Sample Strategic Business Management Essay

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Nov 20, 2013 (3 years and 8 months ago)

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Sample Strategic Business Management Essay


Product Portfolio Management and Applicable Models


Increased competition fuelled by the process of
globalization
, vast developments in the
information and telecommunication technology as well as rapid changes in the world social and
political structures have created intensely competitive markets in which today’s organisations are
struggling to find a competitive foo
thold. Nature of today’s business is such that, organisations
can no longer succeed in achieving a competitive advantage through product quality, speed of
supply or production cost management. These factors have become prerequisites to stay in
business and

no longer offer a platform for competitive advantage. Organisations need to
streamline their business strategies and explore and identify areas, which can be best exploited
with the organisation’s resource base. Maximizing the effective deployment of orga
nisational
resources involve, crafting of market and product strategies that best achieve the organisational
objectives. Thus, management of the product portfolio becomes a key management consideration
for those companies that aim to achieve sustainable co
mpetitiveness in the market place
(Thomson & Strickland 2003).


Portfolio management is an essential aspect of strategic management process and is
executed with the goals of maximizing profitability or value of the portfolio, providing a balance
to the pr
oduct line and supporting the strategy of the enterprise. Portfolio management decisions
involve striking a balance between goals such as risk vs. profitability, new products vs.
improvements, strategy fit vs. reward, market vs. product line, long
-
term vs.

short
-
term (
Cooper,
Edgett & Kliensmidt 2001)
. Techniques used can fall in to three main categories as the
Heuristic
models, Scoring techniques or Visual or mapping techniques.
Various portfolio models have
been devised over the years and common ones in u
se are Ansoff Matrix, Boston Consultancy
Group Matrix, Shell Directional Policy, General Electrics Multifactor Model, Risk
-
Return /
Profit Potential and Life Cycle Model by A.D. Little.

Initially developed Portfolio Management techniques mainly focused

on profitability or
financial returns using heuristic or mathematical models. These approached paid little attention
to striking a balance and aligning the portfolio to the organisation's overall strategy. Scoring
techniques, which used weight and score
criteria, taking into account investment requirements,
profitability, risk and strategic alignment factors and was better than purely financial techniques.
However these too had shortcoming with this approach and still carried an over emphasis on
financial

measures and had an inability to compare and present the mix of the portfolio. Mapping
techniques, which used graphical presentation to visualize a portfolio’s balance, has the
advantage of presenting all product groups in one “snap
-
shot” view, facilitati
ng comparison. The
General Electric Multifactor Portfolio Model (GE Model) and Shells
Directional Policy Matrix,
combines the mapping techniques with the scoring techniques so that the analysis is strengthened
to provide in
-
depth understanding of the produ
ct potential and resource requirements. Therefore
the analysis of Seven Seas Product portfolio will be done with the above two models.


General Electric Multifactor Portfolio Model

This portfolio assessment and management tool has contributed significa
ntly to the success of
General Electrics in the global market and was fully utilized since 1981 when Jack Welsh
became its CEO. During the 1990’s GE made many investment, divesture and portfolio
reshuffling decisions using the evaluations of the GE Multifa
ctor model (Thompson & Strickland
2003, p. 339). The GE model treats product categories as Strategic Business Units (SBU) and
this nine
-
element matrix relate the environmental opportunities and other factors determining
industry attractiveness to key measu
res of the SBUs' relative business strengths (Hussy 1978). A
product category or a SBU is placed in the matrix by determining it’s relative business strengths
and industry attractiveness on a scale of high, medium, or low, through assessment and scoring
of

key contributing factors to these two dimensions. Factors considered for Business Strength
includes sales growth rate, market share, market image, and management capabilities. Factors for
Industry attractiveness, involves the size and potential of its mar
ket, technological status,
financial health, competitive structure, and social and political characteristics of its industry and
economic circumstances. The theory behind the 9 cell grid is that those business units with high
or medium industry attractiven
ess coupled with medium or high business strengths call for an
"invest and grow" decisions while those business units or products with medium or low industry
promise coupled with medium or low strength would indicate for minimal additional investments
The
company may resort to retrenchment or limited technological support of these units. Other
combinations of average and weak industry attractiveness and business strength scores may
indicate borderline cases with medium priority investment decisions. The si
ze of the “bubble”
indicating the business unit placed in the grid is scaled to the percentage revenue contribution to
the total portfolio. A score of 6.7 or greater is considered high or attractive while score of 3.3 or
below is considered weak or low. A
verage is between 3.3 and 6.7. Major shortcoming of GE's
scheme is its ineffectiveness in portraying the circumstances of new businesses whose growth in
new industries is just beginning (Hofer & Schendel 1978) It is necessary that the portfolio
management

activities incorporate different levels of management input and final decisions and
evaluations be a thorough and justifiable. Thus planning discussions, focused on the variables
involved in the grid, may prevent costly mistakes and avoid reliance on gut
reactions (Webber
1982). Figure 1 illustrates the GE Multifactor Model discussed above.

Shell Directional Policy Matrix

Leader Domain



A sustaining strategy is applied and at certain stages this may imply a need
for resources, which cannot be met entirel
y from funds generated by the product. (e.g. resources
to expand capacity) Earnings are above average.
Try Harder Domain



These products or
SBUs can be moved towards the leadership box by effectively deployed resource. In these
circumstances the company s
hould certainly consider making available resources in excess of
what the product can generate.
Growth Domain



Merits investments to allow the product to
grow with the market. Generally, the product will generate sufficient cash to be self
-
financing
and s
hould not be making demands on other corporate cash resources.

Proceed with Care
Domain



While a certain amount of investments may be justified, major investments should be
made with extreme caution.
Double or Quit Domain

-

Tomorrow’s breadwinners among
today’s R&D projects may come from this area. Best prospects should be developed with full
backing while others should be abandoned.
Cash Generator Domain



These are products or
SBUs that are moving towards the end of its

life cycle and is being replaced in the market by
other products. No finance is to be made for expansion, and so long as it is profitable, the
products are continued to generate revenue.
Phased Withdrawal Domain

-

The strategy for this
segment is to reali
ze the value of the assets on a controlled basis to deploy the resources released
from these products in other prospective products.
Divestment Domain

-

Products falling in this
area will probably be losing money and negative growth is likely. Divestment i
s the strategy so
that the released resources can be better utilized.

While this model provides valuable strategy indications for portfolio management, limitations of
the model lies in that it assumes the applicability of same set of factors in assessing prospects of
any product/business.
Relevant factors and thus their rele
vant importance will vary both
according to the firm's products and the individual characteristics of each company (
Wilson &
Gilligan 1997).


In conclusion, increased competition makes most markets less attractive due to reduced
market shares, lesser scop
e for growth and intense competition. Therefore, companies should
focus on products which they have sufficient advantage in terms of both the company
competitiveness as well as industry profitability. Product portfolio analysis allows companies to
evaluate

the product categories in terms of internal and external factors contributing to market
dominance in lucrative high potential markets. While portfolio analysis tools have contributed
significantly to the success of firms such as General Electrics and Shel
l International Chemicals
Ltd, care and caution should be exercised to evaluate investment and divestment decisions in
depth and in context of the current as well as future market situations.