Monday, July 12, 2010
Strategic Analysis
What is The BCG Growth-Share Matrix? What are the main aspects of The BCG Growth-Share Matrix? How to develop Good BCG Growth-Share Matrix of a company? Where to find information for The BCG Growth-Share Matrix?
INTRODUCTION
No strategic management or marketing text appears to be complete without the inclusion of the Boston Consulting Group (BCG) growth-share matrix. When used effectively, this model provides guidance for resource allocation. And despite its inherent weaknesses, is probably one of the most widely used management instrument as far as portfolio management is concern. For instant, each SBU (strategic business unit) of large companies such as General Electric, Siemens, and Centrica require different strategies to compete effectively and efficiently. It is not a question of one strategy fits all SBUs since the likelihood for each of them experiencing the same market growth rate, industry-threats and leverage is very slim. This is where the BCG model comes into play as a management analytical tool. The ensuing examines the underpinnings of the model, for what it is used, how to use it and why it is used.
WHAT IS THE BCG GROWTH-SHARE MATRIX?
To begin with, BCG is the acronym for Boston Consulting Group-a general management consulting firm highly respected in business strategy consulting. BCG Growth-Share Matrix (see figure 1) happens to be one of many of BCG's strategic concepts the organisation developed in the late 1970s, and is being taught at leading business schools and executive education programmes around the world.
It is a management tool that serves four distinct purposes (McDonald 2003; Kotler 2003; Cipher 2006): it can be used to classify product portfolio in four business types based on four graphic labels including Stars, Cash Cows, Question Marks and Dogs; it can be used to determine what priorities should be given in the product portfolio of a company; to classify an organisation's product portfolio according to their cash usage and generation; and offers management available strategies to tackle various product lines. Consider companies like Apple Computer, General Electric, Unilever, Siemens, Centrica and many more, engaging in diversified product lines. The BCG model therefore becomes an invaluable analytical tool to evaluate an organisation's diversified product lines as later seen in the ensuing sections.
WHAT ARE THE MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX?
The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and market growth. They often are pointers to healthiness of a business (Kotler 2003; McDonald 2003). In other words, products with greater market share or within a fast growing market are expected to wield relatively greater profit margins. The reverse is also true. Let's look at the following components of the model:
Fig. 1: Source: 12manage.com 2006
Relative Market Share
According to the proponents of the BCG (Herndemson 1972), It captures the relative market share of a business unit or product. But that is not all! It allows the analysed business unit be pitted against its competitors. As earlier emphasized above, this is due to the sometime correlation between relative market share and the product's cash generation. This phenomenon is often likened to the experience curve paradigm that when an organisation enjoys lower costs, improved efficiency from conducting business operations overtime. The basic tenet of this postulation is that the more an organisation performs a task often; it tends to develop new ways in performing those tasks better which results in lower operating cost (Cipher 2006). What that suggests is that the experience curve effect requires that market share is increased to be able to drive down costs in the long run and at the same time a company with a dominant market share will inevitably have a cost advantage over competitor companies because they have the greater share of the market. Hence, market share is correlated with experience.
A case in point is Apple Computer's flagship product called the iPod, which occupies a dominant 73% share the portable music player market (Cantrell 2006). Analysts believe it is the impetus for Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product line (Cantrell 2006). Similarly, Dell's PC line shares the same market dominance theory as the iPod. The PC manufacture giant occupies a worldwide market share of 18.1%, which is commensurate to its large market revenue above its competitors (see figure 2).
Figure 2: Source: Reuters 2006
Market Growth
Market growth axis, correlates with the product life cycle paradigm, and predicates the cash requirement a product needs relative to the growth of that market. A fast growing market is generally considered attractive, and pulls a lot of organisation's resources in an effort to increase gains. A case in point is the technological market widely consider by experts as a fast growing market, and tends to attract a lot of competition. Therefore, a product life cycle and its associated market play a key role in decision-making.
Cash Cows
These products are said to have high profitability, and require low investment for the fact that they are market leaders in a low-growth market. This viewpoint is captured by the founders themselves thus:
The cash cows fund their own growth. They pay the corporate dividend. They pay the corporate overhead. They pay the corporate interest charges. They supply the funds for R&D. They supply the investment resource for other products. They justify the debt capacity for the whole company. Protect them (Henderson 1976).
According to experts (Drummond & Ensor 2004; Kotler 2003; McDonald 2003), surplus cash from cash cow products should be channelled into Stars and Questions in order to create the future Cash Cows.
