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CHOICE OF STRATEGY Choice of Strategy

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For multi-industry and multi-product/market firms, strategic analysis begins at the corporate level. Large companies are often involved in many different kinds of businesses and sell products in many different countries. The various businesses in the portfolio are called strategic business units (SBUs) . The strategic business unit is the smallest identifiable business of the company, which pursues a sub-strategy, and is involved in an identifiable business or industry. The advantage of multi-business organizations is that they can transfer cash from business units that are highly profitable but have low growth potential to other units that have high growth and high profit potential. Choice of strategy

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Gap analysis In information technology, gap analysis is an assessment tool to help identify differences between information systems or applications. A gap is sometimes called "the space between where we are and where we want to be." A gap analysis helps bridge that space by highlighting which requirements are being met and which are not. The tool provides a foundation for measuring the investment of time, money and human resources that's required to achieve a particular outcome. In software development, for instance, a gap analysis can be used to document which services and/or functions have been accidentally left out, which ones have been deliberately eliminated and which still need to be developed. In compliance, a gap analysis can be used to compare what is required by law to what is currently being done.

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CORPORATE PORTFOLIO ANALYSIS

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Definition A method of categorizing a firm’s products according to their relative competitive position and business growth rate in order to lay the foundations for sound strategic planning. One way to think of corporate-level strategy is to compare it to an individual managing a portfolio of investments. Just as the individual investor must evaluate each individual investment in the portfolio to determine whether or not the investment is currently performing to expectations and what the future prospects are for the investment, managers must make similar decisions about the current and future performances of various businesses constituting the firm's portfolio. The Boston Consulting Group (BCG) matrix is a relatively simple technique for assessing the performance of various segments of the business.

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The most popular analytical technique involves constructing a business portfolio matrix. A business portfolio matrix is a two-dimensional graphical portrait of the comparative strategic position of different businesses . Matrix can be constructed using any pair of strategically relevant variables such as: industry growth rate, market share, long-term industry attractiveness, competitive strength, and stage of product/market evolution. There are several major types of portfolio matrices. Some of these are: the Boston Consulting Group business portfolio matrix, the General Electric business Screen, the product/market/industry evolution portfolio matrix, or S.W.O.T. portfolio framework.

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ORIGINAL BCG MATRIX

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The Boston Consulting Group translates differentials in unit cost as a result of the experience curve into differences in relative market share. Recognition that some firms have multiple products of varying strength, the concept of a matrix portrays the strength of the various products or activities. The market's rate of growth is indicated on the vertical axis, and the firm's share of the market is indicated on the horizontal axis. Each of the circles represents a business unit. The size of the circle reflects each product unit's annual sales, the horizontal position of the circle indicates its market share, and its vertical position depicts the growth rate depicts the growth rate of the market in which its competes.

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Using this framework, management can categorize each of its different businesses as stars, question marks, cash cows, or dogs , depending upon each business unit's relative market share and the growth rate of its market. The Cash Cows . These businesses (in the lower left corner of the matrix) are sources of cash for the organization. Cash flow can be used to grow other products. The Stars . The Stars are the businesses in the upper-left corner of the matrix. They are highly attractive businesses (ones with high market growth), and they have strong competitive positions (high relative market share). Those products could use some of the cash generated from the "Cash Cows" as investments in order to grow.

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BCG MATRIX

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The Question Marks. The Question Mark (in the upper right quadrant) needs careful scrutiny to see which way it will go. Sometimes "Question Marks" are divested, and sometimes they are heavily invested in and transformed into "Stars". * The Dogs. These businesses (in the lower right quadrant) are clearly the great losers, unattractive and weak. Typically, "Dogs" are divested or liquidated.

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The GE Business Screen is not without controversy. Some observes argue that there is too much subjectivity in the construction of the matrix. According to Hofer and Schendel , "The Principal difficulty with GE Business Screen is that it does not depict as affectively at it might the positions of new businesses that are just starting to grow in new industries. In such instances, it may be preferable to use a fifteen-cell matrix in which businesses are plotted in terms of their competitive position and their stage of product/market evolution". Thus, Hofer developed the Product/Market Evolution Portfolio Matrix, or Life Cycle Matrix .

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Business unit A would to be a developing winner. Its relatively large share of the market combined with its being at the development stage of product- market evolution and its potential for being in a strong competitive position make it a good candidate for receiving more corporate resources. Business unit B is somewhat similar to A . However, it has a relatively small share of the market given its strong competitive position. A strategy would have to be developed to overcome this low market share in order to justify more investments. Business unit C might be classified as a potential loser. A strategy must be developed to overcome the low market share and weak competitive position in order to justify future investments. Business unit D is in a shakeout period, has a relatively large share of the market, and is in a relatively strong position. Investment should be made to maintain that position.

