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Determining the firm’s position in its competitive environment and its internal resources and capabilities is the foundation for setting strategy. This assessment aims to profile the industry, and the firm’s position in it, along several dimensions:

 Structure of the industry and intensity of rivalry.

 Sources of change and turbulence that may trigger a shift in industry structure. Chapter 4 highlights a number of the classic forces of change.

 Dimensions of relative strength and weakness among players in the industry.

 Propensity of individual players to take action, exploit change forces, and alter the industry structure.

 Drivers of competitive strength and weakness in the industry.

 Outlook for profitability of investment in the industry.

To prepare the executive for strategic planning, a number of analytic tools are worth noting because of their practical popularity and usefulness. As Exhibit 6.4 illustrates, none of these tools dictate strategy. But they lend insights useful in the effort to inventory the firm’s SWOTs. This is the foundation for strategic planning.

GROWTH-SHARE MATRIX: WHO HAS AN ATTRACTIVE POSITION? This first tool seeks to identify the relative positions of firms in an industry or divisions within a firm along three dimensions: size, growth, and relative share of market. This was popularized by Boston Consulting Group (BCG) in the 1970s and is used to indicate positions of weakness and strength. The choice of the three criteria for comparison reveals an underlying view about competitive advantage: some economic research supports the view that large absolute size and large market share are associated with competitive power and higher returns. Relative market share is measured as the ratio of your own share of market to that of your largest competitor. Growth should be measured in real, not nominal, terms. High real growth and pricing power derived from strong competition position are important drivers of value creation. A stalemate where competitors grow rapidly but slug it out with heavy investment while failing to obtain the profits envisioned with growth can destroy value. In the parlance of BCG, this leads to four broad categories of positions, as sketched in Exhibit 6.5, and available to the reader on the CD-ROM in the spreadsheet model “Growth Share.xls.”

1 A “cash cow” (lower left quadrant) is a business with high market share and low growth, and hence low ongoing investment to sustain the business; firms in this segment are net providers of cash. Within multibusiness firms, cash cows are often milked to support growth of other divisions.

2 A “star” (upper left quadrant) is a firm with high market share and high growth: It generates plenty of cash for its ongoing expansion. And because of its strong market position, the continued investment to grow that business is attractive.

