Theme 7: Strategic Diagnosis
INTRODUCTION
S t r a t e g y - S W O T a n a l y s i s1
Definition:
SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats.
SWOT analysis is an important tool for auditing the overall strategic position of a business and its
environment.
Once key strategic issues have been identified, they feed into business objectives, particularly
marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and
analysis, such as PEST analysis and Porter's Five-Forces analysis. It is also a very popular tool with
business and marketing students because it is quick and easy to learn.
The Key Distinction - Internal and External Issues
Strengths and weaknesses are internal factors. For example, a strength could be your specialist
marketing expertise. A weakness could be the lack of a new product.
Opportunities and threats are external factors. For example, an opportunity could be a
developing distribution channel such as the Internet, or changing consumer lifestyles that
potentially increase demand for a company's products. A threat could be a new competitor in an
important existing market or a technological change that makes existing products potentially
obsolete.
it is worth pointing out that SWOT analysis can be very subjective - two people rarely come-up with
the same version of a SWOT analysis even when given the same information about the same
business and its environment. Accordingly, SWOT analysis is best used as a guide and not a
prescription. Adding and weighting criteria to each factor increases the validity of the analysis.
Areas to Consider
Some of the key areas to consider when identifying and evaluating Strengths, Weaknesses,
Opportunities and Threats are listed in the example SWOT analysis below:
1
Source: http://www.tutor2u.net/business/strategy/SWOT_analysis.htm
1
Theme 7: Strategic Diagnosis
Product portfolio strategy
b o x2
- I n troduction to the Boston Consulting
Introduction
The business portfolio is the collection of businesses and products that make up the company. The
best business portfolio is one that fits the company's strengths and helps exploit the most attractive
opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses should receive more or less
investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the
same time deciding when products and businesses should no longer be retained.
Methods of Portfolio Planning
The two best-known portfolio planning methods are from the Boston Consulting Group (the subject
of this revision note) and by General Electric/Shell. In each method, the first step is to identify the
various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company
that has a separate mission and objectives and that can be planned independently from the other
businesses. An SBU can be a company division, a product line or even individual brands - it all
depends on how the company is organised.
The Boston Consulting Group Box ("BCG Box")
2
Source: http://www.tutor2u.net/business/strategy/bcg_box.htm
2
Theme 7: Strategic Diagnosis
Using the BCG Box (an example is illustrated above) a company classifies all its SBU's according to
two dimensions:
On the horizontal axis: relative market share - this serves as a measure of SBU strength in the
market.
On the vertical axis: market growth rate - this provides a measure of market attractiveness.
By dividing the matrix into four areas, four types of SBU can be distinguished:
Stars - Stars are high growth businesses or products competing in markets where they are relatively
strong compared with the competition. Often they need heavy investment to sustain their growth.
Eventually their growth will slow and, assuming they maintain their relative market share, will
become cash cows.
Cash Cows - Cash cows are low-growth businesses or products with a relatively high market share.
These are mature, successful businesses with relatively little need for investment. They need to be
managed for continued profit - so that they continue to generate the strong cash flows that the
company needs for its Stars.
Question marks - Question marks are businesses or products with low market share but which
operate in higher growth markets. This suggests that they have potential, but may require
substantial investment in order to grow market share at the expense of more powerful competitors.
Management have to think hard about "question marks" - which ones should they invest in? Which
ones should they allow to fail or shrink?
Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that have low relative share
in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but they are
rarely, if ever, worth investing in.
Using the BCG Box to determine strategy
Conventional strategic thinking suggests there are four possible strategies for each SBU:
(1) Build Share: here the company can invest to increase market share (for example turning a
"question mark" into a star).
3
Theme 7: Strategic Diagnosis
(2) Hold: here the company invests just enough to keep the SBU in its present position.
(3) Harvest: here the company reduces the amount of investment in order to maximise the shortterm cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows.
(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the
resources elsewhere (e.g. investing in the more promising "question marks").
S t r a t e g y - P o r t f o l i o a n a l y s i s - G E m a t r i x3
The business portfolio is the collection of businesses and products that make up the company. The
best business portfolio is one that fits the company's strengths and helps exploit the most attractive
opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses should receive more or less
investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the
same time deciding when products and businesses should no longer be retained.
The two best-known portfolio planning methods are the Boston Consulting Group Portfolio Matrix
and the McKinsey / General Electric Matrix (discussed in this revision note). In both methods, the
first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU
is a unit of the company that has a separate mission and objectives and that can be planned
independently from the other businesses. An SBU can be a company division, a product line or even
individual brands - it all depends on how the company is organised.
