20 Strategic Choice

1.      Learning Outcome

2.      Introduction

3.      Process of Strategic Choice

4.      Approaches to Strategic Choice

5.      Subjective Factors in Strategic Choice

6.      Summary

1.   Learning Outcome

After completing this module the students will be able to understand:

• The processes, tools, and techniques used for strategic choice
• The importance of subjective factors in strategic choice

2.      Introduction

Strategic Choice is looked upon as a key aspect of the strategic management process. The process of strategic choice is essentially a decision-making process that has a lasting impact on the organization’s performance. The decision-making involves relating intent to the vision/mission of the organization, generating alternatives, choosing one or more alternatives that helps the firm to achieve its objectives and finally, implementing the chosen strategy. Thus, for the purpose of selecting or rejecting alternatives, the mangers have to ascertain a set of criteria.

These criteria are termed as selection factors and can be broadly classified into two groups: the objective and subjective factors. The objectives factors are basically data driven and are based on analytical techniques whereas the subjective factors are based on one’s experience and personal judgment.

3.   Process of Strategic Choice

The process of strategic choice comprises of following four steps:

1.      Relating intent to the vision & mission

2.      Generating alternatives

3.      Assessing the options

4.      Selecting one option that fits with the intent

A foremost step in the process of strategic choice is to define the intent and relate it to the vision, mission and goals of the organization. Unless the intent is clear, it would be difficult to generate alternatives and further assess them so as to facilitate a strategic choice. Figure 1 illustrate that the strategy chosen must help fulfill a strategic intent, from a set of generated strategic options, of which some are subsequently validated by assessment. For example, Tata Global Beverages (Exhibit 1) states its vision as, ‘To be the most admired natural beverages company in the world by making a big and lasting difference in Tea, Coffee and Water’ while the purpose is stated as, ‘We will focus on creating magical beverage moments for consumers, and an eternity of sustainable goodness for our communities’. From the above stated vision statement it is clear that the company’s business focus area is in natural beverages i.e. Tea, Coffee and Water, whereas it ignored the other feasible alternatives in natural beverages segment like juices, nectar etc. Further, having a close look onto the intent, the key is to build company as an Admired; Global Company; in Natural Beverages, for which it has chosen the strategy that focuses on building unique competencies, differentiated offerings, appealing brands, and significant scale in the 3 natural beverage categories of tea, coffee and water. Tata Global Beverages has grown through innovation, strategic alliances and acquisitions, and organic growth. Over 65% of the company’s consolidated revenue originates from markets outside India and more than 90% of their turnover is from branded products.

4.   Approaches to Strategic Choice

It is well acknowledged that strategic decision-making is a complex activity where no single factor is adequate for making a strategic choice. The various approaches used to generate the strategic alternatives ranges from some of the simplest techniques that are based on intuition, are judgmental and descriptive in nature to the highly sophisticated analytical models such as Product Life Cycle (PLC), Boston Consulting Group (BCG) matrix, GE Nine Cell Model. These models provide generic guidelines for a specific business situation. With the help of these approaches a blueprint is drafted that helps to describe the strategies and the conditions under which they could be made to operate.

4.1 Boston Consulting Group Matrix: Boston Consulting Group (BCG) matrix is a corporate portfolio analysis technique that helps the strategists to take decisions with regards to individual products and business units in a firm’s portfolio. The basic purpose of adopting this approach is to channelize the resources at the corporate level to all the businesses (SBUs) and products that hold greater potential under the corporate umbrella. So as to enable the company to identify the suitable strategy needed to maintain the firm’s strong position in the industry or to regain the lost one.

BCG developed a four quadrant matrix based on the empirical research. The matrix analyses the different products and businesses in its portfolio based on the two parameters i.e. relative market share and industry growth rate. The relative market share refers to the ratio of firm’s sales to that of the sales of the industry’s largest competitor or the market leader, whereas the industry growth rate is rate of growth in sales in percentage for a particular industry. The pictorial depiction of BCG matrix is as below (Exhibit: 2):

Exhibit 2: BCG Matrix

The four quadrants of the matrix are termed as Star, Question Mark, Cash Cow & Dog by the Boston Consulting Group and are as follows:

Stars: The quadrant labeled as star represents the products or businesses that have high market share and holds high industry growth rate. These are the businesses that may or may not be self-sufficient in cash flow. They possibly require cash in excess of what they generate for meeting the capital expenditures so as to maintain their market position and for securing higher returns in the future. Since, the stars are the businesses that are growing fast in the market and have already attained a larger market share therefore they happen to provide the corporation with the best profits and growth opportunities. Henceforth, the profits generated may be utilized for its own future business expansion.

Cash Cows: It is interesting to note that in due course, the star may become cash cows which are classified as low growth with high market share businesses. The cash cows are the businesses that generate high levels of cash flows but needs very little funds for capital expenditures because the industries in which they operate have lost its attractiveness. The strategic feature of cash cow is that the high cash returns generated may be used to pay dividends, debts or to finance the stars. The best suited strategy that these businesses may adopt is stability or a phased retrenchment strategy.

