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.
Business Definitions Are Key
All of the analytic tools described in this chapter are judgment-intensive. They depend on proper definition of the business and the product being analyzed.
DEFINING THE BUSINESS The industry position of a multibusiness or multiproduct firm, such as General Motors (GM), is less useful to analyze in the aggregate than are the positions of its individual products or business units. GM has relatively stronger and weaker segments. To aggregate them into a single assessment for GM yields none of the richness of the strategy problem GM faces. Salter and Weinhold (1979, page 268) argue that the level at which to define the unit of analysis is typically driven by strategic considerations (are there well-defined strategic sectors?), resources (are there special capabilities, patents, know-how, etc. that would justify defining a business in a certain way?), and organizational factors (how does the organization chart define business units, divisions, and sectors?).
DEFINING THE PEER GROUP For instance, consider the example of the sporty cars segment (given in the strategic map of Exhibit 6.7). Is the relevant industry for the Porsche Boxster actually automobiles in general, or should it be two-seat European roadsters? Or transportation? Peers are those products or services that are reasonable substitutes in the customer’s mind. For instance, most brands of ketchup are peers in narrow definition—but considered in terms of competition in “sauces,” brands of ketchup, salsa, steak sauce, and gravy might be peers. One can aim to identify peer groups through competitive analysis, the use of focus groups, or the U.S. government’s “SIC”3 code. As discussed elsewhere in this book, the selection of a peer group for comparison will have a huge impact on the insights to be derived.
Classic Successful Strategies
To illustrate the importance of positioning, Porter (1985) described three classic strategies that seemed to yield special competitive advantage:
1 Low-cost leadership. This seeks to create a sustainable cost advantage over competitors and is often seen in industries where the product or service is a commodity. The attainment of this leadership position permeates the firm and is achieved through focusing on cost containment, strict asset management, an annual budgeting process characterized by great scrutiny, tough negotiation of union and raw materials agreements, and low-overhead central office operations. The advantage of this strategy is that the low-cost
