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BOSTON CONSULTING GROUP MATRIX ( BCG )

This technique is particularly useful for multi-divisional or multi- product companies. The divisions or products compromise the organisations “business portfolio”. The composition of the portfolio can be critical to the growth and success of the company.

The BCG matrix considers two variables, namely

MARKET GROWTH RATE

RELATIVE MARKET SHARE

The market growth rate is shown on the vertical (y) axis and is expressed as a %. The range is set somewhat arbitrarily. The overhead shows a range of 0 to 20% with division between low and high growth at 10% (the original work by B Headley “Strategy and the business portfolio”, Long Range Planning, Feb 1977 used these criteria). Inflation and/or Gross National Product have some impact on the range and thus the vertical axis can be modified to represent an index where the dividing line between low and high growth is at 1.0. Industries expanding faster than inflation or GNP would show above the line and those growing at less than inflation or GNP would be classed as low growth and show below the line.

The horizontal (x) axis shows relative market share. The share is calculated by reference to the largest competitor in the market. Again the range and division between high and low shares is arbitrary. The original work used a scale of 0.1, i.e. market leadership occurs when the relative market share exceeds 1.0.

The BCG growth/share matrix is divided into four cells or quadrants, each of which represent a particular type of business. Divisions or products are represented by circles. The size of the circle reflects the relative significance of the division/product to group sales. A development of the matrix is to reflect the relative profit contribution of each division and this is shown as a pie- segment within the circle.

The Boston Consulting Group’s Growth Share Matrix

Stars Question Marks 20% 18% Cash consumer Large 16% Cash neutral negative cash flow 14%
Stars
Question Marks
20%
18%
Cash consumer
Large
16%
Cash neutral
negative
cash flow
14%
12%
Optimum
10%
Cash Flow
Cash Cow
Dogs
8%
6%
Large
Cash consumer
4%
positive
Modest cash flow
cash flow
2%
0
Relative Market Share
Market Growth Rate
10x
4x
2x
1.5x
1x
0.5x
0.4x
0.3x
0.2x
0.1x

SOURCE: Adapted from Hedley (1977), p12

Success and Disaster Sequences in the Product Portfolio

High Stars Question Marks Cash Cow Dogs Low High Low Relative Market Share Disaster sequences
High
Stars
Question Marks
Cash Cow
Dogs
Low
High
Low
Relative Market Share
Disaster sequences
Success sequences
Market Growth Rate

QUESTION MARKS

These are products or businesses, that compete in high growth markets but where the market share is relatively low. A new product launched into a high growth market and with an existing market leader would normally be considered as a question mark. Because of the high growth environment, they can be a “cash sink”.

Strategic options for question marks include

Market penetration

Market development

Product development

Which are all intensive strategies or divestment.

STARS

Successful question marks become stars. i.e. market leaders in high growth industries. However, investment is normally still required to maintain growth and to defend the leadership position. Stars are frequently only marginally profitable but as they reach a more mature status in their life cycle and growth slows, returns become more attractive. The stars provide the basis for long term growth and profitability.

Strategic options for stars include

Integration forward, backward and horizontal

Market penetration

Market development

Product development

Joint ventures

CASH COWS

These are characterised by high relative market share in low growth industries. As the market matures the need for investment reduces. Cash Cows are the most profitable products in the portfolio. The situation is frequently boosted by economies of scale that may be present with market leaders. Cash Cows may be used to fund the businesses in the other three quadrants.

It is desirable to maintain the strong position as long as possible and strategic options include

Product development

Concentric diversification

If the position weakens as a result of loss of market share or market contraction then options would include

Retrenchment (or even divestment)

DOGS

These describe businesses that have low market shares in slow growth markets. They may well have been Cash Cows. Often they enjoy misguided loyalty from management although some Dogs can be revitalised. Profitability is, at best, marginal.

Strategic options would include

Retrenchment (if it is believed that it could be revitalised)

Liquidation

Divestment (if you can find someone to buy!)

Successful products may well move from question mark though star to Cash Cow and finally to Dog. Less successful products that never gain market position will move straight from question mark to Dog.

