Financial performance-sales and profitability
Performance Measurement-Beyond Profitability
Determinations of strategic options
A business self-analysis is similar to a
competitor analysis, but it has a greater focus on
performance assessment and is much richer and
The analysis is based on detailed, current
information on sales, profits, costs,
organizational structure, management style, and
self-analysis can be conducted at each of the
three strategic formation levels..
The common goal is to identify organizational
strengths, weaknesses, constraints, and,
ultimately, responsive strategies, either
exploiting strengths or correcting or
compensating for weaknesses.
Self-analysis often starts with an analysis of
current financial measures of sales and
Furthermore, they provide and indicator of the
success of past strategies and thus can often
help in evaluating whether strategic changes are
In addition, sales and profitability at least appear
to be specific and easily measured. As a result, it
is not surprising that they are so widely used as
performance evaluation tools.
Increased sales can mean that the customer
base has grown. An enlarged customer base,
if we assume that new customers will develop
loyalty, will mean future sales and profits.
Increased share can provide the potential to
gain SCAs in the form of economies of scale
and experience curve effects.
a problem with using sales as a measure??
They provide the basis for the internally or externally
generated capital needed to pursue growth strategies,
to replace obsolete plants and equipment, and to
absorb market risk.
One basic profitability measure is return on assets,
which is calculated by dividing the profits by the assets
What is Good Performance?
What should the target projected ROA be for existing
businesses? Each business should earn an ROA that
meets or exceeds the cost of capital, the weighted
It is somewhat analogous to preferring $6
million to $4 million.
The real question involves determining which
strategic alternative will generate $6 million
and which will generate $4 million.
Thus, it is necessary to develop performance
measures that will reflect long-term viability
The focus should be on the assets and skills
that underlie the current and future strategies
and their SCAs
Current long term
New Product Activity
Capability & Performance
Customer satisfaction /Brand Loyalty
Measures of customer satisfaction and brand loyalty
are much more sensitive and provide diagnostic
value as well.
Guidelines for Measuring Satisfaction and Loyalty
First, problems & cause of satisfaction that may
motivate customers to change brands or firms
should be identified.
Second, often the most sensitive and insightful
information comes from those who have decided to
leave a brand or firm(exit interviews ).
Third, there is a big difference between a brand or
firm being liked and the absence of dissatisfaction..
Product and Service Quality
A product (or service) and its components should be critically
and objectively compared both with the competition and with
customer expectations and needs.
How good a value is it?
Can it really deliver superior performance? How does it
compare with competitor offerings?
How will it compare with competitor offerings in the future
given competitive innovations?
Product quality: counseling service, hospital, furniture,
computers, cars, fruits and vegetables, films, bottled water
- what marketing strategies(dimensions) are applicable in
Is a brand or firm regarded as expert in a
product or technology area (such as designing
and making sailboats)? Innovative? Expensive?
For the country club set? Is it associated with a
country, a user type, or an application area (like
racing)? Such associations can be key strategic
assets for a brand or firm.
Think over the following different competing
companies and analyze their respective
association: Insurance, hospitals, shoe
manufacturers, TV, Mobile hand sets, NGO’S,
computers, Restaurants, leather products.
Change Value analysis
. Design . Raise Prices
. Manufacturing/systemignores . Promote
. Cost reduction
Inferior Our ComponentIs.... Superior
Value analysis value analysis
. De-emphasis . Emphasize/promote
. Upgrade . Leave it alone
New Product Activity
Does the R&D operation generate a stream of
new product concepts?
Is the process form product concept to new
product introduction well managed?
It there a track record of successful new
products that have affected the product
performance profile and market position?
Manager/Employee Capability and
Capability represents the firm’s capacity or
ability to integrate individual firm (tangible
and intangible )resources to achieve a desired
Are the human resources in place to support
current and future strategies? Do those who
are added to the organization match its
needs in terms of types and quality?
Or are there gaps that are not being filled?
What characteristics of a business make some
options infeasible without a major
What characteristic will be pivotal in making a
choice between strtegic options?
the answers to these questions will depend
on the situation(five areas warrant close
Past and current strategies
Past strength( innovation? manufacturing ? scale
A strategic problem differs from a weakness or
liability, which is the absence of an asset (e.g., good
location) or skill (e.g., new product introduction
A business copes over time with a weakness or
liability by adjusting strategies. Strategic problems,
in contrast, need to be addressed and corrected even
if the fix is difficult and expensive.
Assume that you are financially capable, but you
couldn’t get a high traffic area which is highly
Organizational Capabilities /Constraints
The internal organization of a company-is
structure, systems, people, and culture-can
be an important source of both strengths and
Longer structure vs shorter:
Financial Resources and Constraints
Should a firm increase its net investment or
decrease it by holding liquid assets or
returning cash to shareholders or debt
funds may be obtained either by debt or
A division or subsidiary may need to consider
how much support and involvement it can
expect form a parent organization
Organizational Strengths and Weaknesses
A key step in self-analysis is to identify the
strengths and weaknesses of an organization
that are based on its assets and skills.
In fact, much of self-analysis is motivated by
the need to detect strengths and weaknesses
A business portfolio : is the collection of Strategic
Business Units that make up a corporation..