Stars
Stars are leaders in high growth markets. They tend to/should generate large amounts of cash but also use a lot of cash because of growth market conditions. For example, Apple Computer has a large share in the rapidly growing market for portable digital music players (Cantrell 2006).
Question Marks
Question Marks have not achieved a dominant market position, and hence do not generate much cash. They tend to use a lot of cash because of growth market conditions. Consider Hewlett-Packard's small share of the digital camera market, behind industry leader Canon's 21% (Canon 2006). However, this is a rapidly growing market.
Dogs
Dogs often have little future and are big cash drainers on the company as they generate very little cash by virtue of their low market share in a highly low growth market.
Consider Pfizer's Inspra (Gibson 2006):
"Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child, despite anaemic sales of roughly $40 million in the $2.7 billion heart-failure market dominated by Toprol-XL (metoprolol). It was thought to gain market share and become a star, and eventually a cash cow when the market growth slowed. But, according to industry's experts, Inspra is likely to remain a dog, despite any amount of promotion, given its perceived safety issues and a cheaper, more effective spironolactone in the same Pfizer portfolio. Because Pfizer invested heavily in promotion early on with Inspra, the drug's earnings potential and positive cash flow is elusive at best. A portfolio analysis of Pfizer's cardiovascular franchise would suggest redeploying promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin) or torcetrapib to ensure those drugs reach their sales potential."
HOW TO DEVELOP GOOD BCG GROWTH-SHARE MATRIX OF A COMPANY?
SBUs or products are represented on the model by circles and fall into one of the four cells of the matrix already described above. Mathematically, the mid-point of the axis on the scale of Low-High is represented by 1.0 (Drummond & Ensor 2004; Kotler 2003). At this point, the SBU's or product's market share equals that of its largest competitor's market share (Drummond & Ensor 2004; Kotler 2003). Next, calculate the relative market share and market growth for each SBU and product. Figure 3 depicts the formulas to calculate the relative market share and market growth.
Fig 3
Oftentimes, if you are versed with a particular industry and companies operating in it, you could draw up a BCG matrix for any company without necessarily computing figures for the relative market share and market growth. Figure 4 depicts a fairly accurate BCG growth-share matrix for Apple Computer developed in the spring of 2005 without the author calculating the relative market share and market growth.
Fig. 4 Source: Asong (2005)
Once the products or SBUs have been plotted, the planner then has to decide on the objective, strategy and budget for the business lines. Basically, at this juncture the organisations should strive to maintain a balanced portfolio. Cash generated from Cash Cows should flow into Stars and Question Marks in an effort to create future Cash Cows. Moreover, there are 4 major strategies that can be pursued at this stage as described in the ensuing section.
AVAILABLE STRATEGIES TO PURSUE
Build
The product or SBU's market share needs to be increased to strengthen its position. Short-term earnings and profits are deliberately forfeited because it is hoped that the long-term gains will be higher than this. This strategy is suited to Question Marks if they are to become stars.
Hold
The objective is to maintain the current share position and this strategy is often used for Cash Cows so that they continue to generate large amounts of cash.
Harvest
Here management tries to increase short-term cash flows as far as possible (e.g. price increase, cutting costs) even at the expense of the products or SBU's longer-term future. It is a strategy suited to weak Cash Cows or Cash Cows that are in a market with a limited future. Harvesting is also used for Question Marks where there is no possibility of turning them into Stars, and for Dogs.
Divest
The objective of this strategy is to rid the organisation of the products or SBUs that are a drain on profits and to utilize these resources elsewhere in the business where they will be of greater benefit. This strategy is typically used for Question Marks that will not become Stars and for Dogs.
WHERE TO FIND INFORMATION FOR THE BCG GROWTH-SHARE MATRIX?
Information for the BCG Growth-Share matrix is generated from multiple sources including company's annual reports, sec fillings and a host of specialised research organisations such as IDC, Hoover, Edgar, Forrester and many more. Armed with this information, developing a BCG growth-share matrix should pose less of a problem.
