BCG Growth-Share Matrix

The Boston Consulting Group (BCG) developed a portfolio analysis tool that helps managers develop organizational strategy based on market share of businesses and the growth of markets in which businesses exist. Strategic Business Units (SBUs) The first step in using the BCG Growth-Share Matrix is identifying the organizations strategic business units (SBUs). A strategic business unit is a significant organization segment that is analyzed to develop organizational strategy aimed at generating future business or revenue. Exactly what constitutes an SBU varies from organization to organization. In larger organizations, an SBU could be a company division, a single product, or a complete product line. In smaller organizations, it might be the entire company. 1 Although SBUs vary drastically in form, they have some common characteristics. All SBUs are a single business (or collection of businesses), have their own competitors and a manager accountable for operations, and can be independently planned for. Categorizing SBUs After SBUs have been identified for a particular organization, the next step is to categorize each SBU within one of the following four matrix quadrants: Stars SBUs that are stars have a high share of a high-growth market and typically need large amounts of cash to support their rapid and significant growth. Stars also generate large amount of cash for the organization and are usually segments in which management can make additional investments and earn attractive returns. Cash Cows SBUs that are cash cows have a large share of a market that is growing only slightly. These SBUs provide the organization with large amounts of cash, but since their market is not growing significantly, the cash is generally used to meet the financial demand of the organization in other areas, such as the expansion of a star SBU. Question Marks SBUs that are question marks have a small share of a high-growth market. They are dubbed question marks because it is uncertain whether management should invest more cash in them to gain a larger share of the market or deemphasize or eliminate them. Management will chose the first option when it believes it can turn the question mark into a star, and second when it thinks further investment would be fruitless. Dogs SBUs that are dogs have a relatively small share of a low-growth market. They may barely support themselves; in some cases, they actually drain off cash resources generated by other SBUs. Strategic Business Units Defined A strategic business unit is a significant organization segment that is analyzed to develop organizational strategy aimed at generating future business or revenue. Exactly what constitutes an SBU varies from organization to organization. In larger organizations, an SBU could be a company division, a single product, or a complete product line. In smaller organizations, it might be the entire company.1 Although SBUs vary drastically in form, they have some common characteristics. All SBUs are a single business (or collection of businesses), have their own competitors and a manager accountable for operations, and can be independently planned for. .

BCG MATRIX
Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth. Dogs, or more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off. Question marks (also known as problem child) are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. Stars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom.[citation needed]

As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog. The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG stated in 1970: Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has: stars whose high share and high growth assure the future; cash cows that supply funds for that future growth; and question marks to be converted into stars with the added funds.

Practical use of the BCG Matrix For each product or service, the 'area' of the circle represents the value of its sales. The BCG Matrix thus offers a very useful 'map' of the organization's product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cashflows. The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate.

Derivatives can also be used to create a 'product portfolio' analysis of services. So Information System services can be treated accordingly.[citation needed] Relative market share This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of 'economies of scale' (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster the higher the share. The exact measure is the brand's share relative to its largest competitor. Thus, if the brand had a share of 20 percent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 percent; however, the ratio would be 1:3, implying that the organization's brand was in a relatively weak position. If the largest competitor only had a share of 5 percent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows. If this technique is used in practice, this scale is logarithmic, not linear. On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is that the most stable position (at least in Fast Moving Consumer Goods FMCG markets) is for the brand leader to have a share double that of the second brand, and triple that of the third. Brand leaders in this position tend to be very stableand profitable; the Rule of 123.[2] The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective.[citation needed] Market growth rate Rapidly growing in rapidly growing markets, are what organizations strive for; but, as we have seen, the penalty is that they are usually net cash users - they require investment. The reason for this is often because the growth is being 'bought' by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits. The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment. The cut-off point is usually chosen as 10 per cent per annum. Determining this cut-off point, the rate above which the growth is deemed to be significant (and likely to lead to extra demands on cash) is a critical requirement of the technique; and one that, again, makes the use of the BCG Matrix problematical in some product areas. What is more, the evidence,[2] from FMCG markets at least, is that the most typical pattern is of very low growth, less than 1 per cent per annum. This is outside the range normally considered in BCG Matrix work, which may make application of this form of analysis unworkable in many markets.[citation needed] Where it can be applied, however, the market growth rate says more about the brand position than just its cash flow. It is a good indicator of that market's strength, of its future potential (of its 'maturity' in terms of the market life-cycle), and also of its attractiveness to future competitors. It can also be used in growth analysis.[citation needed] Critical evaluation The matrix ranks only market share and industry growth rate, and only implies actual profitability, the purpose of any business. (It is certainly possible that a particular dog can be profitable without cash infusions required, and therefore should be retained and not sold.) The matrix also overlooks other elements of industry. With this or any other such analytical tool, ranking business units has a subjective element involving guesswork about the future, particularly with respect to growth rates. Unless the rankings are approached with rigor and scepticism, optimistic evaluations can lead to a dot com mentality in which even the most dubious businesses are classified as "question marks" with good prospects; enthusiastic managers may claim that cash must be thrown at these businesses immediately in order to turn them into stars, before

