BCG Matrix

inShare6 Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in its portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBUs (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment. According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share. Relative Market Share = SBU Sales this year leading competitors sales this year. Market Growth Rate = Industry sales this year - Industry Sales last year. The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership. BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBUs are in same industry, the average growth rate of the industry is used. While, if all the SBUs are located in different industries, then the mid-point is set at the growth rate for the economy. Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

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Figure: BCG Matrix Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBUs located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures. Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBUs are the corporations key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued. Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitors/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc.

Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.
Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. 2. Market is not clearly defined in this model. 3. High market share does not always leads to high profits. There are high costs also involved with high market share. 4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. 5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. 6. This four-celled approach is considered as to be too simplistic.

Porter five forces analysis

Porter five forces analysis is a framework for industry analysis and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet

individual companies, by applying unique business models, have been able to make a return in excess of the industry average. Porter's five forces include - three forces from 'horizontal' competition: the threat of substitute products or services, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers. This five forces analysis, is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.[citation needed] Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc.[1] Porter's five forces is based on the StructureConduct-Performance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries.[2]

Porter five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979.

Five forces
Threat of new entrants
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will trend towards zero (perfect competition).

The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution Customer loyalty to established brands Absolute cost Industry profitability; the more profitable the industry the more attractive it will be to new competitors.

Threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. For example, tap water might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product. Increased marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi, whereas increased Pepsi advertising would likely "grow the pie" (increase consumption of all soft drinks), albeit while giving Pepsi a larger slice at Coke's expense. Another example is the substitute of traditional phone with VoIP phone.

Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product. Substandard product Quality depreciation

Bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes.

Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer switching costs relative to firm switching costs Buyer information availability Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products RFM Analysis

Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge excessively high prices for unique resources.

Supplier switching costs relative to firm switching costs Degree of differentiation of inputs

Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Supplier competition - ability to forward vertically integrate and cut out the BUYER

Ex.: If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him.

Intensity of competitive rivalry

For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry.

Sustainable competitive advantage through innovation Competition between online and offline companies Level of advertising expense Powerful competitive strategy Firm concentration ratio

Usage
Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or "checklist." They might use "Value Chain" afterward. Like all general frameworks, an analysis that uses it to the exclusion of specifics about a particular situation is considered nave. According to Porter, the five forces model should be used at the line-of-business industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. (See industry information.) A firm that competes in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industryspecific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business).

Criticisms
Porter's framework has been challenged by other academics and strategists such as Stewart Neill. Similarly, the likes of ABC, Kevin P. Coyne [1] and Somu Subramaniam have stated that three dubious assumptions underlie the five forces:

That buyers, competitors, and suppliers are unrelated and do not interact and collude. That the source of value is structural advantage (creating barriers to entry). That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.[3]

An important extension to Porter was found in the work of Adam Brandenburger and Barry Nalebuff of Yale School of Management in the mid-1990s. Using game theory, they added the concept of complementors (also called "the 6th force"), helping to explain the reasoning behind strategic alliances. The idea that complementors are the sixth force has often been credited to Andrew Grove, former CEO of Intel Corporation. According to most references, the sixth force is government or the public. Martyn Richard Jones, whilst consulting at Groupe Bull, developed an augmented 5 forces model in Scotland in 1993. It is based on Porter's model and includes Government (national and regional) as well as Pressure Groups as the notional 6th force. This model was the result of work carried out as part of Groupe Bull's Knowledge Asset Management Organisation initiative. Porter indirectly rebutted the assertions of other forces, by referring to innovation, government, and complementary products and services as "factors" that affect the five forces.[4] It is also perhaps not feasible to evaluate the attractiveness of an industry independent of the resources a firm brings to that industry. It is thus argued[citation needed] that this theory be coupled with the Resource-Based View (RBV) in order for the firm to develop a much more sound strategy. It provides a simple perspective for accessing and analyzing the competitive strength and position of a corporation, business or organization.

