Robinson, C. G.
A icle
The g ow h sha e ma ix as a planning ool: Ca ea s and
p ac ical p oblems
Sou h A ican Jou nal o Business Managemen
P o ided in Coope a ion wi h:
Uni e si y o S ellenbosch Business School (USB), Bell ille, Sou h A ica
Sugges ed Ci a ion: Robinson, C. G. (1986) : The g ow h sha e ma ix as a planning ool: Ca ea s and
p ac ical p oblems, Sou h A ican Jou nal o Business Managemen , ISSN 2078-5976, A ican Online
Scien i ic In o ma ion Sys ems (AOSIS), Cape Town, Vol. 17, Iss. 1, pp. 32-37,
h ps://doi.o g/10.4102/sajbm. 17i1.1031
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/217918
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The
g ow h
sha e
ma ix
as
a
planning
ool:
ca ea s
and
p ac ical
p oblems
C.G.
Robinson
G adua e School o Business Adminis a ion, Uni e si y
o
he Wi wa e s and, Johannesbu g
Limi a ions exis on he nai e applica ion o he g ow h
sha e
and
g ow h gain ma ices
as
esou ce alloca ion
echniques. This, he las
in
a se ies o h ee a icles,
poin s ou some conside a ions essen ial o success ul
applica ion o he Bos on Consul ing G oup's app oach o
se ing s a egy. Thi een ca ea s anging om he
b eakdown o he implici co ela ions be ween cash lows
and
ma ke sha e and ma ke g ow h a e h ough
mo i a ional and poli ical p oblems mus condi ion a
compe en analysis. P ac ical p oblems in implemen ing
po olio planning a e highligh ed.
S.
A .
J.
Bus. Mgm . 1986,
17:
31
-37
Daa
bes aan seke e bepe kinge op die
na'iewe
oepassing
an
die g oei-aandeel-
en
g oei- oename-ma ikse
as
hulpb on- oedelings egnieke.
In
hie die a ikel, die laas e
in
'n
eeks
an
d ie a ikels, wo d seke e aspek e wa wesenlik
is i die sukses olle oepassing
an
die Bos on G oep
se
benade ing o s a egie o mule ing aangewys. De ien
oo behoude wa me e sig igheid gehan ee moe wo d i
die bekwame ui oe ing
an
'n
analise, wo d besp eek. Hulle
s ek ana die opspli sing
an
implisie e ko elasies ussen
kon an loei
en
ma kaandeel
en
ma kg oeisy e o
by
mo i e ings-
en
poli ieke p obleme.
Die
p ak iese p obleme
by
die oepassing
an
po e euljebeplanning wo d besp eek.
S.-A .
Tydsk . Bed y sl. 1986,
17:
31
-37
C.G. Robinson
G adua e School
o
Business Adminis a ion, Uni e si y
o
he
Wi wa e s and, Johannesbu g, P.O.
Box
31170, B aam on ein,
2017
Republic
o
Sou h A ica
Some
applica ions
conside a ions
Limi a ions exis on he nai e applica ion
o
he g ow h sha e
ma ix. The ma ix depends
on
he ela ionship be ween cash
low and he wo a iables, ela i e ma ke sha e
and
ma ke
g ow h a e. The e a e
13
mi iga ing ac o s ha mus be
bo ne in mind be o e he cash low cha ac e is ics
o
he
s a egic menage ie can
be
applied sla ishly.
Ma ke sha e
may
no
be
co ela ed wi h cash low
The ela ionship be ween ma ke sha e
and
cash low may
be
e y weak owing o a numbe
o
ac o s (Abell &
Ham-
mond,
1979);
• Expe ience e ec s may be e y small.
Fo
some eason
o
o he an expe ience cu e may no exis in a gi en business
(C a ,
1980
and
Robinson, 1982). The expe ience cu e
is
no a law
o
na u e
and
hence, be o e
i
can be used as
a undamen al unde lying assump ion in planning i may
be wise
o
check o he exis ence
o
an
expe ience cu e
o a gi en business.
• Value added may be low. Fo low le els
o
alue added he
impac
o
an expe ience· e ec
on
compe i i e cos di e en-
ials may be negligible.
• A compe i o may ha e access o a low cos sou ce
o
inpu
ma e ials un ela ed o his ela i e sha e posi ion. The
compe i i e edge may no be co ela ed wi h ela i e ma ke
sha e, bu wi h a di e en se
o
c i e ia such as access
o
anchises, echnology
and
so on.
• Low ma ke sha e p oduce s may be
on
s eepe cu es han
he high ma ke sha e compe i o s owing o supe io p o-
duc ion echnology. This
is
he case in he e och ome
indus y whe e small manu ac u e s wi h he la es gene a-
ion
o
echnology can ha e a compe i i e cos edge
and
hence be e p o i s and cash lows han la ge olde com-
pe i o s.
• Di e ences in expe ience may ha e li le impac
on
cos s
because inno a ions
in
p oduc ion echnology a e easily
and
swi ly adop ed by all compe i o s. This occu s when he
majo supplie s
o
o iginal equipmen p o ide he echnol-
ogy
and
ad ances in
an
indus y.
• Capaci y u iliz.a ion a es may di e , hus a ec ing cos s and
cash low. The
PIMS
p og amme (Schoe le , Buzzell &
Heany,
1974
and Robe s,
1981)
and
expe ience
bo h
indica e ha low le els
o
capaci y u iliza ion a e unp o i -
able
and
hence no a ac i e as cash gene a o s.
• S a egic ac o s o he han ela i e ma ke sha e may a ec
p o i ma gins. Cash low may be s ongly dependen
on
pa en s, p oduc quali y
o
o he o ms
o
compe i i e
di e ences.
