OnLine Case Study resource. Suggested solution Task 4

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1 OnLine Case Study resource Suggested solution Task 4 The following is a suggested solution to the task and should not be regarded as comprehensive or correct in all aspects. It is intended to indicate the type of approach, style and content expected at the Final level. Your answer may differ in both presentation and content but still achieve a pass standard. In particular, you may have included other (quite valid) points based on your own research. This answer uses a report format, due to the detailed analysis included as appendices. A memorandum would have been acceptable, but may have looked less professional. Divine product portfolio To: Administration Partner From: Financial Controller Date: Today Contents 1 Terms of reference 2 Product portfolios 3 The Boston Consulting Group (BCG) matrix 4 BCG analysis 5 Other analysis 6 Conclusions and recommendations Appendix 1 BCG analysis Appendix 2 BCG matrix 1 Terms of reference 1.1 This report evaluates the product portfolio of Divine using the growth/share model developed by the Boston Consulting Group (BCG). This model is often misunderstood, as is the concept of product portfolios, so they are briefly described here. If readers are unfamiliar with these concepts and models, further detail can be found in most good strategy textbooks. 2 Product portfolios 2.1 A product portfolio is a collection of products under common ownership. The approach taken in managing a product portfolio is to view the products as a collection, rather than individually.

2 2.2 The objective of portfolio management is to ensure that the portfolio, as a whole, satisfies the expectations of its owner. This is important because, as we can see, it might lead us to accept (or even welcome) an apparently unattractive product into the portfolio if it improves the performance of the portfolio as a whole. 3 The Boston Consulting Group (BCG) matrix 3.1 There are a number of tools available to help us to analyse product portfolios, but one of the most commonly used is the Boston Consulting Group (BCG) matrix. This analyses the products in the portfolio of products by means of a graph showing two characteristics: On the x-axis, the relative market share of the product is shown. This is an attempt to indicate, in a very simplistic way, the strength of the product. Relative market share is the sales value of the product in the period, divided by that of its largest rival. On the y-axis, the market growth rate of the product s market is shown. This is an attempt to show, again in a very simplistic way, the attractiveness of the market. Higher growth rate markets have greater potential for future growth, and tend to be more profitable as demand often exceeds supply. Figure 1 BCG axes High Market growth rate % Low Relative market share (log scale) 3.2 Having drawn the graph as shown in Figure 1, each of the axes can be divided in two. This gives the four quadrants of the BCG matrix as shown in Figure 2.

3 Figure 2 BCG matrix High Star Problem Market growth rate % Medium Cash Cow Dog Low Relative market share (log scale) 3.3 Each of the quadrants defined by the matrix contains products that share similar characteristics. The BCG suggests that we can use the model to look for a balance between products in each of the quadrants. The meaning (and possible consequences for strategy) of each of the relevant quadrants is explained further in the next section. 4 BCG analysis 4.1 Analysis of the data supplied, in order to prepare a BCG matrix, has been carried out as shown in Appendix 1 to this report. The following assumptions have been made in order to prepare the analysis: The data provided is assumed to be both complete and accurate. The growth rates for the various market segments are assumed to be realistic and representative of the longer-term trends. 4.2 Interpretation of the BCG matrix leads to a number of conclusions regarding the Divine services. However, reservations must be expressed due to the simplistic nature of the BCG matrix. The conclusions and reservations are summarised in Figure 3. Figure 3 BCG interpretation Product Category Textbook conclusions Reservations Permanent Dog Dog products tend to be cash neutral If market leadership cannot be achieved, these products should be repositioned into a more attractive market This product actually behaves as a cash cow, as the revenues generated by it are used to crosssubsidise the other products in the portfolio. Market leadership could only be achieved by means of a substantial investment in marketing and infrastructure, which may never pay back. This product is specific to one market, and therefore cannot be repositioned.

4 Temporary Problem If a more attractive market cannot be found, the product should be withdrawn Dog products tend to be cash neutral Withdrawal of a product such as this, which provides over 75% of the firm s revenues, would be suicidal. On a marginal costing basis, these products may be very profitable. Interim management Problem If market leadership cannot be achieved, these products should be repositioned into a more attractive market. If a more attractive market cannot be found, the product should be withdrawn Whereas interim management may be a very new product, temporary staff services is in the maturity stage of its life cycle. Products do not have to be market leaders to be successful. In fact, deliberately being second may be a more profitable strategy (known as an Avis strategy). These products may lead to permanent placements (they may be complementary products). HRM services Dog Dog products tend to be cash neutral If these services are provided by existing staff, they may utilise spare resources and provide a significant contribution. If market leadership cannot be achieved, these products should be repositioned into a more attractive market. If a more attractive market cannot be found, the product should be withdrawn HRM services may be a good loss leader, resulting in other recruitment business. 5 Other analysis 5.1 Other major issues arising from general analysis of the data provided are as follows: Divine are more reliant on one product (permanent placement) than any other firm. This greatly increases the level of risk in the product portfolio. The core product market of Divine is the only market segment that is contracting. This means that, in order to achieve the fee growth targets set for 2000, Divine must steal business from its rivals. This would be difficult to achieve even if customer perceptions were good, but they are not. (See my recent report on CAP analysis). The full portfolio of services does not appear to be offered to all clients. This leads to varying degrees of reliance on permanent recruitment across the client portfolio.

5 6 Conclusions and recommendations 6.1 The main conclusions of this report are as follows: 1. Permanent recruitment is a cash cow product, despite its strict BCG classification. It provides over 75% of our revenue, and must be protected. (4.2) 2. Temporary recruitment has the greatest potential for growth as a strong second product. (4.2) 3. Both interim management and HRM services have potential to add strategic value to the portfolio, either in their own right or as complementary products to permanent and temporary recruitment. (4.2) 4. The reliance on permanent recruitment (a declining product) increases the risk attached to the product portfolio. Although this market may never disappear, it is shrinking. (5.1) 5. The product portfolio appears not to be effectively marketed to all clients. (5.1) 6.2 Bearing in mind these points, the following actions are recommended: 1. Our position as a leading player in the permanent recruitment market should be consolidated. This will require investment in marketing, systems and training. 2. More emphasis should be placed on strengthening the other three products in our portfolio, particularly temporary recruitment. This will involve a strategic review, and significant investment, but will reduce the risk of over-reliance on one product. 3. The organisation structure should be redesigned as a matrix, with separate product departments dealing with each of the four products, supporting client service managers/partners allocated to each major client. This will allow us to improve product quality (and efficiently utilise staff) while maintaining a close relationship with individual clients.

6 Appendix 1 - analysis The data provided can be analysed as follows: Product Relative market share Market growth rate (%) Fees ($M) Permanent 390/ ((1900/2000) - 1) * 100 (5) 390 Temporary 70/ ((900/750) - 1) * Interim management 10/ ((420/350) - 1) * HRM services 30/ ((300/300) - 1) *

7 Appendix 2 BCG matrix T I Market growth rate % 10 0 H P Relative market share (log scale) P Permanent T Temporary I Interim management H HRM Services Scale: 1 cm = $50 Million fees