The BCG is simple and useful technique for strategic analysis. It is convenient for multi-product or multi-divisional companies. It focuses on cash flow and is useful for investment and marketing decisions.

One should not however, ignore the limitations of the technique.

Definition (qualitative and quantitative) of the market is sometimes difficult.

It assumes that market share and profitability are directly related.

The use of high and low to form four categories is too simplistic.

Growth rate is only one aspect of industry attractiveness and high growth markets are not always the most profitable.

It considers the product or business in relation to the largest player only. It ignores the impact of small competitors whose market share is rising fast.

Market share is only one aspect of overall competitive position.

It ignores interdependence and synergy.

Companies will frequently search for a balanced portfolio, since

Too many stars may lead to a cash crisis

Too many Cash Cows puts future profitability at risk

And too many question marks may affect current profitability.

Group exercise Using the data provided construct a BCG and answer the following questions, Has the company a balanced portfolio? From the BCG what do you see as strengths and why? Propose generic strategies for each division or product.

BCG Exercise

Consider a multi-divisional / product organisation Using the following data construct a BCG matrix

 

Division / Product

1

2

3

4

5

GE BUSINESS SCREEN (GEBS)

Sales £ million

0.4

1.8

1.7

3.5

0.6

No. of Competitors

6

20

16

3

8

Sales of Market leaders £ million

0.8, 0.7, 0.4

1.8,1.8,1.2

1.7,1.3,0.9

3.5,1.0,0.8

2.8,2.0,1.5

 

Market Growth (%)

16

18

8

5

2

Total Market £ million

2.3

12.2

8.4

5.3

7.3

Industry/Product Profitability % sales

8

6

9

5

6

Is the company balanced? Identify strengths and weaknesses of company Propose strategies for each division/product

The nine-cell matrix was developed by General Electric with the assistance of McKinsey. As with the BCG it comprises a matrix of 2 dimensions.

(a)

Industry attractiveness

(b)

Business strength / competitive postion

In contrast to the BCG, the GEBS includes much more input than simply industry growth rate and relative market share to assess the attractiveness of the industry and the competitive position of the business unit.

Industry attractiveness will include such factors as

Market growth rate Industry profitability Industry size Pricing practices

Business strength may include such factors as

Profitability Technological position Size

Individual products or business units (SBU) are plotted as circles. The area of the circles is proportional to the industry size (in term of sales), The shaded pie represents the market share for each product or SBU.

The procedure for assessing industry attractiveness and business strength / competitive position is similar to that of IFE/EFE/CPM computations. In both cases it involves four steps.

1. Industry attractiveness

(a)

Select key attractiveness criteria

(b)

Weigh each criterion in terms of relative importance in achieving corporate objectives. (0 – 1.0 and total with equal 1.0)

(c)

Rate the industry on these criteria

1

= very unattractive

5

= very attractive

(d)

Calculate weighted score (see table 1)

2.

Business strength / competitive position

(a)

Identify key factors for success in the industry

(b)

Weigh each success factor in terms of its relative importance to profitability (or some other measure of success such as achieving corporate objectives)

(c)

Rate the product / SBU on each factor

1

= very weak competitive position

5

= very strong competitive position

(d)

Calculate weighted score (see table 2)

3. Plot current or SBU portfolio

4. Plot the firms future portfolio

Future attractiveness and competitive position should be assessed (of forecasting, scenario projections) and the new portfolio examined to determine whether it is improving or deteriorating. Is there a “performance gap” between the projected and desired portfolios

……

the strategic gap.

Shell Directional Policy Matrix

Very similar to the GE Business screen and was developed independently by Shell and is used extensively by European firms.

Hofer Product / Market Evolution Matrix

One of the shortcomings of the GE Screen is that it does not effectively display the impact of new products or SBU’s in developing industries.

