Strategy (prof. Noci) by Cremaschi

GE/MCKINSEY MATRIX

The GE/McKinsey matrix was developed in 1971 by McKinsey at the request of GE. It uses two dimensions - market segment attractiveness and business strength - each of which is built up from a large number of variables. Systematically weighting those variables, each business (or product) is classified into one of nine cells in a 3 x 3 matrix. Like the BCG matrix, this approach aims to compare investment opportunities.

BENEFITS

• Easy to perform;
• Helps to understand the strategic positions of business portfolio;
• It's a good starting point for further thorough analysis;
• Market attractiveness isn't given only by growth. (5 forces model);
• It denies that synergies between different units exist, necessary for competitive advantage.

LIMITATIONS

• Business can only be classified to four quadrants. What if a business falls in the middle?
• It lacks a clear definition of the market;
• Market share doesn't imply competitiveness or profitability.

The difference is that multiple measures are used to assess market attractiveness and competitive position.

Market Segment Attractiveness Business Strengths Recommended Strategies

1. Premium Invest / Grow. These businesses are a target for investment, they have strong business strengths, are in attractive markets and they should therefore have high returns on investment and competitive advantage. They should receive financial and managerial support to maintain their strong position and to continue contributing to long-term profitability.
2. Selective Invest / Grow. Businesses in this box have good business strength in an industry that is losing its attractiveness. They should be supported if necessary, but they may be self-supporting in cash flow terms.
3. Challenge Invest / Grow. Businesses here are in very attractive industries but have average business strength. They should be invested in to improve their long-term competitive position.
4. Protective Selectivity / Earnings. Strong businesses

In unattractivemarkets should be net cash generators and could provide funds for usethroughout the rest of the portfolio. Investment should be aimed at keepingthese businesses in a dominant position of strength, but over-investmentcan be disastrous especially in a mature market.

5. Prime Selectivity / Earnings. Businesses with average business strengthsand in average industries can improve their positions by creativesegmentation to create profitable segments and by selective investment tosupport the segmentation strategy. The business needs to create superiorreturns by concentrating on building segment to differentiate themselves.

6. Opportunistic Selectivity / Earnings. These businesses are in veryattractive markets, but their business strength is weak. Investment must beaimed at improving the business strengths. These businesses will probablyhave to be funded by other businesses in the group as they are not self-funding. Only businesses that can improve their strengths should

To improve the BCG matrix, consider the following:

• It doesn't take into account the performance of a portfolio or the synergies that could exist between two or more business units.
• Accounts for additional factors than just market share.

Today, the BCG tool was conceived in 1970 as a tool to help companies allocate resources based on the attractiveness of their market and their own level of competitiveness. However, in the last decades, conglomerates have become less common and the business environment has become more dynamic and unpredictable. Companies need to "renew their advantage" by increasing the speed at which they shift resources among products and business units. Market share is not the only driver of competitive advantage. New drivers include the ability to adapt to a changing environment or to shape it. These developments result in changes in the distribution of businesses across the matrix. Change accelerates, and businesses move around the matrix quadrants more quickly. Disruption of mature businesses is also a factor.

Lower numbers of cash cows because of their reduced longevity. The Matrix as a tool for strategic experimentation. Today, the matrix can help companies drive the strategic experimentation required for success in unpredictable markets. This involves four key steps:

1. Accelerating the pace of innovation;
2. Balancing exploration and exploitation;
3. Selecting investments and divestments in a rigorous way;
4. Carefully measuring and monitoring experimentation.

8.0 Corporate strategy – Geographical scope

8.1 Introduction

The determinants of firm's international expansion refer to:

1. Expansion of the business
   • Internal markets are saturated
   • Internal markets are too small
2. Access to resources and production input. Examples:
   • Tyres manufacturers that have directly managed rubber plants
   • Oil companies that have expanded to Canada and Venezuela in order to exploit oil deposits
   • Aluminium producers who have ensured the access to bauxite deposits through

international expansion

1. Business portfolio balancing (balancing risk)
   • Create medium-long term stability and growth, given that the same product can be at different stages of its lifecycle in different countries
   • Balance risks related to economic/technological/socio-political cycles in different countries
2. Search for efficiency
   • Economies of scale: extending its market beyond national boundaries, a firm is able to increase the production scale and reduce the average unit production cost.
   • Economies of scope, i.e. efficiency benefits arising from the sharing of some resources in multiple markets (typically transportation and distribution network)
   • Efficiency in resources purchasing
3. Market expansion
   • Homogeneity and globalization of customers' preferences
   • Global presence of customers. Carmakers will force suppliers to go global.
   • Global presence of distribution channels
   • Transferability of marketing campaigns
4. Technological innovation:

removal of exchange controls, internationalisation of standards, convergence of customer preferences)

• Rivalry among existing firms increases as internationalisation lowers seller concentration, increases competitor diversity, and increases excess capacity
• Bargaining power of buyers increases as large customers can exercise their buying power far more.

8.2 Selection of geographical location 58

Decisions related to the geographical location should take into account three main factors:

1. INFLUENCE OF NATIONAL RESOURCES

When the resources of a nation exert a dominant influence on a firm's competitive advantage, it should locate itself where such conditions are more favourable.

Examples:

• For Nike and Reebok, the labour cost is of paramount importance. Therefore, they located their manufacturing plants in low labour cost countries: China, Thailand, India, Philippines
• Most PC manufacturers or telco equipment manufacturers have established R&D units in the US (especially

within the Silicon Valley) inorder to leverage existing skills in the field of microprocessors

SPECIFICITY OF THE COMPETITIVE ADVANTAGE

The advantage of location, for firms whose competitive advantages stem frominternal resources and skills, depends on where they can make the most ofsuch skills.

Example: the competitive advantage of Toyota, Nissan and Honda is based ontheir expertise in product design, development and manufacturing. During the80s they showed that they could make the most of it in the US.

ASSETS TRANSFERABILITY

The possibility to localize products manufacturing away from the targetmarkets depends on their transferability. High transportation costs orpronounced national preferences of consumers can push towards localproduction. It is also possible that the local authorities impose barriers toimports in order to force global companies to build factories on site.

The location decisions should take into account the fact that the supply ofany product or service is made up