| JACK MIXNER |
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| ON STRATEGY CONTRARIAN SITUATION ANALYSIS INCREASES VALUATION By Jack Mixner Standard Tools Yield Non-Standard Results Key Points
• Focus Internally and Externally • Focus On Your Dogs • Payoff is Increased Valuation A complete situation analysis early in your strategic planning is important because it helps increase the value of your firm. Sometimes, it is possible to run a series of flipcharts with your management team and see what surfaces. Not a bad technique, the flipcharts probably contain more than eighty per cent of the information that is relevant to your planning. Many times, I follow Bill Birnbaum’s If Your Strategy Is So Perfect, How Come It Doesn’t Work? (AMACOM 1990). The method works most times in all sorts of companies. I was lucky in that early on in my practice Bill showed me how to pair opportunities with strengths to make offensive strategies, and weaknesses and threats to make defensive strategies. Situation Analysis - SWOT As I modified Bill’s method for my own use in consulting, two things became apparent:
• fix your weakest divisions – or close them. Some weaknesses bear forgetting or, at least, forgiving; others are crucial to company growth. Closely examining your weaknesses, and investing in them in a contrarian manner, may actually return more than culling your dog divisions. GE / McKinsey Matrix Offensive strategies rely on generating a long list of opportunities. That isn’t as easy as it seems, especially if you don’t give the management team enough time to prepare their lists of opportunities for discussion. In looking at the outside world for opportunities, the GE / McKinsey Matrix can help generate new thoughts. It compares Business Unit Strength and Industry Attractiveness in a chart like this: |
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| GE / McKinsey Matrix [A useful source for the full model is the www.quickmba.com website.] |
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| External Opportunities The Industry Attractiveness scale helps you think about things external to your firm, especially opportunities, in your situation analysis. Information on industries is available from market research firms, industry groups – and your competition. Internal Strengths – and Weaknesses Business Unit Strength helps you look internally at your firm to analyze your different business units’ strengths and weaknesses. This is useful as it starts your team combining internal and external strategic parameters. Normally you would look for business units performing well in attractive industry segments. Since we are talking about a GE matrix, we need to remember that GE, especially under Jack Welsh, evaluated every one of their business units regularly. If they did not rank first or second in their respective industries or didn’t have a pretty good story about how they were going to approach leadership in their niche, GE culled the company from their portfolio. Even medium business unit strength wasn’t good enough. Positioning Magic Dean Goodermote from ABS Capital Partners, in talking “tongue-in-cheek” (I assume) about the quadrant presentation “magic” shows a graphic especially for use in presenting to venture capitalists. |
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| Goodermote’s “Tongue-in-Cheek” Positioning “Magic” [After http://ventureeconomics.com/vcj/protected/1045005219586.html ] |
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| Goodermote makes the point, however, that the “magic” positioning is just that all too often – magic with no basis in reality. Make sure your analysis and labeling of the axes makes sense because the graph is often misused. Magic Quadrant Gartner Research takes the methodology one-step farther in their Magic Quadrant, in this case for the Web Services Platforms marketplace (see following chart). Evaluation criteria for comparing ability to execute with completeness of vision include comparing product and services with market undrstanding and strategy. IBM ends up on top because it has a complete vision and the ability to execute. In your situation analysis, using similar axes might make sense as well. Make sure, however that your choices aren’t as silly as Goodermote’s. |
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| Gartner Research’s Magic Quadrant for Web Services Platforms (abridged) [After http://mediaproducts.gartner.com/gc/webletter/microsoft4_enterprise/2005/article15/article15.html ] |
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| BCG Growth-Share Matrix Another useful step in situation analysis is to examine the healthiness of the players in your portfolio of companies or product lines. Created by the Bruce Henderson at Boston Consulting Group in the early 1970’s, the BCG growth-share matrix compares relative market growth rate with relative market share in another now classic matrix. QuickMBA.com has a useful presentation. It looks like this: |
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| BCG Growth-Share Matrix |
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| BCG wanted management to realize that Stars represented the best place to invest scarce funds for marketing because high relative market share in a high market growth rate sector generates out-size profits. Problems with the analysis include the high likely expenses of increasing market share, problems of growing profitability in a declining marketplace and the not necessarily correct assumption that market growth is a given (refer to a summary in QuickMBA.com./strategy/matrix/bcg/ ). The assumptions on growth also assumed that your company has a significant share of a market place. Smaller companies may not be well served by the analysis as they may not be well-enough diversified. The original work on the BCG matrix is reported in http://www.bcg. com/publications/BCGonStrategy/introduction.html?gclid=CM74lIa57IQCFSA3SAodAyYp4A Starve Your Dogs So far, we have seen four ways to consider a market-based strategic situation analysis that reflects both internal strengths and weaknesses and external opportunities and threats. In different situations, all are useful for determining the next steps for your company.
strength to help you decide which business units to keep. • The Goodermote Magic Quadrant introduced the possibility that your analysis could customize the axes of a matrix to suit the company. Goodermote’s example compared internal attributes with external attributes, this time in entrepreneurial companies probably with a single product line. • Gartner Research’s Magic Quadrant used other axes, namely ability to execute and completeness of vision (both internal measures with some external attributes) in a methodology to compare major players in an industry. • Finally, The BCG Growth-Share Matrix compares external measures of market growth rate to internal relative market share in a now classic presentation suggesting that the best place to invest capital for growth is with your Stars, certainly, and Cash Cows, possibly, but not ever with your Dogs. The BCG Matrix is most useful to large companies with multiple product lines and divisions. Or Is It, Starve Your Stars? Writing in strategy+business, Quarls, Pernsteiner and Rangan (Love Your Dogs. May/June 2006.) observe some interesting wrinkles based on twenty-five years of stock market data that may give us more insight for the next round of planning at your companies. The implied message from the BCG Matrix was that the best place for additional investment at your firm is with your current star products and divisions. Quarls et al, thinking like contrarian value investors who look for undervalued firms to invest in because they may give the largest growth rates over time, suggest that your best investment is not with your stars but with your dogs. The underlying data is less important that the strategic implications summarized from Quarls et al: look at fixing your dogs, determine if improving operations will increase profitability and, if you have to buy another company, consider a dog. |
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| The CONTRARIAN Matrix Improving stagnating, low margin businesses pays. |
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| Glamour stocks (Stars in BCG parlance) are popular in the marketplace. As we used to say, you can’t go wrong buying IBM products as no one can criticize your decision. Today we might say no one can pick on you for buying or investing in a glamour division. Value divisions, however, may give you a higher return on investment. Shifting your focus, even in the individual company or division mission statement describing product and marketplace, to sectors that have higher revenue growth in order to increase market share makes sense. Invest in your value division to shift it to a glamour division with hard work and investments. Your return should make your investment worthwhile. If yours is a diversified company, examine all your divisions or products individually. Looking to the future, decide which ones are likely to grow the most. Yes, you will end up culling some of your products, but most likely, you will retain some of your dogs. This interesting way to look at things bears some thought the next time you plan strategically. What to do? The non-traditional – contrarian – way of looking at your dogs may cause you to decide not to cull them, but to invest in them. Focus on value, not glamour. Your investment returns from fixing up a value division may be higher than you expect. JACK MIXNER 714 449 1040 JMIXNER@MIXNERSTRATEGY.COM COPYRIGHT 2006. JACK MIXNER. ALL RIGHTS RESERVED. |
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