The fifteen-cell matrix developed by Hofer goes someway to addressing this limitation. The Hofer matrix has axes of

(a)

competitive position

(b)

stage of product / market evolution

Table 1 An example of an Industry Attractiveness Assessment Matrix

ATTRACTIVENESS CRITERIA

WEIGHT*

RATING **

WEIGHTED

 

SCORE

Size Growth Pricing Market diversity Competitive structure Industry profitability Technical role Inflation vulnerability Cyclicality Customer financials Energy impact Social Environmental Legal Human

0.15

4

0.60

0.12

3

0.36

0.05

3

0.15

0.05

2

0.10

0.05

3

0.15

0.20

3

0.60

0.05

4

0.20

0.05

2

0.10

0.05

2

0.10

0.10

5

0.50

0.08

4

0.32

GO

4

-

GO

4

-

GO

4

-

0.05

4

0.20

 

1.00

3.38

* Some criteria may be of a GO/NO GO type. For example, many firms probably would decide not to invest in industries that are viewed negatively by our society, such as gambling, even if it were both legal and very profitable to do so.

** 1 (very unattractive ) through 5 (highly attractive)

Table 2 An example of a Business Strength / Competitive Position Assessment Matrix for an SBU

KEY SUCCESS FACTORS

WEIGHT*

RATING **

WEIGHTED

 

SCORE

Market share SBU growth rate Breadth of product line Sales distribution effectiveness Propriety and key account advantages Price competitiveness Advertising and promotion effectiveness Facilities location and newness Capacity and productivity Experience curve effects Raw materials cost Value added Relative product quality R&D advantages/position Cash throw-off Calibre of personnel General image

0.10

5

0.50

X

3

-

0.05

4

0.20

0.20

4

0.80

X

3

-

X

4

-

0.05

4

0.20

0.05

5

0.25

X

3

-

0.15

4

0.60

0.05

4

0.20

X

4

-

0.15

4

0.60

0.05

4

0.20

0.10

5

0.50

X

4

-

0.05

5

0.25

 

1.00

4.30

* For any particular industry, there will be some factors that, while important in general, will have little or no effect on the relative competitive position of firms within that industry. It is usually better to drop such factors from the analysis than to assign them very low weights.

** 1 (very weak competitive position) through 5 (very strong competitive position)

PORTFOLIO ANALYSIS 2

The General Electric/McKinsey & Co. ‘Business Screen’ Matrix (a.k.a. The ‘Internal External’ Matrix)

   

BUSINESS STRENGTH / COMPETITIVE POSITION

(Internal factor evaluation total weighted scores)

STRONG

AVERAGE

WEAK

     

WINNER

WINNER

QUESTION

 

MARK

HIGH

-

grow and

- grow and build

build

-hold and

 

maintain

INDUSTRY

 
 

WINNER

AVERAGE

 

LOSER

(External factor evaluation total weighted scores)

MEDIUM

-

grow and

-hold and

build

maintain

-harvest or

 

divest

   

PROFIT

 

PRODUCER

LOSER

LOSER

LOW

-hold and

-harvest or

-harvest or

maintain

divest

divest

ATTRACTIVENESS

4.0

3.0

2.0

4.0

3.0

1.0

THE INTERNAL EXTERNAL (IE) MATRIX

The IE matrix positions the company’s businesses in a nine cell matrix. It is an improvement on the BCG and is similar to the GE Business Screen. As with the BCG it uses two criteria to determine position.

And

INTERNAL STRENGTH (as measured by IFE)

INDUSTRY ATTRACTIVENESS (as measured by EFE)

The individual products / divisions are represented as circles. As with the BCG the size of the circles and the pie slices therein reflect the relative significance of each business in terms of sales and profit.

The horizontal axis reflecting internal strength is divided into

Weak (1.0 1.99)

Average (2.0 2.99)

Strong (3.0 3.99)

The vertical axis reflecting industry attractiveness is divided similarly

Low (1.0 1.99)

Medium (2.0 2.99)

High (3.0 3.99)

The IE Matrix requires more information than the BCG and is felt to be a more rigorous technique although it is much more dependant on value judgements of the strategist(s) in the preparation of the IFE and EFE.

Three broad groupings of cells can be made, namely

1, 2 and 4 where the appropriate strategies might be “GROW AND BUILD”. In generic terms such strategies would include

INTENSIVE Market penetration

Market development

Product development

INTEGRATIVE Backward integration

Forward integration

Horizontal integration

The prescription for cells 3, 5 and 7 is likely to be “HOLD AND MAINTAIN” and might include

And

Market penetration

Product development

Finally, cells 6, 8 and 9, which are characterised by a relatively weak competitive position in a hostile environment, would suggest the appropriate strategies are either HARVEST or DIVEST.

