Strategic Analysis and Choice in Business - Report Example

Strategic Analysis and Choice Portfolio management comprises a set of techniques which are often used by strategic planners to integrate and manage strategically a number of subsidiaries, often operating in different industries that comprise the corporate whole. The larger the business the more likely it is there will be number of operating units in existence which need to be integrated and managed strategically. One of the most popular aids to developing corporate strategy in a multibusiness corporation is portfolio analysis. In portfolio analysis, top management views its product lines and business units as a series of investments from which it expects a profitable return. The product lines/business units form a portfolio of investments that top management must constantly juggle to ensure the best return on the corporations invested money. Two of the most popular approaches are BCG Growth – Share matrix and GE Business screen. This concept can also be used to develop strategies for international markets. The BCG Matrix: The Boston Consulting Group, a well known management consulting firm, developed a strategy based on market growth rate and relative market share to focus company strategies in firms with multiple product lines. In this model, the underlying assumption is that cash flow and profitability are closely related to sales volume. Products or strategic business units are then placed within this matrix according to their positions in two dimensions. Market growth rate refers to the rate of sales growth in the market, while relative market share is a ratio of a product’s share of business within the market compared to that of its largest competitor. If the share equals that of the largest competitor the measure would be 1.0. An administrator can then classify the organization’s product lines into one of these four quadrants. Fig : BCG growth – share matrix In this essay, we would be applying BCG Matrix concept to MetLife. Metropolitan Life Insurance Company (MetLife) is presently one of the largest life insurers in terms of insurance in force. Besides, it also provides a large number of financial services and benefits to a large number of individuals and institutional customers of United States. It is one of the most illustrious firms with revenue of 43.3 Billion Dollars per annum. MetLife’s Institutional segment offers group benefit products (insurance, retirement products, prepaid legal plans); its Individual segment offers consumers many of the same type of products ( annuities, automobile and homeowner’s insurance, retail banking services); and its International segment offers the same to groups and individuals, primarily in Latin America and Asia/Pacific region. (my MetLife, 2005). In examining the position of MetLife in this matrix, it is important to consider the issue of control. A company cannot directly control the market growth rate. This rate is determined by uncontrollable, variable environmental forces. There are many more environmental variables both internal factors and external factors which have an impact on the MetLife. These factors include economics, markets, culture, politics, interchangeability, customers, competition, direct stakeholders and many more. All these factors have their own impact and various strategies have been implemented in order to face the changing needs of the environmental variables. For example, pediatrics may be a declining business, but there is little direct control a provider can have over the overall growth rate of the number of children. A company does have control of its relative market share, however, which is a reflection of the success of the organization’s strategy, particularly its marketing strategy relative to competitors. A company that places a service in the quadrants representing lower share must reexamine its internal strategy and its implementation. Products and services are represented in the matrix as one of the following: stars, cash cows, problem children, or dogs. Stars are products with high market share and high growth rate. An organization is doing well with these products (represented by their high relative market share) and their future potential is still strong as reflected in the high growth rate. From a cash perspective the revenues generated by these business lines should be reinvested back into services that need additional investment in personnel or facilities in order to capitalize on the market growth rate. Growth strategies are the primary focus of products placed within this quadrant. Well, the insurance service provided by MetLife can be considered as a star. It is a well known fact that MetLife is the largest insurance provider throughout the world. The revenue generated by providing insurance services can be well utilized to promote and develop other services which are either performing poor or the ones which are newly launched. Cash cows are the products that have a high market share but a low growth rate. These might be seen as mature businesses; but this maturity is not due to any controllable factor. Placing a service in the cash cow position means that, even though the market is maturing, a company has been able to retain a strong share position. These businesses typically generate a substantial amount of cash; in fact, they usually represent the greatest source of cash flow. There is no need to invest in new facilities or other fixed assets. Monies from this product lines should be reinvested or redirected into services whose market position is growing. Considering the various services provided by MetLife, both insurance services and the different financial services could be considered as cash cows. Both of these services generate huge amount of cash, however, financial services have a high market share but a low growth rate. This service should be maintained by the organization but excess revenue form them should be shifted to develop the “problem children”. The major strategy for these services focuses on maintaining share as long as the market exists. When share drops, then consolidation strategies might be considered. Problem children represent services with low relative market share, but high growth rate. A product could be placed into this quadrant for one of the two reasons. First, a product might be classified as a problem child because it is new to the organization, hence its low market share. In that case, a business needs to invest monies generated by cash cows in marketing of the new product. A second, more problematic reason for a product to be labeled problem child is an organization’s inability to establish market dominance in the midst of a growth market situation. This requires a reexamination of the strategy and tactics used to support this service. Automobile and homeowner’s insurance services provided by MetLife fall into this category. The basic reason to consider these as problem children or question marks is that these are the new services launched by MetLife. The service providers are unsure about the success of these services and are also unsure about the future of their market growth. It is advisable to the firm to turn these services either into a ‘star’ rather than considering them as ‘dog’. Good and effective advertising, promotional and marketing strategies would be required to do so. Dogs represent those products with low share and low growth. These services typically drain an organization’s cash and become targets for consolidation strategy. The simplest recommendation is to drop the product or get out of the market. It is important to recognize the dog only because of its resource implications. There have been no cases so far in the MetLife services line whereby any product or service could be considered as a dog. Generally speaking, the BCG framework created here for MetLife is based on two variables, the rate of growth of the