YS

Week 6 - Developing a business through a successful product portfolio strategy (Ansoff, BCG and McKinsey Matrix)

Developing a Business Through a Successful Product Portfolio Strategy

Learning Objectives

  • Review different strategies with Bowman’s strategy clock

  • Discuss strategic management at the corporate level

  • Explain the Ansoff Matrix

  • Discuss market penetration

  • Understand corporate diversification

  • Discuss portfolio management frameworks

    • BCG Matrix

    • McKinsey Matrix

    • Parenting Matrix

1. Corporate and Strategic Business Units

1.1 Strategic Business Units (SBUs)

  • Definition: An SBU supplies goods or services for a distinct domain of activity.

  • Relationship to Business Size:

    • Small businesses typically have one SBU.

    • Large, diversified corporations have multiple SBUs.

  • Identifiers for SBUs:

    • Market-based Criteria: Similar customers, channels, competitors.

    • Capabilities-based Criteria: Similar strategic capabilities.

1.2 Bowman’s Strategy Clock

Success Strategies

  1. Low price + Low utility

  2. Low price

  3. Hybrid

  4. Differentiation

  5. Focused differentiation

Failure Strategies

  1. High margins (standard product)

  2. Monopoly pricing

  3. Low utility, standard price

1.3 Strategy is Dynamic

  • Emphasizes that strategy adapts over time.

1.4 Strategy Happens at Different Levels

1. Corporate-Level Strategy

  • Determines overall scope of the organization.

  • Adds value to different SBUs.

  • Meets stakeholder expectations.

    • Example: News Corporation diversifying from print journalism into social networking.

2. Business-Level Strategy

  • Focuses on competing successfully in specific markets.

    • Example: MySpace improves website and marketing to attract users.

3. Operational Strategy

  • Concerns operational parts implementing strategy and delivering expected outcomes.

    • Example: Engineers increasing processing capacity at MySpace.

2. Corporate Strategy Directions – Ansoff Matrix

2.1 Ansoff's Matrix

  • Framework for generating four directions for organizational growth.

2.2 Market Penetration

  • Involves increasing market share in current markets with existing products.

    • In downturns, retrenchment might be preferred.

  • Benefits include:

    • Builds on established capabilities.

    • Scope remains unchanged.

    • Leads to greater market share and power over buyers/suppliers.

    • Results in economies of scale.

  • Constraints include competitor retaliation and legal constraints.

2.3 Types of Diversification

  • Related Diversification: Expanding into products/services related to existing business.

  • Conglomerate Diversification: Diversifying into unrelated products/services.

2.4 New Products and Services

  • Involves delivering modified/new products to existing markets.

    • High-risk and potentially expensive.

    • Requires new strategic capabilities.

    • Risks associated with project management.

2.5 Market Development

  • Involves offering existing products to new markets.

    • Strategies include product development and targeting new geographies.

    • Must meet critical success factors and develop new strategic capabilities.

2.6 Critical Success Factors (CSFs)

  • Factors that are valued by strategic customers or provide cost advantages.

  • Important sources of competitive advantage/disadvantage.

2.7 Conglomerate Diversification

  • Takes the organization beyond existing markets/products, increasing scope significantly.

  • Benefits include lower financing costs and reputation from acquiring a business.

  • Costs may arise from lack of obvious value generation methods.

2.8 Drivers for Diversification

  • Economies of Scope: Efficiency gains from utilizing existing resources.

  • Stretching Corporate Management Competences: Dominant logic applied across business portfolios.

  • Exploiting Superior Internal Processes.

  • Increasing Market Power: Via mutual forbearance or cross-subsidization.

2.9 Synergy

  • Benefits of complementary activities/assets; combined effect > sum of parts.

    • Often dubbed the ‘2 + 2 = 5’ effect.

2.10 Negative Synergy

  • Value destruction through diversification.

    • Motivated by market decline, risk spreading, or managerial ambitions.

2.12 Diversification through Vertical Integration

  • Forward Integration: Engaging in activities associated with current outputs.

  • Backward Integration: Engaging in input-related activities.

3. Corporate Parenting

3.1 Value-Adding Activities

  • Corporate parents must demonstrate value creation.

Types of Value-Adding Activities

  1. Envisioning a clear vision.

  2. Providing central services and resources.

  3. Facilitating synergies across BUs.

  4. Intervening and improving.

  5. Coaching management capabilities.

3.2 Value-Destroying Activities

  • Corporate parents can destroy value by:

    • Adding costs and complexity.

    • Obscuring financial performance.

3.3 Corporate Parenting Roles

  1. Portfolio Manager: Active investor in SBUs.

  2. Synergy Manager: Enhances value through inter-BU cooperation.

  3. Parental Developer: Uses central capabilities to add value.

4. Portfolio Matrices

4.1 Corporation-Level Portfolio Management Frameworks

  • Frameworks include BCG matrix, McKinsey matrix, and parental matrix to determine financial investments/divestments.

4.2 BCG Matrix

  • Uses market share and market growth to determine portfolio attractiveness.

Quadrants

  • Star: High market share, growing market.

  • Cash Cow: High market share, mature market.

  • Question Mark: Growing market, low market share.

  • Poor Dog: Low market share, static/declining market.

4.3 Limits of BCG Matrix

  • Issues include definitional vagueness, difficulty in defining growth rates, and potential for misjudging the status of business units.

4.4 GE Portfolio & McKinsey Matrix

  • Originally for GE; positions SBUs according to market attractiveness and competitive strength influenced by PESTEL/five forces analysis.

4.6 Parenting Matrix

  • Defines categories of business units based on fit and potential for value addition:

    • Heartland BUs: Strong understanding and value addition potential.

    • Ballast BUs: Understandable but needs more autonomy.

    • Value-trap BUs: Attractive but may harm due to misunderstanding.

    • Alien BUs: No fit; best to exit.

5. Application Questions

  1. Examples of strategies using Bowman’s strategy clock.

  2. Description of strategy horizons.

  3. Explanation of levels of strategic management.

  4. Description of market penetration in Ansoff’s matrix.

  5. Explanation of diversification dimensions for corporates.

  6. Overview of portfolio management frameworks for strategic decisions (BCG, McKinsey, Parenting Matrix).