The Cultural Web

Aligning Your Organization's Culture with Strategy

Many aspects of organizations are interconnected.

 iStockphoto/enot_polosku What is the first thing that pops in your mind when you hear the term corporate culture? A great many people refer to the classic phrase coined by the McKinsey organization, that culture is "how we do things around here". And while that may be true, there are so many elements that go into determining what you do and why, that this definition only scratches the surface. Whether you can define it or not, you know that culture exists. It's that ethereal something that hangs in the air and influences how work gets done, critically affects project success or failure, says who fits in and who doesn't, and determines the overall mood of the company. Culture often becomes the focus of attention during periods of organizational change when companies merge and their cultures clash, for example, or when growth and other strategic change mean that the existing culture becomes inappropriate, and hinders rather than supports progress. In more static environments, cultural issues may be responsible for low morale, absenteeism or high staff turnover, with all of the adverse effects those can have on productivity. So, for all its elusiveness, corporate culture can have a huge impact on an organization's work environment and output. This is why so much research has been done to pinpoint exactly what makes an effective corporate culture, and how to go about changing a culture that isn't working. Fortunately, while corporate culture can be elusive, approaches have been developed to help us look at it. Such approaches can play a key role in formulating strategy or planning change. The Cultural Web, developed by Gerry Johnson and Kevan Scholes in 1992, provides one such approach for looking at and changing your organization's culture. Using it, you can expose cultural assumptions and practices, and set to work aligning organizational elements with one another, and with your strategy.

Elements of the Cultural Web

The Cultural Web identifies six interrelated elements that help to make up what Johnson and Scholes call the "paradigm" the pattern or model of the work environment. By analyzing the factors in each, you can begin to see the bigger picture of your culture: what is working, what isn't working, and what needs to be changed. The six elements are: 1. Stories The past events and people talked about inside and outside the company. Who and what the company chooses to immortalize says a great deal about what it values, and perceives as great behavior.

2. Rituals and Routines The daily behavior and actions of people that signal acceptable behavior. This determines what is expected to happen in given situations, and what is valued by management. 3. Symbols The visual representations of the company including logos, how plush the offices are, and the formal or informal dress codes. 4. Organizational Structure - This includes both the structure defined by the organization chart, and the unwritten lines of power and influence that indicate whose contributions are most valued. 5. Control Systems - The ways that the organization is controlled. These include financial systems, quality systems, and rewards (including the way they are measured and distributed within the organization.) 6. Power Structures - The pockets of real power in the company. This may involve one or two key senior executives, a whole group of executives, or even a department. The key is that these people have the greatest amount of influence on decisions, operations, and strategic direction. These elements are represented graphically as six semi-overlapping circles (see Figure 1 below), which together influence the cultural paradigm.

Using the Cultural Web

We use the Cultural Web firstly to look at organizational culture as it is now, secondly to look at how we want the culture to be, and thirdly to identify the differences between the two. These differences are the changes we need to make to achieve the high-performance culture that we want.

1. Analyzing Culture As It Is Now

Start by looking at each element separately, and asking yourself questions that help you determine the dominant factors in each element. Elements and related questions are shown below, illustrated with the example of a bodywork repair company. Stories

What stories do people currently tell about your organization? What reputation is communicated amongst your customers and other stakeholders? What do these stories say about what your organization believes in? What do employees talk about when they think of the history of the company? What stories do they tell new people who join the company? What heroes, villains and mavericks appear in these stories?

Examples (car bodywork repair company):

We are known as having high customer complaints, shoddy work. Staff members talk about the founder starting the company with a $1,000 loan.. The message is that we do things the cheapest way we can.

Rituals and Routines

What do customers expect when they walk in? What do employees expect? What would be immediately obvious if changed? What behavior do these routines encourage? When a new problem is encountered, what rules do people apply when they solve it? What core beliefs do these rituals reflect?

Examples:

Customers expect a newspaper and coffee whilst they wait, or a ride to work. Employees expect to have their time cards examined very carefully. There's lots of talk about money, and especially about how to cut costs.

Symbols

Is company-specific jargon or language used? How well known and usable by all is this? Are there any status symbols used? What image is associated with your organization, looking at this from the separate viewpoints of clients and staff?

Examples:

Bright red shuttle vans. Bright red courtesy cars compact, economy cars. The boss wears overalls not a suit.

Organizational Structure

Is the structure flat or hierarchical? Formal or informal? Organic or mechanistic? Where are the formal lines of authority? Are there informal lines?

Examples:

Flat structure Owner, Head Mechanic, Mechanics, Reception. The receptionist is the owner's wife so she goes straight to him with some customer complaints. It's each mechanic for himself no sharing tools or supplies, little teamwork.

Control Systems

What process or procedure has the strongest controls? Weakest controls? Is the company generally loosely or tightly controlled? Do employees get rewarded for good work or penalized for poor work? What reports are issued to keep control of operations, finance, etc...?