Question Marks: Also termed as problem child, question marks are the businesses in a high growth market but with a poor market share. As the label of the quadrant suggests that the future of these businesses is in dilemma so a decision needs to be taken whether to invest in these businesses with a hope that they will gain its market share in near future, or to allow them to die a slow death as they have already been squeezed out by the rivals. Therefore, no single set of strategy could be recommended for businesses falling under the question mark category. ‘Question marks’ holds the opportunity of becoming the ‘stars’, if enough investment is made into them, or may become ‘dogs’ if ignored or neglected.

Dogs: Dogs are categorized as the businesses with a low market share in slow-growth industries. These businesses may have been cash cows at some time but have now fallen on hard times. They neither generate or require any funds and are cash trapped that fails to provide any return on investment. The businesses or products categorized as dogs should be allowed to die or be killed. Therefore, retrenchment is the recommended strategy for such businesses.

The summary of the BCG matrix and its strategic implications are illustrated as below:

Quadrants	Relative Market Share	Industry Growth Rate	Strategy
STARS	High	High	Expansion
CASH COWS	High	Low	Stability/ phased retrenchment
QUESTION MARKS	Low	High	Invest/retrench
DOGS	Low	Low	Retrenchment

The major advantage of BCG model is that it showcases a pictorial representation of the portfolio of businesses/products of a company which makes it easier to classify the businesses/products and the strategic alternatives to be implemented. The critics consider the BCG model to be a fundamental approach that lacks the practical applicability. It is however, difficult to measure the respective relative market share of different businesses in a given portfolio and above all to identify the market leader. Keeping these limitations in view, many other techniques of portfolio analysis have been proposed that are discussed in the following subsections.

4.2 GE Nine Cell Matrix: The General Electric (GE) Company in assistance with the consulting firm of McKinsey & Company developed a nine-cell corporate portfolio analysis grid in an attempt to overcome some of the limitations of the BCG matrix. GE matrix is henceforth, a more advanced technique than the BCG matrix in a sense that each dimensions of GE nine-cell matrix is a composite measure of several component factors whereas BCG matrix considered evaluating its two dimensions based on a single factor only. The two dimensions of the GE matrix are ‘industry attractiveness’ and ‘business strength’ which are determined by various other factors. However, BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the business strength.

Exhibit 3 demonstrates a GE nine-cell matrix. The vertical axis of the matrix represents the industry attractiveness while the horizontal represents the business strength. The industry attractiveness is determined by the component factors such as: market size, market growth rate, industry profitability, demand variability, competitive intensity, macroeconomic factors (PESTEL). While, business strength is again a composite measure of several factors that includes relative market share, growth in market share, product quality, pricing, brand equity, distribution channel access, capacity utilization. The procedure for calculating the composite values for industry attractiveness and business strength respectively involves assigning each of the component factor a weight depending on its perceived importance and multiplying it with the estimated value using a 1-10 rating scale. It is important to note that the weightage assigned to each factor and the ratings given by the analyst are based on detailed research. The respective dimensions of GE matrix are calculated as below: Industry Attractiveness/Business Strength = factor value1 x factor weight1 + factor value2 x factor weight2 + …………+ factor valuen x factor weightn

Exhibit 3: GE nine-cell matrix

The businesses in a firm’s portfolio under consideration are plotted on to the matrix based on the composite values calculated for industry attractiveness and business strength respectively. The businesses or products are represented by circles. The sizes of the circles represent the size of the relevant market, while the market share is represent by the using circle as a pie chart. The position of the business in the matrix suggests an appropriate strategy for the business. However, it is to be noted that there are strategy variations within the respective zones or groups. The nine cell matrix is grouped into three zones of three cells each that are denoted by green, red and yellow colors for which the matrix is also known as traffic light signal model (Exhibit 4). For example, within the red zone the firm would be quick to divest its weak SBU operating in an unattractive market whereas it might undergo a phased harvest of a business of an average strength in the same industry. The three different zones are explained as below.

The diagonal cells (yellow) from lower left to upper right represents the businesses units that are mediocre in overall attractiveness. Such SBU’s may require selective investment i.e. the resource allocation recommendation for these businesses may be of hold type strategy (wait and watch) that is aimed at stability and consolidation.

Exhibit 4: Traffic light signal model

(Source:https://open.lib.umn.edu/principlesmarketing/wpcontent/uploads/sites/6/2015/03/bb85afea7bd15cdde86e1763da0e4bc5.jpg)

The three cells (red vertical lines) below the diagonal cells represents the SBU’s that are low in overall attractiveness. The appropriate strategy for these businesses would be retrenchment or harvesting. However, the three cells (green horizontal lines) above the diagonal lines represent the businesses having strong competitive position in a highly attractive industry. These businesses require resources for further development and to ensure that at least their market share grows along with the growth in a given industry.