growth rates slow and it's too late. Poor definition of a business's market will lead to some dogs being misclassified as cash bulls. As originally practiced by the Boston Consulting Group, [2] the matrix was undoubtedly a useful tool, in those few situations where it could be applied, for graphically illustrating cashflows. If used with this degree of sophistication its use would still be valid. However, later practitioners have tended to oversimplify its messages. In particular, the later application of the names (problem children, stars, cash cows and dogs) has tended to overshadow all elseand is often what most students, and practitioners, remember. This is unfortunate, since such simplistic use contains at least two major problems: 'Minority applicability'. The cashflow techniques are only applicable to a very limited number of markets (where growth is relatively high, and a definite pattern of product life-cycles can be observed, such as that of ethical pharmaceuticals). In the majority of markets, use may give misleading results. 'Milking cash bulls'. Perhaps the worst implication of the later developments is that the (brand leader) cash bulls should be milked to fund new brands. This is not what research into the FMCG markets has shown to be the case. The brand leader's position is the one, above all, to be defended, not least since brands in this position will probably outperform any number of newly launched brands. Such brand leaders will, of course, generate large cash flows; but they should not be `milked' to such an extent that their position is jeopardized. In any case, the chance of the new brands achieving similar brand leadership may be slim certainly far less than the popular perception of the Boston Matrix would imply. Perhaps the most important danger[2] is, however, that the apparent implication of its four-quadrant form is that there should be balance of products or services across all four quadrants; and that is, indeed, the main message that it is intended to convey. Thus, money must be diverted from `cash cows' to fund the `stars' of the future, since `cash cows' will inevitably decline to become `dogs'. There is an almost mesmeric inevitability about the whole process. It focuses attention, and funding, on to the `stars'. It presumes, and almost demands, that `cash bulls' will turn into `dogs'. The reality is that it is only the `cash bulls' that are really importantall the other elements are supporting actors. It is a foolish vendor who diverts funds from a `cash cow' when these are needed to extend the life of that `product'. Although it is necessary to recognize a `dog' when it appears (at least before it bites you) it would be foolish in the extreme to create one in order to balance up the picture. The vendor, who has most of his (or her) products in the `cash cow' quadrant, should consider himself (or herself) fortunate indeed, and an excellent marketer, although he or she might also consider creating a few stars as an insurance policy against unexpected future developments and, perhaps, to add some extra growth. There is also a common misconception that 'dogs' are a waste of resources. In many markets 'dogs' can be considered loss-leaders that while not themselves profitable will lead to increased sales in other profitable areas. Alternatives As with most marketing techniques, there are a number of alternative offerings vying with the BCG Matrix although this appears to be the most widely used (or at least most widely taughtand then probably 'not' used). The next most widely reported technique is that developed by McKinsey and General Electric, which is a three-cell by three-cell matrixusing the dimensions of `industry attractiveness' and `business strengths'. This approaches some of the same issues as the BCG Matrix but from a different direction and in a more complex way (which may be why it is used less, or is at least less widely taught). Perhaps the most practical approach is that of the Boston Consulting Group's Advantage Matrix, which the consultancy reportedly used itself though it is little known amongst the wider population.