Successful companies will endeavour to build a portfolio of businesses in or around cell 1 in the IE matrix.

(Individual exercise: Using IFE and EFE scores, construct an IE matrix for your organisation and derive some strategic proposals for your products / divisions)

An Example of an IE Matrix

THE EFE

TOTAL

WEIGHTED

SCORES

4.0

High 3.0 to 4.0

3.0

Medium

2.0 to 2.99

2.0

Low

1.0 to 1.99

1.0

THE IFE TOTAL WEIGHTED SCORES

Strong 3.0 to 4.0

3.0

Average 2.0 to 2.99

Weak 2.0 1.0 to 1.99

1.0

2 1 25% 50% 4 3 5% 20%
2
1
25%
50%
4
3
5%
20%

THE EFE

TOTAL

WEIGHTED

SCORES

T h e

I n t e r n a l

E x

t e

r n a l

M a t

r I x

Grow and build

THE IFE TOTAL WEIGHTED SCORES

a l M a t r I x Grow and build THE IFE TOTAL WEIGHTED SCORES
Strong 3.0 to 4.0 Average 2.0 to 2.99 3.0 2.0 High 3.0 to 4.0 I
Strong
3.0 to 4.0
Average
2.0 to 2.99
3.0
2.0
High
3.0 to 4.0
I
II
3.0
Medium
IV
V
2.0
to 2.99
2.0
Low
VII
VIII
1.0
to 1.99
1.0

Weak 1.0 to 1.99

1.0

III

VI

IX

to 2.99 2.0 Low VII VIII 1.0 to 1.99 1.0 Weak 1.0 to 1.99 1.0 III

Hold and maintain

Harvest or divest

SWOT/TOWS Matrix

The analysis brings together the key elements of the internal auditing. The analysis involves answering two questions.

Where are the major opportunities and threats?

How can we capitalise on our strengths and reduce our weaknesses?

The first question relates to the environment and the second to resources. The matrix construction involves the listing of key threats, opportunities, weaknesses and strengths (IFE, EFE) and then matching the factors to generate four different groups of strategic options, namely ….

SO where internal strength(s) are matched to external opportunities.

WO aimed at improving internal weaknesses by exploiting external opportunities.

ST where the organisation uses its strengths to avoid or reduce the impact of external threats.

WT where defensive strategies are adopted to reduce internal weaknesses and avoid external threats.

Unlike the portfolio (e.g. BCG) or directional (e.g. Shell) matrices, it is suggested that specific rather than generic strategies are generated from the exercise.

(individual exercise …. Construct a TOWS matrix and generate SO, WO, ST and WO strategies for your organisation)

SWOT Evaluation (Current)

OPPORTUNITIESTHREATS

STRENGTHS

WEAKNESSES

Current Aims and Objectives

SO Decisions

ST Decisions

WO Decisions

WT Decisions

TOWS Analysis

FUTURE

OPPORTUNITIES

THREATS

Aims, objectives and policies as developed from TOWS analysis

As identified by scenario projection techniques

As identified by scenario projection techniques

STRENGTHS

STRATEGY

STRATEGY

Calculated as necessary to future performance

To grasp the future opportunity

To fend off the future threat

WEAKNESSES

STRATEGY

STRATEGY

To be eradicated or to be prevented

To ensure that future opportunities are not lost

To avoid or pre-empt the future threat

Developed from ideas of H Weihrich, 1982

Grand Strategy Mix (GSM)

The Grand Strategy Mix (GSM) would appear to be growing in popularity as a tool for formulating strategic alternatives. The matrix considers two parameters, namely

COMPETITIVE POSITION

MARKET GROWTH

(cf BCG, GEBS and IE matrices)

Competitive position could be measured by an IFE. The matrix can be used for both organisations or SBU’s. The matrix shows “appropriate” strategies for the organisation or business unit in order of attractiveness.

QUADRANT 1 (SO)

Strong strategic position. Strong competitive position in a high growth market. It would seem logical for such organisations to concentrate on their current markets and products, e.g.