32
I
ela i e
ma ke
sha e and
cash
low
a _e
no
_co ela ed
his
has he
e ec
o
coOapsing
one
o
he
c imenslOn.s
~
he
g ow h
sha e
mamx
and
e ec i ely
~ es
only
~
~.
ma ke
g o . h
a e,
as
a
!:mis
o
aking
s ~egic
decisiOOS-
Tll i
ma'"
end o
imply
ha unde he
a cums~ances
a
po ~
app oach~
on a
de ailed
p oduc
li e
cycle
analysis may be
mo e
use ul
han one
based
on he
g ow h
sha e
ma ix.
Rela ionShiP
be ween
ma ke
g ow h
a e and cash low
may
be weak.
The
g o . h
sha e
ma ix
is
p edicaled
on he
a SUIDpOOll.S
~
high
a es o
g O h
consume
cash
o
und
ixed
and
wo ~
capilal equi emen s,
and
ha ma u i y o
he
li e
cycle
?~
abou he
genesis
o p o i s. This
may
be inco ec
owmg
o
a nwnbe o
ac o s
(Abell & Hammond, I
979);
• Capi al nensi y
may
be
low. I
ixed
and
wo king
~pi al
in cnsi Y
is low o
example
in
an
inden agency,
11
may
be
~'ble
o
~ease
he
size
o he
business
subs an ially
•ilhou
equi ing
a
meaning ul
inc ease
in
ei he
ix~
o
wo king capi al.
I
may
be
possible
o
g ow
he
bus~
by
he
me e
addi ion
o
a
ypew i e
and a
elex
machine
wi hou d aining
~-
• High
en y
ba ie s
may
exis .
Ma gins
may
be sus ainable
and
la ge
enough
o p oduce
JX)Si i e
cash
lows
and o
inance
g ow h
a he
same
ime. Technology, pa en , and
o he
o ms
o p o ec ion
could
e ec
en y
ba ie s
(Pone ,
198()).
• lndusl y
m·e capaci y
and p ice compe i ion
may
dep ess
p ices
in
ma u i y. P ice compe i ion
may
dep ess
ma gins
in maiu i y because
o
indus y o e capaci y o dumping.
aen hough inancing needs
may
decline,
ca,;h
low
can
de e io a e.
•
Legal
es ic ions
may
limi p o i abili y.
Le els
o
p o i -
abili y
may
be
ei he
legisla ed
o
alloca ed
a
he
whim
o
go e nmen agencies i h he
esuh
ha
cash
lows
do no
imp o e
on
ma u i y.
• Seasonal and cyclical pa e ns
may
p oduce shon- un
im-
balances
in
p o nabili y
and
cash
low.
Seasonal
e ec s
can
be
el
on
cash
low.
Mo e
cogen ly,
as
economies
mo e
in o
ecession,
businesses
ede ine
hei
ma ke s, and
some-
imes la ge
i ms
mo e
downma ke
wi h
a domino e ec
on hose companjes below hem.
The p oblem
o
ma ke
de ini ion
I
he ma ke
is
inco ec ly iden i ied
i
makes
he
measu e-
men
o ma ke sha e
and
ma ke g ow h a e un eliable
and
lends o e oneous
s a egies.
Ma ke de ini ion e o s
can
depend
on a numbe o inco ec
assessmen s
including
he inco ec
assessmen
o
ma ke bounda ies
based
on
aul y
geog aphic, demog aphic,
psychog aphic,
beha iou al,
compe i o , and o he a iables.
•
In
Figu e l he
impac
o an e o
in
geog aphic segmen a-
ion is
shown
(Channon & Jalland,
1979).
When
measu ed
in e ms o he UK ma ke , company A has a clea
posi ion
o
ela i e
dominance agains
i s
nea es
compe i o s. When
measu ed
in
he con ex
o
he o al EEC ma ke he
com-
pany's business is ans o med om an appa en cash
gene a o
o
bei:lg
a dog. Channon & Jalland
(1979)
poin ed
ou ha despi e he
ac
ha he Eu opean ma ke leade
did
no
compe e
in
he
UK
ma ke a
all,
he
implied
h ea
o
po en ial en y
was
signi ican
enough o
educe
he cash
low o company A's
business
as he
p ices
i
cha ged
we e
a ec ed
by
he posi ion in
wes e n
Eu ope
as
a
whole.
S.-A .
Tydsk . Bcd y sl.
1986,
17(1)
UK
Ma,l<el
&;
1
"
~
10%
;8
I
(QQ)
:,
:
,,.
',
~
: I
- I I l j
10,, 1.5x
0.h
Aela ..e
Ma ke
0om,nance
Ficw J
The
impo ance
o
geog aphic m~ ke de ini ion
in
pon o io
analysis (Channon & Jalland, 1979:110)
The le el
o
ma ke
segmen a ion
a ec s
he
posi ioning
Ma ke s
can be segmen ed a di e en
le..-els
om
he
e y
b oad o he
e y
p ecise. Al hough he ocus
is
on
s a egic
posi ioning, he
le el
o
segmen a ion s ill e ec s
he
posi ion
o
a business on he g id.
•
In
Figu e 2 a company's posi ioning on he g id
is
sho":11
$
a majo dis ibu o o eco ds,
music
casse es,
and
ca idga
(Channon & Jalland, I 979).
The
ma ke
is
shown
as
a
high
g ow h ma ke . In ac , he ma ke should
eally
be
~
men ed in o h ee ypes
o
eco ds -popula ,
classical
and budge -and in o
casse es
and
can idges.
1_1 is
e ~
e y
di e en posi ions o he indi"idual
busmes.,;
um s
in
e ms o ma ke sha e and g o"'1h a e.
Decisions
made
on he basis
o
he i s posi ioning could
be
in
se i®'
e o
in
he ligh
o
mo e ca e ul segmen a ion.
