Chapter 7: Methods of strategic development

Chapter learning objectives

Upon completion of this chapter you will be able to:

  • assess how internal development, mergers, acquisitions, strategic alliances and franchising can be used as different methods of pursuing a chosen strategic direction
  • describe, for a range of businesses, the relationship between corporate parents and business units and how the corporate parent can create or destroy value
  • explain in the context of a business, three corporate rationales for adding value – portfolio managers, synergy managers and parental developers
  • evaluate, in a scenario, the use of a BCG matrix
  • evaluate, in a scenario, the public sector portfolio matrix
  • evaluate, in a scenario, the market attractiveness/SBU strength matrix
  • evaluate, in a scenario, the directional policy matrix
  • evaluate, in a scenario, the Ashridge Portfolio Display.

1 Introduction

This chapter looks at how some of the strategies discussed in thelast two chapters might be developed. It looks at various types ofbusiness combinations. If the chosen method is to develop a strategythrough acquisition, then an organisation must consider corporateparenting and portfolio analysis.

2 Alternative development options

There are many ways in which a strategy can be developed. Some of the key methods are explored in this section.


Potential sources of synergy

Synergistic gains refers to a position where the combined entity isworth more than the sum of the value of the companies prior toacquisition. This can come from areas such as improved combinedprofitability, a better financial position or better market position.

Improved profitability

Combined profits can be higher due to:

  • Sales synergies. These can come from sharing databases, selling products which are complimentary, sharing distribution channels etc.
  • Cost synergies. Combined costs may be lower through sharing staff (and making excess staff redundant), gaining economies of scale, sharing premises, sharing central services (such as accounting) etc.

Improved financial position

The financial position of the combined company may be better due to:

  • sharing assets (and selling off excess assets)
  • using assets better
  • shared working capital management
  • finding cheaper financing
  • stabilising cash flows (e.g. removing seasonality)

Improved market position

This can come from:

  • sharing skills or knowledge
  • risk reduction from a portfolio effect
  • improved management / better corporate parenting
  • better focus

Organic growth

Joint venture

Characteristics of a well structured strategic alliance

A strategic alliance can be defined as a co-operative businessactivity, formed by two or more separate organisations for strategicpurposes, that allocates ownership, operational responsibilities,financial risks, and rewards to each member, while preserving theirseparateidentity/autonomy.

  • Alliances can allow participants to achieve critical mass, benefit from other participants' skills and can allow skill transfer between participants.
  • The technical difference between a strategic alliance and a joint venture is whether or not a new, independent business entity is formed.
  • A strategic alliance is often a preliminary step to a joint venture or an acquisition. A strategic alliance can take many forms, from a loose informal agreement to a formal joint venture.
  • Alliances include partnerships, joint ventures and contracting out services to outside suppliers.

Seven characteristics of a well-structured alliance have been identified.

  • Strategic synergy – more strength when combined than they have independently.
  • Positioning opportunity – at least one of the companies should be able to gain a leadership position (i.e. to sell a new product or service; to secure access to raw material or technology).
  • Limited resource availability – a potentially good partner will have strengths that complement weaknesses of the other partner. One of the partners could not do this alone.
  • Less risk – forming the alliance reduces the risk of the venture.
  • Co-operative spirit – both companies must want to do this and be willing to co-operate fully.
  • Clarity of purpose – results, milestones, methods and resource commitments must be clearly understood.
  • Win-win – the structure, risks, operations and rewards must be fairly apportioned among members.

Some organisations are trying to retain some of the innovation andflexibility that is characteristic of small companies by formingstrategic alliances (closer working relationships) with otherorganisations. They also play an important role in global strategies,where the organisation lacks a key success factor for some markets.


Further detail on franchising


The mechanism

  • The franchiser grants a licence to the franchisee allowing the franchisee to use the franchiser's name, goodwill and systems.
  • The franchisee pays the franchiser for these rights and also for subsequent support services the franchiser may supply.
  • The franchisee is responsible for the day to day running of the franchise. The franchiser may impose quality control measures on the franchisee to ensure the goodwill of the franchiser is not damaged.
  • Capital for setting up the franchise is normally supplied by both parties.
  • The franchiser will typically provide support services including: national advertising, market research, research and development, technical expertise, management support.

The advantages for the franchiser are as follows:

  • Rapid expansion and increasing market share with relatively little equity capital.
  • The franchisee provides local knowledge and unit supervision. The franchiser specialises in providing a central marketing and control function, limiting the range of management skills needed.
  • The franchiser has limited capital in any one unit and therefore has low financial risk.
  • Economies of scale are quickly available to the franchiser as the network increases. For example, with the supply of branded goods, extensive advertising spend are justifiable.

