The organization‘s mix of SBUs and product lines that fit together in such a way as to provide the corporation with synergy and competitive advantage.
Portfolio strategy pertains to the mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage to the corporation. For example, an individual might wish to diversify in an investment portfolio with some high risk stocks, some low risk stocks, some growth stocks and perhaps a few income bonds. In much the same way corporations like to have a balanced mix of business divisions called strategic business units (SBUs). An SBU has a unique business mission– product line competitors and markets relative to other SBUs in the corporation. Executives in charge of the entire corporation generally define the grand strategy and then bring together a portfolio of strategies business units carry it out. Managers don’t like to become too dependent on one business. For example, at United Technology Corp. (UTC) the aerospace related business units are struggling through one of the worst slumps in history. UTCs Otis Elevator division is keeping the corporation’s sales and profits strong. Otis has a commanding share of the worldwide market for new elevators and escalators. In addition, the unit provides a steady revenue stream from elevator maintenance, repair and upgrade. The elevators in the Waldorf-Astoria for example, were installed in 1931 and have been steadily upgraded by Otis ever since. One useful way to think about portfolio strategy is the BCG matrix.
The BCG Matrix
The BCG (from Boston Consulting Group) matrix is illustrated in Exhibit. The BCG matrix organizes businesses along two dimensions – business growth rate and market share. Business growth rate pertains to how rapidly the entire industry is increasing. Market share defines whether a business unit has a larger or smaller share than competitors. The combination of high and low market share and high and low business growth provides four categories for a corporate portfolio.
The star has a market share in a rapidly growing industry. The star is important because it has additional growth potential and profits should be ploughed into this business as investment for growth and profits. The star is visible and attractive and will generate profits and a positive cash flow even when the industry matures and market growth slows
The cash cow exists in mature, slow growth industry but is a dominant business in the industry with a large market share. Because heavy investments in advertising and plant expansion are no longer required, the corporation earns a positive cash flow. It can milk the cash cow to invest in other, riskier, businesses
The question mark exists in a new rapidly growing industry. But has only a small market share. The question mark business is risky: it could become a star, or it could fail, The Corporation can invest the cash earned from cash cows in question marks with goal of nurturing time in to future stars.
The dog is a poor performer. It has only a small share of a slow growth market. The dog provides little profit for the corporation and may be targeted for divestment or liquidation if turnout is not possible.
The circles in exhibit represent the business portfolio for a hypothetical corporation. Most organizations such as Gillette have business in more than one quadrant, thereby representing different market shares and growth rates.
Formulating Business level strategy:
Now we turn to strategy formulation within the strategic business unit, in which the concern is how to compete. The same three generic strategies – growth, stability and retrenchment apply at the business level, but they are accomplished through competitive actions rather than the acquisition or divestment of business divisions. One model for formulating strategy is Porter’s competitive strategy which provides a framework for business unit competitive action.
Porter’s Competitive Forces and Strategies:
Michael E Porter studied a number of business organizations and proposed that business level strategies are the result of five competitive forces in the company’s environment. More recently Porter has examined the impact of the internet on business level strategy. New web based technology is influencing industries in both positive and negative ways, and understanding this impact is essential for managers to accurately analyse their competitive environment and design appropriate strategic actions.
Five competitive Forces:
Exhibit illustrates the competitive forces that exist in a company’s environment and indicates some way in which internet technology is affecting each area. These forces help determine a company’s position vis-à-vis competitors in the industry environment.
Potential new entrants: Capital requirements and economies of scale are examples of two potential barriers to entry that can keep out new competitors. It is far more close to entering the automobile industry, for instance than to start a specialized mail-order business. In general internet technology has made it much easier for new companies to enter an industry by curtailing the need for such organizational elements as an established sales force, physical assets such as buildings and machinery or access to existing suppliers and sales channels.
Bargaining power of buyers: Informed customers become empowered customers. The internet provides easy access to a wide array of information about products services, and competitors thereby greatly increasing the bargaining power of end consumer. For example, a customer shopping for a car can gather extensive information about various options, such as wholesale prices for a new car or average value for used vehicles, detailed specifications, repair records, and even whether a used car has ever been involved in an action.
Bargaining power of suppliers: The concentration of suppliers and the availability of substitute suppliers are significant factors in determining supplier power. The sole supplier of engines to a manufacturer of small airplanes will have great power. For example, the impact of the Internet in this area can be both positive and negative. That is, procurement over the Web tends to give a company greater power over suppliers, but the Web also gives suppliers access to a greater number of customers as well as the ability to reach end users. Overall, the Internet tends to raise the bargaining power of suppliers.
Threat of substitute products: A company’s product may be affected by changes in cost or in trends such as increased health consciousness that will deflect buyer loyalty. Companies in the sugar industry suffered from the growth of sugar substitutes, manufacturers of aerosol spray cans lost business as environmentally conscious consumers chose other products. The internet has created a greater threat of new substitutes by enabling new approaches to meeting customer needs. For example, traditional travel agencies have been hurt by the offering of low cost airline tickets over the internet.
Rivalry among competitors: Rivalry among competitors is influenced by the preceding four forces as well as by cost and product differentiation. With the leveling force of the internet and information technology, it has become more difficult for many companies to find ways to distinguish themselves from their competitors so the rivalry has intensified.
Porter referred to the advertising slugfest when describing the scrambling and jockeying for position that often occurs among fierce rivals within an industry. Famous examples include the competitive rivalry between the Pepsi and Coke between UPS and FedEx and between the Home Depot and Lowe’s. The rivalry between Gillette described earlier, and Schick the No 2 maker of razors may soon be just as heated. Although Gillette is still way ahead, the introduction of the Schick Quattro and a massive advertising campaign helped Schick’s sales go up to about 149 per cent in 2004, while Gillette’s razor sales slipped. IBM and Oracle Corporation are currently involved in a fight for the No 1 spot in the $50 billion corporate software market. IBM rented a billboard near Oracle’s headquarters proclaiming a search for intelligent software. A few days later Oracle fired the next shot with a competing billboard retorting “Then you’ve come to the right place”.
Organizational characteristics of Competitive strategies:
1) Acts in a flexible loosely knit way, with strong coordination among departments
2) Strong capability in basic rewards
3) Creative flair- thinks out of the box,
4) Strong marketing abilities.
5) Rewards employee innovation
6) Corporate reputation for quality or technological leadership
1) String central authority; right cost controls
2) Maintain standard operating procedures
3) Easy to use manufacturing technologies.
4) Highly effective procurement and distribution systems.
5) Close supervision finite employees’ empowerment.
1) Frequent detailed control reports
2) May use a combination of the above policies directed at a particular strategic target
3) Values and rewards flexibility and customer intimacy.
4) Measures costs of providing service and maintaining customers’ loyalty.
5) Pushes empowerment to employees with customers contact.
Source: New Era Management