Ch~
& Jalland poin ed ou ha
ca e
mus
be
aken in
dis inguish-
ing
be ween s a egic ma ke segmen a ion and
p oduc
di e en ia ion. O he wise, unde endable segmen s
may
be
inco ec ly iden i ied.
To al
Aecoo:led
Music
Mall<e
m I 1
a:
I
I
,0%1
....
~-4--.+---.....;
Cl
~
.;
::,
~
10x
1x
O.lx
Rel.ali e
Ma ke
Dominance
10ll
1x
0.11
Re!a ..e Ma ke Dominance
F'll
2 The imponance
o
ma ke segmen iden i ica1ion
in
po olio
analysis (Channon & Jalland, 1979:111)
In la ion
clouds
he
pic u e
High a es o in la ion ha e a se ious e ec on he
measu e-
men
o
ma ke g ow h a e and on he cash
low
and
p o i
cha ac e is ics o any business.
• Fi s ly ma ke g ow h a e should
be
s a ed
in
uni
e~
o
emo e
he impac
o
in la ion. This
is
no
always
pos.sible
in
p ac ice and because indus ies in la e a di e en
a es
he
choice
o he co ec sec o al de la o can be a
p oblem-
• Secondly, unde condi ions
o
in la ion,
p ice
and
cos
changes a ec businesses
in
di e en
ways
and can
lead
o
he eposi ioning
o
businesses
on
he g id. Figu e 3
shows
he di e en chemical business uni s
o
a company und~
de la ed and unde la ed ma ke condi ions (Channon
Jalland,
1979).
A gene al impac
o
in la ion
is
o
make
low
eal g ow h businesses in o appa en high
g ow h
s.
A . J.
Bus.
Mgm .
1986,
17(1)
businesses. Few businessmen, when conside ing his o ic
company pe o mance, a e likely
o
de la e he da a.
I
is
a sobe ing exe cise.
Unde condi ions
o
high in la ion, g ow h a es
in
money
e ms g ow apidly. Wo king capi al equi emen s associa ed
wi h unding a gi en le el
o
business in uni e ms can
escala e apidly
and
u n
cash gene a o s in o cash use s.
The e ec
is
no uni o m and
in
he example gi en
in
Figu e
3,
a signi ican change
in
he s uc u e can ake place wi h
he ela i e posi ioning
o
a numbe
o
he businesses
changing ma kedly.
Low In la ion Ra e High In la ion Ra e
G
10x
1x
0.1x
Rela i e
Mo Ke
Dominance Rela i e Ma ke Dominance
Figu e
3 The di e en ial e ec
o
in la ion on he s a egic po olio
(Channon & Jalland, 1979:112)
• Thi dly, dep ecia ion allowances may be qui e inadequa e
o cope wi h he cos s
o
eplacing capi al asse s (Channon
& Jalland, 1979). In capi al in ensi e businesses high a es
o
in la ion can se iously ans o m he ac ual cash low
cha ac e is ics
o
a heo e ically balanced po olio and esul
in
a dange ous liquidi y posi ion.
• Fou hly, unde in la iona y condi ions mos businesses
become cash aps. This may be ue e en i hey show an
accoun ing p o i (Channon,
1981).
A ypical manu ac u ing
company in a low g ow h en i onmen mus ea n a ound
7%
on sales
o
he en i e company becomes a cash ap.
High g ow h sec o s
and
capi al in ensi e businesses equi e
e en highe ma gins.
A
lowe g ow h a es he inc ease in
asse s equi ed
o
main ain business
will
exceed he epo ed
p o i .
The
company uns he dange
o
being locked in o
a eal cash ap which
is
wo hless as
i
may ne e pay ou
di idends and could need con inual cash injec ions.
• Finally he g ow h gain ma ix has i s cen e
o
g a i y o
a balanced po olio subs an ially changed by in la ion as
shown
in
Figu e 4. Unde high a es
o
in la ion in e es
a es end
o
mo e
up
o
e lec he economic imbalance.
Ma ke g ow h
and
business g ow h a es may
well
emain
unchanged
o
e en decline. This ends o ein o ce he
well-
known e ec
o
gea ing going nega i e and cash lows can
ac ually e e se unless ma gins can be inc eased
o
compen-
sa e o he highe deb bu den. In addi ion he maximum
sus ainable g ow h a e o he po olio, as calcula ed om:
D
g=E
( -1)
p+ p
will
change
i
i ises as e
han
,,
hus gi ing ise
o
a
po olio imbalance as po ayed in Figu e 4.
Fo eign exchange a ia ions cause p oblems
Mul ina ionals
and
indus ies in which
i
is
s a egically nai e
o se s a egy
on
a limi ed geog aphic basis mus con end
wi h he e ec s
o
o eign exchange a ia ions. Fo eign ex-
0
0
0
Maximum sus ainable
g ow h a e shi s
Unbalanced Balanced
lo
I / / I
I /
0~
I
I
I
/
01
0//
I
/
/ . I
Business G ow h
Ra e
/
/
/
/
/
/
/
0
Qi
O!
33
Figu e
4 The impac
o
in la ion on po olio balance and he maxi-
mum sus ainable g ow h a e
change a ia ions can o ally ans o m he ela i e expe ience
cu e e ec (Channon & Jalland, 1979:
113
and
Robinson,
1982:49). When cos s a e measu ed in a weake cu ency he
slope
o
he expe ience cu e may e e se
and
a eal cos
inc ease could ake place. This implies ha ma ke sha e
and
ela i e cos s may cease
o
be co ela ed. The e
is
a mi iga ing
e ec in ha economies subjec
o
high a es
o
in la ion a e
hose wi h a
poo
exchange a e pe o mance and he e ec s
o
in la ion
and
o eign exchange a e a ia ions can cancel
one ano he ou .
