The tools discussed in this session are in the following order: Market-Activated Corporate Strategy framework , Hofer’s Product Market Evolution, Directional Policy & the Strategic Position, Strategic Planning Institute’s Matrix and finally the Arthur D. Little Company’s Matrix
1. Market-Activated Corporate Strategy (MACS) framework
McKinsey’s nine-box strategy matrix, prevalent in the 1970s,
plotted the attractiveness of a given industry along one axis and the
competitive position of a particular business unit in that industry along the
other. Thus, the matrix could reduce the value-creation potential of a
company’s many business units to a single, digestible chart.
However, the nine-box matrix applied only to product
markets: those in which companies sell goods and services to customers. Because
a comprehensive strategy must also help a parent company win in the market for
corporate control—where business units themselves are bought, sold, spun off,
and taken private— McKinsey have developed an analytical tool called the
market-activated corporate strategy (MACS) framework.
In the late 1980s, McKinsey developed its
market activated corporate strategy (MACS) framework, which answered that
question in a surprising way. The obvious considerations – the attractiveness
of the industry in which the unit competes and its competitiveness within that
industry – are both relevant, but the acid test is which company can extract
the greatest value from the business. If the present owner should be that
company, it probably ought to keep even a mediocre or poorly performing unit. A
company should make sure that it is the best possible owner of each of its
business units – not simply hold on to units that are strong in themselves.
MACS represents much of McKinsey’s most recent thinking
in strategy and finance. Like the old nine-box matrix, MACS includes a measure
of each business unit’s stand-alone value within the corporation, but it adds a
measure of a business unit’s fitness for sale to other companies. This new
measure is what makes MACS especially useful.
The key insight of MACS is that a corporation’s
ability to extract value from a business unit relative to other
potential owners should determine whether the corporation ought to
hold onto the unit in question. In particular, this issue should not be decided
by the value of the business unit viewed in isolation. Thus, decisions about
whether to sell off a business unit may have less to do with how unattractive
it really is (the main concern of the nine-box matrix) and more to do with
whether a company is, for whatever reason, particularly well suited to run it.
In the MACS matrix, the axes from the old
nine-box framework measuring the industry’s attractiveness and the business
unit’s ability to compete have been collapsed into a single horizontal axis,
representing a business unit’s potential for creating value as a stand-alone
enterprise . The vertical axis in MACS represents a parent company’s
ability, relative to other potential owners, to extract value from a business
unit. And it is this second measure that makes MACS unique.
Managers can use MACS just as they used the nine-box tool, by representing each business unit as a bubble whose radius is proportional to the sales, the funds employed, or the value added by that unit. The resulting chart can be used to plan acquisitions or divestitures and toidentify the sorts of institutional skill-building efforts that the parentcorporation should be engaged in.
- The horizontal dimension: Business unit’s potential of creating value as a stand-alone enterprise. The horizontal dimension of a MACS matrix shows a business unit’s potential value as an optimally managed stand-alone enterprise. This measures the optimal value of a business, sometimes it can be qualitative. When more precise information is needed, the manager can use the net present value of the business unit and then compare it with other units (factors like sales, value added, or funds employed can be also included). The horizontal dimension of a MACS matrix shows a business unit’s potential value as an optimally managed stand-alone enterprise. Sometimes, this measure can be qualitative. When precision is needed, though, you can calculate the maximum potential net present value (NPV) of the business unit and then scale that NPV by some factor—such as sales, value added, or funds employed—to make it comparable to the values of the other business units. If the business unit might be better run under different managers, its value is appraised as if they already do manage it, since the goal is to estimate optimal, not actual, value.
That optimal value
depends on three basic factors:
1. Industry
attractiveness: it is function of the structure of an industry and the conduct
of its players, both of which can be assessed using the
Structure-Conduct-Performance (SCP) model. Start by considering the external
forces impinging on an industry, such as new technologies, government policies
and life style changes. Then consider the industry’s structure, including the
economics of supply, demand and the industry chain. Finally, look at the
conduct and the financial performance of the industry’s players. The feedback
loops shown in Exhibit 4 interact over time to determine the attractiveness of
the industry at any given moment
2. The
Position of one’s business unit within the Industry: This depends on its
ability to sustain higher prices or lower costs than the competition does.
Assess this ability by considering the business unit as a value delivery
system, where “value” means benefits to buyers minus price.(ref 2)
3. Chances
to improve the attractiveness of the industry or the business unit’s competitive
position within it: this come in two forms viz..,
a. Opportunities
to do a better job of managing internally and
b. Possible ways of shaping the structure of the industry or the conduct of its participants.