Limitations
The BCG model is criticised for having a number of limitations (Kotler 2003; McDonald 2003):
o There are other reasons other than relative market share and market growth that could influence the allocation of resources to a product or SBU: reasons such as the need for strong brand name and product positioning could compel resource allocation to an SBU or product (Drummond & Ensor 2004).
o What is more, the model rests on net cash consumption or generation as the fundamental portfolio balancing criterion. That is appropriate only in a capital constrained environment. In modern economies, with relatively frictionless capital flows, this is not the appropriate metric to apply - rather, risk-adjusted discounted cash flows should be used (ManyWorlds 2005).
o Also, the matrix assumes products/business units are independent of each other, and independent of assets outside of the business. In other words, there is no provision for synergy among products/business units. This is rarely realistic.
o The relationship between cash flow and market share may be weak due to a number of factors including (Cipher 2006): competitors may have access to lower cost materials unrelated to their relative share position; low market share producers may be on steeper experience curves due to superior production technology; and strategic factors other than relative market share may affect profit margins.
o In addition, the growth-share matrix is based on the assumption that high rates of growth use large cash resources and that maturity of the life cycle brings about the expected profit returns. This may be incorrect due to various reasons (Cipher 2006): capital intensity may be low and the business/product could be grown without major cash outlay; high entry barriers may exist so margins may be sustainable and big enough to produce a positive cash flow and a growth at the same time; and industry overcapacity and price competition may depress prices in maturity.
o Furthermore, market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market. A fast growing market is not necessarily an attractive one. Growth markets attract new entrants and if capacity exceeds demand then the market may become a low margin one and therefore unattractive. A high growth market may lack size and stability.
Given the aforementioned weaknesses, the BCG Growth-Share matrix must be used with care; nonetheless, it is a best-known business portfolio evaluation model (Kotler 2003).
If you found this article useful please have a look at the other articles we have written: PEST analysis, Porter's 5 Forces analysis, Ansoff analysis, SWOT analysis, Porter's Generic Strategies, Scenario Planning, Value chain analysis.
REFERENCE
12Management (2006). BCG Matrix. www.12management.com [Accessed: September 23, 2006]
Asong, B. (2005). Case Study: Apple Computer Market Assessment and Product Launch Strategy. CLC-PHW: London, pp. 17-40.
BCG (2006). The Growth-Share Matrix. www.bcg.com [Accessed: September 20, 2006]
Canon (2006). InfoSource research puts Canon No.1 in the UK & Ireland. [Accessed: September 28, 2006]
Cantrell, A. (2006). Apple's Remarkable Comeback Story. [Accessed: September 28, 2006]
Drummond, G. & Ensor, J. (2004). Strategic Marketing: Planning & Control. 2nd Ed. Butterworth-Heinemann: MA, pp. 96-100.
Henderson, B. (1976). Anatomy of the Cash Cow. Accessed: September 21, 2006]
Lane, S. (2006). Overall Mac OS usage market share declining? [Accessed: September 28, 2006] http://www.appleinsider.com/article.php?id=2059
ManyWorlds (2005). Models and Concepts.[Accessed: September 24, 2006]
McDonald, M. (2003). Marketing Plans: How To Prepare Them, How To Use Them. MA: Butterworth-Heinemann, pp. 175-245.
MindTools (2006). The Boston Matrix. www.mindtools.com/pages/article/newTED_97.htm [Accessed: September 28, 2006]
BIBLIOGRAPHY
Cooper, R. G., Edgett, S. J., & Kleinschmidt, E.J. (2006). Portfolio Management. Working Paper No 12: The Product Development Institute.
Lee, C. K. (2004). Asia Zirconium Limited Valuation report. Prudential Tower: Standard & Poor's.
Vriens, D (2004). The Role of Information and Communication Technology in Competitive Intelligence. Idea Group Inc: University of Nijmegen.
Zolkiewski, J. & Turnbull, P. (undated). Relationship Portfolios-Past, Present & Future.
Innovation 2010
Innovation 2010 is the title of a report published by the Boston Consulting Group (BCG) in April regarding the state of Innovation globally. There are a number of conclusions that can be drawn, but it is heartening to see that after a cautious 2009, companies are committing once more to pursuing Innovation during 2010.
Innovation is now a top three priority for 72% of respondents to the BCG survey, the highest figure since the survey was first introduced seven years ago. In addition, 84% of respondents consider Innovation an important or extremely important lever for reaping the benefits of an economic recovery. Companies are backing up their statements with hard cash too as 61% of companies plan to boost spending on Innovation and 26% plan to increase spending by more than 10%.
Executives cite the following as the major factors that are reducing the return on their Innovation spend:
- Risk averse corporate culture
- Lengthy product development cycles
- Poor Innovation measurement
If we look at the first-time entrants to the most innovative list, all but one come from outside the US. One topical observation relates to the energy sector. Here BP rank number one and Exxon Mobil rank number four!
So what are the implications for senior executives this year?
- Improving your innovation efforts this year are key. You have survived the recession, you must now beat the others that have done so.
- If you don't show a decent return on your innovation programme then someone will cut back on your funding eventually or find someone who can improve return.
- Your top team needs to be more 'holistic', embracing rather than merely supporting Innovation.