3 A “dog” (lower right quadrant) is a business with low growth and low market share. This business has low competitive power in the marketplace and has low prospects for growing into a more attractive position. Unless the position is changed, a business in this quadrant will be a sump for cash. EXHIBIT 6.4 Overview of Tools for Strategic AnalysisWhat It IsHow to Use ItPros and ConsGrowth-share matrix Illustrates the relative competitive position of firms or divisions on three dimensions: growth rate, relative share of market, and size.Load data into “Growth Share.xls” on the CD-ROM and interpret the resulting figure.Cash cow generates cash with which to sustain other businesses.Star generates cash and grows rapidly. A keeper.Dog uses cash and grows slowly. Earmark for serious improvement or sale.Problem child. Grows rapidly but has a disadvantageous market share. Earmark for improvement but watch closely.+ A helpful graphic depiction of business units or competitors.+ Highlights the different kinds of attention the various units might warrant.– Focused on market position, not directly on shareholder value.– Makes no clear action recommendation about the four categories—ultimately this remains a matter of judgment.Porter model A diagram illustrating how the structure of competition in an industry drives conduct and outcomes.Use the model as a general guide in assessing a firm’s competitive position:What are the barriers to entry?What power do customers have?What power do suppliers have?Do substitutes affect pricing?What are the patterns of competitive conduct in the industry?+ A useful guide and discipline for industry and competitor analysis.+ Adds the idea that power from barriers or outside players affects outcomes.– Focused on market position and only indirectly on shareholder value.– Prescriptions are a matter of judgment.Learning curve A graph that depicts the decline in costs as cumulative volume grows.Load the data into “Learning Curve.xls” on the CD-ROM and interpret the resulting figure. The curve lends a prediction for the future path of production costs for your firm and competitors. Think critically about what might cause the curve to change slope or kink.+ A foundation for setting goals for internal transformation and cost management.– The curve smooths over the results of many observations. Inspect the specific points and inquire into sources of deviation from the curve.Strategic map A generic figure for comparing the relative positions of competitors on three dimensions.Load the data into “Strategic Map.xls” and interpret the resulting figure. Of particular interest will be the appearance of groups or “strategic clusters” as well as areas of the map that are unoccupied by any competitors.+ A useful illustration of the relative positions of competitors.– Not guided by any theory that specifies which criteria matter.Strategic canvas A generic figure for comparing the strategies of competitors on a number of dimensions.Load the data into “Strategic Canvas.xls” and interpret the resulting figure. Of particular interest are points of similarity and difference.+ A useful illustration of the relative positions of competitors.– Not guided by any theory that specifies which criteria matter.Attractiveness-strength matrix A grid for comparing business units of a diversified firm on the basis of industry attractiveness and the competitive strength of the unit within that industry.Select a range of criteria for scoring industries for their attractiveness and business units for their competitive strength. Score the units and their industries. Position the unit in the nine-cell matrix. Interpret the resulting table.+ A useful illustration of the relative positions of competitors.– Not guided by any theory that specifies which criteria matter.Self-sustainable growth rate A formula for determining the rate at which the firm can grow its assets without issuing new equity or altering its capital structure.Insert values into the formulas outlined in Appendix 6.1 and interpret the resulting estimates of self-sustainable growth rate (SSGR). Compare the SSGR to growth rates of competitors, industry, or internal goals as a test of feasibility of strategy.+ An easy test of strategic feasibility and source of critical thinking about financial sustainability.– Not directly focused on value creation.EXHIBIT 6.5 Illustration of Growth-Share MatrixNote: The crosshairs separating the categories are to be placed as a matter of judgment by the analyst—the convention is to place the vertical line between 0.75 and 1.00, and the horizontal line at the average growth rate for the industry. Relative share of market is measured as the ratio of your share of market to that of your largest competitor. The rate of growth should be real (i.e., net of inflation) rather than nominal.Source: Author’s analysis.

4 A “problem child” or “question mark” (upper right quadrant) has a high growth rate and low market share—this business demands high rates of investment to grow the business but does not command the position in the market that might justify the investment.

A chart such as this can be used to depict the position of the units within a corporation for the purpose of assisting resource allocation decisions, as well as of competitors within an industry.² Also, one could prepare this chart based on current conditions and again based on expected performance over the next two- to five-year horizon—this before-and-after presentation would give a sense of competitive dynamics within the industry. The advantages of this chart are its strong graphic presentation and its appeal to marketers and strategists. On the other hand, the growth-share matrix relies heavily on historical data (rather than forecast data) and says nothing about the capabilities necessary for success in the various businesses. The model implies that market power matters most and that market power is driven by size, share of market, and growth. Yet theories of valuation and value creation indicate a broader set of drivers than market power alone. Stewart and Glassman (1999) criticized the growth-share matrix, writing, “A company’s cash cows were supposed to fund the growth of promising businesses (‘question marks’) into highly performing ‘stars.’ By making a company self-funding and self-perpetuating, the BCG approach appealed to corporate managers because it circumvented the monitoring processes of the capital markets. In reality, the poorly performing “dogs” ate the cash while the “question marks” were either starved, overmanaged, or were acquired for obscene premiums.” (Page 628)

DRIVERS OF INDUSTRY ATTRACTIVENESS (PORTER MODEL): HOW ATTRACTIVE WILL THIS INDUSTRY BE? Drawing on research in the subfield of economics, called industrial organization, Michael Porter (1980) presented a framework that characterized industry structure and competitive conduct as drivers of competitive success in an industry. His framework highlighted the role of five factors as driving economic attractiveness of an industry:

