Strategic Management - Bcg Model of Portfolio Analysis

Strategic Management

STRATEGY LEVELS

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Although alignment of strategic initiatives is a corporate-wide effort, considering strategy in terms of levels is a convenient way to distinguish among the various responsibilities involved in strategy formulation and implementation. A convenient way to classify levels of strategy is to view corporate-level strategy as responsible for market definition, business-level strategy as responsible for market navigation, and functional-level strategy as the foundation that supports both of these (see Table 1).

CORPORATE-LEVEL STRATEGY

Corporate-level strategies address the entire strategic scope of the enterprise. This is the "big picture" view of the organization and includes deciding in which product or service markets to compete and in which geographic regions to operate. For multi-business firms, the resource allocation process--how cash, staffing, equipment and other resources are distributed--is typically established at the corporate level. In addition, because market definition is the domain of corporate-level strategists, the responsibility for diversification, or the addition of new products or services to the existing product/service line-up, also falls within the realm of corporate-level strategy. Similarly, whether to compete directly with other firms or to selectively establish cooperative relationships--strategic alliances--falls within the purview corporate-level strategy, while requiring ongoing input from

Table 1

Corporate, Business, and Functional Strategy

Level of Strategy Definition Example

Corporate strategy Market definition Diversification into new product or geographic markets

Business strategy Market navigation Attempts to secure competitive advantage in existing product or geographic markets

Functional strategy Support of corporate strategy and business strategy Information systems, human resource practices, and production processes that facilitate achievement of corporate and business strategy

business-level managers. Critical questions answered by corporate-level strategists thus include:

1. What should be the scope of operations; i.e.; what businesses should the firm be in?

2. How should the firm allocate its resources among existing businesses?

3. What level of diversification should the firm pursue; i.e., which businesses represent the company's future? Are there additional businesses the firm should enter or are there businesses that should be targeted for termination or divestment?

4. How diversified should the corporation's business be? Should we pursue related diversification; i.e., similar products and service markets, or is unrelated diversification; i.e., dissimilar product and service markets, a more suitable approach given current and projected industry conditions? If we pursue related diversification, how will the firm leverage potential cross-business synergies? In other words, how will adding new product or service businesses benefit the existing product/service line-up?

5. How should the firm be structured? Where should the boundaries of the firm be drawn and how will these boundaries affect relationships across businesses, with suppliers, customers and other constituents? Do the organizational components such as research and development, finance, marketing, customer service, etc. fit together? Are the responsibilities or each business unit clearly identified and is accountability established?

6. Should the firm enter into strategic alliances--cooperative, mutually-beneficial relationships with other firms? If so, for what reasons? If not, what impact might this have on future profitability?

As the previous questions illustrate, corporate strategies represent the long-term direction for the organization. Issues addressed as part of corporate strategy include those concerning diversification, acquisition, divestment, strategic alliances, and formulation of new business ventures. Corporate strategies deal with plans for the entire organization and change as industry and specific market conditions warrant.

Top management has primary decision making responsibility in developing corporate strategies and these managers are directly responsible to shareholders. The role of the board of directors is to ensure that top managers actually represent these shareholder interests. With information from the corporation's multiple businesses and a view of the entire scope of operations and markets, corporate-level strategists have the most advantageous perspective for assessing organization-wide competitive strengths and weaknesses, although as a subsequent section notes, corporate strategists are paralyzed without accurate and up-to-date information from managers at the business-level.

CORPORATE PORTFOLIO ANALYSIS

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.

The BCG matrix classifies business-unit performance on the basis of the unit's relative market share and the rate of market growth as shown in Figure 1.

Figure 1

BCG Model of Portfolio Analysis

Products and their respective strategies fall into one of four quadrants. The typical starting point for a new business is as a question mark. If the product is new, it has no market share, but the predicted growth rate is good. What typically happens in an organization is that management is faced with a number of these types of products but with too few resources to develop all of them. Thus, the strategic decision-maker must determine which of the products to attempt to develop into commercially viable products and which