Strategic business-Planning grid: Chapter 13

Strategic business-Planning grid

Management's first step is to identify the key businesses making up the company. These are strategic business units. A strategic business unit (SBC) is a unit of the company that has a separate mission and objectives, and which can be planned independently from other company businesses. An SBU can be a company division, a product line within a division, or sometimes a single product or brand. The next step in business portfolio analysis calls for management to assess the attractiveness of its various SBUs and decide how much support each deserves. In some companies, this occurs informally. Management looks at the company's collection of businesses or products and uses judgment to decide how much each SBU should contribute and receive. Other companies use formal portfolio-planning methods. The purpose of strategic planning is to find ways in which the company can best use its strengths to take advantage of attractive opportunities in the environment. So most standard portfolio-analysis methods evaluate SBUs on two important dimensions: the attractiveness of the SBU's market or industry; and the strength of the SBU's position in that market or industry. The best-known portfolio-planning methods are from the Boston Consulting Group, a leading management consulting firm, and by General Electric and Shell.

 

Tl-IE BOSTON CONSULTING GROUP BOX. Using the Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix shown in Figure 3.3. On the vertical axis,.market growth rate provides a measure of market attractiveness. On the horizontal axis, relative market share serves as a measure of company strength in the market. By dividing the growth-share matrix as indicated, four types of SBU can be distinguished:

1. Stars. 

Stars are high-growth, high-share businesses or products. They often need heavy investment to finance their rapid growth. Eventually, their growth will slow down, and they will turn into cash cows,

2. Cash cows. 

Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to hold their market share. Thus they produce cash that the company uses to pay its bills and to support other SBUs that need investment.

3. Question marks. 

Question marks are low-share businesses united in high-growth markets. They require cash to hold their share, let alone increase it. Management has to think hard about question marks - which ones they should build into stars and which ones they should phase out.

4. Dogs. 

Dogs are low-growth, low-share businesses, and products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash.

Marketing Management

 

 

The ten circles in the growth-share matrix represent a company's ten current SBAs. The company has two stars, two cash cows, three question marks, and three dogs. The areas of die circles are proportional to the SBUs' sales value. This company is in fair shape, although not in good shape. It wants to invest in the more promising question marks to make them stars, and to maintain the stars so that they will become cash cows as their markets mature. Fortunately, it has two good-sized mesh cows whose income helps finance the company's question marks, stars, and dogs. The company should take some decisive action concerning its dogs and their question marks. The picture would be worse if the company had no stars, had too many dogs, or had only one weak cash cow. Once it has classified its SBUs, the company must determine what role each will play in the future. There are four alternative strategies for each SBU. The company can invest more in the business unit to build its share. It can invest just enough to hold the SBU's share at the current level. It can harvest the SBU, milking its short-term cash flow regardless of the long-term effect. Finally, the company can divest the SBU by selling it or phasing it out and using the resources elsewhere. As time passes, SBUs change their positions in the growth-share matrix. Each SBU has a life cycle. Many SBUs start out as question marks and move into the star category if they succeed. They later become cash cows as market growth falls, then finally die off or turn into dogs toward the end of their life cycle. The company needs to add new products and units continuously, so that some of them will become stars and, eventually, cash cows that will help finance other SBUs.

 

THE GENERAL ELECTRIC GRID. General Electric introduced a comprehensive portfolio planning tool called a strategic business-planning grid (see Figure 3.4). It is similar to Shell's directional policy matrix. Like the BCG approach, it uses a matrix with two dimensions - one representing industry attractiveness (the vertical axis) and one representing company strength in the industry (the horizontal axis). The best businesses are those located in highly attractive industries where the company has high business strength. The GE approach considers many factors besides market growth rate as part of industry attretctifBeness, It uses an industry attractiveness index made up of market size, market growth rate, industry profit margin, amount of competition, seasonal and cycle of demand, and industry cost structure. Each of these factors is rated and combined in an index of industry attractiveness. For our purposes, an industry's attractiveness is high, medium, or low. As an example, the Kraft subsidiary of Philip Morris has identified numerous highly attractive industries - natural foods, specialty frozen foods, physical fitness products, and others.

It has withdrawn from less attractive industries, such as bulk oils and cardboard packaging. The Dutch chemical giant Akzo Nobel has identified specialty chemicals, coatings, and Pharmaceuticals as attractive. Its less attractive bulk chemical and fiber businesses are being sold. For business strength, the GE approach again uses an index rather than a simple measure of relative market share. The business strength index includes factors such as the company's relative market share, price competitiveness, product quality, customer and market knowledge, sales effectiveness, and geographic advantages. These factors are rated and combined in an index of business strengths described as strong, average, or weak. Thus, Kraft has substantial business strength in food and related industries but is relatively weak in the home appliances industry

The Societal Marketing Concept

 

 

The grid has three zones. The green cells in the upper left include the strong SBUs in which the company should invest and grow. The beige diagonal cells contain SRUs that are medium in overall attractiveness. The company should maintain its level of investment in these SRUs. The three mauve cells at the lower right indicate SBUs that are low in overall attractiveness. The company should give serious thought to harvesting or divesting these SRUs. The circles represent their company SBUs; the areas of the circles are proportional to the relative sizes of the industries in which these SRUs compete. The pie slices within the circles represent each SBU's market share. Thus circle A represents a company SRU with a 75 percent market share in a good-sized, highly attractive industry in which the company has strong business strength. Circle B represents an SRU that has a 50 percent market share, but the industry is not very attractive. (Circles C and D represent two other company SBUs in industries where the company has small market shares and not much business strength. Altogether, the company should build A, maintain B, and make some hard decisions on what to do with G and D. Management would also plot the projected positions of the SBUs with and without changes in strategies. By comparing current and projected business grids, management can identify the primary strategic issues and opportunities it faces.

