
current round of plant additions by fiberglass insulation producers has boosted capacity enough
to meet demand (and then some).
Substitute products that deserve the most attention strategically are those that (a) are subject to
trends improving their price-performance trade-off with the industrys product, or (b) are
produced by industries earning high profits. Substitutes often come rapidly into play if some
development increases competition in their industries and causes price reduction or
performance improvement.
Rivalry
Rivalry among existing competitors takes the familiar form of jockeying for positionusing
tactics like price competition, product introduction, and advertising slugfests. Intense rivalry is
related to the presence of a number of factors:
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2. Internal Analysis
2.1 Resources, Capabilities and Core Competencies
1. Resources
Broad in scope, resources cover a spectrum of individual, social and organizational phenomena.
Typically, resources alone do not yield a competitive advantage. In fact, a competitive advantage
is generally based on the unique bundling of several resources.
Some of a firms resources (defined as inputs to the firms production process) are tangible,
while others are intangible.
Tangible resources are assets that can be observed and quantified. Production
equipment, manufacturing facilities, distribution centres and formal reporting structures
are examples of tangible resources. The four types of tangible resources are financial,
organizational, physical and technological. The value of many tangible resources can be
established through financial statements; but these statements do not account for the
value of all the firms assets, because they disregard some intangible resources. The
value of tangible resources is also constrained because they are difficult to leverageit is
difficult to derive additional business or value from a tangible resource. For example, an
airplane is a tangible resource, but You cant use the same airplane on five different
routes at the same time. You cant put the same crew on five different routes at the
same time. And the same goes for the financial investment youve made in the airplane.
Intangible resources are assets that are rooted deeply in the firms history and have
accumulated over time. Because they are embedded in unique patterns of routines,
intangible resources are relatively difficult for competitors to analyze and imitate. The
three types of intangible resources are human, innovation and reputational. Knowledge,
trust between managers and employees, managerial capabilities, organizational routines
(the unique ways people work together), scientific capabilities, the capacity for
innovation, brand name, and the firms reputation for its goods or services and how it
interacts with people (such as employees, customers, and suppliers) are intangible
resources.
For example, Ford hired a well-respected Indian actor, Sunil Shetty, to serve as the brand
ambassador for the Ford Endeavour launched in India. The Endeavour had the highest sales of
SUVs in 2008. Similarly, Studio Ghibli, the Japanese animation company that has produced films
including Princess Mono-noke and Ponyo has successfully exploited blockbusters, especially after
forming an alliance with Pixar and Walt Disney to distribute Ghibli products.
2. Capabilities
Capabilities exist when resources have been purposely integrated to achieve a specific
task or set of tasks.
These tasks range from human resource selection to product marketing and research
and development activities.
Critical to the building of competitive advantages, capabilities are often based on
developing, carrying and exchanging information and knowledge through the firms
human capital.
Capabilities often evolve and develop over time. The foundation of many capabilities lies
in the unique skills and knowledge of a firms employees and, often, their functional
expertise.
The firms challenge is to create an environment that allows people to integrate their
individual knowledge with that held by others in the firm so that, collectively, the firm
1-10
has significant organizational knowledge. Eg. GE has been effective in developing its
human capital and in promoting the transfer of their knowledge throughout the
company. Building important capabilities is critical to achieving high firm performance.
3. Core competencies
Core competencies are capabilities that serve as a source of competitive advantage for a
firm over its rivals.
Core competencies distinguish a company competitively and reflect its personality.
They emerge over time through an organizational process of accumulating and learning
how to deploy different resources and capabilities.
The activities the company performs especially well when compared with competitors,
and through which the firm adds unique value to its goods or services over a long period
of time.
McKinsey & Co. recommends that its clients identify no more than three or four
competencies around which their strategic actions can be framed. Supporting and
nurturing more than four core competencies may prevent a firm from developing the
focus it needs to fully exploit its competencies in the marketplace.
1-11
Valuable:
o Attractive Features
o Lower costs (and higher profits)
o Eg. Hondas Engines
Rare:
o Only a few firms possess
o Eg. Toyota Lean Manufacturing
Costly to Imitate:
o Unable to develop or buy at reasonable price
o Eg.
Supported by Organization
o Exploit competitive potential by organizing the firm
o Eg. McDonalds
1-12
Porter's generic strategies describe how a company pursues competitive advantage across its
chosen market scope. There are three/four generic strategies, either lower cost, differentiated,
or focus.
