Business Logic
Jo Whitehead, Director
Ashridge Strategic Management Centre
Why is the Airlines Business so Lousy?
British Airways chairman Martin Broughton yesterday labelled
the world’s airline industry as “crazy” and lambasted
governments for keeping ailing carriers afloat.
He said the industry was forecast to lose $5.5bn this year,
bringing the cumulative loss to more than $40bn since the turn
of the century.
Yet in the US, the government “continues to prop up the walking
dead” through the use of the chapter 11 bankruptcy
procedures”, while the European commission “approves what
looks to us like more state aid for Alitalia”…The industry had to
shoulder blame for its situation. Earlier this year Europe’s 60th
no-frills airline had taken to the skies… ”That there is room for
several no-frills airlines is self-evident. But 60?”
- Guardian Newspaper, July 20, 2005
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Profitability of selected EU industries
Average ROCE (Return on Capital
Employed), 1997-20062)
Profitability of selected U.S. industries
Average ROIC (Return on Invested Capital)
1992-20061)
Security Brokers & Dealers
Manufacture of tobacco products
40.9%
20.32%
Soft Drinks
37.6%
Manufacture of coke, refined petroleum
products and nuclear fuel
Prepackaged Software
37.6%
Construction
13.51%
Sale, maintenance and repair of motor vehicles
and motorcycles; retail sales of automotive fuel
13.44%
Pharmaceuticals
31.7%
Manufacture of machinery and equipment
28.6%
Perfume, Cosmetics, Toiletries
Cookies & Crackers
15.4%
Mobile Homes
15.0%
Wine & Brandy
13.9%
Bakery Products
13.8%
Soft Drink Bottling
16.01%
13.00%
Manufacture of chemicals and chemical products
Average industry
ROIC in the U.S.
14.9%
10.20%
Publishing, printing and reproduction
of recorded media
9.98%
Manufacture of medical, precision and
optical instruments, watches and clocks
9.50%
Manufacture of motor vehicles trailers
and semi-trailers
9.49%
11.7%
Public administration and defense;
compulsory social security
7.49%
Knitting Mills
10.5%
Manufacture of textiles
6.81%
Hotels
10.4%
Health and social work
6.75%
Air transport
6.45%
Catalog, Mail-Order Houses
5.9%
Airlines
5.9%
3
Sources:1)
HBR,
JanuaryCentre
2008; 2) ESMT analysis Burger, Rocholl
Ashridge Porter,
Strategic
Management
Recycling
3.47%
Average industry
ROCE in the EU
9.8%
Why is the Airlines Business so Great?
BARS:
Millions of
passengers
1995 –
2007
Ryanair Performance
LINE:
Net
Margin (%)
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The Strategy Matrix
High
Key concepts:
• Industry
attractiveness
• Competitive
advantage
Average industry
profitability
Ryanair?
Low
Low
High
Competitive advantage/Premium earned over
industry average return
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Position of BA?
High
Key concepts:
• Industry
attractiveness
• Competitive
advantage
Average industry
profitability
Low
Low
High
Competitive advantage
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Matrix with BA example
High
Average segment
profitability
Other intercontinental
North American
flights
UK and
UK-Europe
European
flights
Low
Low
High
Competitive advantage
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Key concepts:
• Industry
attractiveness
• Competitive
advantage
• Segmentation
Matrix with BA example
High
Average segment
profitability
Other intercontinental
North American
flights
UK and
UK-Europe
European
flights
Low
Low
High
Competitive advantage
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Key concepts:
• Industry
attractiveness
• Competitive
advantage
• Segmentation
• Linkages
• Changes over
time
The Strategy Matrix
High
Average segment
profitability
Other intercontinental
North American
flights
UK and
UK-Europe
Sale to Flybe
European
flights
Low
Low
High
Competitive advantage
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Key concepts:
• Industry
attractiveness
• Competitive
advantage
• Segmentation
• Linkages
• Changes over
time
• Options
BCG Matrix was a predecessor
High
?
Growth
Low
Low
High
Market Share
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BCG Matrix was a predecessor
High
Other intercontinental
European
flights
Growth
North
American
flights
UK and
UK-Europe
Low
Low
High
Market Share
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Starting point suggests type of options that
are most relevant to consider
High
Average segment
profitability
•QUESTION
MARKS
•Build advantage
e.g., from market
share
•If no credible
pathway – divest
•STARS
•Address any
threats to
attractiveness or
advantage
•Strengthen if
possible
•Use to enter new
markets
•DOGS
•Is turnaround,
consolidation or
niche strategy
attractive?