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- Business units E and F are cash cows and should be used for cash generation. -Business unit G appears to be a dog . It should be managed to generate cash in the short run, if possible; however, the long-run strategy will more the likely be divestment or liquidation. It has been suggested that most portfolios are variations of one of three ideal types: growth, profit, balanced . ‘

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GE-MCKINSEY MATRIX

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The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used to perform business portfolio analysis as a step in the strategic planning process. The template allows the user to generate the matrix using MS-Excel. The MS-Word template allows the user to tabulate and present the results of portfolio analysis in a Word document. The GE/McKinsey Matrix identifies the optimum business portfolio as one that fits perfectly to the company's strengths and helps to exploit the most attractive industry sectors or markets. Thus, the objective of the analysis is to position each SBU on the chart depending on the SBU's Strength and the Attractiveness of the Industry Sector or Market on which it is focused. Each axis is divided into Low, Medium and High, giving the nine-cell matrix as depicted below.

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Each factor can be given a different weighting in calculating the overall attractiveness of a particular industry. Typically: Industry Attractiveness = Attractiveness Factor 1 Value by Factor 1 weighting + Attractiveness Factor 2 Value by Factor 2 weighting, etc . Business Unit Strength = Strength Factor 1 Value by Factor 1 weighting + Strength Factor 2 Value by Factor 2 weighting, etc . This template allows the user to define up to 10 SBUs to be plotted. Up to 10 different factors can be used to define Industry Attractiveness, Typical factors would be Market Size, Market Growth Rate, Industry Profitability, Competitive Rivalry, etc. Up to 10 factors can also be used to define SBU Strength. Typical factors are Market Share, Distribution Channel Access, Financial Resources, R&D Capability, etc SBUs are portrayed as a circle plotted on the GE/McKinsey Matrix, where the size of the circle represents a factor such as Market Size. The GE/McKinsey Matrix differs from other tools, like the Boston Consulting Group Matrix, in that multiple factors are used to define Industry Attractiveness and Business Unit Strength.

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The factors and their relative weightings are selected. The rating values for each factor are entered for each SBU and Industry. The SBU Strength and Industry Sector Attractiveness are calculated and the GE/McKinsey Matrix is automatically produced. The format used to produce the Matrix is a MS-Excel Bubble Chart. Industry Attractiveness and Business Strength are plotted on the X and Y axes. The size of the Bubble allows a further factor to be depicted on the chart. The default factor used is Market Size. However, a Dropdown list is available allowing the user to dynamically select any of the Industry Attractiveness factors as an alternative

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PRODUCT/MARKET/INDUSTRY LIFE CYCLE

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The product life cycle is basic to understanding the significance the portfolio approaches. The product life cycle holds that products and markets and entire industries develop, grow rapidly, mature, saturate, and decline in a somewhat predictable fashion. If sales are plotted as a function of time, this predictable pattern is a lazy- S curve . In the introduction phase, the output industry (products or services) is initially offered to the customers, and sales are slowly built up as more customers become aware of product. At this stage in the industry's development, choice of technology is often not yet settled. After a certain critical mass of demand has been established, sales take off in an exponential growth rate as increasingly large numbers of new customers demand the product for the first time, the industry enters the growth stage.

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At this stage, most buyers are still first-time purchasers of the industry's outputs. Over time, growth of the industry begins to slow as marked demand approaches saturation. Fewer first-time buyers remain; most purchase are now for replacement purposes. When the market demand for the industry/s outputs is completely saturated, the maturity stage has been reached. As technology makes the product obsolete, or as substitute products arrive, sales decline. This decline stage is often ushered in when consumers begin to turn to the products or services of substitute industries. There are problems with using the Life Cycle Concept as a precise strategic decision making tool. It is almost impossible to predict how long a certain phase of the life cycle will last or know the height of the curve (unit sold). Thus, the concept's use as a forecasting tool is very limited.

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The important observation of the life cycle is that one of the critical success factors in this in the extent to which the product can gain and maintain a large market share. This later became of central importance to portfolio analysis.

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However, the product life cycle captures the dynamics of product of production and market evolution and can be used for generating strategic alternatives, specifically in the following ways: -to suggest appropriate areas of functional area emphasis by stages of the cycle; -to suggest appropriate strategy alternative; -to time strategy changes; -to asses the corporate business units to ensure that developing products are introduced as others pass through growth to maturity.