The advantages for the franchisee are as follows.

These are mainly in the set-up stages where many new businesses often fail.

  • The franchisee will adopt a brand name, trading format and product specification that has been tested and practised.
  • The learning curve and attendant risks are minimised.
  • The franchisee usually undertakes training, organised by the franchiser, which should provide a running start, further reducing risk.


  • A franchisee is largely independent and makes personal decisions about how to run his operation. In addition, the quality of product, customer satisfaction and goodwill is under his control. The franchiser will seek to maintain some control or influence over quality and service from the centre but this will be difficult if the local unit sees opportunities to increase profit by deviating from the standards which the franchiser has established.
  • There can be a clash between local needs or opportunities and the strategy of the franchiser, for example, with respect to location.
  • The franchiser may seek to update/amend the products/services on offer whilst some franchisees may be slow to accept change or may find it necessary to write off existing stock holdings.
  • The most successful franchisees may break away and set up as independents, thereby becoming competitors.

Test your understanding 1

Which of licensing, joint venture, strategic alliance andfranchising might be the most suitable for the following circumstances?

(1)A company has invented a uniquely good ice cream and wants to set up an international chain of strongly branded outlets.

(2)Oil companies are under political pressure to develop alternative, renewable energy sources.

(3)A beer manufacturer wants to move from their existing domestic market into international sales.

Test your understanding 2

Blueberry is a quoted resort hotel chain based in Europe.

The industry

The hotel industry is a truly global business characterised by the following:

  • Increasing competition
  • An increasing emphasis on customer service with higher standards being demanded.
  • In particular the range of facilities, especially spas, is becoming more important as a differentiating factor.


  • Blueberry offers services at the luxury end of the market only, based on a strong brand and prestigious hotels – although its reputation has become tarnished over the last five years due to variable customer satisfaction levels.
  • Despite a reputation for having the most prestigious coastal resort hotels along the Mediterranean in 20X0, Blueberry was loss-making in the financial years 20X4/5 and 20X5/6.
  • To some extent this situation has been turned around in 20X6/7 with an operating profit of €11 million. However shareholders are putting the board under pressure to increase profits and dividends further.
  • Management have responded to this by setting out an ambitious plan to upgrade hotel facilities throughout the company and move more upmarket. The bulk of the finance is planned to come from retained profits as Blueberry has historically kept its financial gearing low.

Acquisition opportunity

The management of Blueberry have been approached by the owner of'The Villa d'Oeste', a luxury hotel on the shores of Lake Como in Italy,who is considering selling it. The hotel has an internationalreputation with world-class spa facilities and generates revenuethroughout most of the year due to Lake Como's mild micro-climate. Theasking price will be approximately €50m.


Outline the issues to be considered when assessing the acquisition.

3 Corporate parenting

Corporate parenting looks at the relationship between head officeand individual business units. This will become more important if abusiness follows the route of growth through acquisitions – the aimwill be to become a good "parent" to new subsidiaries.

Goold and Campbell

Goold and Campbell (1991) identified three broad approaches or'parenting' styles reflecting the degree to which staff at corporateheadquarters become involved in the process of business strategydevelopment. The approach will have a significant impact on the role ofcentral departments such as the accounting function. The differentstyles are:

  • strategic planning
  • financial control
  • strategic control.

Different parenting styles

Strategic planning companies

In strategic planning companies such as Cadbury Schweppes and BP.

  • There is a focus on a limited number of businesses where significant synergies exist leading to a concentration on a few core areas where it is possible to have a degree of expertise.
  • Corporate management play a major role in setting the strategies for each of the SBUs.
  • The approach is based on the belief that strategic decisions occur relatively infrequently and that when they do, it is important for corporate headquarters to frame and control the strategic planning and decision-making process.
  • There is good integration across the units, which is particularly useful when resources such as distribution may be shared.
  • Decisions are made at a senior level and hence there is less likelihood of short-term views predominating.
  • There may be a number of disadvantages:
    • difficulties in communication and co-ordination may slow down development
    • there may be less 'ownership' of the strategies by the operating unit managers. There is strong empirical evidence that there are fewer low-risk strategies pursued, which might otherwise be the case if strategy was centred on the unit managers
    • there is also a likelihood that this strategy formulation from the centre might result in getting 'locked into' failing businesses. There may be a resistance to the closing down of poorly performing units if the strategies have been sanctioned at the centre.

Financial control companies

In financial control companies such as Marconi (GEC).