2. vertical dimension: Parent Company’s ability to extract value from the business unit. The vertical axis of the MACS matrix measures a corporation’s relative ability to extract value from each business unit in its portfolio. If the parent company can extract the most value from the business unit than could be done by anyone else, this company is the owner that can really create the most value from the assets and these business units should be kept.
The vertical axis of
the MACS matrix measures a corporation’s relative ability to extract value from
each business unit in its portfolio. The parent can be classified as "in
the pack," if it is no better suited than other companies to extract value
from a particular business unit, or as a "natural owner," if it is
uniquely suited for the job. The strength of this vertical dimension is that it
makes explicit the true requirement for corporate performance: extracting more
value from assets than anyone else can.
Many qualities can
make a corporation the natural owner of a certain business unit. The parent
corporation may be able to envision the future shape of the industry—and
therefore to buy, sell, and manipulate assets in a way that anticipates a new
equilibrium. It may excel at internal control: cutting costs, squeezing
suppliers, and so on. It may have other businesses that can share resources
with the new unit or transfer intermediate products or services to and from it.
(In our experience, corporations tend to overvalue synergies that fall into
this latter category. Believing that the internal transfer of goods and
services is always a good thing, these companies never consider the advantages
of arm’s-length market transactions.) Finally,
there may be financial or technical factors that determine, to one extent or
other, the natural owner of a business unit. These can include taxation,
owners’ incentives, imperfect information, and differing valuation techniques.
Conclusion
The
parent corporation may be able to envision the future shape of the industry-and
therefore to buy, sell, and manipulate assets in a way that anticipates a new
equilibrium.
1.
It may excel at internal control: cutting costs,
squeezing suppliers.
2.
It may have other
businesses that can share resources with the new unit or transfer intermediate
products or services to and from it.
There may be financial or technical factors that
determine, to one extent or other, the natural owner of a business unit. These
can include taxation, owners’ incentives, imperfect information, and
differing valuation techniques.
Of course, the MACS matrix is just a snapshot. The
manager’s objective is to find the combination of corporate capabilities and
business units that provides the best overall scope for creating value with the
usage of all available tools for analysis, including the MACS.
If the parent company is best suited to extract value from a
unit, it often makes no sense to sell,
even if that unit doesn’t compete in a particularly profitable industry.
Conversely, if a parent company determines that it is not the best possible
owner of a business unit, the parent maximizes value by selling it to the most
appropriate owner, even if the unit happens to be in a business that is fundamentally attractive. In short, the “market activated corporate strategy
framework” prompts managers to view their portfolios with an investor’s value-maximizing eye.
But even taking into consideration these factors, MACS is
still useful and helps in company’s assessment and planning process. In combination with other tools, MACS represent a reliable
combination of data, required by company’s management.
Ch. W . Hofer’s Portfolio Matrix (or just Hofer’s Portfolio Matrix) is a tool used in the field of marketing; it belongs to the group of portfolio matrixes. It facilitates the graphic visualisation of the competitive position of a company for each of the individual phases of the life cycle of the market branch. On the vertical axis the competitive position of the company is mapped, whereas on the horizontal axis the individual phases are entered. The circles represent the size of the branch and the turquoise sections of the circles show the market share of the company. It is is also called ‘life-cycle portfolio matrix’. In this matrix, the horizontal axis explains the SBU’s competitive position and the vertical axis shows the stages of product-market evolution.
Charles
Hoffer proposed a 3 x 5 matrix in which businesses are plotted in terms of
product/market evolution and competitive position. Thus Hofer’s product-market
evolution model is a 15 cell matrix of a firm’s business. Hoffer's product
market evolution matrix adds additional cells to the display of market
evolution and business position and uses a finer grid. The relative size of the
industry is shown in circles, and the shadow of the business’s market share is
shown in this template.
The Hofer’s matrix considered
the following variables:
Variable # (a) Market and Consumer
Behaviour Variables Like:
i. Buyer needs
ii. Purchase frequency
iii. Buyer concentration
iv. Market segmentation
v. Market size
vi. Elasticity of demand
vii. Buyer loyalty
viii. Seasonality and cyclicality
Variable # (b) Industry Structure
Variables Like:
i. Uniqueness of the product
ii. Rate of technological change in product design
iii. Type of product
iv. Number of equal products
v. Barriers to entry
vi. Degree of product differentiation
vii. Transportation and distribution costs
viii. Price/cost structure
ix. Experience curve
x. Degree of integration
xi. Economy of scale etc.