MARKET DEVELOPMENT

MARKET PENETRATION

PRODUCT DEVELOPMENT

There may be reasons why an organisation or business unit would wish to change, e.g.

Utilise excess resources (physical, financial, human) by

INTEGRATION Limited product portfolio may suggest CONCENTRIC DIVERSIFICATION for future security.

QUADRANT 2 (WO)

Opportunities exist for growth in Quadrant 2 but the organisations in this quadrant are ineffective (Resources?, Products?, Management? etc). The first option must surely be an INTENSIVE strategy bur other options include HORIZONTAL integration. If the organisation is unable to find the competitive advantage to exploit the market growth DIVESTMENT or even LIQUIDATION are options.

QUADRANT 3 (WT)

Organisations in this quadrant have a weak competitive position and compete in slow growth industries. The options are obviously DIVESTMENT or LIQUIDATION but RETRENCHMENT or even DIVERSIFICATION could be considered if exit costs were unacceptable.

QUADRANT 4 (ST)

Organisations with competitive strength but operate in low growth industries. Preferred option is to move into a more attractive industry by CONCENTRIC, HORIZONTAL or CONGLOMERATE DIVERSIFICATION.

WEAK

COMPETITIVE

POSITION

The Grand Strategy matrix

RAPID MARKET GROWTH

POSITION The Grand Strategy matrix RAPID MARKET GROWTH     20%     QUADRANT II QUADRANT
   

20%

   

QUADRANT II

QUADRANT I

 

1. Market development

1. Market development

2. Market penetration

2. Market penetration

3. Product development

3. Product development

4. Horizontal integration

4. Forward integration

5. Divestment

5. Backward integration

Liquidation

6. Horizontal integration

Concentric Diversification

10%

 
 
 

QUADRANT III

QUADRANT IV

 

1. Retrenchment

1. Concentric diversification

2. Concentric diversification

2. Horizontal diversification

3. Horizontal diversification

3. Conglomerate diversification

Joint ventures

 

4. Conglomerate diversification

5. Divestment

Liquidation

0%

- 6

- 3

- 3

0

5. Divestment Liquidation 0% - 6 - 3 0 SLOW MARKET GROWTH STRONG COMPETITIVE POSITION

SLOW MARKET GROWTH

STRONG

COMPETITIVE

POSITION

Some Matching Tools in Strategy Formulation

7.1 SPACE (After Fred David)

The Strategic Position and Action Matrix was developed by Rowe, Mason and Dickel (Strategic Management and Business Policy – a methodical approach, Addison Wesley 1982). It is a matching tool that indicates what general type of strategy and organisation should follow

AGGRESSIVE

CONSERVATIVE

DEFENSIVE

COMPETITIVE

The technique involves the production of a vector on a matrix where the axes represent…

Financial strength (FS)

Competitive advantage (CA)

that are both internal dimensions and

Environmental stability (ES)

Industry Strength (IS)

that are external dimensions

The steps in the construction of the matrix are

a. Select a set of variables that reflect the internal and external dimensions (see David P 214)

b. Assign a rating to each variable FS and IS will be between +1 and +6 where +1 is the worst situation and +6 the best. ES and CA will be between –1 and –6 where –1 is the best situation and –6 the worst.

c. Compute the average score for each dimension (ie FS, CA, IS, ES)

d. Plot the average scores for each dimension on the relevant axes

e. Add the scores on the x axis and plot the result Add the scores on the y axis and plot the result

f. Finally, draw a directional vector from the origin through the intersection point.

The vector will lie in one of the four quadrants

AGGRESSIVE strategies that might include

Market penetration

Market development

Product development

Integration

Diversification

CONSERVATIVE strategies that might include

Market penetration

Market development

Product development

Concentric diversification

DEFENSIVE strategies that might include…

Retrenchment

Divestment

Concentric diversification

COMPETITIVE strategies that might include

Integration

Market penetration

Market development

Product development

Joint venture

PORTFOLIO ANALYSIS:

The Strategic Position and Action Evaluation (SPACE) matrix

PORTFOLIO ANALYSIS: The Strategic Position and Action Evaluation (SPACE) matrix