  • Timescales tend to be shorter.
  • The head office takes a 'hands-off' approach but sets stringent short-term financial targets that have to be met to ensure continued funding of capital investment plans.
  • Failure to meet financial targets will lead to the possibility of divestment.
  • This type of strategy allows for diversity and companies generally have a wide corporate portfolio with limited links between divisions and acquisition/divestment is a continuing process as opposed to an exceptional event.
  • Empirical evidence suggests that lower risk strategies are pursued but with resultant higher profitability ratios.
  • Much of the growth in this scenario comes from acquisition as distinct from internal growth.
  • There may be a number of disadvantages:
    • there is a propensity to be risk averse and possibly to 'milk' the business
    • this type of decentralisation may make it difficult to exploit any potential synergies
    • the control framework set up by the head office might constrain flexibility.

Strategic control companies

In strategic control companies such as ICI.

  • Corporate management take a middle course, accepting that subsidiaries must develop and be responsible for their own strategies, while being able to draw on headquarters' expertise.
  • Evaluation of performance extends beyond short-term financial targets to embrace strategic objectives such as growth in market share and technology development, that are seen to support long-term financial and operational effectiveness.
  • Diversity is coped with more readily than the 'strategic planning' style.
  • There is also a danger of greater ambiguity.

Test your understanding 3

Comment on the implications of each of Goold and Campbell's approaches for innovation.

4 Adding value

Corporate parenting

Corporate parents do not generally have direct contact withcustomers or suppliers but instead their main function is to manage thebusiness units within the organisation. The issue for corporate parentswhether they:

  • add value to the organisation and give business units advantages that they would not otherwise have
  • add cost and so destroy the value that the business units have created.

Ways of adding value

There are a number of ways in which the corporate parent can add value.

  • By providing resources which the business units would not otherwise have access to, such as investment and expertise in different markets.
  • By providing access to central services such as information technology and human resources that can be made available more cheaply on an organisation-wide basis due to economies of scale.
  • By providing access to markets, suppliers and sources of finance that would not be available to individual units.
  • By improving performance through monitoring performance against targets and taking corrective action.
  • Sharing expertise, knowledge and training across business units.
  • Facilitating co-operation and collaboration between business units.
  • Providing strategic direction to the business and clarity of purpose to business units and external stakeholders such as shareholders.
  • By helping business units to develop either through assisting with specific strategic developments or by enhancing the management expertise.

Illustration 1 – Managing business units

The rationale behind many take-overs is that they allow access toinvestment and expertise in different markets, e.g. the parent companymay have the funds needed to finance high levels of research inhigh-tech areas.

Destroying value

It is not uncommon for corporate parents to be criticised fordestroying value such that business units would fare better on theirown. There are a number of ways in which this can happen.

  • The high administrative cost of the centre may exceed the benefits provided to business units.
  • The added bureaucracy resulting from the organisational structure may slow decision making and limit the organisation's flexibility and speed of response to customers and environmental changes.
  • If organisations become very complex, this can prevent clarity and make it difficult for managers within the organisation and external stakeholders to understand the strategic direction.

Test your understanding 4

What may be the result if a corporate parent does destroy value?

Rationales for adding value

A well-managed corporate parent should be able to add value. In their book, Exploring Corporate Strategy, Johnson, Scholes and Whittington identify three corporate rationales or roles adopted by parents in order to do this:

  • portfolio managers
  • synergy managers
  • parental developers.

Different roles adopted by good corporate parents

The portfolio manager

Portfolio managers:

  • are corporate parents effectively acting as agents for financial markets and shareholders to enhance the value from individual businesses more effectively than the financial markets could
  • identify and acquire under-valued businesses and improve them, perhaps by divesting low-performance businesses or improving the performance of others
  • keep the costs of the centre low by minimising the provision of central services and allowing business units autonomy whilst using targets and incentives to encourage high performance
  • may manage a large number of businesses, which may be unrelated.

The synergy manager

Synergy managers:

  • enhance value by sharing resources and activity, such as distribution systems offices or brand names
  • may however bring substantial costs as managing integration across businesses can be expensive
  • may have difficulty in bringing synergy as cultures and systems in different business units may not be compatible
  • may need to be very hands-on and intervene at the business unit level to ensure that synergy is actually achieved.

The parental developer

Parental developers:

  • use their own central competences to add value to the businesses by applying specific skills required by business units for a particular purpose, such as financial management or research and development
  • need to have a clear understanding of the value-adding capabilities of the parent and the needs of the business units in order to identify how these can be used to add value to business units
  • need to ensure that they are able to add value to all businesses or be prepared to divest those to which they can offer no advantages.

Test your understanding 5

Philip Morris used strong generation of cash from its cigarettesales to purchase a large-scale food business. The management believedthey had good expertise in developing strong global brand management andthey could apply this to their acquisitions.