One of the aims of portfolio analysis is to direct firms away from investing in markets that look attractive, but where they have no strength: In their rush away from the declining steel market, four of Japan's 'famous five' big steel makers (Nippon. NKK, Kawasaki, Sumitomo, and Kobe) diversified into the microchip business. They had the misplaced belief that chips would be to the 1980s what steel had been to the 1950s and that they, naturally, had to be part of it. The market was attractive but it did not fit their strengths. Sofer, none have made money from chips. The misadventure also distracted them from attending to their core business. In 1987 they said they would reduce fixed costs by 30 percent but their 'salarymen stayed in place. By 1993, their costs were up by 3.6 percent, and their losses were huge.

The 'famous five failure contrasts with Erainet, a focused French company that is the world's biggest producer of Ferro-risked and high-speed steels. They owe their number one position to their decision to invest their profits in a 'second leg' that would be a logical industrial and geographical diversification for them. They bought French Commentryene and Swedish Kloster Speedsteel. They quickly integrated them and, according to Yves Rambert, their chairman, and chief executive, 'found that the French and the Swedes can work together. The unified international marketing team is doing better than when the companies were separate. Aramco is now looking for a 'third industrial leg' that will have customers and technologies with which the group's management is familiar but does not compete for their present customers.

 

 

• Problems with Matrix Approaches

The BCG, GE, Shell, and other formal methods revolutionized strategic planning. However, such approaches have limitations. They can be difficult, time-consuming, and costly to implement. Management may find it difficult to define SBUs and measure market share and growth. In addition, these approaches focus on classifying current businesses but provide little advice for future planning. Management must still rely on its judgment to set the business objectives for each SBU, determine what resources to give to each, and work out which new businesses to add. Formal planning approaches can also lead the company to place too much emphasis on market-share growth or growth through entry into attractive new markets. Using these approaches, many companies plunged into unrelated and new high-growth businesses that they did not know how to manage - with very bad results. At the same time, these companies were often too quick to abandon, sell, or milk to death their healthy, mature businesses.

As a result, many companies that diversified in the past are now narrowing their focus and getting back to the industries that they know best (see Marketing Highlight 3.3). Despite these and other problems, and although many companies have dropped formal matrix methods in favor of customized approaches better suited to their situations, most companies remain firmly committed to strategic planning. Roughly 75 percent of Fortune 500 companies practice some form of portfolio planning.6 Such analysis is no cure-all for finding the best strategy. Conversely, it can help management to understand the company's overall situation, see how each business or product contributes, assign resources to its businesses, and orient the company for future success. When used properly, strategic planning is just one important aspect of overall strategic management, a way of thinking about how to manage a business.'

The information technology boom

 

 

Developing Growth Strategies

The product/market expansion grid,'"shown in Figure 3.5, is a useful device for identifying growth opportunities. This shows four routes to growth: market development, new markets, new products, and diversification. We use the grid to explain how Mercedes-Benz, the luxury ear division of the German Daimler-Benz industrial group, hoped for a return to profits after its DM1.8hn loss in 1993."

MARKET PENETRATION.

The new C-class model (replacing the aging 190) helped the company increase its sales by 23 percent in 1994. Sales were up 40 percent in Western Europe (excluding Germany), 34 percent in the United States, and 30 percent in Japan. In Germany, the 38 percent growth gave a 2 percent rise in market share.

MARKET DEVELOPMENT.

Its original 190 launched Mercedes into the executive saloon market for the first time. With its A-series, an 'even smaller car' produced at Rastatt, Mercedes will enter the family saloon market. German reunification gave the company an immediate sales boost. In Eastern Europe and China, the brand's image and reputation for reliability and quality have made it the transport for the newly rich.

 DIVERSIFICATION.

