Strategic Planning Tools

STRATEGIC PLANNING TOOLS

Strategic planning may be characterized as a systematic effort to produce fundamental decisions and actions that shape and guide what a business organization is, what it does, and why it does it. The objective of strategic planning is to develop a map by which to manage an organization's positioning.

Although some would suggest that strategic planning has lost some of its effectiveness, most managers continue to recognize the need for effective strategic planning and implementation. While strategic planning requires a significant amount of time and can be quite frustrating, if done properly, it can enable a firm to recognize its most effective position within its industry.

There are a variety of perspectives, models and approaches used in strategic planning. The development and implementation of these different tools depend on a large number of factors, such as size of the organization, nature and complexity of the organization's environment, and the organization's leadership and culture.

Five strategic planning tools are presented below: the Boston Consulting Group Matrix; the GE Market Growth/Market Share Matrix; SWOT Analysis; Porter's Generic Competitive Strategies; and Porter's Five Forces Model.

BOSTON CONSULTING GROUP MATRIX

In the late 1960s the Boston Consulting Group, a leading management consulting company, designed a four-cell matrix known as BCG Growth/Share Matrix. This tool was developed to aid companies in the measurement of all their company businesses according to relative market share and market growth. The BCG Matrix made a significant contribution to strategic management and continues to be an important strategic tool used by companies today. The matrix provides a composite picture of the strategic position of each separate business within a company so that the management can determine the strengths and the needs of

Figure 1

Market Growth/Share Matrix

all sectors of the firm. The development of the matrix requires the assessment of a business portfolio, which includes an organization's autonomous divisions (activities, or profit centers).

The BCG Matrix presents graphically the differences among these business units in terms of relative market share and industry growth rate. The vertical axis represents in a linear scale the growth rate of the market in which the business exists (see Figure 1). This is generally viewed as the expected growth rate for the next five years of the market in which a particular business competes. The values of the vertical axis are the relevant market growth rates (i.e., 5 percent, 10 percent, 15 percent, 20 percent, etc.). Usually a 10 percent cut-off level is selected in order to distinguish high from low market growth rate (a 10 percent value corresponds to doubling current experience in the next five to seven years).

The horizontal axis represents in a logarithmic scale the market share of a business within a firm relative to the market share of the largest competitor in the market. For example, Company A may have a 10 percent market share and Company B, the leading competitor, holds 40 percent of the market. Company A's market share relative to Company B's market share is 25 percent, or .25Ð"--. If Company A has a 40 percent share and Company B has a 10 percent share, Company A's market share is 400 percent, or 4.0Ð"--.

Relative market share is an indicator of organization's competitive position within the industry, and underlies the concept of experience curve. Thus, business organizations with high relative market share tend to have a cost leadership position.

Each of a company's products or business units is plotted on the matrix and classified as one of four types: question marks, stars, cash cows, and dogs. Question marks, located in the upper-right quadrant, have low relative market share in a high-growth market. These businesses are appropriately called question marks because it is often uncertain what will happen to them. Careful examination by management can help determine how many resources (if any) should be invested in these businesses. If significant change can increase relative market share for a question mark, it can become a star and eventually gain cash-cow status. If relative market share can not be increased, the question mark becomes a dog.

The upper-left quadrant contains stars, businesses with high relative market share in high-growth markets. These businesses are very important to the company because they generate a high level of sales and are quite profitable. However, because they are in a high growth market that is very attractive to competitors, they require a lot of resources and investments to maintain a high market share. Often the cash generated by stars must be reinvested in the products in order to maintain market share.

When the market growth slows down, stars can take different paths, depending on their abilities to hold (or gain) market share or to lose market share. If a star holds or gains market share when the growth rate slows, stars become more valuable over time, or cash cows. However, if a star loses market share, it becomes a dog and has significantly less value (if any) to the company.

The lower-left quadrant contains businesses that have high relative market share in low-growth markets. These businesses are called cash cows and are highly profitable leaders in their industries. The funds received from cash cows are often used to help other businesses within the company, to allow the company to purchase other businesses, or to return dividends to stockholders.

Dogs generate low relative market share in a low-growth market. They generate little cash and frequently result in losses. Management should carefully consider their reasons for maintaining dogs. If there is a loyal consumer group to which these businesses appeal, and if the businesses yield relatively consistent cash that can cover their expenses, management may choose to continue their existence. However, if a dog consumes more resources than it's worth, it will likely be deleted or divested.

Strategic business units, which are often used to describe the products grouping or activities, are represented with a circle in the BCG Matrix. The size of the circle indicates the relative significance of each business unit to the organization in terms of revenue generated (or assets used).

Although the BCG Matrix is not used as often as it was in past years, one big advantage of the matrix