What would be their corporate rationale for adding value?

5 Portfolio analysis tools

The use of portfolio analysis

An organisation may have to make investment decisions such aswhether to add a company to its existing portfolio or whether to divestof an existing subsidiary. One technique that can be used to performthis task is portfolio analysis which determines the fit between thebusiness unit and other business units held by the organisation.

More on portfolio analysis

Portfolio analysis:

  • is designed to reveal whether the organisation has:
    • too many declining products or services
    • too few products or services with growth potential
    • insufficient product or service profit generators to maintain present organisation performance or to provide investment funds for the nurturing of tomorrow's successful ventures
  • portfolio analysis can be very valuable in assessing how the balance of activities contributes to the strategic capability of the organisation
  • should be applied to SBUs, that is units dealing with particular market segments not whole markets
  • will result in different targets and expectations for different parts of the organisation, which will impact on the resource allocation processes – both capital and revenue budgets
  • in this section the BCG matrix is discussed in detail and alternatives in outline. The examiner has stated that he will not explicitly ask for a specific portfolio tool but will expect you to use whichever models are most useful in the scenario given.

The Boston Consulting Group (BCG) growth share matrix

  • The two-by-two matrix classifies businesses, divisions or products according to the present market share and the future growth of that market.
  • Growth is seen as the best measure of market attractiveness.
  • Market share is seen to be a good indicator of competitive strength.

BCG measurement issues

Assessing the rate of market growth as high or low is difficultbecause it depends on the market. New markets may grow explosively whilemature markets grow hardly at all. The midpoint of the growth dimensionis usually set at 10% annual growth rate; markets growing in excess of10% are considered to be high-growth markets and those growing at lessare low-growth markets.

Relative market share is defined by the ratio of market share tothe market of the largest competitor. The log scale is used so that themidpoint of the axis is 1.0, the point at which an organisation's marketshare is exactly equal to that of its largest competitor. Anything tothe left of the midpoint indicates that the organisation has the leadingmarket share position.

  • The money value of sales is indicated by the relative size of the circle.

An organisation would want to have in a balanced portfolio:

  • cash cows of sufficient size and/or number that can support other products in the portfolio
  • stars of sufficient size and/or number which will provide sufficient cash generation when the current cash cows can no longer do so
  • problem children that have reasonable prospects of becoming future stars
  • no dogs or – if there are any – there would need to be good reasons for retaining them.

BCG decision making aspects

Decision-making implications for different quadrants in the matrix

A cash cow has a high relative market share in a low-growth marketand should be generating substantial cash inflows. The period of highgrowth in the market has ended (the product life cycle is in thematurity or decline stage), and consequently the market is lessattractive to new entrants and existing competitors. Cash cow productstend to generate cash in excess of what is needed to sustain theirmarket positions. Profits support the growth of other company products.The firm's strategy is oriented towards maintaining the product's strongposition in the market.

A star has a high relative market share in a high-growth market.This type of product may be in a later stage of its product life cycle. Astar may be only cash-neutral despite its strong position, as largeamounts of cash may need to be spent to defend an organisation'sposition against competitors. Competitors will be attracted to themarket by the high growth rates. Failure to support a star sufficientlystrongly may lead to the product losing its leading market shareposition, slipping eastwards in the matrix and becoming a problem child.A star, however, represents the best future prospects for anorganisation. Market share can be maintained or increased through pricereductions, product modifications, and/or greater distribution. Asindustry growth slows, stars become cash cows.

A problem child (sometimes called 'question mark') is characterisedby a low market share in a high-growth market. Substantial net cashinput is required to maintain or increase market share. The company mustdecide whether to do nothing – but cash continues to be absorbed –or market more intensively or get out of this market. The questions arewhether this product can compete successfully with adequate support andwhat that support will cost.

The dog product has a low relative market share in a low-growthmarket. Such a product tends to have a negative cash flow, that islikely to continue. It is unlikely that a dog can wrest market sharefrom competitors. Competitors, who have the advantage of having largermarket shares, are likely to fiercely resist any attempts to reducetheir share of a low-growth or static market. An organisation with such aproduct can attempt to appeal to a specialised market, delete theproduct or harvest profits by cutting back support services to aminimum.

Options for the future can be plotted onto a BCG matrix and thelong-term rationale of business development can be highlighted by thematrix. Using the original matrix a strategist could address thefollowing issues.