Examples:

Costs are highly controlled, and customers are billed for parts down to the last screw. Quality is not emphasized. Getting the work done with the least amount of direct costs is the goal. Employees docked pay if their quotes/estimates are more than 10% out.

Power Structures

Who has the real power in the organization? What do these people believe and champion within the organization? Who makes or influences decisions? How is this power used or abused?

Example:

The owner believes in a low cost, high profit model, and is prepared to lose repeat customers. The threat of docked pay keeps mechanics working with this model.

As these questions are answered, you start to build up a picture of what is influencing your corporate culture. Now you need to look at the web as a whole and make some generalized statements regarding the overall culture. These statements about your corporate culture should:

Describe the culture; and Identify the factors that are prevalent throughout the web.

In our example the common theme is tight cost control at the expense of quality, and at the expense of customer and employee satisfaction.

2. Analyzing Culture as You Want it to Be

With the picture of your current cultural web complete, now's the time to repeat the process, thinking about the culture that you want. Starting from your organization's strategy, think about how you want the organization's culture to look, if everything were to be correctly aligned, and if you were to have the ideal corporate culture.

3. Mapping the Differences Between the Two

Now compare your two Cultural Web diagrams, and identify the differences between the two. Considering the organization's strategic aims and objectives:

What cultural strengths have been highlighted by your analysis of the current culture? What factors are hindering your strategy or are misaligned with one another? What factors are detrimental to the health and productivity of your workplace? What factors will you encourage and reinforce? Which factors do you need to change? What new beliefs and behaviors do you need to promote?

4. Prioritize Changes, and Develop a Plan to Address Them

Strategic Choice
Key Point: The company needs to determine its competitive position (i.e. choice of generic strategy) and choose its future path or strategic direction (i.e. grand strategy options). In terms of grand strategy the company may pursue multiple options simultaneously.

Video Resources: Strategic Choice

1. Choice of Competitive Position In this section the focus is Porter's types of generic strategy.

2. Choice of Strategy Direction (i.e. Grand Strategy options 1-4) The tool for determining this is Ansoff's matrix.

3. Choice of Means of Growth (i.e. other Grand Strategy Options)

In terms of choices the company will determine whether to undertake:

horizontal integration (i.e. acquire a rival); vertical integration (i.e. acquire a supplier or a buyer) joint ventures (i.e. partner with a company that possesses what you lack, and vice versa) strategic alliances (i.e. informal arrangement to enhance individual member's competitiveness); divestment and sell off assets (i.e. product(s), brand(s), division(s) that are now deemed surplus to requirements); turnaround (i.e. try and stop the erosion of competitiveness and often results in job losses and a major change in the organization's scope and spread); liquidation (i.e. simply terminate a business line without even seeking to sell it).

4. Grand Strategy Matrix The Grand Strategy matrix offers a framework that suggest suitable options based upon the company's competitive position (i.e. strong vs weak?). This might be somewhat simplistic but is nonetheless worthy of consideration.

Michael Porter has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension (Michael E. Porter was originally an engineer, then an economist before he specialized in strategy) and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two competencies that he felt were most important: product differentiation and product cost (efficiency).

Bowman's Strategy Clock

Bowman's Strategy Clock is a model used in marketing to analyse the competitive position of a company in comparison to the offerings of competitors. It was developed by Cliff Bowman and David Faulkner[1] as an elaboration of the three Porter generic strategies. As with Porter's Generic Strategies, Bowman considers competitive advantage in relation to cost advantage or differentiation advantage. Bowman's Strategy Clock represents eight possible strategies in four quadrants defined by the axes of price and perceived added value. The resulting star shape is reminiscent of a clock face, giving this tool its name. There are six core strategic options:

The Strategy Clock: Bowman's Competitive Strategy Options

The 'Strategy Clock' is based upon the work of Cliff Bowman (see C. Bowman and D. Faulkner 'Competitve and Corporate Strategy - Irwin - 1996). It's another suitable way to analyze a company's competitive position in comparison to the offerings of competitors. As with Porter's Generic Strategies, Bowman considers competitive advantage in relation to cost advantage or differentiation advantage. There are six core strategic options:

Option one - low price/low added value

likely to be segment specific.

Option two - low price

risk of price war and low margins/need to be a 'cost leader'.