F ee loa ing does no always occu
and
go e nmen in e -
en ion
in
o eign exchange ma ke s mus a ec cos s, p o i s
and
cash low.
• The cash low
and
he e u n
on
in es men cha ac e is ics
o
a business can be a ec ed by he cu ency in which asse s
and p o i s a e measu ed. So, o example, Channon poin s
ou ha US and o he US-quo ed mul ina ionals ha e ound
SEC-imposed changes
in
accoun ing ea men s
o
o e seas
asse s and ea nings ha e signi ican ly a ec ed hei balance
shee s when measu ed
in
dolla s (Channon & Jalland,
1979:
113). Mul ina ionals ope a ing p oduc ion asse s in s ong
cu ency en i onmen s and supplying weak cu ency a eas,
whe e ma gins a e educed owing
o
he exchange a e
di e en ial, epo dec eased e u ns, inc eases in ela i e
capi al in ensi y,
and
dec eased cash lows.
•
An
added s a egic e ec
is
el by some la ge
Eu opean
mul ina ionals which ha e he policy
o
no
allowing o e -
seas subsidia ies
o
become independen SBU's un il a
equi ed e u n
is
ea ned
on
p oduc ion asse s esiden in
he pa en coun y. Only a e a gi en e u n
on
asse s
is
achie ed
is
s a egic independence g an ed.
An
emb yonic
SBU could ind a decade elapse be o e being g an ed in-
dependence as exchange a es mo e downwa d a he same
a e,
o
as e , han p o i s mo e upwa d.
• Mul ina ional ansac ions can change he ela i e economics
o
a business. Cen aliza ion
o
mul ina ional easu y
unc ions has occu ed in o de
o
op imize g oup cash low
and
pos - ax p o i abili y
and
o
minimize o eign exchange
exposu e. A numbe
o
mul ina ionals a e ac i ely managing
34
hei o eign cxdJange
po5i ions
as
p o i cen es gene a ing
up
o
50'7e
o
co po a e p o i abili y
(Channon
&
Jalland,
1979:114).
The s a egic planning c i e ia may he e o e no be p e-
ax
ca.41
low
bu
he amoun , loca ion, and cu ency
o
pos ·
ax
income.
O he planning c i e ia
may
exis .
The
g 0 1h sha e
and
g ow h
gain
ma ~
a e
~ edica ed
upon he
SUS aining
o
g ow h
o
a
pon
olio om m emally
gene a ed cash lows.
O hel:J>WUU11g
c i e ia may be mo e
,-alid.
C i e ia such
as:
• capi alizing on
ax
bene i s,
• he
use
o
pape
o
und g ow h
ia
high
p emiums
on
ma ke ,'aloe
o
book alue
o
common
s ock,
and
•
he
use
o
pape
o
und acquisi ions,
Unde
hese
ci cums ances he planning mode becomes ax
a oidance, equi y gene a ion
o
acquisi ion a he
han
he
balancing
o
sus ainable cash lows and he alloca ion
o
cash
esou ces
among opponuni ies.
O ganiza ion
s uc u e
a ely
e lec s he s a egic
business
uni s.
Signi ican p oblems
occu
in
p ac ice,
pa icu)a ly
in
im-
plemen ing a po olio s a egy:
• Fi s ly, he s a egic business uni s
o
a co po a ion a ely
con o m o he o mal o ganiza ion s uc u e (Channon &
Jalland,
1979
and Haspeslagh,
1982).
The o ganiza ion's
s uc u e
is
o en a elic
o
his o y
o
a ehicle designed
a ound
ope a ing con ol,
o
o he , conside a ions. I
is
he e o e
posgble
o
md
sub-elemen s
o
s a egic
b~
uni loca ed in a numbe
o
unc ional p oduc
o
geo-
g aphic di isions
o
a
inn,
pani ula ly
i
he
i m
is
a
mul ina ional. Two endencies exis :
-
One
is
o
assess
he co po a e
pon olio
in e ms
o
he
onnal o ganiza ion s uc u e a he han
o
ge in ol ed
in he p oblems
o
accoun ing sepa a ely o c oss-
di isional
businesses.
The
second
is
no
o
ealize
he
ac ha
pa s
o
a
onnal di ision may
no
in ac belong
o
he
same
s a egic business uni and
o
con inue
o
ea hem as
belonging oge he .
Odd
abe a ions can
and
do
anspi e (Channon & Jal-
land,
1979:114).
Se iously dys unc ional beha iou occu ed
in a majo Eu opean chemical p oduce when one hal
o
a high g ow h business was loca ed in a p oduc di ision
iden i ied by
op
managemen as a cash-gene a ing ope a-
ion whils
he
o he hal was loca ed in a egional
geo-
g aphic
di ision singled
ou
o hea y in es men . In he
i s
case
he business uni managemen we e eluc an
o
make any in es men which did no show
an
ex emely
high
a e
o
e u n, apid payback and low cash usage whe eas
in
he
second, manage s we e p epa ed
o
accep low a es
o
e u n p o ided
an
in es men con ibu ed o imp o ing
he
business
g ow h
and
sha e posi ion (Channon & Jalland,
1979).
Consequenlly he manage s esponsible o ope a ing
pans
o
he
same
business
wi hin he di e en di isions
we e
a emp ing o pu sue ahnos o ally di e en s a egies.
To
gua d agains such si ua ions i
is
necessa y
o
e-
s uc u e he o ganiza ion
on
an
ongoing basis dependen
on
he
iden i ica ion
o
s a egic business uni s. Majo
eo ganiza ions
a e usually pain ul and ha e
o
be in-
oduced agains he
wishes
o
es ed in e es s wi hin he
exis ing
s uc u e. Signi ican eo ganim ion
does
no
occu
in
an
e olu iona y manne bu akes
place
pe iodically
when
i becomes clea
ha
s a egy and Sl uc u e
ha e
diYC gell
signi ican ly.