  • Which strategies are most suitable to ensure a move from question marks through to stars and eventually to cash cows? In other words, will the strategy move the organisation to a dominant position in its market?
  • Will there be sufficient funds from cash cows to provide the necessary investment in stars? Many bankruptcies have occurred because firms have invested heavily in the promotion of products in rapid growth without profitable and well-established products from which it can fund these new ventures.
  • Does the portfolio have a balance of activities that matches the range of skills within the organisation? Unless a balance is achieved certain groups are overstretched while others remain underemployed. In general, question marks and stars can be very demanding on the time of management.
  • Is the organisation thinking about an acquisition strategy? Firms that embark on acquisition programmes often forget that the most likely targets for acquisition are not the cash cows and stars of the business world but the question marks and dogs. There may be logic in acquiring a question mark for an organisation with the resources to move it towards stardom.

Strategic movements on the BCG matrix

A product's place in the matrix is not fixed for ever as the rateof growth of the market should be taken into account in determiningstrategy.

  • Stars tend to move vertically downwards as the market growth rate slows, to become cash cows.
  • The cash that they then generate can be used to turn problem children into stars, and eventually cash cows.

The ideal progression is illustrated below:

Criticisms of the BCG matrix

(1)The matrix uses only two measures

The only two measures used in the BCG matrix are growth andmarket share. These may be too limited as a basis for policy decisions.The Boston Consulting Group has now developed a further matrix to meetthis criticism:

The vertical axis now indicates the number of ways in which aunique advantage may be achieved over competitors, and the horizontalaxis is a measure of the size advantage that may be created overcompetitors. The new matrix makes the exercise much more a matter ofqualitative judgement.

(2)The matrix encourages companies to adopt holding strategies

The strategic principles involved advocate that companies withlarge market shares in static or low-growth markets (i.e. cash cows)adopt holding or harvesting strategies rather than encouraging them totry to increase the total demand of the markets in which their productsare selling. Compliance with these strategic tenets has led todevastating results for some companies.

There are a number of dangers in assuming that a product is a'cash cow'. (BCG defines a cash cow as a product occupying a strongposition in a static or slow growing market.) First, management may betempted to pull back on investment, by treating the product as in'safe-water', and second make assumptions about future cash flow thatmay be unrealistic. Radios, for example, form a product line that wastreated by a number of manufacturers as a cash cow. Convinced that everyproduct had its 'product life cycle' they treated the radio as aproduct that had passed its peak and the radio business as a candidatefor cash milking.

Japanese radio manufacturers were not prepared to treat theradio-line in this way and, by creating new markets, expanded the totaldemand for radios. The result was a flood of innovative products thatincluded: radio-cassette, stereoradio-cassette, ultra-thin radio,'Walkman with radio', radio-in-pocket with calculator, radio-in-TV anddigital clock radio – all successful products. Yamaha destroyed thedominance of the well-established US musical instrument manufacturerswho concentrated on milking their mature products for profit rather thanon planning how to defend their market shares.

(3)The matrix implies only those with large market shares should remain

There are many examples of businesses with a low market sharecontinuing to operate profitably. Sometimes this is because the marketis not unitary, but fragmented, and the small competitor has founditself a particular market niche; on other occasions large companies mayprefer smaller competitors to preserve the impression of competition.

The link between profitability and market share may be weak because:

  • low share competitors entering the market late may be on the steepest experience curve
  • low share competitors may have some in-built cost advantage
  • not all products have costs related to experience
  • large competitors may receive more government attention and regulation.

(4)The matrix implies that the most profitable markets are those with high growth

Again this is not always so, due to:

  • high entry barriers, especially in high-technology industries
  • high price competition.

Both of these problems are typified by the microcomputerbusiness. Despite impressive rates of growth, a number of companies havebeen unable to make profits because of the high levels of initialinvestment followed by extreme price competition from low-cost lateentrants.

(5)Not all dogs should be condemned

A very large number of small but successful businesses are'dogs', and according to the BCG concept are ripe for reinvestment orliquidation. However, this would not always be the case. Dog productsare often used not with the primary aim of maximising the profit fromthe product itself, but to provide economies of scale in manufacturing,marketing and administration to sustain the overall business.Furthermore, the BCG portfolio theory does not seem to take into accountthe need for competitive strategy. A company might, for example, launcha product to act as a 'second front' to support the thrust of its mainoffering, although the product, by definition, is a dog.

When the Clorox company (the market leader in the US forbleach) introduced a new product, 'Wave', the purpose was to try todeflect Procter & Gamble's attack by creating a 'second front',rather than to generate substantial profits from Wave. Despite thesecriticisms, in certain circumstances the model provides a useful methodby which a company can (a) attempt to achieve overall cost leadership inits market(s) through aggressive use of directed efficiency; (b) focusits expenditures and capital investment programmes; and (c) plan for anappropriate balance of resources between conflicting product-marketclaims. Also the information and analysis required to construct thematrix will provide meaningful indicators. It should, however, not beused in a rigid, stereotype manner. The model ought to be used as ameans to an end, not as representing the end objective in itself.