market and the relative market share. Some of the major assumptions on which the matrix is based are that : the matrix can be defined;  profitability and market share are positively related;  there are no barriers to entry or exit in the market concerned;  the stage of industry maturity can be defined;  the market is still in the positive growth stage;  two dimensions are sufficient to describe the competitive situation. Thus in order to use the matrix, this firm would determine the values of each dimension for each of its services and when placed in the matrix this would provide an overview of the company portfolio. It would indicate whether the parts of the business were concentrated in one area. The theory suggests that portfolios should be reasonably balanced among stars, cash cows and question marks and that this is the desired direction for continued success and profitability. A company may develop a product in a high-growth market which initially has a low market share (question mark).The company should plan to increase the market share and thus move the product into the star category. While the product remains a star it is unlikely to release cash as, given that the market is still growing rapidly, the cash generated and may be more, will be required for new plant to satisfy the increases in demand. As the market growth rate slows even further, the theory enables revitalization to the question mark stage and so the cycle begins again. Dogs are low market share products in a declining industry, and so the firm should exists from theses businesses unless there is a special reason for not doing so. If there are two many stars a cash crisis may result, if too many cash cows, future profitability may be in jeopardy, and too many question marks may affect current profitability. The broad nature of the BCG matrix often makes it too limiting for significant strategy formulation. Yet, in this type of organizations, it can help as a valuable conceptual framework to engender strategy discussions. A major source of organizational conflict occurs when everybody views their services in a different market position requiring a different level of resource commitment. The BCG framework is a useful tool for focusing management attention on broad marketplace considerations and for getting participants to discuss the issues of market growth and requirements for market dominance in a particular clinical setting. Underlying the BCG Growth – Share Matrix is the concept of the experience curve. The key to success is assumed to be market share. Firms with the highest market share tend to have a cost leadership position based on economies of scale, among other things. If this company is able to use the experience curve to its advantage, it should be able to sell new services at a price low enough to garner early market share leadership (assuming no successful imitation by competitors). Once the products or services becomes a star, it is destined to be very profitable, considering its inevitable future as a cash cow. Having plotted the current positions of its product lines or business units on a matrix, this company can project their future positions, assuming no change in strategy. Present and projected matrixes can thus be used to help identify major strategic issues facing the organization. The goal of any company is to maintain a balance portfolio so it can be self sufficient in cash and always working to harvest mature products in declining industries to support new ones in growing industries. The BCG matrix is also a useful tool for helping the well known MetLife assess its internal strength and future direction. Depending on distribution of services within the matrix, an audit might reveal if this organization needs to redirect resources to generate more new products or services. For example if assumed that MetLife has a large number of cash cows( 60 percent), a reasonable number of stars (25 percent), a few dogs (5 percent), and only 10 percent problem children, it might indicate that the program director of mature services have succeeded in keeping the cash within their own operations. Little revenue, therefore, has been redirected to generate new opportunities at the low – share, high growth potential position. Similarly, a business with a large number of problem children relative to the number of cash cows might need to prioritize which problems it will invest in to gain share. To move a service from the problem child to star position often requires redirecting the marketing mix, and infusing financial and management resources in new areas. If too many services are vying for these resources, investment must be prioritized to ensure that at least some services receives the needed support to become successful market competitors. The BCG matrix gas the additional advantage that it can be easily used as an indicator of competitive strength, not only at the level of an individual company but also for an industry as whole. By mapping all product – market combinations of competing companies, competitive position on both domestic and export markets can be determined and compared with competitors. Unfortunately the BCG Growth Share Matrix also has some serious limitations : The use of highs and lows to form four categories is too simplistic. The link between market share and profitability is not necessarily strong. Low share business can also be profitable. Growth rate is only one aspect of industry attractiveness. Product lines or business units are considered only in relation to one competitor: the market leader. Small competitors with fast-growing market shares are ignored. Market share is only one aspect of overall competitive position. The real lesson is that the Boston Matrix is useful as a tool to do a certain job. It should, for example, remind the owners of the company to invest in some new products, so that they become ‘stars’ and then ‘cash cows’, to underwrite an uncertain future. On the other hand, it should not distract attention from the much more important task of maintaining the ‘cash cows’ so that they do not turn into ‘dogs’; and the money stripped out to fund new developments should never be at the expense of the future of those existing ‘cash cows’. It is always to be noted that before the BCG matrix is used, it is essential to make sure that the future prospects are adequately measured by volume growth and the firm’s relative competitive position by its relative market share. When the conditions are right, the BCG has the advantage of simplicity. CONCLUSION : It is concluded that any organization (MetLife in this case) will need to adopt a full range of generic strategies if it is to manage an extensive portfolio. Central planning is a demand management strategy; in contrast, monopoly is a supply management approach and both lead to strong centralization and control. It is a fact that the real option in production or rendering of any service accelerates the growth of the firm. BCG – Matrix rests on a similar logic. There it is argued that any firm consists of a portfolio of different projects which needs to generate the cash flows necessary in order to be able to invest in new high growth ventures. As these so called - stars start to generate positive cash flows they turn into cash cows which are projects whose positive cash flows can be used to build up new stars. As the success of a cash cow finally fades it turns into a so called poor dog which is eliminated from the project portfolio of the firm because it does no longer contribute to financing new stars. At this point the role of managing new options in production of goods or rendering of services becomes more evident. REFERNECES :  Jenster Per, Smith David & Hayes Michael, 2005: Managing Business Marketing & Sales, pg 17. Copenhagen Business School Press DK  Williams Chuck, 2005: Management, pg 203. Thomson South-Western Publishers.  www.myMetlife.com Read More