The McKinsey / General Electric Matrix
The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly, market
attractiveness replaces market growth as the dimension of industry attractiveness, and includes a
broader range of factors other than just the market growth rate. Secondly, competitive strength
replaces market share as the dimension by which the competitive position of each SBU is assessed.
The diagram below illustrates some of the possible elements that determine market attractiveness
and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:
3
Source: http://www.tutor2u.net/business/strategy/ge_matrix.htm
4
Theme 7: Strategic Diagnosis
Factors that Affect Market Attractiveness
Whilst any assessment of market attractiveness is necessarily subjective, there are several factors
which can help determine attractiveness. These are listed below:
-
Market size.
Market growth.
Market profitability.
Pricing trends.
Competitive intensity / rivalry.
Overall risk of returns in the industry.
Opportunity to differentiate products and services.
Segmentation.
Distribution structure (e.g. retail, direct, wholesale.
Factors that Affect Competitive Strength
Factors to consider include:
-
Strength of assets and competencies.
Relative brand strength.
Market share.
Customer loyalty.
Relative cost position (cost structure compared with competitors).
Distribution strength.
Record of technological or other innovation.
Access to financial and other investment resources.
5
Theme 7: Strategic Diagnosis
EXERCISE 1
SOUTH 92 is a corporation comprising ten businesses, on which the following data is available:
Business
NA
% RONA
1
500
10
2
1,000
15
3
200
7
4
500
8
5
300
20
6
100
14
7
1,000
12
8
500
6
9
100
7
10
200
9
NA: Net Assets.
RONA: Return On Net Assets (%).
SB: Sales of the Business.
SMC: Sales of the Main Competitor.
SI (0): Sales of the Industry in the current year.
SI (-3): Sales of the Industry three years ago.
SB
1,000
2,000
500
800
300
200
700
1,500
100
600
SMC
500
1,000
800
300
800
700
2,000
500
1,000
300
SI (0)
2,000
10,000
5,000
1,500
5,000
2,000
3,000
8,000
3,000
2,500
SI (-3)
1,000
7,000
5,000
1,000
3,000
1,000
500
1,000
2,000
1,000
You are requested to:
1. Construct the BCG growth-share matrix, considering a Market Growth Rate (MGR) of more than 10% p.a. as
strong.
2. Analyze the characteristics of each business in function of its corresponding position in the matrix.
6
Theme 7: Strategic Diagnosis
SOLUTION
Strategic
Business Unit,
SBU
1
2
3
4
5
6
7
8
9
10
?
(A)
Market Growth Rate,
MGR (%)
25,99
12,62
0,00
14,47
18,56
25,99
81,71
100,00
14,47
35,72
---
(B)
Relative Market Share,
RMS
2,00
2,00
0,63
2,67
0,38
0,29
0,35
3,00
0,10
2,00
---
Type
Star
Star
Dog
Star
Question Mark
Question Mark
Question Mark
Star
Question Mark
Star
---
(C)
Net Cash Flow,
NCF
-79,96
23,75
14,00
-32,36
4,31
-11,99
-697,12
-470,00
-7,47
-53,44
-1310,28
(A) MGR = (v 3 [SI (0) / SI (-3)]) - 1
Further explanation:
SI (0) = SI (-3) x (1 + MGR) 3 ? (1 + MGR) 3 = SI (0) / SI (-3) ? (1 + MGR) = v 3 [SI (0) / SI (-3)] ?
? MGR = (v 3 [SI (0) / SI (-3)]) – 1
(B) RMS = SB / SMC
(C) NCF = NA x (RONA – MGR) = RONA x NA x (1 – [MGR / RONA])
Further explanation:
NCF = NPAT – IN = RONA x NA – IRONA x NA = NA x (RONA – IRONA) =
= RONA x NA x [(RONA – IRONA)] / RONA = RONA x NA x (1 – [IRONA / RONA])
If we consider IRONA = MGR (scenario to keep stable the current market share), then:
NCF = RONA x NA x (1 – [MGR / RONA])
Note that:
NPAT = Net Profit After Tax.
IN = Investment Needs.
IRONA = Investment Rate On Net Assets.