The evidence

Several studies have been carried out into the use of the BCG,and on the whole these would not encourage uncritical use of the model.In particular, the link between quadrant and cash flow is notparticularly strong, and there are many exceptions. Fortune oncedescribed this model as the worst business model ever devised.

Test your understanding 6

The marketing manager of Fruity Drinks Ltd has invited you in for achat. Fruity Drinks Ltd provides fruit juices to a number ofsupermarket chains, that sell them under their own label. 'We've got alarge number of products, of course. Our freshly squeezed orange juiceis doing fine – it sells in huge quantities. Although margins are low,we have sufficient economies of scale to do very nicely in this market.We've got advanced production and bottling equipment and long-termcontracts with some major growers. No problems there. We also sellfreshly squeezed pomegranate juice: customers loved it in the tests, butproducing the stuff at the right price is a major hassle – all theseeds get in the way. We hope it will be a winner, once we get theproduction right and start converting customers to it. After all, themarket for exotic fruit juices generally is expanding fast.'

What sort of products, according to the BCG classification, are described here?

Other portfolio matrices

There are a number of other matrices that are used in the real world. Some examples are:

  • the public sector portfolio matrix. This adapts the BCG idea to public sector organisations and the axis are "public need and funding effectiveness" and "value for money"
  • the directional policy matrix. This was formulated by Shell International and expands the BCG into 9 categories by also considering factors such as business sector prospects and competitive capabilities. For each axis there are then three levels which include an "average" position.
  • the market attractiveness matrix. This extends the directional policy matrix to four axes: industry attractiveness, business or competitive strengths, size of the industry and share of the industry.

These matrices are on the periphery of the syllabus and the use ofthe BCG matrix should give a similar analysis and opinion about abusiness' units or products. It is therefore more important to becomfortable with the BCG matrix and treat these other matrices asbackground/supporting models.

Public sector portfolio matrix

A similar approach can be used to assess the different services provided by public sector organisations.

The dimensions of the matrix are:

  • can the service can be provided effectively while giving value for money
  • the desirability of the service – public support and funding attractiveness.

The major problem with the application of the public sectorportfolio matrix is that its dimensions (the organisation's ability toserve effectively by providing value for money, and the public's needand support and the funding attractiveness) are all subjective, andlargely dependent on the user's own perceptions as to what the bodyshould be doing, and what the public sector body is good at.

The Directional Policy Matrix

  • The Directional Policy Matrix (DPM) is a method of business portfolio analysis formulated by Shell International Chemical Company.

Rather than simply market growth and share, the DPM considers a range of factors including the following.

Business sector prospects

  • Market – demographic factors, growth, seasonality, maturity.
  • Competition – number and size of competitors, price competition, barriers to entry, substitutes.
  • Technology – sophistication, rate of change, lead time, patents.
  • Economic – leverage, capital intensity, margins.
  • Government – subsidies/grants, purchases, protection, regulation, taxation.
  • Geography – location, markets, communications, environment.
  • Social – pressure groups, trade unions, availability of labour.

Competitive capabilities

  • Market – share, growth, product maturity, product quality, product mix, marketing ability, price strategy, customer loyalty.
  • Technological – skills, patent protection, R&D, manufacturing technology.
  • Production – costs, capacity utilisation, inventory control, maintenance, extent of vertical integration.
  • Personnel – employee quality, top management quality, industrial relations, trade union strength, training, labour costs.
  • Financial – resources, capital structure, margins, tax position, financial control, investment intensity.


Ewe's Group plc is located within the dairy products sector of theeconomy. What criteria might apply on the business prospects' axis?


Potential criteria include:

  • demographic changes – ageing population
  • growth areas – goats' milk
  • seasonality of products
  • number of competitors
  • size of competitors
  • non-dairy substitutes
  • technology
  • economic factors – capital intensive
  • margins
  • government grants
  • government regulation
  • location
  • availability of skilled labour, etc.

DPM strategic choices

Possible strategic choices

The cell labels shown in the diagram on the previous page representpossible strategic choices or types of resource deployments mostappropriate for the firm, given its score on each of the two axes. Morespecifically these cell labels have the following implications.