A company chooses one of two types of scope, either focus (offering its products to selected
segments of the market) or industry-wide, offering its product across many market segments
either using cost leadership or differentiation strategy.
1. Cost Leadership
This strategy also involves the firm winning market share by appealing to cost-conscious or
price-sensitive customers.
This is achieved by having the lowest prices in the target market segment, or at least the
lowest price to value ratio (price compared to what customers receive).
The firm must be able to operate at a lower cost than its rivals. There are three main ways to
achieve this.
o Achieving a high asset utilization. In manufacturing, it will involve production of high
volumes of output. These approaches mean fixed costs are spread over a larger
number of units of the product or service, resulting in a lower unit cost, i.e. the firm
hopes to take advantage of economies of scale and experience curve effects.
o Achieving low direct and indirect operating costs. This is achieved by offering high
volumes of standardized products, offering basic no-frills products and limiting
customization and personalization of service. Production costs are kept low by using
fewer components, using standard components, and limiting the number of models
produced to ensure larger production runs. Overheads are kept low by paying low
wages, locating premises in low rent areas, establishing a cost-conscious culture, etc.
Outsourcing, controlling production costs, increasing asset capacity utilization, and
minimizing other costs including distribution, R&D and advertising are some ways to
achieve this.
2-13
Control over the value chain encompassing all functional groups (finance,
supply/procurement, marketing, inventory, information technology etc..) to ensure
low costs. For example Dell Computer initially achieved market share by keeping
inventories low and only building computers to order via applying Differentiation
strategies in supply/procurement chain. This will be clarified in other sections.
Cost leadership strategies are only viable for large firms with the opportunity to enjoy
economies of scale and large production volumes and big market share. Small businesses
can be cost focus not cost leaders if they enjoy any advantages conducive to low costs.
Disadvantages:
-
2. Differentiation
2-14
3. Diversification
Market Penetration
In this strategy, there can be further exploitation of the products without necessarily changing
the product or the outlook of the product.
-
This will be possible through the use of promotional methods, putting various pricing
policies that may attract more clientele, or one can make the distribution more extensive.
- In Market Penetration, the risk involved in its marketing strategies is usually the least
since the products are already familiar to the consumers and so is the established market.
Another way in which market penetration can be increased is by coming up with various
initiatives that will encourage increased usage of the product.
A good example is the usage of toothpaste. Research has shown that the toothbrush head
influences the amount of toothpaste that one will use. Thus if the head of the toothbrush
is bigger it will mean that more toothpaste will be used thus promoting the usage of the
toothpaste and eventually leading to more purchase of the toothpaste.
Product Development
In product development growth strategy, new products are introduced into existing markets.
- Product development can differ from the introduction of a new product in an existing
market or it can involve the modification of an existing product.
- By modifying the product one would probably change its outlook or presentation, increase
the products performance or quality. By doing so, it can appeal more to the already
existing market.
- A good example is car manufacturers who offer a range of car parts so as to target the car
owners in purchasing a replica of the models, clothing and pens.
Market Development
The third marketing strategy is Market Development. It may also be known as Market
Extension. In this strategy, the business sells its existing products to new markets.
2-15
- This can be made possible through further market segmentation to aid in identifying a
new clientele base. This strategy assumes that the existing markets have been fully
exploited thus the need to venture into new markets.
- There are various approaches to this strategy, which include: New geographical markets,
new distribution channels, new product packaging, and different pricing policies.
- In New geographical markets, the business can expound by exporting their products to
other new countries. It would also mean setting up other branches of the business in
other areas that the business had not ventured yet. Various businesses have adopted the
franchise method as a way of setting up other branches in new markets. A good example
is Guinness. This beer had originally been made to be sold in countries that have a colder
climate, but now it is also being sold in African countries.
- The other method is via new distribution channels. This would entail selling the products
via e-commerce or mail order. Selling through e-commerce will capture a larger clientele
base since we are in a digital era where most people access the internet often.
- In New Product packaging, it means repacking the product in another method or
dimension. That way it may attract a different customer base. In Different pricing policies,
the business could change its prices so as to attract a different customer base or so create
a new market segment.
- Market Development is a far much risky strategy as compared to Market Penetration. This
is so as it is targeting a new market and one may not quit tell how the outcome may be.