1 Barriers to entry. In theory, if an industry offers high returns, new entrants will be attracted into it, thus driving returns to a more normal level. But barriers may exist (or may be constructed) that prevent this from happening and enable current players in an industry to enjoy sustained high returns. Classic examples of entry barriers include regulatory restrictions (e.g., you must have a banking or broadcasting license from the government to compete), brand names (hard to develop and/or imitate), patents (illegal to exploit without ownership or license), high capital requirements (you must build a large greenfield plant to become a viable competitor), and unique know-how (Wal-Mart’s “hot docking” technique of logistics management). Porter highlighted the role of accumulated experience as a potential barrier—this learning curve effect is illustrated in Exhibit 6.6 and consists in reducing one’s cost of production as know-how accumulates. The effect of learning is apparent, for instance, in the substantial decline in the price of semiconductors over time: Unit costs decline by about 20 percent with each doubling of accumulated production. The learning curve gives a competitive advantage to the first or early mover. This benefit can be achieved in either of two ways. First, one can accumulate experience faster than one’s competitors can (e.g., through higher volume production or more rapid product changes) and thus get farther down the common learning curve faster. Second, one can try to steepen the slope of learning through larger leaps in internal development or the acquisition of know-how from outside the firm. Exhibit 6.6 shows the dramatic effects on unit cost of differing rates of cost reduction. Abernathy and Wayne (1974) discuss the impact of experience in various industries.

2 Customer power. Powerful customers can strongly influence prices and product quality in an industry. Examples are Wal-Mart and Federated Department Stores for consumer goods, and the U.S. government for the U.S. defense industry. Weak customers, on the other hand, are likely to be mere price-takers—examples would be consumers of filmed entertainment, cigarettes, and education. In those industries, the suppliers have been able to sustain prices increases well ahead of the rate of inflation.Slope Base Cost Cumulative Unit Production10% Cost Reduction 0.1 $100.0020% Cost Reduction 0.2 $100.0030% Cost Reduction 0.3 $100.000$100.00$100.00$100.0010$ 90.00$ 80.00$ 70.0020$ 81.00$ 64.00$ 49.0040$ 72.90$ 51.20$ 34.3080$ 65.61$ 40.96$ 24.01160$ 59.05$ 32.77$ 16.81320$ 53.14$ 26.21$ 11.76EXHIBIT 6.6 Illustration of Learning CurveSource: Author’s analysis.

3 Supplier power. Similarly, powerful suppliers (e.g., monopolists) can extract high prices from firms in an industry. Weak suppliers can be a source of positive value to an industry—through most of the 1990s, the U.S. auto industry extracted material price reductions and quality improvements from its suppliers.

4 Threat of substitutes. Substitutes limit the pricing power of competitors in an industry. For instance, the price of coal quoted to electric power generators is influenced by the prices of Btu (British thermal unit) substitutes such as oil and natural gas.

5 Rivalry conduct. This final force captures the effects of dynamic competition among players in an industry. Investment in new product or process innovation, opening new channels of distribution, and entry into new geographic markets can alter the balance of competitive advantage. Cartel agreements (banned under the antitrust regulations in most countries) create industries with few adverse surprises for its players. At the other extreme, predatory pricing aimed at driving peers out of business can produce sharp variations in profitability. Porter noted that rivalry may be sharper where the players are similar in size, the barriers to exit from an industry are high, fixed costs are high, growth is slow, and products or services are not differentiated.

STRATEGIC MAP AND STRATEGIC CANVAS: HOW DOES OUR STRATEGY COMPARE WITH OTHERS? Assessing the industry and comparing the market shares of the players tells little about how they got there, and where they might be headed next. It is necessary to profile the strategies of competitors as a foundation for developing a strategy for your own business. Two tools are particularly useful here:

The first is a strategic map that, like a growth-share matrix, positions the players in an industry on the basis of size and two other dimensions that are strategically meaningful. Exhibit 6.7 gives an example of competing brands of sporty cars in the U.S. market, mapped on the basis of size, price/quality/image, and geographic market coverage. A map such as this helps to reveal niches of competition or strategic groups of competitors, as well as gaps in the competitive field where a firm might find unserved demand and/or a relatively safer haven from competition. In the example one observes two clusters: (1) high price/quality/image with small size and restricted geographic base and (2) medium price/quality/image with larger size and geographic base. Porter (1980) discusses the import of strategic group analysis at more length.