Other uses The initial intent of the growth-share matrix was to evaluate business units, but the same evaluation can be made for product lines or any other cash-generating entities. This should only be attempted for real lines that have a sufficient history to allow some prediction; if the corporation has made only a few products and called them a product line, the sample variance will be too high for this sort of analysis to be meaningful. Drawbacks The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are: Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability. The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage. The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow. While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation's business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units.

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GENERAL ELECTRIC MATRIX (GE Matrix) In the 1980s General Electric, along with the McKinsey and Company Consulting group, developed a more involved method for analyzing a company's portfolio of businesses or product lines. This nine-cell matrix considers the attractiveness of the market situation and the strength of the particular business of interest. These two dimensions allow a company to use much more data in determining each business unit's position. The key to the successful implementation of this strategic tool is the identification and measurement of the appropriate factors that define market attractiveness and business strength. Those individuals involved in strategic planning are responsible for determining the factors. The attractiveness of the market may be based on such factors as market growth rate, barriers to entry, barriers to exit, industry profitability, power of the suppliers and customers, availability of substitutes, negotiating power of both customers and members of the channel of distribution, as well as other opportunities and threats. The strength of a particular business may be based on such factors as market-share position, cost placement in the industry, brand equity, technological position, and other possible strengths and weaknesses. The development of General Electric (GE) Matrix requires assessing the criteria to evaluate both industry attractiveness and business strength. The calculation of scores for these dimensions is frequently based on a simple weighted sum formula. To consider this approach as a matrix analysis, market attractiveness is placed on the vertical axis with the possible values of low, medium, and high (see Figure 2). Business strength is placed on the horizontal axis with the possible values of weak, average, and strong. A circle on the matrix represents each business unit (or product line). The size (area) of each circle represents the size of the relevant market in terms of sales. A portion of the circle is shaded to represent the market share of each business unit or product line within the market.

Figure

GE Business Strength/Market Attractiveness The nine cells of this matrix define three general zones of consideration for the strategic manager. According to this approach, the first zone contains businesses that are the best investments. These are units high in market attractiveness and strong in business strength, followed by those that are strong in business strength and medium in market attractiveness, and those that are medium in business strength and high in market attractiveness. Management should pursue investment and growth strategies for these units. Management should be very careful in determining the appropriate strategy for those business units located in any of the three cells in the diagonal of this matrix. The second zone includes those business units that have moderate overall attractiveness and those units that have medium business strength and market attractiveness, weak business strength and high market attractiveness, and strong business strength and low market attractiveness. These businesses should be managed according to their relative strengths and the company's ability to build on those strengths. Moreover, possible changes in market attractiveness should be carefully considered. Those businesses that fall in the last zone are low in overall attractiveness; these are a good investment only if additional resources can move the business from a low overall attractiveness position to a moderate or strong overall attractiveness position. If not, these businesses should be considered for deletion or harvest. The GE Matrix may be considered as an improvement over the BCG Matrix. The major advantage of using this matrix design is that both a business' strength and an industry's attractiveness are considered in the company's decision. Generally, it considers much more information than BCG Matrix, it involves the judgments of the strategic decision-makers, and it focuses on competitive position. A major disadvantage, however, is the difficulty in appropriately defining business strength and market attractiveness. Also, the estimation of these dimensions is a subjective judgment that may become quite complicated. Another disadvantage lies in the lack of objective measures available to position a company; managers making these strategic decisions may have difficulty determining their unit's proper placement. Too, some argue that the GE Matrix cannot effectively depict the positions of new products or business units in developing industries.

PORTER'S COMPETITIVE STRATEGIES

GENERIC

Michael Porter has suggested a method of categorizing the various types of competitive strategies. He identified two generic competitive strategies: overall lower cost and differentiation. These strategies are termed generic because they can be applied to any size or form of business. Overall lower cost refers to companies that can develop, manufacture, and distribute products more efficiently than their competitors. Differentiation refers to companies that are able to provide superior products based on some factor other than low cost. Differentiation can be based on customer service, product quality, unique style, and so on. Porter also suggests that another factor affecting a company's competitive position is its competitive scope. Competitive scope defines the breadth of a company's target market. A company can have a broad (mass market) competitive scope or a narrow (niche market) competitive scope. The combination of broad scope and narrow scope with a low-cost strategy and differentiation results in the following generic competitive strategies: cost leadership, cost focus, differentiation, and focused differentiation (see Figure 4). The implementation of these strategies requires different organizational arrangements and control processes. Larger firms with greater access to resources typically select a cost leadership or a differentiation

