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.

McKinsey's Strategic Control Map

The principle behind Strategic Control Map is that, market capitalization = book value of assets under management x market-to-book ratio.

To arrive the above equation;

Market Capitalization = The market value of a company’s equity and debt securities = (Ve + Vd)

where,

  • Ve = Value of Equity = Outstanding Shares x Price per Share
  • Vd = Value of Debt

By adding (Be + Bd) to the numerator and denominator of the above equation;

where,

  • Be = Book value of Equity
  • Bd = Book value of Debt

Market Capitalization =  (Ve + Vd) / (Be + Bd) x (Be + Bd) / 1

where,

  • (Ve + Vd) / (Be + Bd) = Market-to-Book Ratio
  • (Be + Bd) = Book Value

Strategic Control Map is essentially a visual representation of this “equation breakdown” process with respect to market capitalization. When we plot this into a horizontal axis (book value), a vertical axis with the key performance indicator (market-to-book ratio), and the resulting isoquants represent the overall market capitalization. Companies on the same isoquant have achieved the same market capitalization, although it may well be through a different combination of assets and market-to-book ratio.

The resulting map can be divided into four quadrants. Companies in different quadrants face different threats as well as strategic opportunities.

  1. In Control – The high-performing and large companies in the upper-right quadrant of the map are the most unlikely to become targets for acquisition. For them, the challenge is to sustain their position by hunting growth opportunities and options, while maintaining returns.
  2. At Risk – Companies in the lower-left quadrant are the most at risk for takeover. Their strategic imperative is to improve the performance of the existing businesses and make decisions on where to reinvest and rejuvenate, and where to divest under performing businesses.
  3. Targets – The high performing small to medium size companies in the upper-left quadrant are attractive acquisition targets. These companies are in a good position to maintain strategic control over their business, as long as they can keep up their performance. If their performance drops, they will be in danger of a takeover.
  4. Cost Consolidators – The large under performing companies in the lower-right quadrant, may be attractive cost-consolidation targets for the larger and better performing players.

The fundamental assertion in Strategic Control Map is that companies with high market capitalization are in a stronger position, have more strategic control, and would more likely be in a position to acquire other companies. Companies with a combination of low assets and low market-to-book ratio are probably quite vulnerable strategically.

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