4.3 Product Life Cycle: Product life cycle (PLC) is yet another technique for making a strategic choice. It helps to map the stages in a product’s sales history and assists in understanding that how the strategy under pursuance would be helpful to position the business units. Exhibit 5 demonstrates a classical PLC pattern.

Exhibit 5: Product Life Cycle (PLC)

The two axes of the PLC graph are sales/profits (X-Axis) and time (Y-Axis) where the profitability and sales of a product can be expected to change over a period of time. PLC, therefore is an attempt to identify the distinct stages in the life cycle of a product and to suggest the appropriate strategies. The four phases of the product life cycle are discussed in detail as follows:

Image Source: https://www.linkedin.com/pulse/20140916031354-63871420-will-your-products-and-services-live-forever

Introduction phase: The first phase of the life cycle that is identified with slow acceptance of the product by the consumer, inconsistent production costs and hurdles in the initial set up of operations. This stage is generally characterized by low sales, low or no profits.

Growth phase: At this stage, the product is being able to overcome the initial hurdles and becomes equally accepted by the consumers, henceforth giving sharp rise to the demand of the product in the market. The revenues tend to grow because the firm starts to enjoy larger economies of scale that helps to achieve low unit cost of production and enhanced profit margins. The prospective firms try to enter the industry because of the high growth attained by the industry and ultimately leading to increased rivalry amongst the firms in the industry. Therefore, product differentiation and cost leadership approaches become more important for competing and retaining the market share.

Maturity phase: In this stage, the growth rate slows down and stabilizes. This is fairly a longer phase in the life cycle of a product. The product becomes mature and has a defined demand in the marketplace though has the capacity to generate constant or slightly declining profits. Therefore, the focus is to prolong the duration of this phase by way of product modifications or improvements so as to remain competitive in the industry.

Decline phase: This is a logical phase and is inevitable. The old products give way to new ones. However, the path of decline may differ for different products. Some products may have an abrupt ending while others may have a fairly long one in a more phased manner. This shrinkage could be due to markets becoming saturated, technological intervention making the products obsolete or change in consumers’ preferences etc.

In this way, a strategic choice may be made based on the life cycle concept.

5.   Subjective Factors in Strategic Choice

Strategic decision making is a complex activity where no one factor is sufficient for exercising a strategic choice. Strategy formulation is looked upon as an art as it is a science. The strategists should

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be capable to sense the future opportunities and respond quickly to build a strong position for a business. It becomes imperative for one  to  understand  that  strategic  choice  is  not  entirely  an analytical  process  but  take  into  account  the  subjective factors too. It would be wrong to assume that subjective factors  are  irrational  and  non-analytical.  Rather,  they engulf many of the issues that cannot be dealt with help of analytical  models.  The  subjective  factors  are  basically intuitive and descriptive in nature. Some of the important subjective aspects of strategic choice are culture, politics, managerial  bias  and  leadership  style.  For  example:  On shifting  of  Tata  Motors  Nano  plant  from  Singur  (West Bengal) to Sanand (Gujarat), Mr. Rattan Tata was asked that how he would be liked to be remembered, he said, “I would like to be remembered as somebody who had never hurt others and done work to the best interest of business.” (source: ‘Ratan Tata: Shifting from Singur cost us heavily’ Business Line, 6 August, 2014). Six years hence, Mr. Tata termed shifting of Nano plant from West Bengal as a prudent move though to the group it gave a high negative cost. Shifting of Tata Motor’s fully-built passenger car plants from Singur to Sanand (a distance of 2,000 Kms.), was perhaps an unprecedented operation of such a scale that might have ever happened anywhere in the world. Over 3,340 trucks were used to transport the plant from Bengal to Gujarat in seven months. This decision to shift the plant was announced in wake of the political unrest and farmer’s agitation led by Mamata Banerjee (leader, opposition party) in West Bengal against the acquisition of farmland by the state government to have Tata build its factory. It was the group chairman’s, Shri Ratan Tata firm commitment to deliver the nation a small car at $ 2,500 that led to the strategic decision of shifting Nano’s plant from Singur to Sanand (Exhibit 6).

Exhibit 6: Tata Nano – Rattan Tata’ dream project

(Source: http://www.aniruddhafriend-samirsinh.com/wp-content/uploads/2013/01/Jugaad-nano.jpg)

6. Summary

The strategic choice process is a highly complex activity that requires a structured strategic thinking mechanism. One may note that no single technique or tool is adequate to make the strategic choice decision. The process of strategic choice is divided into four steps i.e. relating intent to the vision & mission, generating alternatives, assessing the options and selecting one option that fits with the intent. Further, the selection factors for making the strategic choice can be broadly classified into two groups: the objective and subjective factors. The objectives factors are basically data driven and are based on analytical techniques whereas the subjective factors are based on one’s experience and personal judgment. The highly sophisticated analytical techniques include models such as Product Life Cycle (PLC), Boston Consulting Group (BCG) matrix, GE Nine Cell Model whereas; some of the important subjective aspects of strategic choice are culture, politics, managerial bias and leadership style.