Corporate and business levels are the two levels for doing strategic analysis. The analysis focuses on techniques helpful for analyzing the business under the same corporate umbrella and is defined as the corporate level strategy analysis. In contrast, the analysis focusing on the individual businesses from an industry perspective under the corporate umbrella to each of those firms belonging to the particular competitive conditions they face in their respective industries is business level strategies. In this article, you will know the corporate level strategy and its analysis.
Corporate Level Strategy Analysis
Strategic analysis at the corporate level treats a corporate organization under a corporate umbrella as constituting a portfolio of businesses. The study centers on the issue of what can a business organization accomplish with many businesses in its portfolio. Generally, the alternative strategies are stability, reduction, expansion, and combination corporate strategies. Firms should remember that only in the cases of a diversified corporation having many businesses corporate-level strategic analysis is significant.
Accessible BCG Matrix
The BCG matrix is a model used for analyzing the portfolio of companies. It is also known as Business Portfolio Matrix. This model was developed during the early 1970s by Bruce Henderson of the Boston Consulting Group. According to this model, the business units of an organization can be classified into four different categories based on the market growth and market share compared to the leader in that sector. Therefore, this method is also called the “growth-share matrix”. The growth-share matrix measures the positions of various business units along these two dimensions.
The BCG matrix seeks to establish a relationship between the products or business units that are highly profitable (cash-generating) and highly unprofitable (cash-eaters). Market growth symbolizes the attractiveness of a particular industry. The market growth here denotes the overall industry’s growth, which also includes the returns and profits of competitors.
Boston Consulting Group (BCG) Matrix is a technique for estimating a company’s position based on its product range. This technique helps an organization to analyze its products and services so that various important decisions can be made about the ones it should invest in and the ones it should divest its money from.
As per the BCG matrix, the business units can be classified as high or low based on Relative market share and the Market growth rate. These are described below:
Relative Market Share
According to this model, the more the relative market share of a firm, the more the return. It says that the firm that produces more enjoys higher economies of scale, so the experience curve is higher for them. Hence these firms exploit the benefits of higher market share. However, sometimes, higher profit is also achieved by those firms that have a low production market share.
Market Growth Rate
If the market growth rate is high, there are opportunities for higher returns. However, it also takes more capital to be invested for future growth. Thus, business firms operating in industries with a higher growth rate invest their capital when there are opportunities to grow further.
Four Cells of BCG Matrix
Based on the above classification, the firms in an industry can be classified into four types.
In this block, those businesses are placed which enjoy a high growth rate and higher market share. These businesses are most likely to be in the product life cycle’s (PLC) growth stage. These firms pursue an aggressive strategy to expand the market and gain maximum penetration in consumer segments. For example, In India, sectors like telecommunications, fast foods, retail, petrochemicals, etc., are some of the businesses which are having very high growth.
2) Cash Cows
Cash cows are those business units that generate a lot of cash, but the growth rate of these business units is less. These businesses correspond to the maturation stage of the product life cycle, which enjoys the benefits of its high experience curve. The capital needed to reinvest in the business is less than the profit returns. To sustain in this position, the firm needs to implement stability strategies. The firms focus on beneficial long-term opportunities and limited expansion at this stage.
Since these are mature firms, they gradually lose their market share and their growth rate declines. Due to this, the profitability also decreases. At this point, retrenchment strategies are appropriate for these firms. The profit generated from cash cows can be reinvested into ‘star’ and ‘question mark’ firms, which require high resource investment. Some examples of cash cows in India are Scooters for Bajaj Auto, toothpaste for Colgate, etc.
3) Question Marks (Problem Child or Wild Cat)
These business units have a low relative market share even when the industry growth is high. The firms require a huge amount of capital to sustain that market share. It generally comes from those firms that introduce new products or services in the market with high growth opportunities. According to the experience curve concept, the firm that gains early profits can achieve cost advantages and market leadership. It will create entry barriers for other firms in the industry.
