The Shell Directional Policy Matrix (DPM) is another refinement upon the Boston Consulting Group (BCG) Matrix. Along the horizontal axis are prospects for business sector profitability, and along the vertical axis is a company’s competitive capability. Business sector profitability includes the size of the market, expected growth, lack of competition, profit margins within the market and other favorable political and socio-economic conditions. On the other hand company’s competitive capability is determined by the sales volume, the products reputation, reliability of service and competitive pricing. As with the GE Business Screen the location of a Strategic Business Unit (SBU) in any cell of the matrix implies different strategic decisions. However decisions often span options and in practice the zones are an irregular shape and do not tend to be accommodated by box shapes. Instead they blend into each other. Each of the zones in Shell’s Directional Policy Matrix is described as Continue reading
Strategic Management Tools
The Strategic Game Board
The Strategic Game Board is a concept coined by McKinsey & Company, this strategic framework can be used to identify the strategic management options in a competitive landscape by showing the strategists that the business organization can choose where (market segments), how (business system) and when (timing) to compete. A firm’s decisions pertaining to the scope and mode of competition and the time for the overall action should be based on a continuous analysis of the firm’s strengths, vulnerabilities, and resources in relation to those of its competitors. The strategic game board describes the options open to a firm regarding the scope and mode components of strategy. The vertical axis represents a continuum of where-to-compete options ranging from a sharp focus on a narrow market niche to competing across an entire market. The horizontal axis represents a continuum of how-to-compete options ranging from playing entirely by the accepted rules of Continue reading
Resource-Based View (RBV) Strategy Formulation
The resource-based view (RBV) is a tool to determine strategic resources and how it affects the performance of the firm based solely on reviewing its internal environment while the external environment remains fixed. Firms using RBV competes in terms of their resources and capabilities. The aim of this article is to study the factors that influence a firm’s performance. The RBV emphasizes the firm’s resources as the essential elements of competitive advantage and performance. It assumes two assumptions in examining sources of a competitive advantage which are that the firms are heterogeneous in terms of the resources they control and that resource heterogeneity can continue over a period as the resources used to implement their strategies are not easily portable across firms. The RBV method of analyzing a firm’s performance is focused that other vital factors that tend to be disregarded. Resources are not valuable of themselves; instead, they are Continue reading
McKinsey’s Strategic Control Map
Strategic Control Map shows the relationship between size (measured by book value) and performance for shareholders (measured by market-to-book ratio). It was developed by McKinsey consultants D’Silva, Fallon and Mehta in 1996, and it is used to help companies get visibility into their own and competitors performance trajectories and better understand the threats and opportunities for a company’s strategy execution. Strategic Control Map is helpful in analyzing an industry landscape, looking at various companies or firms in this industry, by breaking down overall performance into two key drivers or indicators, helps companies identify their biggest opportunities and threats and boost their odds of hunting for acquisition targets rather than being hunted themselves. Strategic Control Map tracks the relationship between the two dimensions of market capitalization by plotting a company’s size against its performance for shareholders. The principle behind Strategic Control Map is that, market capitalization = book value of assets Continue reading
McKinsey Model of Value Based Management
The McKinsey model, developed by leading management consultants McKinsey & Company, is a comprehensive approach to value-based management. This approach is based on the discounted cash flow principle, which is a direct measure of value creation. McKinsey Model of Value Based Management focuses on the identification of key value drivers at various levels of the organization, and places emphasis on these value drivers in all the areas, i.e. in setting up of targets, in the various management processes, in performance measurement, etc. Value based management is a model that allow managers to run a business focusing on the creation, improvement, and delivery of value. According to Copeland, Roller and Murrin, value-based management is “an approach to management whereby the company’s overall aspirations, analytical techniques, and management processes are all aligned to help the company maximize its value by focusing management decision-making on the key drivers of value”. According to Continue reading
Alcar Model of Value Based Management
The Alcar model, developed by the Alcar Group Inc., a company into management education and software development, uses the discounted cash flow analysis to identify value adding strategies. According to Alcar Model of Value Based Management, there are seven ‘value drivers’ that affect a firm’s value. These are The growth rate of sales Operating profit margin Income tax rate Incremental investment in working capital Incremental investment in fixed assets Value growth duration Cost of capital. Value growth duration refers to the time period for which a strategy is expected to result in a higher than normal growth rate for the firm. The first six factors affect the value of the strategy for the firm by determining the cash flows generated by a strategy. The last term, i.e. the cost of capital, affects the value of the strategy by determining the present value of these cash flows. The following figure represents Continue reading