Variable # (c) Competitor Variables Like:
i. Degree of specialization within the industry
ii. Degree of capacity utilization
iii. Degree of seller concentration
iv. Aggressiveness of competition
Variable # (d) Supplier Variables Like:
i. Degree of supplier concentration
ii. Major changes in availability of raw materials
Variable # (e) Broader Environment
Variables:
i. Interest rates
ii. Money supply
iii. GNP trend
iv. Growth of population
v. Age distribution of population
vi. Life cycle changes
Variable # (f) Organizations Variables
Like:
i. Quality of products
ii. Market share
iii. Marketing intensity
iv. Value added
v. Degree of customer concentration etc.
Hofer developed descriptive
propositions for each stage of product life cycle.
For example- in the maturity
stage of the product life cycle, Hofer identified the following major
determinants of business strategy:
(a) Nature of buyer needs
(b) Degree of product differentiation
(c) Rate of technological change in the process design
(d) Ratio of market segmentation
(e) Ratio of distribution costs to manufacturing
(f) Value added
(g) Frequency with which the product is purchased
Hofer, thereafter formulated
normative contingency hypothesis using the above major determinants.
An example for the maturity
stage is when:
(a) Degree of product differentiation is low.
(b) The rate of buyer needs is primarily economic.
(c) Rate of technological change in process design is high.
(d) Purchase frequency is high.
(e) Buyer concentration is high.
(f) Degree of capacity utilization is low.
Then the business firms should:
(1) Allocate most of their R&D funds to improvements in process design rather than to new product development.
(2) Allocate most of their plant and equipment expenditures to new equipment purchases.
(3) Seek to integrate forward or backward in order to increase the value they added to the product.
(4) Attempt to improve their production scheduling and inventory control procedures in order to increase their capacity utilization.
(5) Attempt to segment the market.
(6) Attempt to reduce their raw material unit costs by standardizing their product design and using interchangeable components throughout their product line in order to qualify for volume discount.
Matrix
is created on the basis of two criteria: the maturity of the product in the
industry sector, divided into 5 phases and the competitive position of
companies in that industry sector into 3 phases. This circles are placed in the
appropriate cell, where represent different areas of activity in the company,
and the size of the circle is proportional to size of the sector. Sometimes
segments could be added to the circle, which reflect the market share of
company in the sector.
3. Directional Policy & the Strategic Position
The Directional Policy Matrix
(DPM) is developed by Shell Chemicals, U.K. It is another portfolio model helps
the companies in identifying one balanced business portfolio. The model is
positioned in 3 x 3 matrix. The vertical axis represents the company’s
competitive capability graded in three classes viz., weak, average and strong.
The horizontal axis represents the business sector prospects which are
categorized into unattractive, average and attractive.
The competitive capability of
the company is determined on the basis of three factors, such as market
position, production capability and product research and development. The
profitability prospects of a business are determined on the basis of market
growth rate, market quality and environmental prospects. The DPM is an aid to
the top management in strategic planning for a conglomerate with diverse
position in terms of their prospects and competitive capabilities.
(1)
Divestment:
In the first quadrant, the
companies competitive capabilities are weak and its business prospects are also
unattractive. The SBU will be in a position cash outflow and will be a looser.
This represents ‘dog position in BCG matrix. The situation is not likely to
improve in future. Therefore, the investments should be withdrawn immediately
by divestment. The resources so released can be properly used elsewhere.
(2)
Phased Withdrawal:
The competitive capability of
this SBU is weak and its business sector prospects are average. The investment
in these SBUs should be withdrawn in a phased manner. The company may adopt
harvest strategy in these SBUs, without any further new investments in these
businesses.
(3)
Double or Quit:
The business prospects are
attractive but the company’s capability is weak in this area of business. The
company has two options to remedy the situation i.e.- (a) invest more to
exploit the prospects of the business sector, (b) if not possible to better the
situation, it is suggested to quit such business altogether.
(4)
Phased Withdrawal:
The SBU falling quadrant (4)
has unattractive prospects of the business sector in which the company’s
competitive capability is average. The company should withdraw from this
business gradually in a phased manner by adopting harvest strategy.
The prospects of the business
sector is average in this SBU and the company’s competitive capability is also
average. It is suggested to hold the position with little support or investment
from outside the SBU. When the position is more clear, either the SBU can
continue in such business or withdraw the investment by focusing on other
profitable business.
(6)
Try Harder:
The business sector prospects
are attractive for the SBU, but the company’s competitive capability is
average. These SBUs need additional resources to strengthen their capabilities.