In this phase, the firms need to decide their plans. If they feel they can gain market share, they must adopt expansion strategies. Retrenchment strategies are also appropriate in this phase. If sufficient investment is made in the growth of these firms, they may convert into ‘star’ firms, or else they can also become ‘dog’ firms if sufficient attention is not provided. In India, industries like e-commerce can be called question marks. These are growing at a very fast rate, but for the majority of players, the relative market share is very less. Another example is holiday resorts.
These are the firms that have slow growth and have relatively less market share. These neither earn profits nor require investments. If correlating with the stages of PLC, these firms remain at the stage of late maturity or decline.
Merits of BCG Matrix
BCG matrix provides the following benefits:
1) The BCG matrix adds value to portfolio analysis.
2) The BCG matrix can be applied to large conglomerates interested in benefits from experience effects and volume.
3) The BCG model can be easily understood and put into practice.
4) It helps in management decision-making.
5) The model helps compare the growth of different businesses based on the industry average. It also helps in checking the portfolio for financial evaluation.
6) The ideas behind the model are truthful and easily applicable at the business and corporate levels.
7) The use of the experience curve helps the company to manufacture products that are priced low enough to get market leadership. On becoming a ‘star’ firm (as per the BCG matrix), the company certainly becomes profitable.
8) It is a good and useful guide to allocate the company’s resources for the company or competitors.
9) The BCG matrix simplifies the business analysis by limiting it to just two factors: market growth and relative market share from various possible factors.
10) The BCG matrix helps evaluate the firm’s product portfolio in the four categories and helps frame strategies for the same.
Demerits of BCG Matrix
BCG matrix suffers from the following demerits:
1) The BCG matrix oversimplifies by categorizing businesses into high and low. However, businesses can vary in various degrees between these two extreme measures. The two-dimensional nature of the model thus only captures some aspects of the business.
2) This matrix only considers other important aspects for portfolio analysis, such as competitive advantages, capital requirements, size of the market, etc.
3) Some aspects of the BCG matrix do not represent the real situation. For example, the new firms with a low market share or growth categorizes as ‘dog’ firms. However, the real picture is entirely different. Sometimes, these new firms show great potential for growth and capture the market.
Basic GE 9 Cell
The GE-9 cell model or GE business screen is a portfolio analysis technique. General Electric Company (GEC) along with McKinsey & Co. of the USA develops it to overcome the BCG matrix’s loopholes. Instead of considering market growth and relative market share as the basis for portfolio analysis, this model considers industry attractiveness and business strength as the basis for classifying the firms. These two factors are split into three categories, making it a nine-cell grid. These cells classify business firms as winners, losers, question marks, average businesses, and profit producers.
Organizations should also maintain the market position of average and profitable businesses, though their industry attractiveness and strengths are average. Moreover, the business units at a loss should be sold-out as the industry attractiveness and business strength are unfavorable. For example, Mahindra and Mahindra hives off its M-Seal brand of adhesives to the Pidilite industries (makers of Fevicol) as M-Seal was not part of the product strategy of Mahindra.
The two basic factors considered in analyzing the business units are:
1) Business Strength
Various factors that are jointly analyzes under the basic factors are the profit margin of the products, market share of the business unit, management skills, the technology deployed, etc. the quantification of these factors can done on the basis of estimation of the strength and importance of other factors for achieving success. The strategists can rate the strength and importance as per their personal experience.
2) Industry Attractiveness
Many factors must be studied to analyze the industry attractiveness, such as industry growth rate, profit margin, and seasonal and cyclical industry trends. Economies of scale, entry and exit barriers, technological development, legal and social factors, etc. These factors can also be quantified similarly in which the business strength factors have been estimated.
There are two basic differences between the GE 9 cell and the BCG matrix.
1) The GE model considers two basic factors, i.e., industry attractiveness and competitive position, divided into three factors instead of only two in the BCG matrix. 1.e., market growth and share make it a simple model.