  • Withdrawal – probably already losing money; net cash flow negative over time. Losses may be minimised by divesting or even liquidation.
  • Phased withdrawal – probably not generating sufficient cash to justify continuation; assets can be redeployed.
  • Cash generation – equivalent to a 'cash cow' in the BCG grid. This cell would be occupied by a firm or product in later stages of the life cycle that does not warrant heavy investment, but can be 'milked' of cash due to its strong competitive position.
  • Proceed with care – similar to a 'problem child'; firms falling in this sector may require some investment support but heavy investment would be extremely risky.
  • Growth – a firm, product or SBU in these sectors would call for investment support to allow growth with the market. It should generate sufficient cash on its own.
  • Double or quit – units in this sector should become 'high fliers' in the not-too-distant future. Consequently those in the upper right corner of this cell should be singled out for full support. Others should be abandoned.
  • Try harder – external financing may be justified to push a unit in this sector to a leadership position. However, such a move will require judicious application of funds.
  • Leader – the strategy for this segment is to protect this position by external investment (funds beyond those generated by the unit itself – occasionally); earnings should be quite strong and a major focus may be maintaining sufficient capacity to capitalise on strong demand.

Strategic movements

In addition to considering the position on the directional policymatrix in static terms, changes over time need also to be considered.

  • Ideally, products in the cash-generating sectors should be able to finance expenditure on products in the attractive business/weak position sectors, so as to move them to the attractive business/strong position sectors.
  • Later these products move down to become cash generators themselves and the cycle is completed.

The market attractiveness matrix

The market attractiveness/SBU strength matrix

A more sophisticated directional policy matrix has been developedby General Electric, McKinsey and Shell. As can be seen in the diagrambelow, the matrix has four dimensions on two axes.

  • Industry attractiveness – which includes the size, growth, diversity, profitability and competitive structure of the industry, as well as relevant political, economic, social and technological factors.
  • Business or competitive strengths – another composite dimension including size, growth, share, position, profitability, image, strengths and weaknesses.
  • Size of industry – products or services (strategic business units) are entered onto the policy matrix as circles, with size proportional to turnover size of circle.
  • Share of industry – represented by a segment of the circle.

Each axis should be defined in terms of meaningful to that company. Some examples are given below.

Strategic choices

This matrix can also be used to develop and clarify strategic choices:

  • depending on where a unit is positioned in the matrix, its broad strategic mandate will be to invest/build, hold or harvest
  • arrows can be attached to the circles showing the direction in which the strategist wants the product to move
  • the direction of movement can often be changed by management action – for example, competitive strength could be increased if resources were directed at technological innovation. The implied strategies may be as shown in the chart below.

Strengths and weaknesses of this matrix

There are strengths and weaknesses of this approach.

  • The use of multiple criteria provides sounder judgement.
  • The criteria used can be tailored to business level or business type and the matrix is relevant to many business situations.
  • However the analysis is not totally quantitative and judgements need to be made.
  • To be effective the matrix needs sophisticated users.


Hotels-U-Like are designed to appeal to cost-conscious families andbusiness travellers within the mid-price range market. The marketresearch conducted by the group found that its customers were unhappywith the appearance and general quality of the hotels.

What would you wish to examine in evaluating the attractiveness of Hotels-U-Like's target market?


Variables that might be considered are:

  • market growth rate in the mid-price hotel market
  • managerial ability
  • synergies with other companies in the group
  • the level of facilities in the market
  • the age of the facilities
  • customer satisfaction with competitors
  • customer loyalty for group and its competitors
  • investment levels required.

The Ashridge portfolio display

The Ashridge portfolio display, or parenting matrix, developed byCampbell, Goold and Alexander, focuses on the benefits that corporateparents can bring to business units and whether they are likely to addor destroy value (as discussed earlier in this chapter).

The matrix considers two particular questions.

  • How good is the match between perceived parenting opportunities and the parent's skills?
  • How good is the match between the CSFs of the business units and the skills and resources that the parent can bring?

Explanation of the matrix

Heartland business units

  • These are where there is a high degree of match and the parent company has the capabilities and experience to add value by providing the support required by the business unit.
  • These businesses should be central to future strategy.

Edge of heartland business units

  • These are those where there is a good fit in some areas where the parent can bring particular skills that add value to the business unit, but not in others, where the parent may destroy value.
  • However, if the parent develops sufficient understanding of the business to avoid this, then the business may move into the heartland.

Ballast businesses

  • These are those where the parent understands the business well but there are limited opportunities to offer help, sometimes because the business has been owned for a long time and has no further support needs.
  • These businesses would do better if left alone or indeed divested.

Value trap businesses

  • These are those where there appear to be many parenting opportunities but there is a poor fit with the critical success factors of the business.
  • There appears to be good potential but in practice because of the lack of fit with the strategy there is a high possibility of destruction of value.

Alien businesses

  • These are those where there is a complete mismatch.
  • These should not remain part of the corporate portfolio.