Figure

Porter's Generic Competition strategy, whereas smaller firms often compete on a focus basis. Cost leadership is a low-cost, broad-based market strategy. Firms pursuing this type of strategy must be particularly efficient in engineering tasks, production operations, and physical distribution. Because these firms focus on a large market, they must also be able to minimize costs in marketing and R&D. A low-cost leader can gain significant market share enabling it to procure a more powerful position relative to both suppliers and competitors. This strategy is particularly effective in case of price-sensitive buyers in the market and small possibilities to achieve product differentiation. A cost-focus strategy is a low-cost, narrowly focused market strategy. Firms employing this strategy may focus on a particular buyer segment or a particular geographic segment, and must locate a niche market that wants or needs an efficient product and is willing to do without the extras in order to pay a lower price for the product. A company's costs can be reduced by providing little or no service, providing a low-cost method of distribution, or producing a no-frills product.

A differentiation strategy involves marketing a unique product to a broad-based market. Because this type of strategy involves a unique product, price is not the significant factor. In fact, consumers may be willing to pay a high price for a product that they perceive as different. The product difference may be based on product design, method of distribution, or any aspect of the product (other than price) that is significant to a broad market group of consumers. A company choosing this strategy must develop and maintain a product that is perceived as different enough from the competitor's products to warrant the asking price. Effective implementation of a differentiation strategy requires an analytical study of customer needs and preferences in order to offer a unique product. This usually helps business organizations to achieve customer loyalty, which can also serve as an entry barrier for new firms. Several studies have shown that a differentiation strategy is more likely to generate higher profits than a cost-leadership strategy, because differentiation creates stronger entry barriers. However, a cost-leadership strategy is more likely to generate increases in market share. A differentiation-focus strategy is the marketing of a differentiated product to a narrow market, often involving a unique product and a unique market. This strategy is viable for a company that can convince consumers that its narrow focus allows it to provide better goods and services than its competitors. None of these competitive strategies is guaranteed to achieve success, and some companies that have successfully implemented one of Porter's generic strategies have found that they could not sustain the strategy. Several risks associated with these strategies are based on evolved market conditions (buyer perceptions, competitors, etc). Recent researchers argue that both cost-leadership and differentiation strategies can be simultaneously achieved. The principal condition for this situation is superior quality, which may lead to increased customer commitment on the one hand, and minimized quality costs (through learning effects, economies of scale, etc.) on the other.

PORTER'S FIVE-FORCES MODEL Before a company enters a market or market segment, the competitive nature of the market or segment is evaluated. Porter suggests that five forces collectively determine the intensity of competition in an industry: threat of potential entrants, threat of potential substitutes, bargaining power of suppliers, bargaining power of buyers, and rivalry of existing firms in the industry. By using the model shown in Figure 5, a firm can identify the existence and importance of the five competitive forces, as well as the effect of each force on the firm's success.

Figure Five Forces Model

The threat of new entrants deals with the ease or difficulty with which new companies can enter an industry. When a new company enters an industry, the competitive climate changes; there is new capacity, more competition for market share, and the addition of new resources. Entry barriers and exit barriers affect the entrance of new companies into a marketplace. If entry barriers (capital requirements, economies of scale, product differentiation, switching costs, access to distribution channels, cost of promotion and advertising, etc.) are high, a company is less likely to enter a market. The same holds true for exit barriers. The threat of substitutes affects competition in an industry by placing an artificial ceiling on the prices companies within an industry can charge. A substitute product is one that can satisfy consumer needs also targeted by another product; for example, lemonade can be substituted for a soft drink. Generally, competitive pressures arising from substitute products increase as the relative price of substitute products declines and as consumer's switching costs decrease. The bargaining power of buyers is affected by the concentration and number of consumers, the differentiation of products, the potential switching costs, and the potential of buyers to integrate backwards. If buyers have strong bargaining power in the exchange relationship, competition can be affected in several ways. Powerful buyers can bargain for lower prices, better product distribution, higher-quality products, as well as other factors that can create greater competition among companies. Similarly, the bargaining power of suppliers affects the intensity of competition in an industry, especially when there is a large number of suppliers, limited substitute raw materials, or increased switching costs. The bargaining power of suppliers is important to industry competition because suppliers can also affect the quality of exchange relationships. Competition may become more intense as powerful suppliers raise prices, reduce services, or reduce the quality of goods or services. Competition is also affected by the rivalry among existing firms, which is usually considered as the most powerful of the five competitive forces. In most industries, business organizations are mutually dependent. A competitive move by one firm can be expected to have a noticeable effect on its competitors, and thus, may cause retaliation or counter-efforts (e.g. lowering prices, enhancing quality, adding features, providing services, extending warranties, and increasing advertising).