The
pon olio
planning models
a e
used
au
guide o s a egic cash low alloca ion
and
may
p o ide
li le
o
no
help conce ning o ganiza ion design.
Cash
con ol sys ems may no exis
The
use
o
a esou ce alloca ion g id based
on
expec ed
cash
lows
p esumes
ha
he
company
is
able
o
ealloea e he
cash
lows om a ious businesses in
he
pon olio.
Su p isingly,
howe e , companies
a e
unable
o
ealloca e cash
lows
a ound
he
ma ix because:
• In
many
o ganiza ions
he
adi ional p o i cen e
CODCeJl
exis s. This equen ly
means
ha
J p o i cen e,
because
i
is
p o i able
and
has
su plus cash,
is
able o
ein es
i s
ee cash low equen ly in
ma u e
businesses.
This
leads
o
o e in es men in businesses
a
he
op
o
he p odua
li e cycle
and
does
no
lead
o
cash
alloca ion a ound
he
ma ix. A
majo
canning
company,
amongs
he
bes
in
he wo ld, was encou aged
o
ein es in ma u e, and
dying,
p oduc lines owing
o
he
p o i
cen e concep and
o
neglec eme ging businesses. As esul money was
ein es ed
in a eas such as peaches in
sy up,
e "en hough
eme ging
consume as es equi ed ei he ein es men
in
o he
ood
lines
o ,
a
leas ,
p oduc
line
enhancemen
wi h he
e o
being ocused
on
peaches in
na u al
juice
o
sui
eme gen
consume as es.
• A di e si ied building ma e ials, enginee ing
and
cons ue·
ion
company
was a clea cash-gene a ing
busin :c;s.
I
·
p oduced cash
om
a deple ing asse
and
was allowed
o
·
ein es hese unds in o e seas acquisi ions a he
han
being o ced
o
edeploy
hem
o
he o ganiza ions'
ele ~
ing ac i i ies in cons uc ion
and
enginee ing (Channon &
Jalland,
1979).
This was
made
possible
by
he ac
hal
cen al managemen allowed di "isional cash managemen
and
high in es men disc e ion le els.
Success ul edeploymen
o
cash esou ces
equi es
a
cen al esou ce alloca ion,
o
banking
unc ion, bo h
o
s a egic in es men s
and
he
alloca ion
o
cash. This
may
equi e cen al
banking
accoun s, global
o
egional
cam
pools,
and
capi al cha ge i ems
on
managed
asse s.
T ans e p icing clouds he pic u e
A e y eal p oblem exis s wi h ega d
o
ans e
p icing.
I
is
possible
o
show
an
accoun ing p o i whe e e
i
is
mos desi able dependen
on
he
manipula ion
o
ans e
p ices. This aises
wo
issues:
• Fi s ly,
i
may be p e e able
o
manipula e p o i s
o
maxim-
ize
a e - ax e u ns.
T ans e
p ices
may
be
manipula ed
o
p o ide p o i s as, whe e.
and
when needed
o
maximize
a e - ax e u ns.
• Secondly, ans e p icing
may
be
used
o
alida e a
man·
age ial posi ion,
and
o
p o ide p o i s whe e none should
exis , in
o de
o
sa is y manage ial
ego
as
o
he
c edibili y
o
p e ious decision-making.
The
p oblem o
o e head
cos s
The
join o e head cos alloca ion
p oblem
is
a exing
one
o a numbe
o
easons.
• Fi s ly, in in eg a ed companies wi h
p oduc
lines
which
a e
o en in ima ely ela ed
he
alloca ion
o
o e head
cos s
is
o en a
ho ny
p oblem. P o i s,
and
cash
low, a e
sub-
jec
o
he
whim
o
he
accoun an . A
unhe
complica in8
ac o
is
he ac
ha
equen ly accoun ing sys ems
do
no
exis in he o ganiz.a ion
o
acili a e
he
alloca ion
o
cos s
and
p o i s
o
a ious s a egic business uni s. This
is
a
di ec

S.
A . J. Bus. Mgm . 1986, 17(1)
esul
o
h ee ac o s;
One: Cos s and p o i s a e o en moni o ed
on
an abso p-
ion a he han a di ec cos ing basis.
Two: S a egic business uni s equen ly bea no ela ionship
o he o ganiza ion s uc u e and o he accoun ing sys ems
adop ed.
Th ee: P oblems a ise wi h ega d
o
he sha ing
o
o e -
head acili ies and, by implica ion, expe ience e ec s.
Mo i a ional p oblems occu
When a business
is
iden i ied as a cash gene a o
o
a dog
o
be
placed in a ha es
o
di es ca ego y, mo i a ional and
o he p oblems may occu .
Mos o ganiza ions, pa icula ly in non-socialis economies,
ha e a common alue sys em endo sing g ow h as no mal
o
all
businesses. The decision o un down a business leads
o p oblems wi h manage s, he wo k- o ce and he consuming
public.
• When a business
is
iden i ied as one o
be
un down
o
elimina ed om a po olio
i
is
o en di icul o ge accep -
ance
o
his ac om he manage s conce ned. This may
pa ly
be
due o he ac ha some businesses may
be
in es -
men s in manage ial ego bu may also be due o he eali y
ha businessmen a e no unin ol ed in hei decisions.
Execu i es ha e made anguished commen o he au ho :
'How
do you kill you
own
child en?' The accep ance ha
a business
is
o
be
un
down
is
alien
o
accep ed manage-
men alues.