- You must keep looking over your shoulder. You might have a head start if you are based in a developing country but there are others who can run faster.
Derek Cheshire is an expert, speaker, consultant and facilitator in the areas of Business Creativity, Innovation and Idea Generation. He is creator of the Innovation Toolkit, and co creator of workshops such as Bite Sized Creativity, Creativity as a Business Tool and The Idea Factory.
Receive regular updates on Business Creativity and Innovation by visiting http://www.creative4business.co.uk and filling out the ezine sign up form.
BCG Business Strategic Model - The Rule of 3 & 4
Many organizations often embrace the common corporate taglines - "Your choice service provider"; "Leading organization"; "Premium company". One starts to wonder how true these taglines are in their ambitious claims to market share victory.
Ambitious claims aside, let us explore a few more definitive strategic benchmarks.
The Boston Consulting Group developed this particular model some 30 years ago - the Rule of 3 & 4, suggesting that in a stable competitive market, there is never more than 3 significant competitors and the largest of the 3 has no more than 4 times the market share of the smallest. The approximate equilibrium point for any 2 competitor is 2:1 ratio at which it will not become advantageous to compete for market share. Any company with less than 1/4 the share of its largest competitor will not be able to compete effectively.
Such conditions stipulates that the market share of each competitor is no less than 1/2 that of the next largest competitor, with the smallest having no less than 1/4 of the share of the largest. Obviously, in meeting the requirements, there would be no more than 3 major competitors in the game. This theory is supported by observation in industries as diverse as automobiles, baby food, and soft drinks, with significant implication to the competition.
Cost is a function of market share, in terms of experience curve and economies of scale benefits, and from a cost perspective, the logic also stands. If 2 competitors have nearly equal shares, the one that increases relative share gains a cost advantage. However, as the share difference widens, the opportunity diminishes as a price reduction costs more and the potential gain is less. This limit is approximately 2:1 in terms of market share.
The limiting share ratio of 4:1 is also an approximate. At this ratio, the probable cost differential produces very large profits for the leader, while the low share competitor breaks even. This differential should be enough to discourage either competitor from further significant investment to gain share. Barring exceptions, the Rule of 3&4 seems to be a good predictor of the results of effective competition.
In applying The Rule of 3&4, it depends on an accurate definition of the relevant market, requiring years to reach equilibrium, unless the leader chooses to hold market share in high-growth phase of the product life.
If the Rule of 3&4 is inexorable, the rule of thumb (no pun intended) says: if you cannot be a leader in a market sector, cash out as soon as practical. Reinvest in products and markets where you can be a successful leader.
Always remember the timeless maxim - Never fall in love with your business.
Joey Jones is a business management consultant with 17 years of business and marketing experience, both online and offline. VISIT Small Business Marketing Strategies for business and marketing proven and tested strategies, marketing plans and internet marketing that works. Head over to BusinessFast4ward.com NOW for one stop information.
Visit Boston, Massachusetts
Boston is the capital and most populous city of Massachusetts. As of 2005, the city of Boston's population was 596,638. Additionally, Boston lies within a large metropolitan area, the 11th largest in the United States, known as "Greater Boston", which is home to approximately 4.4 million people. Boston is not only the largest city in Massachusetts, but also in the whole of New England, and hence is often considered the unofficial cultural and business capital of the region.
Attractions in Boston include:
- Franklin Park Zoo
- Museum of Fine Arts
- Museum of Science
- New England Aquarium
Here is some more information about the area:
- Some of the major companies headquartered in Boston include Bain & Company, Bain Capital, Gilette (now a subsidiary of Proctor & Gamble), Liberty Mutual Insurance Group, New Balance and The Boston Consulting Group.
- Boston is sometimes known as the "Athens of America" because of the many teaching, educational and research institutions located in the area - including over 100 colleges and universities in the Greater Boston Area, and more than 250,000 students in Boston and Cambridge. Important education institutions in Boston include Boston University, Harvard University's business and medical schools, Northeastern University and Suffolk University. Boston University is a private research university and 4th largest employer in the city. Northeastern University is a private national research university known for its links with business and industry. Suffolk University is a small private university, particularly known for its law school.
- The main airport for Boston is Logan International.
- Professional sports teams in Boston include the Major League Baseball team, the Boston Red Sox, the NBA basketball team, the Boston Celtics, and the NHL ice hockey team, the Boston Bruins.
By S. Tanna. First published at http://www.vacation2usa.com/p1_state_massachusetts_cities_boston.php - Visit this link for more details, pictures, attractions, towns and cities and more!
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