Diversification
This growth strategy involves an organization marketing or selling new products to new
markets at the same time.
-
It is the riskiest strategy among the others as it involves two unknowns, new products
being created and the business does not know the development problems that may
occur in the process.
A new market being targeted, which will bring the problem of having unknown
characteristics. For a business to take a step into diversification, they need to have
their facts right regarding what it expects to gain from the strategy and have a clear
assessment of the risks involved.
Related diversification means that the business remains in the same industry in
which it is familiar with. For example, a cake manufacturer diversifies into a
fresh juice manufacturer (food industry).
3-16
Sometimes it's just a matter of cost. It's cheaper to do business abroad because the companies
can reduce production costs and pay employees in more affordable countries less. There's a
reason why Apple outsources the bulk of its iPhone production to Asia.
Expanding will enable the firms to produce more units. The more units being produced the
lower the per unit cost. This can increase profit margins, but to get the best of this is possible
only through selling to more customers, which can only come through expanding to more
countries.
3-17
2.1 Exporting
Direct Exports
Direct exports represent the most basic mode of exporting made by a (holding) company,
capitalizing on economies of scale in production concentrated in the home country and affording
better control over distribution. Direct export works the best if the volumes are small. Large
volumes of export may trigger protectionism. The main characteristic of direct exports entry
model is that there are no intermediaries.
Passive exports represent the treating and filling overseas orders like domestic orders.
Advantages
-
Disadvantages
Indirect Exports
Indirect export is the process of exporting through domestically based export intermediaries.
The exporter has no control over its products in the foreign market.
Export Trading Companies
Export Management
Companies
Export Merchants
Conrming Houses
Non-conforming Purchasing
houses
Similar to ETCs
Do not take on the export credit risks
They are the wholesale companiesthat buy unpackages products from the
suppliers for export overseas under their own brand names
They are the intermediate sellers that work for the foreign houses
They recieve the product requirements from the clients, negotiate purchases
and make deliveryand pay suppliers/manufacturers
Similar to conifrming houses except that they do not pay the suppliers
directly
3-18
Advantages
Disadvantages
company
ability.
2.2 Licensing
It allows foreign firms, either exclusively or non-exclusively to manufacture a proprietors
product for a fixed term in a specific market.
A licensor in the home country makes limited rights or resources available to the licensee in the
host country like patents, trademarks, managerial skills, technology, and others that can make it
possible for the licensee to manufacture and sell in the host country a similar product to the one
the licensor has already been producing and selling in the home country without requiring the
licensor to open a new operation overseas. The licensor earnings take forms of one-time
payments, technical fees and royalty payments usually calculated as a % of sales.
Advantages:
Disadvantages:
3-19
Disadvantages:
- Difficult to find a good partner
- Risk of unequal partnership
- Loss of control
- Relationship management across borders
2.4 Franchising
It is a system in which semi-independent business owners (franchisees) pay fees and royalties to
a parent company (franchiser) in return for the right to become identified with its trademark, to
sell its products or services, and often to use its business format and system."
Compared to licensing, franchising agreements tend to be longer and the franchisor offers a
broader package of rights and resources which usually includes: equipment, managerial systems,
operation manual, initial trainings, site approval and all the support necessary for the franchisee
to run its business in the same way it is done by the franchisor. In addition to that, while a
licensing agreement involves things such as intellectual property, trade secrets and others while
in franchising it is limited to trademarks and operating know-how of the business.
Disadvantages:
Advantages:
Low cost
Allows simultaneous expansion into different
regions of the world
2.5 Acquisitions
3-20
2.7 Brownfield Investments
Brown field investing covers both the purchase and the lease of existing facilities. At times, this
approach may be preferable, as the structure already stands. Not only can it result in cost
savings for the investing business, it can also avoid certain steps that are required in order to
build new facilities on empty lots, such as building permits and connecting utilities.
The term brown field refers to the fact that the land itself may be contaminated by the prior
activities that have taken place on the site, a side effect of which may be the lack of vegetation
on the property.
3-21
Together these elements provide a pretty coherent view of a business key drivers
1. Customer Segments: Who are the customers? What do they think? See? Feel? Do?
2. Value Propositions: Whats compelling about the proposition? Why do customers
buy, use?
3. Channels: How are these propositions promoted, sold and delivered? Why? Is it
working?
4. Customer Relationships: How do you interact with the customer through their
journey?
