CHAPTER 14
SET TING PRIORITIES FOR BUSINESS AND BRANDS –
THE EXIT, MILK AND CONSOLIDATE OPTION
T H E R E I S N OT H I N G S O U S E L E S S A S D O I N G E F F I C I E N T LY T H AT W H I C H
S H O U L D N OT B E D O N E AT A L L .
PETER DRUCKER
S TA N D I N G I N T H E M I D D L E O F T H E R O A D I S V E R Y D A N G E R O U S : YO U
G E T K N O C K E D D O W N B Y T R A F F I C F R O M B OT H S I D E S .
M A R G A R E T T H AT C H E R
Boston Consulting Group’s
(BCG) Matrix
BCG Matrix
o Cash cows – should not absorb investments aimed at growing the business.
o Some units are divested or closed or merged because
o They lack the potential to become either stars.
o Their profit prospects may be unsatisfactory, or they may lack a fit with the
strategic thrust going forward.
o A related issue is dealing with too many brands by eliminating or merging
them.
o Too many brands result in confusion, overlap, inefficiency, and, worse, an
inability to fund promising brands. E.g. Automobile sector
o Brand strategy is often a good vehicle to develop and clarify the business
strategy.
BCG Matrix
BCG Matrix
o Stars – Important to the business and deserving of any needed investment
o Cash Cows – Source of cash
o Dogs – Potential cash traps, candidates for liquidation
o Problem Childs – Have heavy cash needs but will eventually convert into
stars
o BCG contribution is to make visible the issue of allocation across business
units
o Some businesses should generate cash that supports others
GE McKinsey Matrix
The Market
Attractiveness/Business Position
Evaluating the Ability to Compete Evaluating Market Attractiveness
Organization Size
Growth Growth
Share by segment Customer satisfaction levels
Customer loyalty Competition: quantity, types,
effectiveness, commitment
Margins Price levels
Distribution Profitability
Technology skills Technology
Patents Governmental regulations
Marketing , Flexibility Sensitivity to economic trends
Divestment or Liquidation
o Three drivers of a divestment decision
o Market Demand
o Overoptimistic demand estimates in the first place, or perhaps the demand was
there but deteriorated as the market matured
o Competitive Intensity
o New competitors could have emerged or the existing competitors may have
been underestimated or could have enhanced their offering
o A Change in Strategic Thrust of the Organization
o A change that affects the fit of the business
o A firm may no longer be a synergistic asset, or the business may no longer be a
link to the future e.g. Telegram
Divestment or Liquidation
o Making and implementing an exit decision can be healthy and energizing
o Opportunity cost of overinvesting in a business, and of hanging on to
business and ventures not performing can be damaging
o Sometimes cost is hidden
o Investment done in underperforming hits the financial capital and those
businesses that represent the future of the firm. Business having potential
for growth will be sidelined or starved
o Active divestment programme can generate cash at a fair rather than
forced price, liberate management talent and help reposition the firm
o Divested businesses move into environments that are more supportive
Divestment or Liquidation
o Consider an exit strategy when any of the following are present
o Business position
o Business position is weak, assets and competencies are inadequate
o Value proposition is losing relevance
o Market share declining due to strong competition
o Business is now losing money, and future prospects are dim
o Market attractiveness
o Demand within the category is declining at an accelerating rate
o Extreme price pressures determined by competitors
o Strategic fit
o Firm’s strategic direction has changed. Business has become unwanted
o Firms’ financial and management resources are not utilized where needed
Divestment or Liquidation
o Exit Barriers
o Exit barriers need to be considered as some involve termination costs
o Business may support other businesses within the firm by providing part of a
system, by supporting distribution or using excess capacity
o Long-term contracts with suppliers and with labour groups may be expensive to
break
o Commitments to provide spare parts and service back-up to retailers and
customers
o Exit decision may affect the reputation and operation of other company
businesses
o Make the business innovative. E.g. Nespresso
Divestment or Liquidation
o Biases Inhibiting the Exit Decision
o Psychological Bias
o Reluctance to give up
o Emotional attachment – Family business
o Managerial pride – Managers viewing themselves as problem-solvers
o Confirmation Bias
o Information that confirms that the business can be saved is more likely to be
uncovered and valued than disconfirming information
o Market research may be slanted to provide an optimistic future
o Escalation of Commitment
o Instead of regarding prior investments as sunk costs, there is a bias towards
linking them to future decisions
Divestment or Liquidation
o Injecting Objectivity into Disinvest Decisions
o Process should be transparent and persuasive, encouraging the
discussion to be professional, centered on key issues, and discouraging
gut feelings
o Helpful to have people interjected into the analysis without a history of
the issue
o E.g. Intel made the painful decision to leave the memory business by
appointment of new CEO
The Milk Strategy
o Milk or harvest strategy aims to generate cash flow by
reducing investment and operating expenses to a minimum,
even if that causes a reduction in sales and market share
o Assumptions are
o the firm has better uses for the funds,
o involved business is not crucial to the firm either financially or
synergistically
o milking is feasible because sales will stabilize or decline in an orderly
way
The Milk Strategy
o Fast milking strategy
o Minimizing the expenditures towards the brand and maximizing
the short-term cash flow, accepting the risk of a fast exit.
o Slow milking strategy
o Sharply reduce long-term investment but continue to support operating
areas such as marketing and service
o Hold strategy
o Provide enough product development investment to hold a market
position, as opposed to investing to grow or strengthen it
The Milk Strategy
o Conditions Favouring a Milking Strategy
o When current market conditions make investments unlikely to improve
o Negative environment caused by competitor aggressiveness, consumer tastes,
or whatever
o A new entrant in the market
o Conditions supporting a milking strategy rather than an exit strategy:
o The business position is weak but there is enough customer loyalty
o The business is not central to the current strategic direction but has relevance to
it
o The demand is stable or the decline rate is not excessively steep
o The price structure is stable at a level that is profitable for efficient firms
o A milking strategy can be successfully managed
The Milk Strategy
o Advantage
o Can be reversed if it turns out to be based on incorrect premises
regarding market
o Oatmeal, has experienced a sharp increase in sales because of its low
cost and nutrition and health benefits
o Fountain pens, invented in 1884, were virtually killed off by the
appearance of ballpoint pen in 1939. Made a comeback again due to
prestige and nostalgia
The Milk Strategy
o Implementation Problems
1. Organizationally difficult to assign business units to a cash cow role
o In decentralized organizations, managers of cash-generating businesses
control the available cash
2. Difficulty of placing and motivating a manager for this job
3. If customers suspect that a milking strategy is being employed, the
resulting lack of trust may upset the situation
The Milk Strategy
o The Hold Strategy
o Growth motivated investment is avoided, but an adequate level of
investment is employed to maintain product quality, production facilities,
and customer loyalty
o Superior to milking when the market prospects and/or the business
position is not that grim
o A hold strategy can result in a profitable ‘last survivor’ of a market
o Problems
o If conditions change, reluctance or slowness to reinvest may result in lost market
share
o If a disruptive innovation appears and strategy prevents a firm from making
necessary investments to remain relevant. E.g. film to digital camera, hybrid cars