•If not – sell or exit
•CASH COWS
•Shape the industry
to improve it
• Remain dominant
•Use to enter more
attractive markets
Low
Low
High
Competitive advantage
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E.ON Portfolio 2008
Hi
6
Low
Segment Average profitability
5
Ruhrgas
4
3
2
Italian
generation
Spanish
generation
German
fossil
SwedenUS
Renewables
UK
Eastern
Europe
downstream
1
-1
1
German
downstream
Russian
generation
0
0 Low
German
nuclear
2
3
4
E.ON
Competitive
Advantage
Note: Bubble area proportional to book value excluding goodwill
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5
Hi 6
E.ON case exercise
1. Review the positioning of the bubbles on the
chart. As a board member, would you question
any of them?
2. What is your diagnosis of E.ON’s position?
3. What overall goals and strategies does this
matrix suggest?
4. What factors, other than those in the matrix,
might you want to consider? What strategies
would that imply?
25 minutes!
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Potential answers
Business
Diagnosis
Implied
actions
Other
comments
Ruhrgas
Star, under threat
Restructure if possible
Sell while you can?
Germany nuclear
German fossil
German downstream
Stars
Defend
Russian generation
Cash cow – potential
star
Set tight cash flow
targets – invest if
attractiveness improves
UK
Cash cow
Set tight cash flow
targets – look for
opportunities to
improve position
Spanish generation
Eastern Europe
Dogs
Restructure or Divest
Renewables
Dog becoming a
Question mark
Hold until improved
profitability – then
invest to strengthen, or
divest
Italian generation
Question mark
Strengthen or divest
Sweden
?
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Linkage value between
Eastern Europe and
Germany?
Results of a Recent study (I)
• Two thirds of the largest corporates use portfolio
management techniques extensively
• The most popular criteria used to evaluate BUs
are market attractiveness, competitive position,
value creation and parenting advantage
• Parenting advantage is used slightly less
perhaps due to difficulties in quantification
• Typically used by Corporate staff and Executive
Board, for strategy development and annual
strategic planning (but not short term planning
and budgeting)
Corporate portfolio management: Theory and Practice, Journal of Applied Corporate Finance, Vol 23,
Number 1, Winter 2011
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Results of a Recent study – Specific uses
• Diagnosing SBUs
– Setting strategic targets for SBUs
– Creating transparency
– Identifying the need for action
• Diagnosing Corporates
– Evaluating growth candidates
– Identifying the need for acquisitions
– Identifying divestiture candidates
• Resource allocation, target setting and control (to a
lesser extent)
–
–
–
–
Allocating investment budgets
Setting financial SBU targets
Allocating management resources
Assigning specific roles to the SBUs
Which do you recognise?
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Common issues in portfolio analysis
• Deciding exactly where to position the bubbles
– Ranking, scoring possible but quantification is difficult
(PIMS database was an attempt to try)
– Checking with actual performance is a practical check –
but accounting issues e.g., goodwill, depreciation
• Technical issues in conducting the analysis
– Assessing segment profitability when there are very few
competitors
– Accounting for linkages
– Deciding on the right segmentation (and confusions due
to segmentation implied by organisational design)
– Evaluating disruptive competitors
• Thinking about uncertainty
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Application to your business
1. Quickly draw up the portfolio matrix for one of
the group’s businesses
2. Review the implications
3. Discuss the impact and value of using the
matrix
– What is its contribution to guiding strategy and decision
making?
– Do you recognise any of the issues?
Goal is not just to create the matrix,
but also to evaluate its usefulness
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Starting point suggests type of options that
are most relevant to consider
High
Average segment
profitability
•QUESTION
MARKS
•Build advantage
e.g., from market
share
•If no credible
pathway – divest
•STARS
•Address any
threats to
attractiveness or
advantage
•Strengthen if
possible
•Use to enter new
markets
•DOGS
•Is turnaround,
consolidation or
niche strategy
attractive?
•If not – sell or exit
•CASH COWS
•Shape the industry
to improve it
• Remain dominant
•Use to enter more
attractive markets
Low
Low
High
Competitive advantage
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