Portfolio matrix models can be useful in re-
examining a company's present portfolio.
The purpose is to help a company understand and
consider changes in its portfolio of businesses, and
also to think about allocation of resources among
the different business elements.
The two primary models (planning tools) are the BCG
Growth-Share Matrix and the GE Business Screen.
These models consider and display on a two-dimensional
graph each major SBU in terms of some measure of its
industry attractiveness and its relative competitive strength
The BCG Growth-Share Matrix
The BCG growth-share matrix, being both simple and easily
quantifiable is often a useful first step in portfolio analysis
It suggests that the desirability of the market can best be
expressed by the market growth rate, and that the best
summary indication of a firm’s strength in a market is its
relative market share.
Industry growth rate
Relative market share position of the
SBUs plotted as circles with area proportional
to their contribution to overall corporate sales
Relative Market Share Position
The Growth Dimensions:
Of all the characteristics of a market, why select growth
as the single indicator of its desirability? The reasons
include the following:
• Growth is perhaps the best measure of the product life
cycle, a key strategic consideration.
• Market share is assumed to be more easily gained in a
growth context when new users with no developed
loyalties are attracted to the product class.
• Furthermore, competitors may react less aggressively
to the loss of new customers than to the loss of their
base of existing customers.
• Share gain is important, in part, because of its link to
the experience curve.
The Growth Dimensions:
• A market position in a growth market will be worth
more in the future as the market grows, if we
assume the position can be retained. It is normally
easier to retain market share than to gain it.
• In a growth market, demand often exceeds supply;
excess demand will support premium prices and
• By aggressively entering in to a growth market and
establishing a sustainable competitive advantage, a
firm can discourage competitors from entering the
The Market-Share Dimension
Relative market share is selected as the single indicator of a firm’s position for
The largest-share firm will very likely enjoy advantages of
size such as economies of scale, high brand recognition,
channel dominance, and the strongest bargaining position
with customers and suppliers.
The market leader is the best position to exploit the
experience curve because it will accumulate experience faster
than competitors. The experience curve suggests that
cumulative production experience will result in lower unit
costs because of learning effects, technological
improvements in production /operations, and product
Empirical evidence indicates that market share is related to
The matrix and its cast of characters
1. Stars: contains the high-share SBUs operating in
Because they are in growth contexts, the model
predicts that they will have a heavy need for cash to
support that growth.
they will be both users and providers of large cash
2. Cash cows: are high-share SBUs operating in a low-
growth market. Because of their market position, their
cash generation should be high.
Because the market is mature, the cash investment
needs should be small and these businesses should
therefore be a source of substantial amount of cash
that can be channeled to other areas
because growth is low, expansion of share is
assumed to be very costly
Dogs are often cash users and possibly even “cash
trap”---products that perpetuate absorb cash, in
part because of the investment required to
4. Problem children: also called question marks or
are assumed to have cash needs because,
although they need to fund growth, they generate
little cash because they are not far down the
The general strategy is to take cash from the
cash cows to fund R&D, the source of future
SBUs, and those problem children that have
the potential to gain share to achieve star
The cash cows should receive a maintenance
investment level, but any tendency to
automatically reinvest the cash they are
generating should be recoded. Stars, on the
other hand, should be of lesser concern.
Given that the stars are adequately financed, a
limited number of the most promising
problem children can be selected for
investment to try to improve their shares.
The other problem children neither should nor
receive investment. They should be held,
abandoned, or molded for whatever cash they
The dogs, usually the most prevalent category,
present a challenge, several alternatives are
First, a dog can sometimes become very
profitable through the pursuit of a “focus”
In effect, it would then be the star or cash
cow of the redefined market. Second,
investment can be sold or simply liquidated.
Managers should be wary of “turn-around”
plans for dogs, particularly when there is no
fundamental change in the market or
Assumption and limitations
The BCG growth-share matrix is usually easy to
develop, because measures on the two dimensions
are often readily available and the baseline
conclusions are usually clear.
The fact that the model is so simple also means
that its assumptions are both evident and
vulnerable in many contexts.
The assumption that market share affects cost. The
motivation for using relative share to describe
competitive position is based on the assumption
that market share will affect costs because of
economies of scale and experience curve effects.
1 1 2
1 2 3
2 2 3
The industry attractiveness-business position matrix is
much richer than the growth-share matrix. As a result,
it is not limited to “volume” industries, but can be
applied in other competitive settings as well.
Furthermore, its structure can be adapted more easily
to higher-level investment-allocation decisions such as
those across divisions.
A business-Position and a market-attractiveness rating
may both represent averages of several component
Thus, the growth-share-matrix logic is
unlikely to apply when a business consists
operating on its own experience curve. Thus,
it is rarely helpful in allocating investment
over divisions or groups of SBUs.
Furthermore, an experience-curve-based,
low-cost strategy is only of several ways to
complete. Relative market share will not be as
likely to be relevant to differentiate or focus
strategies, for example
more subjective an ambiguous, especially across
The selection and weighting of factors and the
subsequent development of both a firm’s position and
market attractiveness are highly subjective processes
They can be unduly influenced by historical
perspectives and performance and by individual biases
The final evaluating are bound to be somewhat
unreliable in that different people will obtain different
Furthermore, different business units will undoubtedly
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