Using the Ashridge portfolio display indicates which types ofcompanies should be divested and why. Businesses that may be candidatesfor disinvestment are:

  • alien businesses – the parent can do good to these organisations and they would achieve more in another group
  • value trap businesses – despite potential a lack of fit leads to a high possibility of a loss of value
  • ballast businesses – may do better as the parent has little to offer.

Test your understanding 7

Anudir Inc started as a single restaurant and has since developedto a large quoted fast food provider. Over the last ten years it hasdiversified as follows:

  • trendy hotels
  • commercial property development – a depressed market at present
  • jeans manufacture.

The main skills of the parent holding company lie in identifyingconsumer trends regarding food and designing menus to match thosetrends.

From the above information – label the different business units using the Ashridge portfolio display.

6 Chapter summary

Test your understanding answers

Test your understanding 1

(1)A franchise arrangement would workwell here. There is more than just manufacturing involved – there isthe whole retail offering, and entering into franchise agreements wouldbe a quick, effective way of expanding.

(2)Unless the oil companies felt that,because of their size, there was no need for joint research,development, marketing and lobbying, a strategic alliance of some sortcould be useful. Research costs and findings could be shared. Togetherthey could bring powerful pressure to bear on governments to, forexample, allow more generous time scales for implementation of the newtechnology. Alternatively, the new energy technology could be developedwithin a joint venture organisation.

(3)Almost certainly, this company would expand by licensing local brewing companies to make and distribute its product.

Test your understanding 2


  • The hotel market is becoming increasingly more competitive, so it might make more sense for Blueberry to try to diversify its activities more.
  • Furthermore, the acquisition does not address Blueberry's underlying problems of inconsistent customer service levels.
  • On the other hand, the Villa d'Oesta already has a world class spa facility and would fit well into Blueberry's current strategy of moving more 'upscale'.
  • Also the goodwill attached to the Villa's reputation could enhance Blueberry's image, depending on branding decisions.


  • Financing the acquisition could prove problematic:
  • Debt finance: Historically, the Board have chosen to keep Blueberry's financial gearing level relatively low. Blueberry's existing clientele of shareholders may thus resist any major increase in gearing.
  • Equity finance: Given losses in two out of the last three years, Blueberry may struggle to raise the purchase price via a rights issue.


  • Growth by acquisition is generally quicker than organic growth, thus satisfying institutional shareholders' desire to see growth in revenues and dividends.
  • Further work is needed to assess whether the 50m asking price is acceptable.
  • Buying another hotel should enable Blueberry to gain additional economies of scale with respect to insurance, staff costs such as pensions and purchasing economies on drinks. This should boost margins and profitability further.
  • The new hotel would fit well into Blueberry's existing portfolio of hotels, for example, by having significant cash inflows throughout the year in contrast to Blueberry's highly seasonal business, thus reducing the overall level of risk.

Preliminary Recommendations

  • The opportunity to acquire the Villa d'Oeste should be rejected on the grounds that financing the acquisition would be problematic at present.
  • Blueberry should instead focus on improving facilities and quality in existing hotels before looking to expand through acquisition.

Test your understanding 3

Strategic planning

  • Senior management can put pressure on business units to develop new ideas and products.
  • Problems with communication may slow new developments.
  • Where innovation does arise, it is more likely to be transferred between different SBUs who share similar CSFs. (Note: only if senior management see the potential for this!)

Financial control

  • Inherent risk aversion may prevent innovative ideas being adopted
  • Emphasis on financial performance and short-termism may stifle radical innovations that take time to emerge.

Strategic control

  • Head office can still encourage innovation.
  • Local ownership of strategy may see some managers trying to drive the business forward through innovation without the short-term financial constraints of the financial control model.

Test your understanding 4

The alternatives may be:

  • a decision to divest of the subsidiary
  • a take-over of the group
  • nothing, followed by a general decline of the business.

Test your understanding 5

They would consider themselves a parental developer – using theirown competences to add value to the businesses by applying the specificskills (in this case marketing) required by the business units.

Test your understanding 6

Orange juice is a cash cow.

Pomegranate juice is a question-mark, which the company wants to turn into a star.

Test your understanding 7


While in practice you would have more detail on which to base yourfindings – the model could be applied as:

  • fast food outlets – heartland (or ballast as it is debatable whether further opportunities exist for value to be added)
  • jeans – alien (possibly edge of heartland if you believe that skills can be transferred to identifying consumer trends in clothing as well)
  • hotels – value trap. Head office may believe that it has the skills to add value on the food side but in reality CSFs are more concerned with marketing, staffing, cost control
  • property development – alien.

Created at 5/24/2012 12:51 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 5/25/2012 12:55 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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