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WHAT IS THE BCG GROWTH-SHARE MATRIX?

To begin with, BCG is the acronym for Boston Consulting Groupa general management consulting firm highly respected in business strategy consulting. BCG Growth-Share Matrix 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: 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 organisations 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 organisations 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. 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. The following components of the model are:

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 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 organisations 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.

Products are classified into four distinct groups, Stars, Cash Cows, Problem Child and Dog. Stars (high share and high growth) Star products all have rapid growth and dominant market share. This means that star products can be seen as market leading products. These products will need a lot of investment to retain their position, to support further growth as well as to maintain its lead over competing products. This being said, star products will also be generating a lot of income due to the strength they have in the market. The main problem for product portfolio managers it to judge whether the market is going to continue to grow or whether it will go down. Star product can become Cash Cows as the market growth starts to decline if they keep their high market share. Cash Cows (high share, low growth) Cash cows dont need the same level of support as before. This is due to less competitive pressures with a low growth market and they usually enjoy a dominant position that has been generated from economies of scale. Cash cows are still generating a significant level of income but is not costing the organization much to maintain. These products can be milked to fund Star products. Dogs (low share, low growth) Product classified as dogs always have a weak market share in a low growth market. These products are very likely making a loss or a very low profit at best. These products can be a big drain on management time and resources. The question for managers are whether the investment currently being spent on keeping these products alive, could be spent on making something that would be more profitable. The answer to this question is usually yes. Problem Child (low share, high growth) Also sometime referred to as Question Marks, these products prove to be tricky ones for product managers. These products are in a high growth market but does not seem to have a high share of the market. The could be reason for this such as a very new product to the market. If this is not

the case, then some questions need to be asked. What is the organization doing wrong? What is a competitor doing right? It could be that these products just need more investment behind them to become Stars. A completed matrix can be used to assess the strength of your organization and its product portfolio. Organizations would ideally like to have a good mix of cash cows and stars. There are four assumptions that underpin the Boston Consulting Group Matrix: 1. If you want to gain market share you will need to invest in a competitive package, especially through the investment in marketing 2. Market share gains have the potential to generate a cash surplus due to the effect of economies of scale. 3. The maturity stage of the product life cycle is were any cash surplus is most likely to be generated 4. The best opportunities to build a strong market position usually occur during a markets growth period. Benefits of the BCG-Matrix:

The BCG-Matrix is helpful for managers to evaluate balance in the companiess current portfolio of Stars, Cash Cows, Question Marks and Dogs.

BCG-Matrix is applicable to large companies that seek volume and experience effects. The model is simple and easy to understand. It provides a base for management to decide and prepare for future actions. If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price that is low enough to get early market share leadership. Once it becomes a star, it is destined to be profitable.

Limitations of the BCG-Matrix:


It neglects the effects of synergies between business units. High market share is not the only success factor. Market growth is not the only indicator for attractiveness of a market.

Sometimes Dogs can earn even more cash as Cash Cows. The problems of getting data on the market share and market growth. There is no clear definition of what constitutes a market. A high market share does not necessarily lead to profitability all the time. The model uses only two dimensions market share and growth rate. This may tempt management to emphasize a particular product, or to divest prematurely.

A business with a low market share can be profitable too. The model neglects small competitors that have fast growing market shares.

Grand Strategy Selection Matrix (GSSM) Grand Strategy Selection Matrix has become an effective tool in devising alternative strategies. The matrix is based on the following four important elements.

Rapid market growth Slow market growth Strong competitive position Weak competitive position. The above four elements form a four quadrant matrix wherein every organization can be placed in a way the identification and selection of appropriate strategy becomes an easy task. With the result, the matrix can be adapted to choose the best strategy based on the current growth and competitive state of the company. A huge company with many divisions can also plot its divisions in this four quadrants Grand Strategy Matrix by formulating the best strategy for each division. The management must select the strategy that is cohesive with the market and competitive position. Broadly speaking the four elements of GSSM can be described as two evaluative dimensions of market growth and competitive position. Quadrant 1: This quadrant is meant for companies that are in strong competitive position and flourishing with market growth. The companies have an excellent strategic position and should focus on current markets and product and its development strategy. With resources they can also expand in backward, forward, or horizontal integration. A single product company here should