5. Revenue Streams: How does the business earn revenue from the value
propositions?
6. Key Activities: What uniquely strategic things does the business do to deliver its
proposition?
7. Key Resources: What unique strategic assets must the business have to compete?
8. Key Partnerships: What can the company not do so it can focus on its Key Activities?
9. Cost Structure: What are the business major cost drivers? How are they linked to
revenue?
4-22
The balanced scorecard translates the organization's strategy into four perspectives, with a
balance between the following:
between internal and external measures
between objective measures and subjective measures
between performance results and the drivers of future results
5-23
Business process perspective includes measures such as cost, throughput, and quality. These are
for business processes such as procurement, production, and order fulfillment.
Learning & growth perspective includes measures such as employee satisfaction, employee
retention, skill sets, etc.
5-24
6-25
6-26
The model can be applied to many situations and is a valuable tool when organizational design is
at question. The most common uses of the framework are:
7S Factors
Strategy, structure and systems are hard elements that are much easier to identify and manage
when compared to soft elements. On the other hand, soft areas, although harder to manage, are
the foundation of the organization and are more likely to create the sustained competitive
advantage.
7-27
7-28
7-29
8-30
W. Chan Kim & Rene Mauborgne coined the terms red and blue oceans to denote the market
universe. Red oceans are all the industries in existence today the known market space, where
industry boundaries are defined and companies try to outperform their rivals to grab a greater
share of the existing market. Cutthroat competition turns the ocean bloody red. Hence, the term
red ocean.
Blue oceans denote all the industries not in existence today the unknown market space,
unexplored and untainted by competition. Like the blue ocean, it is vast, deep and powerful in
terms of opportunity and profitable growth.
The Four Actions Framework developed by W. Chan Kim and Rene Mauborgne is used to
reconstruct buyer value elements in crafting a new value curve or strategic profile. To break the
trade-off between differentiation and low cost in creating a new value curve, the framework
poses four key questions, shown in the diagram, to challenge an industrys strategic logic.
Examples
Pitney Bowes: Michael Critelli, the departing CEO of Pitney Bowes, explained how Pitney
Bowes created the Advanced Concept & Technology Group (ACTG), a unit responsible for
identifying and developing new products outside. Critelli cited ACTG's development of a
machine, which enables people to design and print their own postage from their
desktops, as an example of a blue ocean strategic move.
Starwood: One group which has been exploring blue ocean thinking for the past three
years is Starwood Hotels and Resorts. In an interview to INSEAD Knowledge, Robyn Pratt,
Vice President, Six Sigma and Operational Innovation talks about how they are taking a
step-by-step approach to implementing the concept.
TATA Motors: In their recent product, the "'Nano Car", they have adopted combination
of differentiation and low cost as stated in blue ocean strategy. It is the outcome of
combining value innovation and playing a different game.
8-31
Stars
Cash Cows
Dogs
9-32
Question Marks
The BCG Method can help understand a frequently made strategy mistake: having a one-sizefits-all-approach to strategy, such as a generic growth target (9 percent per year) or a generic
return on capital of say 9.5% for an entire corporation.
In such a scenario:
Cash Cows Business Units will beat their profit target easily; their management have an easy job
and are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash
amounts in their businesses which are mature and not growing anymore.
Dogs Business Units fight an impossible battle and, even worse, investments are made now and
then in hopeless attempts to 'turn the business around'.
As a result, (all) Question Marks and Stars Business Units get mediocre size investment funds. In
this way they are unable to ever become cash cows. These inadequate invested sums of money
are a waste of money. Either these SBUs should receive enough investment funds to enable
them to achieve a real market dominance and become a cash cow (or star), or otherwise
companies are advised to disinvest and try to get whatever possible cash out of the question
marks that were not selected.
Limitations
Some limitations of the Boston Consulting Group Matrix include:
High market share is not the only success factor.
Market growth is not the only indicator for attractiveness of a market.
Sometimes Dogs can earn even more cash as Cash Cows.
9-33
List the entire range of products created or sold by a particular strategic business unit.
Identify the factors that make a specific market attractive.
Evaluate the strategic business units position in the market.
Calculate the business strength and market attractiveness.
Determine the strategic business units category: High, Medium or low.