Con en ional logic equi es ha i a business
is
o
be
un
down
i
should be a g adual p ocess
and
ha he manage-
men s yle o
be
adop ed should
be
conse a i e pa e nalis ic
and cos conscious. Con ac wi h businessmen may imply
he opposi e. As one en ep eneu quo ed
'i
I wan o un
a business down gi e me a wen y i e yea old us a ed
dynamo. He'll maximise cash low and close he business
down in one yea ins ead
o
en'.
• The ha es posi ion
is
soon iden i ied by he wo k- o ce
who end o become demo i a ed
and
esis an o manage-
men policies (Channon & Jalland, 1979). Indus ial ela-
ions p oblems o en accumula e in a bid o main ain
job
secu i y. In some economies i
is
becoming inc easingly
di icul o shed labou
in
a casual manne . S ong p essu e
may be moun ed o ein es men in he cash-gene a ing
business. This can be he exac e e se
o
cen al manage-
men s's in ended s a egy.
• The con en ional wisdom associa ed wi h he s a egic
ha es ing
and
disin es men
o
a business implies ha a
business may be quie ly un down
and
milked o cash.
Expe ience implies ha his may no
be
so. When a business
is
being disin es ed
i
gene a es signals ha he consuming
public picks up - o example discoun sales
on
lines soon
o
be
obsole e. Ra he
han
being quie ly milked
o
cash
he eali y may be ha he business collapses like a p icked
sou le as consume s, dis ibu o s
and
use s exce cise o he
op ions in he expec a ion
o
collapse (Channon & Jalland,
1979).
• Mo i a ional p oblems exis pa icula ly in you h ul con-
glome a es whe e he whole empi e has been buil
on
he
acquisi ion
o
smalle companies ounded by a, now middle-
aged, en ep eneu . How
is
i
possible o ge he en husiasm
and endo semen
o
an
en ep eneu in unning down
his
o iginal b ainchild
o
c ea e cash o o he oppo uni ies?
S a us
and
poli ics in e ene
The cash low ealloca ion p oblem becomes
especially
acu e
35
in dominan business companies whe e one co e ac i i y has
cons i u ed he majo p o i ea ning po en ial (Channon &
Jalland,
1979).
In hese cases he business uni managemen
esen s being asked o pass
on
he cash
o
new businesses in
which hey do no see he logic. The exis ing business
is
also
in a a mo e powe ul si ua ion o p ess i s case ha ing been
he p incipal p o i ea ne . In such companies he cen al
managemen eam has also equen ly been p omo ed om
he dominan p o i ea ne and
is
equen ly unsu e abou he
po en ial
o
he new businessess. When
in
doub cash
is
edeployed in o he exis ing, o en ma u e, p o i cen e.
P ac ical
p oblems
wi h
po olio
planning
Managemen canno a o d he leisu e
o
di o cing heo y
om p ac ice. A heo y only becomes use ul when
i
mee s
adminis a i e eali y.
• Lip se ice
is
equen ly paid o po olio planning and chie
execu i e o ice s equen ly e e , almos knowledgeably,
o cash cows, dogs
and
so
on
while con inuing o ein es
in
ma u e ma ke s
and
o allow p o i cen es o e ain
p o i s. The challenge
o
po olio planning should, once
adop ed, become he ule
o
he p ince and implemen a ion
should become he esponsibili y
o
he chie execu i e
o ice .
•
I
akes ime o companies o adop and in eg a e po olio
planning in o hei sys ems. Haspeslagh (1982) iden i ied
h ee s ages namely:
(i)
po olio g id analysis
(ii)
co po a e ag eemen
on
missions,
and
(iii) explici nego ia ion
o
missions wi h SBU manage s.
The a e age ime aken o a company
o
mo e om
he i s g id
o
explici assignmen
and
nego ia ion
o
all
missions wi h he business uni manage s appea s
o
ake
abou
i e
yea s (Figu e 5).
S age
1
S age 2
S age
3
S age 4
All missions explici ly
assigned o nego ia ed
wi h SBU's
Co po a e ag eemen
on all missions
Time
4
3
2
New
Po olio Planning: Ha ing jus in oduced he app oach,
companies
a e
s ill in he p ocess
o
cons uc ing he po olio
Undecided Po olio Planning: The ini ial g id comple ed, he companies
ha e no ye decided
a
he co po a e le el wha o do wi h he
businesses o which s a egic missions o assign o he SBU's
Unassigned Po olio Planning: Co po a e le el decisions
a e
eached on
he s a egic mission o each business uni . bu companies
hOld
no
explici nego ia ions ye wi h he uni manage s
P ocess Po olio Planning: Po olio planning is a cen al pa
o
he
ongoing managemen p ocess
as
e idenced
by
he explici nego ia ion
o
s a egic missions wi h
SBU
manage s.
Figu e
5
S ages
o in oduc ion o
p ocess
po olio planning (Haspes-
lagh,
1982:63)
36
• Po olio
planning
is
a
mul ile el
ac i i y.
When
analysing
he co po a e po olio and
making
ade-o s among
businesses,
co po a e
managemen
looks
a he company
in
agg ega e.
In
his
b oade con ex he company ends
o
look
a
SBU's
ha
a e
equen ly
o ganiza ional
uni s
and
o
assign
o he
uni s
s a egic
missions
o
e lec
he
cash
low
con ibu ion
o
he
whole
company.
Indi idual
businesses
hen
ge
in ol ed
in
a epe i ion
o
he
same
p ocess
bu
a
a a mo e de ailed
le el
o
dis-
agg ega ion.
The
s a egic
businesses
iden i ied a e mo e
likely
o
esul
om
an
analysis
o
indi idual
business
~
a he han
om
an a emp o accommoda e he
exis ing
o ganiz.a ion
s uc u e.