Niche is the suitable strategy in these situations. Lot of efforts are required
to tap the prospects of the business sector.
(7)
Cash Generation:
The business sector prospects
are bleak but the SBUs competitive capability is strong, which make the SBU to
generate cash inflow with its internal strength. Very little additional
investments maybe allowed for such SBUs but expansion programs should not be
undertaken unless the industry attractiveness is improved substantially.
(8)
Growth:
The SBU’s industry
attractiveness is average and the company’s competitive capability is strong in
this area. This requires infusion of additional funds to support product
innovation, R&D activities, capacity expansion etc. They should adopt
growth strategies in this situation with caution. The sales promotion and
advertising will enable the company to increase its market share.
(9)
Market Leadership:
The SBU’s business sector
prospects are attractive and the company’s competitive capabilities is also
strong. The company can adopt offensive strategies to increase its market share
and attain market leadership through innovations, capacity additions and R&D
experiments. The economies of scale will also help in attaining cost leadership
also. The company can apply growth strategies to such SBUs.
4. Strategic Planning Institute’s Matrix
A programme for the
Profit Impact of Market Strategy (PIMS) was started at General Electric, and
was later used by the Strategic Planning Institute. The PIMS programme analyses
data provided by member companies to discover ‘general laws which determine the
business strategy in different competitive environments producing different
profit results’. Unlike the earlier approaches using judgement for
multidimensional factors, the SPI uses multidimensional cross-sectional
regression studies of the profitability of more than 2,000 businesses. It then
develops an industry characteristic, Business Average Profitability, and
compares it with the performance in the concerned company. This model uses
statistical relationship estimated from past experience in place of the
judgmental weightages assigned for the importance of different factors behind
Industry Attractiveness and Competitive Position in previous approaches. This
scientific objective approach has been criticised that the analysis
relationship in it is based on heterogeneous population, i.e., different types of
business, taken at different time periods. Profitability is closely linked with
market share. A 10 per cent improvement in profitability is linked with 5 per
cent improvement in Return on Investment. This has since been rationalised by a
number of arguments, such as ‘the Experience Curve Effect’ which implies
reduction in average cost with increase in accumulated production. The larger
company can use better quality management, and thus can exercise greater market
power
5. Arthur D Little model
The ADL portfolio matrix was
suggested by Arthur D. Little (ADL) consists of 20 cell, identified by
competitive position and its stage of industry maturity. In this matrix, the
stage of industry maturity is identified in four stages viz., embryonic,
growth, maturity and ageing. The competitive position is categorized into five
classes viz., dominant, strong, favourable, tenable and weak. The purpose of
the matrix is to establish the appropriateness of a particular strategy in
relation to these two dimensions.
The position within the life
cycle and of the company is determined in relation to eight external factors
(or disciplines) of the evolutionary stage of the industry.
These are:
(a) Market growth rate
(b) Growth potential
(c) Breadth of product line
(d) Number of competitors
(e) Spread of market share among the competitors
(f) Customer loyalty
(g) Entry barriers
(h) Technology
It is the balance of these
factors which determines the life cycle. The competitiveness of the
organization can be established by looking at the characteristics of each
category. The weights must be defined to calculate the matrix position of a
particular business the matrix location of each unit can be used to formulate a
natural strategy to accomplish the business goals of the firm.
The competitive position of a company’s SBU or product line can be
classified as:
Type # i. Dominant:
It is comparatively a rare
situation where the SBU enjoys monopoly position or very strong market ability
of its products. This may be due to high level of entry barriers or protected
technology leadership.
Type # ii. Strong:
When an SBU enjoys strong
competitive position, it can afford to chalk out its own strategies without too
much concern for the competitors.
Type # iii. Favourable:
In this competitive position,
no firm will enjoy dominant market share and the competition will be intense.
The strategy formulation much depends on the competitors moves. The market
leader will have a reasonable degree of freedom. Analysis of their product
portfolio and learning from them would help others while framing their own
strategies.
Type # iv. Tenable:
The tenable competitive
position implies that a firm can survive through specialization and focus.
These firms are vulnerable to stiff competition in the market. They can
withstand with cost focus and differentiation focus strategies.
Type # v. Weak:
The weak firms will generally
show poor performance. They can withstand with niche strategy and can become
strong players in their area. The consistent weak performance may need to
divest or withdraw from the product line.
Once plotted, the matrix look like:
Those who read this, also read:
1. GE Matrix
2. Organizational Capability Profile