Market Attractiveness
This dimension helps determine the attractiveness of the market by analyzing the benefits a
company is likely to get by entering and competing within the market. A number of factors are
studied within this analysis. These include the size of the market, its rate of growth, profit
potential, and the nature, size and weaknesses of the competition within the industry. Some
factors used to determine market attractiveness include:
10-34
Business/Competitive Strength
The other main dimension that makes up this grid is the competitive or business strength of the
company itself. An assessment along this dimension helps understand whether a company has
the required competence to compete in a particular market. This can be determined by internal
factors such as assets, market share and development of this market share, brand position and
loyalty, creativity, and handling of market changes and fluctuations. This can also be determined
by external factors such as environmental concerns, government regulations and laws, energy
consumption etc. Some factors that can determine this business/competitive strength include:
Investment Strategies
Once the chart is plotted, investment strategies can be created based on which box within the
matrix the strategic business unit appears in. The three options are:
Grow Business units that fall within this category attract investment by the corporation
because they are in a position to bring high returns in the future. Investments include
those in research and development, acquisitions, advertisement and brand expansion as
well as an expansion in production capacity.
Selectivity These business units are in a more ambiguous position and it is unclear
whether they will grow in the future or become stagnant. Investments in this category may
10-35
happen after money has already been put into grow units and if there is a strategic
purpose for these units.
Harvest Units in this category may be poor performers and in less attractive industries
and markets. Investment will be put into these if they generate revenues to equal this
investment. If this does not happen, then these units may be liquidated.
Limitations
As with any tool, there are some limitations to keep in mind. For the Mckinsey matrix, these
limitations include:
The industry attractiveness and business unit strength can only be accurately determined
by a consultant or a very experienced person.
The entire exercise can be costly to conduct for a company
Potential synergies and dynamics between 2 or more business units are not taken into
account.
The weight given to different factors can be very subjective as there is no set of rules to
determine this.
Based on the position of each business unit in the matrix, there are three actions a company can
take for each unit. These actions are to invest/grow, selectivity/earnings and harvest/divest.
Each unit falls within a certain set of boxes and this position determines the action to be taken.
10-36
Chapter 11 : Benchmarking
Benchmarking is a strategy tool used to compare the performance of the business processes and
products with the best performances of other companies inside and outside the industry.
Benchmarking is the search for industry best practices that lead to superior performance.
Managers use the tool to identify the best practices in other companies and apply those
practices to their own processes in order to improve the companys performance. Improving
companys performance is, without a doubt, the most important goal of benchmarking.
Other uses of the tool:
To reveal successful business processes - It is often unclear how successful companies achieve
superior performance. By observing and scrutinizing such companies you can identify the
processes, skills or competences that contribute to organizations success and then apply the
same practices to your own company.
To facilitate knowledge sharing - The knowledge acquired about other businesses can be easily
transferred to your own organization.
To gain competitive advantage - The company can gain a competitive advantage if it applies the
best practices from other industries to its own industry. For example, a small family owned farm
selling its own agricultural products online could apply the same social media strategies as
internet blogs to attract attention and gain new customers.
Types of Benchmarking:
Strategic benchmarking:
Managers use this type of benchmarking to identify the best way to compete in the market.
During the process, the companies identify the winning strategies (usually outside their own
industry) that successful companies use and apply them to their own strategic process. It is also
common to compare the strategic goals in order to spot new strategic choices.
Performance benchmarking:
It is concerned with comparing your companys products and services. The tool mainly focuses
on product and service quality, features, price, speed, reliability, design and customer
satisfaction, but it can measure anything that has the measurable metrics, including processes.
Performance benchmarking determines how strong our products and services are compared to
our competition.
Process benchmarking:
It requires to look at other companies that engage in similar activities and to identify the best
practices that can be applied to your own processes in order to improve them. Process
benchmarking is a separate type of benchmarking, but it usually derives from performance
benchmarking. This is because companies first identify the weak competing points of their
products or services and then focus on the key processes to eliminate those weaknesses.
For example, an organization using performance comparison identifies that their product X is
superior in features, manufacturing quality and design, but pricier than competitors product Y.
Then the company determines, which processes add the most to the cost of the product and
seek how to improve them by looking at similar, but less cost heavy processes in other
companies.
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Primary Activities
Primary activities relate directly to the physical creation, sale, maintenance and support of a
product or service. They consist of the following:
Inbound logistics These are all the processes related to receiving, storing, and
distributing inputs internally. Your supplier relationships are a key factor in creating
value here.