The
SBU
missions
hus
de ined,
e-
lec
he pa icula s a egy he company
wishes
a
business
uni
manage
o
ollow
in
each
compe i i e
a ena.
Figu e
6
illus a es
his
concep .
A co po a e
le el
analysis
has
iden i ied
a
di ision,
o
subsidia y,
o
he
o al co po a-
ion
as
an
eme ging
cash
cow.
A de ailed
business
le el
analysis
o
he
cash
cow
iden i ies
ou di e en s a egic
business
uni s
each
equi ing
a di e en s a egic
mission.
A
his
s age he ques ion
mus
be
asked
and
indeed
e lec -
ed
back
o
co po a e headqua e s ha i
he
decision
is
aken o un
he
business
as
a
cash
cow
hen p oduc
line
x,
a
wildca ,
mus
be
econside ed
in
e ms
o
i s
po en ial
impac
on
he
cash-gene a ion cha ac e is ics
o
he sub-
sidia y.
The
subsidia y
canno
be
a
cash
gene a o and
easily
und
business
x.
10x
I
I
I
I
I
~~-+-~~~-+--~~-~~~~~~Co po aie
l-'
0,lx
Rela i e
Ma ke
Dominance
Figu e
6
Mul ile el
po olio
planning
•
The
de ini ion
o
he
s a egic
business
uni s
e ol es
h ough-
ou he in oduc ion
o
he
p ocess.
As
companies
go
h ough mo e planning
cycles
he SBU's
become
mo e
o
a o mal
o ganiz.a ional
eali y
and he
segmen
de ini ion
becomes
be e .
• ~as y p oblems a e c ea ed
by
he
p oblems
o
s a egic
m ~dependence.
~ i s
_simples
he cash
low
and p o i -
abili y o an
SBU
JS
easily
manipula ed
by
ans · ·
licies
,e pncmg
po on p oduc s
~ e ed
om one
SBU
o ano he .
A
i:no e
~omy ques ion
a ises
in
he
case
o
sha ed
ex-
penence
VJa
sha ed manu ac u ing
acili ies,
common
basic
echnology, o common dis ibu ion channels
Wi h many di e ing
dimensions
ade-o s
·ha e
o
be
made (Haspeslagh,
1982).
The
guiding
p inciple appea s
>
be
ha a company should
de me
he
SBU
o
include hose
S.-A .
Tydsk .
Bed y sl.
1986,
l7(1
:
esou ces
ha will be he
key
s a egic
a iables
in
he
u u e,
This p edica es a knowledge
o
he co po a e
ision
a
dis
ea ly s age o a leas a mul iple pass ope a ion
achie ed
by
planning and eplanning o compe en
ongoing
p~
Haspeslagh (
1982)
indica ed ha a numbe o
compania
su eyed made hese ade-o s in p ac ice
wi h
a
bias
o,
wa ds cos e iciency
in
ela ion o
esponsi eness.
The
business economics and expe ience-based
o ien a ion
o
po olio planning mus end o push cos
s uc u es
as
a
basis
o business de ini ion.
As
a esul
companies
may
end o
de ine
SBU's along echnological and
manu ac u q
a he han ma ke lines. Because he
SBU
esponsi eness
o
local
ma ke and o he in luences
is
di icul
o
quan i y,
companies may ind ha hei wo ld-wide
SBU's
may
be
less
esponsi e o local
issues
and coole owa ds
in e n&,
ional
ac i i ies
han unde p e ious s uc u es
and
plannq
app oaches (Haspeslagh,
1982).
In
low
alue
added businesses, such
as
se ice
indus ies
and eselle indus ies, he implica ion could
be
ha
SBU
de ini ion
may
be
mo e alidly based on ma ke
c i e ia
a he han on echnology
o
cos c i e ia dependen
on
an
expe ience cu e.
• Sha ed
expe ience,
in
which
expe ience gains
om
a
ela m
echnology causes cos s o d op below hose
o
compe i o s
wi h
a backg ound only
in
a single echnology,
can
u n
a
new
en an wi h a small ma ke sha e in o a
s ong
cash
gene a o (Hammond & Allan,
1975).
'Texas
Ins umen s'
explosi e
domina ion
o
he consume elec onic
calcula o
ma ke o e es ablished bu mo e specialised
compe i o s
such
as
Bowma Ins umen s
is
a
classic
example.'
The
key
o Texas Ins umen s' success was i s sha ed
expe ience
in
in eg a ed ci cui manu ac u e.
• The Bos on Consul ing G oup's app oach
ela es
o
a
long-
e m decision-making ho izon. I
is
no a
echnique
o
making sho - e m adjus men s o business po olios.
I
is
ecommended (Hammond & Allan,
1975
and
Abell
&
Hammond,
1979)
ha a i e-yea ho izon
be
conside ed
minimal, excep o p oduc s
in
which
i e
yea s
ep esen s
a subs an ial
pa
o
he p oduc li e cycle.
Blow
ho ,
blow
cold s a egic commi men
by
managemen
will
p obably
lead o disappoin ing ou comes. I may
be
necessa y
o
be
con en
wi h
medioc e sho - un pe o mance
in
ques
o
he
inal
goal
o
a balanced po olio. I
sho - e m
dec eases
in
ea nings pa e ns a e
likely
o dissuade
manage,
men hey should
be
ad ised no o emba k on he
s a egy
in
he
i s
place.
Conclusion
The Bos on Consul ing G oup a emp s o add ess
he
e-
sou ce alloca ion p oblem
ia
a numbe
o
echniques.
The
concep ual
bases
unde lying he p ima y planning
ma ix,
he
g ow h sha e ma ix, a e he concep s
o
he
expe ience
cu e
and he p oduc
li e
cycle.