The nature of competition is often affected by a variety of factors, such as the size and number of competitors, demand changes for the industry's products, the specificity of assets within the industry, the presence of strong exit barriers, and the variety of competitors. Recently, several researchers have proposed a sixth force that should be added to Porter's list in order to include a variety of stakeholder groups from the task environment that wield over industry activities. These groups include governments, local communities, creditors, trade associations, special interest groups, and shareholders. The implementation of strategic planning tools serves a variety of purposes in firms, including the clear definition of an organization's purpose and mission, and the establishment of a standard base from which progress can be measured and future actions can be planned. Furthermore, the strategic planning tools should communicate those goals and objectives to the organization's constituents. Thus, the worth of these tools, as well as others, is often dependent on the objective insight of those who participate in the planning process. It is also important for those individuals who will implement the strategies to play a role in the strategic-planning process; this often requires a team effort that should allow a variety of inputs and should result in a better overall understanding of the company's current and future industry position.

Directional Policy Matrix

Description of the Model This matrix measures the health of the market and your strength to pursue it. The results indicate the direction for future investment. The recommendation may be to invest, grow, harvest or divest. Characterize Your Enterprise The expert system will position your enterprise on the chart based upon your description of:

Supplier Bargaining Power Threat of Substitutes Threat of New Entrants Competitive Rivalry Buyer Bargaining Power Product Quality Product Value Relative Market Share Reputation Customer Loyalty Staying Power Experience

You can trace through the supporting analysis and its conclusions, adjusting your input until you are satisfied your description accurately characterizes your enterprise. Analysis of Your Enterprise Position Invest High Market Attractiveness High Business Strengths This is the ideal quadrant. Your strengths are directed at a highly attractive market. Invest your best resources in those parts of your business which are in this quadrant. Grow High Market Attractiveness Low Business Strengths You are in an uncomfortable quadrant. The market potential is attractive but you do not have the business strengths necessary for being really successful. The options facing you are either to take what you can while it is still possible or to invest in building a better competitive position. You must be selective in your efforts here, as this segment will cost you to invest in every aspect of the business. Harvest Low Market Attractiveness High Business Strengths In this quadrant you have high strengths in a market that has lost its attractiveness in terms of future potential. It is still good for near term profits, so maintain the position for as long as possible. Divest Low Market Attractiveness Low Business Strengths Think carefully about what you are doing to be in this quadrant. The market is not particularly attractive and your business strengths are below average here. Keep in this segment only if it supports a more profitable part of your business (for instance, if this segment completes a product line range) or if it absorbs some of the overhead costs of a more profitable segment.

Hofers Matrix Hofer-Schendel Matrix

Brief History The principal purpose of analysis for strategic planning is to identify the major opportunities and threats a business unit faces in the future and to identify the skills around which it can develop a strategic intelligence plan to exploit the opportunities and negotiate around the threats. Hofer and Schendel felt that the major weakness with the General Electric business screen was that it didnt effectively depict the positions of new businesses that are just starting to grow in new industries. They suggested in 1975 that changes in basic competitive positions are easier to accomplish at certain stages in the evolution of an industry than others. The Boston Consulting Group also alluded to this with their assumption that market growth was related to life cycle and was used as the one axis on their matrix. The competitive position / market evolution matrix was developed in the late 1970s by Charles W. Hofer and Dan Schendel.