Operations These are the transformation activities that change inputs into outputs
that are sold to customers. Here, your operational systems create value.
Outbound logistics These activities deliver your product or service to your customer.
These are things like collection, storage, and distribution systems, and they may be
internal or external to your organization.
Marketing and sales These are the processes you use to persuade clients to purchase
from you instead of your competitors. The benefits you offer, and how well you
communicate them, are sources of value here.
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Service These are the activities related to maintaining the value of your product or
service to your customers, once it's been purchased.
Support Activities
These activities support the primary functions above. In our diagram, the dotted lines show that
each support, or secondary, activity can play a role in each primary activity. For example,
procurement supports operations with certain activities, but it also supports marketing and sales
with other activities.
Procurement (purchasing) This is what the organization does to get the resources it
needs to operate. This includes finding vendors and negotiating best prices.
Human resource management This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of value, so
businesses can create a clear advantage with good HR practices.
Infrastructure These are a company's support systems, and the functions that allow it
to maintain daily operations. Accounting, legal, administrative, and general management
are examples of necessary infrastructure that businesses can use to their advantage.
Companies use these primary and support activities as "building blocks" to create a valuable
product or service.
It works by breaking an organization's activities down into strategically relevant pieces, so that
you can see a fuller picture of the cost drivers and sources of differentiation, and then make
changes appropriately.
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A Four-Step Process
Consider the US personal computer industry in Late 1990s. Mapping profits across the value
chain shows that profit is much more highly concentrated in the microprocessor and software
segments than in hardware manufacturing. Yet few if any computer manufacturers can hope to
shift successfully onto Intels or Microsofts turf. The differences in required capabilities and
competitive structure are enormous, and Microsoft and Intel have vast resources with which to
defend themselves.
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FIT Assessment:
To assess the fit between the parent and its businesses, the following approach can be followed:
Step 3: Understand the characteristics of the corporate parent. Describe theirs skills,
experience, structure, processes, and employees.
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Heartland Businesses:
Businesses that fall in the top right corner should be at the heart of the companys future.
Heartland businesses have opportunities to improve that the parent knows how to address, and
they have critical success factors the parent understands well.
Heartland businesses should have priority in the companys portfolio development, and the
parenting characteristics that fit its heartland businesses should form the core of the parent
organization.
Edge-of-Heartland Businesses:
For some businesses, making clear judgments is difficult. Some parenting characteristics fit;
others do not. We call those businesses edge of heartland. The parents skills in staff scheduling,
brand management, and lean organizational structures appear to add value to the business.
However, the added value is partly offset by critical success factors that fit less well with the
parent.
With edge-of-heartland businesses, the parent both creates and destroys value. The net
contribution is not clear-cut. Such businesses are likely to consume much of the parents
attention, as it tries to clarify its judgments about them and, if possible, transform them into
heartland businesses.
Ballast Businesses:
Most portfolios contain a number of ballast businesses, in which the potential for further value
creation is low but the business fits comfortably with the parenting approach. That situation
often occurs when the parent understands the business extremely well because it has owned it
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for many years or because some of the parent managers previously worked in it. The parent may
have added value in the past but can find no further parenting opportunities.
Managers should search their ballast businesses for new parenting opportunities that might
move them into heartland or edge-of-heartland territory. If that effort fails or if the parenting
opportunities that are discovered fit better with a rivals characteristics, companies should divest
the ballast business as soon as they can get a price that exceeds the expected value of future
cash flows.
Alien-Territory Businesses:
Most corporate portfolios contain at least a smattering of businesses in which the parent sees
little potential for value creation and some possibility of value destruction. Those businesses are
alien territory for that parent. Frequently, they are small and few in a portfoliothe remnants of
past experiments with diversifications, pet projects of senior managers, businesses acquired as
part of a larger purchase, or attempts to find new growth opportunities.
Managers normally concede that alien-territory businesses do not fit with the companys
parenting approach and would perform better with another parent. Nevertheless, parent
managers often have reasons for not divesting them: the business is currently profitable or in
the process of a turnaround; the business has growth potential, and the parent is learning how
to improve the fit; there are few ready buyers; the parent has made commitments to the
businesss managers; the business is a special favorite of the chairman; and so forth. The reality,
however, is that the relationship between such businesses and the parent organization is likely
to be destroying value. They should be divested sooner rather than later. The company in our
example should sell its food-products business to an international food company.
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