The idea
is
o op imize he
bene i s
associa ed
wi h
ela i e
ma ke sha e, and hence he busin~'
compe i i e cos posi ion, and he impac
o
he g ow h
a e
~
he ma ke , a su oga e a iable o posi ion on he
p oduc
h e
cycle.
The
basis
o esou ce allocij ion
is
he
expec ed
cash
low
cha ac e is ics
o
businesses on he
BCG
g id.
•
cash
cows
a e
cash
gene a o s, hey equi e an
in es
o
hold
s a egy
while
maximizing cash
low
•
s a s
a e
po en ial
cash
cows
which
eq~e
adequa e
undini
o es ablish a dominan posi ion be o e ma ke g ow h
a e
sl?ws
down and hey change in o cows,
• wildca s, ques ion ma ks, o p oblem child en
ha e
nei he
ma ke sha e no g ow h on hei side. They a e
poo ly
S.
A . J. Bus. Mgm . 1986, 17(1)
posi ioned
in
g owing ma ke s and need unding o become
s a s. I esou ces a e inadequa e
i
is
sugges ed ha wi h-
d awal ake place,
• dogs a e nei he cash gene a o s, no
in
many ins ances cash
d ains, hey can be le alone
o
i necessa y be emo ed
om he po olio.
The maximum sus ainable a e
o
g ow h o a po olio
can be calcula ed and used o assess he po olio's abili y o
sus ain g ow h om in e nally gene a ed sou ces.
Compa isons can be made using he g ow h gain ma ix
o assess bo h he ela i e g ow h a e
o
businesses agains
he indus y a e age and o check he po olio o balance.
F on ie cu es can be used o highligh g ow h a eas, cash
gene a o s and money aps. Lines
o
equally a ac i e
oppo uni ies can be used o make in es men decisions.
The o e all e ec
is
o gi e a se
o
guidelines o se ing
compe i i e s a egy based on:
• a balanced po olio
o
businesses;
• an analysis
o
po olio ends;
• an e alua ion
o
compe i o s' po olios; and
• he de elopmen
o
a ge po olios.
Ve y
eal e.e a ions mus be made in connec ion wi h he
nai e applica ion
o
he echniques sugges ed, pa icula ly
because
• ela i e ma ke sha e may no be co ela ed wi h cash low;
• ma ke g ow h a e may no be s ongly nega i ely co ela -
ed wi h cash low;
•
i
is
di icul
o
de ine he ma ke ;
•
le els
o
ma ke segmen a ion a ec he posi ioning
o
businesses;
• in la ion clouds he pic u e;
• o eign exchange a ia ions cause p oblems;
• o he planning c i e ia, such as ax conside a ions may be
mo e alid;
• he o ganiza ion s uc u e a ely e lec s he s a egic business
uni s conce ned;
• cash con ol sys ems equen ly
do
no exis in companies;
• ans e p icing clouds he pic u e;
• he join o e head cos alloca ion p oblem and i s a endan
accoun ing p ocedu es
is
a headache;
• mo i a ional p oblems occu ; and
• s a us and poli ics in e e e.
37
These ese a ions imply ha a numbe
o
p ac ical con-
side a ions mus be bo ne
in
mind,
• lip se ice may be all ha
is
paid;
•
i
akes ime o adap and adop po olio planning sys ems;
• po olio planning
is
a mul ile el ac i i y wi h le els
o
agg ega ion;
• he co ec de ini ion
o
he SBU may ake ime
o
e ol e;
• s a egic in e dependence causes p oblems;
• sha ed expe ience e ec s mus be iden i ied; and
• he ocus
is
long e m and pe ipa e ic planning
is
no aposi e.
The bene i s claimed a e ha he app oach
• helps
o
eapp aise SBU objec i es ealis ically;
• gi es guidelines on he op imum inancial s uc u e;
• aids he esou ce alloca ion p ocess;
• a oids minimum a e
o
e u n, o hu dle a e, calcula ions
in which he assump ions a e manipula ed;
• a oids s a egic aps and in es men s
in
manage ial ego;
• gi es guidelines o g ow h;
• gi es guidelines o con ac ion o ha es ing; and
• helps pinpoin he black holes
o
inance.
Re e ences
Abell, D.F. &
Hammond,
J.S. 1979. S a egic ma ke planning.
Englewood Cli s. P en ice Hall.
Channon, D.F. July 1981. S a egic managemen
in
in la iona y
condi ions. P e o ia. Lec u e se ies, Uni e si y
o
Sou h A ica.
Channon, D.F. & Jalland,
M.
1979. Mul ina ional s a egic
planning. London, MacMillan.
C a ,
M.
1980. S a egic planning: Wha
is
i ? Camb idge,
Massachuse s, S a egic Planning Ins i u e.
Day, G.S. 1977. Diagnosing he p oduc po olio.
J.
Ma ke . ol.
41,
29-38.
Hammond,
J.S. & Allen, G.B. 1975. A no e on he Bos on
Consul ing G oup concep
o
compe i i e analysis and
co po a e s a egy. Bos on, Massachuse s. Ha a d Business
School, no e
9-
175
-
175.
Haspeslagh, P. Janua y, Feb ua y 1982. Po olio planning: uses
and
limi s. Ha . Bus. Re ., p.
58
-71.
Po e , M.
1980.
Compe i i e s a egy. The ee P ess, New Yo k.
Robe s,
K.
1981.
The p o i assessmen epo . Camb idge.
The
S a egic Planning Ins i u e.
Robinson,
C.G.
1982. Expe ience cu es
as
a planning ool.
Uni e si y
o
Sou h A ica. Wo king pape , School
o
Business
Leade ship.
Schoe le , S., Buzzell, R.D. & Heany, D.F. Ma ch, Ap il, 1974.
Impac
o
s a egic planning
on
p o i pe o mance. Han•. Bus.
Re .,
137-145.