7
Theme 7: Strategic Diagnosis
EXERCISE 2
HUELVA CORPORATION, PLC is the parent of a group of companies comprising thirteen businesses, of
which the following information is known, referring to the close of the latest financial year (time 0):
Business
SB
NA
% RONA
NCF
%GSB
1
81.4
53.5
2.2
-4.52
3
2
27.2
7.7
14.7
-3.69
25
3
38.2
23.8
-5.9
-7.13
10
4
5.2
3.0
-5.3
-0.79
10
5
5.8
1.7
19.4
0.51
5
6
1.2
0.5
12.0
0.07
5
7
39.9
23.2
6.8
-3.41
10
8
9.4
4.3
9.3
0.44
3
9
6.7
2.9
13.1
-0.05
10
10
23.3
10.2
19.1
-0.71
0
11
9.6
2.8
58.0
0.88
15
12
91.7
39.2
13.1
3.50
5
13
3.3
2.0
6.5
-0.57
40
Total
342.9
174.8
-15.47
SB: Sales of the Business.
NA: Net Assets.
RONA: Return On Net Assets (%).
NCF: Net Cash Flow.
GSB: Growth of Sales of the Business (%, forecast).
SMC: Sales of the Main Competitor.
GSMC: Growth of Sales of the Main Competitor (%, forecast).
MGR: Market Growth Rate (%).
SMC
98
15
70
15
4
1.4
34
8
6.3
12
10
60
3
-
%GSMC
10
20
12
5
6
6
12
0
10
0
20
5
30
-
%MGR
12
20
10
8
4
4
10
2
9
0
17
6
30
-
Additional data:
•
•
•
•
•
The MGR that differentiates between strong and weak growth is 10% p.a.
In the "question mark" businesses, disinvestment can be achieved for the full value of the net assets. In the
“dog” businesses, it can be achieved for half of the value of the net assets.
The corporation could absorb a negative NCF, but never in excess of 5% of the total NA.
The corporation does not accept an overall rate of growth of less than 2% p.a.
The minimum rate of return set by the corporation is 7%.
Tasks to be completed:
1. Analyze the situation of the businesses portfolio applying the BCG growth-share box. The scenario should be
constructed and the recommendations formulated for a time horizon of two years.
2. With respect to SBU 1, this pursues a strategy of growth by means of investments financed with the profits
generated annually and with resources from the rest of the corporation or from outside, up to an annual figure
equal to the external funds required at time 0. The company knows that, while it may grow at a rate of less than
or equal to that of the market, it can maintain the current margin on sales, and that its main competitor will
continue to grow in the next few years at the present rate.
Knowing that the investment for repositioning is equal to the depreciation of its assets, you are requested to:
2.1. Calculate the sales, net assets, net cash flow, sales growth, profit, return on net assets, and investments in
the next five years.
2.2. Represent the position of this business in a growth-share matrix and the evolution foreseen for this business
over the 5 year period, differentiating between high and low growth as above or below the rate of 7% p.a.
2.3. Comment on the results.
8
Theme 7: Strategic Diagnosis
SOLUTION
Part 1
SBU
1
2
3
4
5
6
7
8
9
10
11
12
13
?
(A)
Relative Market
Share, RMS
0.83
1.81
0.55
0.35
1.45
0.86
1.17
1.18
1.06
1.94
0.96
1.53
1.10
---
Time 0
(B)
Net Profit After
Tax, NPAT
1.18
1.13
-1.40
-0.16
0.33
0.06
1.58
0.40
0.38
1.95
1.62
5.14
0.13
12.33
(C)
Investments,
IN
5.70
4.82
5.73
0.63
-0.18
-0.01
4.99
-0.04
0.43
2.66
0.74
1.64
0.70
27.80
Time 1
(D)
(E)
Sales of the
Net Assets,
Business, SB
NA
83.84
55.11
34.00
9.63
42.02
26.18
5.72
3.30
6.09
1.79
1.26
0.53
43.89
25.52
9.68
4.43
7.37
3.19
23.30
10.20
11.04
3.22
96.29
41.16
4.62
2.80
369.12
187.04
(A) RMS (0) = SB (0) / SMC (0)
(B) NPAT (0) = NA (0) x RONA
(C) IN (0) = NPAT (0) – NCF (0)
(D) SB (1) = SB (0) x (1 + GSB)
(E) NA (0) / SB (0) = NA (1) / SB (1) ? NA (1) = NA (0) x SB (1) / SB (0) ?
? NA (1) = NA (0) x (1 + GSB)
SBU
1
2
3
4
5
6
7
8
9
10
11
12
13
?