2) The GE model analyses the variables at three levels, i.c., high, medium, and low, whereas the BCG model considers only two. i.e., high and low.
Zones of GE-9 Cell Model
The nine cells of the GE matrix divide into three zones and are represented in the colors green, yellow, and red, similar to the traffic signals. Hence, these colors interpretes similarly, i.e., green represents “go”, yellow represents “wait”, and red represents ‘stop’. Due to this similarity, the GE model is called the “spot-light strategy matrix”. Each of these zones suggests a particular strategy to be followed by the organizations, which are as follows:
This is the first zone, represented by green color, called the “green zone”. In this zone, firms have different degrees of industry attractiveness and business strength. This is a favorable situation for business units, but the business units only remain in this situation for a short time when other firms attracts to the industry. But this can maintains with the help of creating some entry barriers. An example of this is the fast food business. Few fast food corners were in India, such as Mcdonald’s, Domino, etc. But, gradually, numerous players have entered the market, such as KFC. Pizza Hut, Bikanervala, etc., making this industry less attractive.
The important strategy for the firms in this zone is to invest and expand their businesses. The industry attractiveness and business strengths are high in the upper left corner, which is an ideal position. However, the other two cells represent realistic business situations. The middle cell of the top row indicates high industry attractiveness and average business strength. The firms which belong to this cell would grow in the long term. Though, if the firm does not improve its strength, the situation may be unfavorable in the future. For example, many players have entered the e-commerce market in India, looking at the industry’s attractiveness.
However, most of the players have average business strengths. Another situation, where the business strength is relatively higher, and industry attractiveness is average, represents the most realistic scenario. Since the firms that belong to this cell have strength; therefore these firms can develop a competitive advantage, which in turn may act as an entry barrier in the industry. This explains the rise of companies like Reliance in the polyester and polymer businesses which could have been more attractive, but Reliance was able to get a good market share due to its competitive strength.
This situation represents the middle or mixed situation for the company. Only a little growth opportunity exists, but the organization has the opportunity to do selective earning. This happens because either one of two parameters of business strength and industry attractiveness are at a high or middle level. The two situations of average strength and medium attractiveness and strong strength and low attractiveness indicate a strategy of hold, i.e., to earn the profits at existing capacity with no additional investment.
In high industry attractiveness, the company has a flexible option. High industry attractiveness and low strength indicate an opportunity for the organization. However, if the organization cannot build its business strength, it makes sense to leave the business as it is likely to turn into a “question mark”. Similarly, the company can opt for backward or forward integration in case of strong strength and low industry attractiveness. A company can also diversify into other industries to utilize its business strengths.
This is the third zone also the “red zone”. The cells under the zone have average strength, low or average attractiveness, and weak business strength. For these firms, harvesting is the appropriate business strategy. In harvesting, the company quits the business but withdraws gradually.
The initial emphasis is on reducing the costs by stopping those activities with long-term business influence, such as research and development, advertising, etc. The entire thrust of the organization is to earn short-term profits as the business has a short-term horizon. One thing that should be kept in mind is that the business units with low strength and low industry attractiveness should immediately be stopped, and the company should divest its capital.
Merits of GE-9 Cell Model
GE-9 cell matrix has the following merits:
1) The GE-9 cell model offers a classification into medium and average ratings, while the BCG matrix needs a more complex classification of high and low.
2) It also considers factors like market share, industry size, etc.
3) It is also a powerful strategic technique that channels corporate resources to businesses and categorizes them as medium to high attractiveness and business strength.
4) It also utilizes many factors while framing the two variables of industry attractiveness and business strength.
Demerits of GE-9 Cell Model
Besides various advantages, the GE-9 cell matrix has the following disadvantages:
1) It can become quite complex with the increase in business size.
2) Industry attractiveness and business strengths are subjective variables and differ from person to person.
3) New business units in a developing industry cannot analyzes with the help of this model appropriately.
4) rather than specifying the business policies, provides strategic prescriptions.