Diversification is an option taken by Mercedes' parent company Daimler-Renz, It has rapidly moved into aerospace by buying Dornier, Motoren Turbinen Union (MTU), and a 51 percent stake in Messerschmitt Boelkow-BIohm (MBB). Its newer Deutsche Aerospace (DASA) is now Germany's biggest aerospace and defense group. The motives behind the strategy were to offset stagnating vehicle sales and to use high technology from the acquisitions of cars and trucks. Like many other firms, Daimler-Benz is finding diversification a difficult route. Shortly after consolidating the acquisitions, the 'peace dividend' damaged the defense sector and the international airline industry was in recession. Observers now question the logic of the acquisitions and doubt whether even a company with Daimler's management and financial strength can handle such a radical diversification

 

Marketing Within Strategic Planning

Planning Functional Strategies

The company's strategic plan establishes what kinds of business the company will be in and its objectives for each. Then, within each business unit, more detailed planning takes place. The main functional departments in each unit - marketing, finance, accounting, buying, manufacturing, personnel, and others - must work together to accomplish strategic objectives. Each functional department deals with different publics to obtain resources such as cash, labor, raw materials, research ideas, and manufacturing processes, For example, marketing brings in revenues by negotiating exchanges with consumers. Finance arranges exchanges with lenders and stockholders to obtain cash. Thus the marketing and finance departments must work together to obtain needed funds. Similarly, the personnel department supplies labor, and the buying department obtains materials needed for operations and manufacturing.

Strategic business-Planning grid

Social Criticisms of Marketing: Deceptive practices

 

 

Marketing's Role in Strategic Planning

There is much overlap between the overall company strategy and marketing strategy. Marketing looks at consumer needs and the company's ability to satisfy them; these factors guide the company's mission and objectives. Most company strategic planning deals with marketing variables - market share, market development, and growth - and it is sometimes hard to separate strategic planning from marketing planning. Some companies refer to their strategic planning as 'strategic marketing planning'. Marketing plays a key role in the company's strategic planning in several ways. First, marketing provides a guiding philosophy - company strategy should revolve around serving the needs of important consumer groups. Second, marketing provides inputs to strategic planners by helping to identify attractive market opportunities and by assessing the firm's potential to take advantage of them. Finally, within individual business units, marketing designs strategies for reaching the unit's objectives. Within each business unit, marketing management determines how to help achieve strategic objectives. Some marketing managers will find that their objective is not to build sales. Rather, it may be to hold existing sales with a smaller marketing budget or even to reduce demand. Thus marketing management must manage demand to the level decided upon by the strategic planning prepared at headquarters. Marketing helps to assess each business unit's potential, set objectives for it, and then achieve those objectives.                                             

 

 

Marketing and the Other Business Functions

In some firms, marketing is just another function - all functions count in the company and none takes leadership. On the other extreme, some marketers claim that marketing is the principal function of the firm. They quote Drucker's statement: 'The aim of the business is to create customers.' They say it is marketing's job to define the company's mission, products, and markets, and to direct the other functions in the task of serving customers. More enlightened marketers prefer to put the customer at the center of the company. These marketers argue that the firm cannot succeed without customers, so the crucial task is to attract and hold them. Customers are attracted by promises and held by satisfaction. Marketing defines the promise and ensures its delivery. However, because actual consumer satisfaction is affected by the performance of other departments, all functions should work together to sense, serve, and satisfy customer needs. Marketing plays an integrative role in ensuring that all departments work together toward consumer satisfaction,

 

Social Criticisms of Marketing: High-Pressure Selling

 

Conflict Between Departments

Each business function has a different view of which publics and activities are most important. Manufacturing focuses on suppliers and production; finance addresses stockholders and sound investment; marketing emphasizes consumers and products, pricing, promotion, and distribution. Ideally, all the different functions should blend to achieve consumer satisfaction. In practice, departmental relations are full of conflicts and misunderstandings. The marketing department takes the consumer's point of view. But when marketing tries to develop customer satisfaction, it often causes other departments to do a poorer job on their terms. Marketing department actions can increase buying costs, disrupt production schedules, increase inventories, and create budget headaches. Thus the other departments may resist bending their efforts to the will of the marketing department. Despite the resistance, marketers must get all departments to 'think consumer' and to put the consumer at the center of company activity.

Customer satisfaction requires a total company effort to deliver superior value to target customers. Creating value for buyers is much more than a 'marketing function'; rather, it is 'analogous to a symphony orchestra in which the contribution of each subgroup is tailored and integrated by a conductor - with a synergistic effect. A seller must draw upon and integrate effectively ... its entire human and other capital resources .., [Creating superior value for buyers] is the proper focus of the entire business and not merely of a single department in it."2 ABB Asea Brown Boveri, formed in 1987 by the merger of Sweden's Asea and Switzerland's Brown Boveri, shows the benefits of customer focus. ABB launched a customer-focused program in 1990. It was initially a regional effort stressing time-based management to quicken response to customers by cutting total customer orders to delivery time. 

Strategic business-Planning grid

The customer-focus program has since extended to all its operations. It encourages people in all its 5,000-plus profit centers to 'think customer', track customer satisfaction, and find ways to continually improve customer service. The company keeps 'close to the customer' through extreme decentralization and a flat, team-driven organization. Sune Karlsson, who is responsible for the customer focus program, says: 'The people in our many small groups are close to the customer, are more sensitive to their needs, and are more able to respond to those needs. The role of keeping the customer satisfied and happy is not just the role of marketing people. Employees work together to develop a system of functional plans and then use cross-border coordination to accomplish the company's overall objectives. Furthermore, Karlsson suggests, 'We have learned that the customer focus program reduces the optimal size of an operation (that is, improves efficiency). It ensures that the customer is better served and brings us closer to the ultimate goal of partnering (that is, long-term relationships)

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