(F)
Sales of
the
Business,
SB
86.36
42.50
46.22
6.29
6.39
1.32
48.28
9.97
8.11
23.30
12.70
101.10
6.47
399.01
(**)
(G)
Net Assets,
NA
(H)
Net Profit
After Tax,
NPAT
56.76
12.03
28.80
3.63
1.87
0.55
28.07
4.56
3.51
10.20
3.70
43.22
3.92
200.83
(***)
1.25
1.77
-1.70
-0.19
0.36
0.07
1.91
0.42
0.46
1.95
2.15
5.66
0.25
14.36
(***)
Time 2
(I)
Investments,
IN
1.65
2.41
2.62
0.33
0.09
0.03
2.55
0.13
0.32
0.00
0.48
2.06
1.12
13.79
(J)
Net Cash
Flow, NCF
-0.40
-0.64
-4.32
-0.52
0.27
0.04
-0.64
0.29
0.14
1.95
1.66
3.60
-0.87
0.57
(*)
(K)
Sales of the
Main
Competitor,
SMC
118.58
21.60
87.81
16.54
4.49
1.57
42.65
8.00
7.62
12.00
14.40
66.15
5.07
406.49
(L)
Relative
Market
Share,
RMS
0.73
1.97
0.53
0.38
1.42
0.84
1.13
1.25
1.06
1.94
0.88
1.53
1.28
---
9
Theme 7: Strategic Diagnosis
(*) Condition 1 fulfilled.
(**) Condition 2 fulfilled: annual growth > 2%.
(***) Condition 3 fulfilled: RONA > 7% (14.36 / 200.83 = 7.15%).
(F) SB (2) = SB (1) x (1 + GSB) = SB (0) x (1 + GSB)2
(G) NA (2) = NA (1) x (1 + GSB) = NA (0) x (1 + GSB)2
(H) NPAT (2) = NA (2) X RONA
(I) IN (2) = NA (2) – NA (1)
(J) NCF (2) = NPAT (2) – IN (2)
(K) SMC (2) = SMC (0) x (1+ GSMC)2
(L) RMS (2) = SB (2) / SMC (2)
10
Theme 7: Strategic Diagnosis
Part 2
Year
0
1
2
3
4
5
(A)
NA
53.50
59.33
65.28
71.37
77.60
83.97
(B)
%RONA
2.2
2.2
2.2
2.2
2.2
2.2
(C)
NPAT
1.18
1.31
1.44
1.57
1.71
1.85
(D)
NCF
-4.52
-4.52
-4.52
-4.52
-4.52
-4.52
(E)
IN
5.70
5.83
5.96
6.09
6.23
6.37
(F)
SB
81.40
90.26
99.32
108.59
118.06
127.75
(G)
%GSB
3.00
10.90
10.04
9.33
8.73
8.21
(H)
SMC
98.00
107.80
118.58
130.44
143.48
157.83
(I)
RMS
0.83
0.84
0.84
0.83
0.82
0.81
(A) NA (i) = [NA (i-1) + 4.52] / 0.978
Further explanation:
IN (i) = NPAT (i) + 4.52
NPAT (i) = NA (i) x RONA = NA (i) x 0.022
IN (i) = [NA (i) x 0.022] + 4.52
NA (i) = NA (i-1) + IN (i) = NA (i-1) + [NA (i) x 0.022] + 4.52 ? NA (i) x 0.978 = NA (i-1) + 4.52 ?
? NA (i) = [NA (i-1) + 4.52] / 0.978
(B) It is supposed as a constant.
(C) NPAT (i) = NA (i) x 0.022
(D) Constant, as a consequence of the company’s policy.
(E) IN (i) = NPAT + 4.52
(F) ROS (0) = NPAT (0) / SB (0) = [NA (0) x RONA] / SB (0) = [53.5 x 0.022] / 81.4 = 0.01446 (constant,
as sais in the text).
0.01446 = NPAT (i) / SB (i) ? SB (i) = NPAT (i) / 0.01446
(G) GSB (i) = [SB (i) – SB (i-1)] x 100 / SB (i-1)
(H) SMC (i) = SMC (i-1) x 1.10
(I) RMS (i) = SB (i) / SMC (i)
11
Theme 7: Strategic Diagnosis
EXERCISE 3
In respect of BANESO INDUSTRIAL CORPORATION (BIC) the following data are known with reference to
its portfolio of businesses at the close of the last year:
Business
Profits
Depreciations
1
50
2
80
3
20
4
100
5
70
6
300
7
150
8
400
9
60
10
40
11
90
12
110
Total
1,470
ROI: Return On Investments (%),
ROS: Return On Sales (%).