The second tool is a strategic canvas that illustrates in graphic form the similarity or difference among competitors’ strategies. Exhibit 6.8 gives an example of a strategic canvas for two retailers, Brooks Brothers (a high-end primarily men’s apparel retailer) and the Big & Tall Men’s Shop (a mass-market men’s apparel retailer). The exhibit shows that the two retailers’ strategies vary markedly. Writing about the strategic canvas, Kim and Mauborgne (2002) said, “It does three things in one picture. First, it shows the strategic profile of an industry by depicting very clearly the factors that affect competition among industry players, as well as those that might in the future. Second, it shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically. Finally our approach draws the company’s strategic profile … showing how it invests in the factors of competition and how it might invest in them in the future.” (Page 78)

	Price/Quality/Image (Max = 100)	Geographic Market Coverage (Max = 100)	Relative Size (Max = 100)
GM Corvette	75	100	100
Ford Thunderbird	40	95	95
Chrysler Prowler	50	85	80
BMW Z4	98	50	20
Porsche Boxster	100	30	5
Mazda Miata	60	70	30

EXHIBIT 6.7 Illustration of Strategic Map

Source: Qualitative assessment based on author’s analysis.

Excel templates for the strategic map and strategic canvas are given in two programs on the CD-ROM, “Strategic Map.xls,” and “Strategic Canvas.xls.”

ATTRACTIVENESS-STRENGTH MATRIX: HOW DO RETURNS VARY WITH INDUSTRY POSITION AND INDUSTRY ATTRACTIVENESS? General Electric sought to combine an assessment of the attractiveness of an industry (i.e., the ability of the industry to generate attractive investment returns) and the attractiveness of the position within the industry, drawing on the research that showed a direct correlation between market share and returns. Industry attractiveness would be assessed through a Porter-style analysis of growth and prospective returns based on structure and conduct of the industry, and the drivers of change. The firm’s position would be assessed through measures such as market share and costs to produce, and qualitative assessments of resources, capabilities, and core competencies. The firm’s business units and their industries are typically scored by means of a weighted average of ratings on various dimensions. These scores are used to place the various units in the nine-cell grid shown in Exhibit 6.9. The cells located toward the upper-left corner of the grid will be more attractive business/industry combinations—the grid implies that these should merit priority treatment for investment. Similarly, the lower right cells are least attractive and would be candidates for divestment or at least a highly skeptical investment stance. Compared to the BCG growth-share matrix, this matrix admits a wider range of criteria on which to judge the attractiveness of a business and its industry. But the scoring system for producing the ratings for business and industry attractiveness is arbitrary and may not be linked to financial returns in an obvious way. This exposes the analyst and audience to possible abuses.

Strategic Criteria for Comparison	Brooks Brothers	Big & Tall Men’s Shop
Product quality	4.5	2.0
Service quality	4.5	2.0
Location quality	4.0	2.5
Price	5.0	1.0
Advertising	1.0	3.0
Inventory turns	2.0	4.0

EXHIBIT 6.8 Illustration of Strategic Canvas

Source: Qualitative assessment based on author’s analysis.

EXHIBIT 6.9 Illustration of Attractiveness-Strength Matrix

Industry Attractiveness	Competitive Position of the Unit
Strong	Average	Weak
High	Most attractive: Invest and build.		Question mark: Assess unit’s profitability and prospects for improving position.
Medium		Moderate: restructure to improve.
Low	Question mark: Analyze long-term profitability and prospects for endgame		Least attractive: Restructure or exit.

The resources of the firm will dictate the rate at which it can grow organically— this is the self-sustainable growth rate (SSGR) and is a test of fit between the firm’s current capabilities and its aspirations. In its simplest form, SSGR is determined by the firm’s return on equity (ROE) and dividend payout (DPO) ratio as follows:

This indicates that the maximum internally sustainable rate of asset growth will be a direct result of the firm’s profitability (ROE) and retention rate—(1 – DPO) or one less the percentage of earnings paid out in dividends. This rate can be compared to projected asset growth rates for the firm, its competitors, and its industry as a test of financial feasibility. Appendix 6.1 discusses various models of the self-sustainable growth rate and illustrates their application.