Option three - hybrid

low cost base and reinvestment in low price and differentiation.

Option four - differentiation

(a)without a price premium:

perceived added value by user, yielding market share benefits.

(b)with a price premium:

perceived added value sufficient to to bear price premium.

Option five - focussed differentiation

perceived added value to a 'particular segment' warranting a premium price.

Option six - increased price/standard

higher margins if competitors do not value follow/risk of losing market share.

Option seven - increased price/low values

only feasible in a monopoly situation.

Option eight - low value/standard price

loss of market share.

Sustainable Competitive Advantage

Competitive advantage is gained when a firm acquires attributes that allow it to perform at a higher level than others in the same industry.

1. fig. 1
Starbucks Coffee

Starbucks Coffee shops are almost always strategically placed to ensure a competitive advantage.

Firms can obtain a competitive advantage by implementing value-creating strategies, not simultaneously being implemented by any current competitor. These strategies need to be rare, valuable, and non-substitutable. Sustainable, competitive advantages are advantages that are not easily copied and, thus, can be maintained over a long period of time. The competition must not be able to do it right away or it is not sustainable. Developing a sustainable, competitive advantage requires customer loyalty, a great location, unique merchandise, proper distribution channels, good vendor relations, a reputation for customer service, and multiple sources of advantage.

Competitive Advantage The strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment.

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Want help studying Sustainable Competitive Advantage?

Get the Flashcards Create a Study Guide Take a Quiz A sustainable competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources or access to highly trained and skilled personnel human resources. It is an advantage (over the competition), and must have some life; the competition must not be able to do it right away, or it is not sustainable. It is an advantage that is not easily copied and, thus, can be maintained over a long period of time. Competitive advantage is a key determinant of superior performance, and ensures survival and prominent placing in the market. Superior performance is the ultimate, desired goal of a firm; competitive advantage becomes the foundation. It gives firms the ability to stay ahead of present or potential competition and ensure market leadership.

Resource-Based View of the firm.

In 1991, Jay Barney established four criteria that determine a firm's competitive capabilities in the marketplace. These four criteria for judging a firm's resources are: 1. Are they valuable? (Do they enable a firm to devise strategies that improve efficiency or effectiveness?) 2. Are they rare? (If many other firms possess it, then it is not rare.) 3. Are they imperfectly imitable (because of unique historical conditions, causally ambiguous, and/or are socially complex)? 4. Are they non-substitutable? (If a ready substitute can be found, then this condition is not met?) When all four of these criteria are met, then a firm can be said to have a sustainable competitive advantage. In other words, the firm will have an advantage in the marketplace which will last until the criteria are no longer met completely. As a result, the firm will be able to earn higher profits than other firms with which it competes.

Developing Sustainable Competitive Advantages

1. Customer Loyalty: Customers must be committed to buying merchandise and services from a particular retailer. This can be accomplished through retail

2.

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4. 5. 6. 7.

branding, positioning, and loyalty programs. A loyalty program is like a "Target card." Now, when the customer uses the card as a credit card, Target can track all of their transactions and store it in their data warehouse, which keeps track of the customers needs and wants outside of Target. This will entice Target to offer products that they do not have in stock. Target tracks all sales done on their cards. So, Target can track customers who use their card at other retailers and compete by providing that merchandise as well. Location: Location is a critical factor in a consumer's selection of a store. Starbucks coffee (shown here Figure 0) is an example. They will conquer one area of a city at a time and then expand in the region. They open stores close to one another to let the storefront promote the company; they do little media advertising due to their location strategy. Distribution and Information Systems: Walmart has killed this part of the retailing strategy. Retailers try to have the most effective and efficient way to get their products at a cheap price and sell them for a reasonable price. Distributing is extremely expensive and timely. Unique Merchandise: Private label brands are products developed and marketed by a retailer and available only from the retailer. For example, if you want Craftsman tools, you must go to Sears to purchase them. Vendor Relations: Developing strong relations with vendors may gain exclusive rights to sell merchandise to a specific region and receive popular merchandise in short supply. Customer Service: This takes time to establish but once it's established, it will be hard for a competitor to a develop a comparable reputation. Multiple Source Advantage: Having an advantage over multiple sources is important. For example, McDonald's is known for fast, clean, and hot food. They have cheap meals, nice facilities, and good customer service with a strong reputation for always providing fast, hot food.