ROM: Return On Marketing (%).
80
70
60
90
40
200
130
70
20
10
110
100
980
Sales
1,000
1,400
2,000
2,200
600
3,000
1,000
1,600
900
120
1,500
1,200
16,520
Commercial
Costs
100
60
300
410
30
240
100
200
20
10
40
60
1,570
Investment
(assets)
1,500
1,300
1,600
1,400
700
3,900
2,160
1,130
890
170
1,430
1,620
17,800
% ROI of the
competition
10
40
20
30
15
20
5
15
30
25
6
10
-
You are requested to: Make a study of the situation of the portfolio of businesses of this company applying
matrix analysis.
Notes:
1. Rates of return of less than 10% are considered low, and rates of more than 20% high.
2. The company has set its objectives for ROS and ROM at 10% and 100%, respectively.
12
Theme 7: Strategic Diagnosis
SOLUTION
SBU
1
2
3
4
5
6
7
8
9
10
11
12
?
SBU
8
6
7
12
4
11
?
%
Profit
400
300
150
110
100
90
1,150
78
Investment (assets)
1,130
3,900
2,160
1,620
1,400
1,430
11,640
65
SBU
6
7
12
3
1
11
4
?
%
Investment (assets)
3,900
2,160
1,620
1,600
1,500
1,430
1,400
13,610
76
Profit
300
150
110
20
50
90
100
820
56
(A)
%Investment
8.43
7.30
8.99
7.87
3.93
21.91
12.13
6.35
5.00
0.96
8.03
9.10
100.00
(B)
%Profit
3.40
5.44
1.36
6.80
4.76
20.41
10.21
27.21
4.08
2.72
6.12
7.49
100.00
(C)
%ROI
3.33
6.15
1.25
7.14
10.00
7.69
6.94
35.40
6.74
23.53
6.29
6.79
8.26
(D)
%ROS
5.00
5.71
1.00
4.55
11.67
10.00
15.00
25.00
6.67
33.33
6.00
9.17
8.90
(E)
ROT
0.67
1.08
1.25
1.57
0.86
0.77
0.46
1.42
1.01
0.71
1.05
0.74
0.93
(F)
%ROM
50.00
133.33
6.67
24.39
233.33
125.00
150.00
200.00
300.00
400.00
225.00
183.33
93.63
(G)
%ME
10.00
4.29
15.00
18.64
5.00
8.00
10.00
12.50
2.22
8.33
2.67
5.00
9.50
(A) Business Assets / Total Assets
(B) Business Profit / Total Profit
(C) Return On Investment = Profit / Assets
(D) Return On Sales = Profit / Sales
(E) Assets Turnover or ROTation = Sales / Assets
(F) Return On Marketing = Profit / Commercial Costs
(G) Marketing Effort = Commercial Costs / Sales
Notes:
ROI = ROS x ROT
ROS = ROM x ME
13
Theme 7: Strategic Diagnosis
Example
This is an example to show how the commercial efficacy matrix works; concerning the question of how the
Return On Sales (ROS) can be increased raising the company’s Marketing Effort (ME):
ROS = ROM x ME
Profit
Profit
Commercial Costs
------ = ---------------------- x ----------------------Sales Commercial Costs
Sales
Imagine the following situation, related to business 2 in the portfolio of exercise 3:
Since ROM is 133,33%, this means that, in this business, each euro devoted to marketing generates 1,33 euros
of profit.
So, the current situation is, for each 100 euros of sales:
Commercial Costs = 4,29 (ME = 4,29%)
Sales = 100
Profit = 5,71 (ROS = 5,71%)
According to the commercial efficacy matrix, the recommendation is to increase the company’s commercial
expenses (zone 3).
If these expenses are doubled, of course an increase in the volume of sales will be expected. It is reasonable to
assume that this increase won’t be the double, but significant any way, such as a 50%, for instance. Under this
hypothesis, the new data will be the following:
Commercial Costs = 8,58 (double)
Sales = 150 (50% increase)
Profit = 11,41 (*)
(*) Remember that each euro devoted to marketing generates 1,33 euros of profit. This is why 11,41 = 8,58 x
1,33.
The new value of the marketing effort is:
8,58
ME = ----- x 100 = 5,72%
150
And the new value of the Return On Sales:
11,41
ROS = ------ x 100 = 7,61%
150
To sum up:
Before
Now
ROS (%)
5,71
7,61
ROM
1,33
1,33
ME (%)
4,29
5,72
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