diversify to avert risks with the slender product line. Companies in this quadrant can afford to exploit external opportunities and enhance their financial muscle. Quadrant II: Companies in this quadrant of the GSSM have weak competitive position in a fast growing market. Companies here are in growing market but they are competing ineffectively. An intensive and effective strategy must be adopted. Companies can adapt to horizontal integration. If they cannot have a suitable strategy, then divestiture of some divisions can be considered. As a last resort, liquidation can be considered and another business can be acquired. Quadrant III: Here companies are in a slow growth industry with weak competition. Drastic changes are required. The management must change its philosophy and new approaches to governance are the need. Overall revamping at a cost may be warranted. Strategic asset reduction, retrenchment may be the best option. Diversifying by shifting the resources may be another option. Final option could be divestiture or liquidation. Quadrant IV: The companies are in strong competitive position, but in a slow growth industry.Companies must look for promising growth areas and to exploit opportunities in the growing markets as they have the strength. These companies have limited requirement of funds for internal growth and enjoy high cash flow due to a strong competitive position. They can look for related or unrelated diversification with cash flow and funds; they can also look for joint ventures.

Examples of GSSM Rapid Market Growth Characteristics of Company with weak competitive Characteristics of Company with strong position in rapid growth market competitive position in rapid growth market

market development market penetration product development Horizontal integration Forward integration Related diversification

Market development

Market penetration

Product development

Horizontal Integration

Divestiture Liquidation

Slow Market Growth Characteristics of Company with weak competitive Characteristics of Company with strong position in Slow growth market competitive position in Slow growth market

Retrenchment Related diversification Unrelated diversification Divestiture Liquidation


Related diversification Unrelated diversification Joint venture

The Approach This model suggests that the long run profitability of each unit is influenced by the units business strength and that the ability and incentive of a firm to maintain or improve its position in a market depends on the industry attractiveness.

Factors that Affect Industry Attractiveness Whilst any assessment of Industry attractiveness is necessarily subjective, there are several factors which can help determine attractiveness. These are listed below: Industry size Industry growth Market profitability Pricing trend Competition intensity Overall risk and returns in the industry Opportunity to differentiate products and services Distribution structure

Factors that Affect Business Strength Strength of assets and competencies Relative brand strength Market share Customer loyalty Relative cost position Distribution strength Record of technological or other innovation Access to finance and other investment resources

Who Defines the Factors? The factors are usually identified by a representative, experienced group of managers from the firm including corporate, business and functional managers. An explicit understanding of what constitutes a potentially profitable environment is essential to the formulation of strategy and for the understanding of the potential impact of competitors. A market or industry is considered to be attractive if its potential for providing a significant contribution to objectives for earnings growth and return on investment is judged to be high. Examples of Industry Attractiveness Factors Different strategists and consultants have devised different sets of variables for industry or market attractiveness indicating that there is no consensus regarding the factors that make up industry attractiveness but the final factor selection is a subjective evaluation conducted by the firm. Not all of the factors have equal attractiveness to every company. They must be weighted accordingly to determine how much each factor contributes to the attractiveness of the industry to which the business belongs. The criteria or factors must be consistent for all the industries that the firm competes in so that comparisons between the various strategic businesses can be made. Plot Configuration

In the original GE McKinsey matrix, business strength is plotted on the vertical axis; the industry attractiveness on the horizontal axis and the size of the circle represents the size of the industry with a shaded wedge representing the firms current share of the industry. The matrix is divided into nine boxes. The GE-McKinsey Matrix This approach considers not only the objective factors such as sales, profit, ROI for example but also gives weight to the subjectively estimated factors such as volatility of market share, technology, employee loyalty, competitive stance and social need. The GE-McKinsey model can be likened to the more generalized and well-known SWOT (strengths, weaknesses, opportunities, threats) analysis as it allows the addition of both internal and external factors in the matrix construction. The competitive position or business strength represent the internal capabilities which are controllable by the company while the external factors which are not controlled by the company (opportunities and threats) make up the industry attractiveness. Value of the Model This portfolio model also allows the business/product to be analyzed in terms of dimensions of value to the organization (Industry Attractiveness) and dimensions of value to the customer (Relative Business Strength). The GE McKinsey or AttractivenessStrength matrix is important primarily for assigning priorities for investment in the various businesses of the firm; it is a guide for resource allocation and does not deal with cash flow balance, as does the BCG.

Model Use and Applicability

Generic Strategies 1. The three cells at the top left hand side of the matrix are the most attractive in which to operate and require a policy of investment for growth these are usually coloured green. 2. The three cells running diagonally from left to right have a medium attractiveness, are coloured yellow and the management of businesses within this category should be more cautious and with a greater emphasis being placed on selective investment and earning retention. 3. The three cells at the bottom right hand side are the least attractive, therefore coloured red and management should follow a policy of harvesting and / or divesting unless the relative strengths can be improved.

Grow / Penetrate These businesses are a target for investment, they have strong business strengths, are in attractive markets and they should therefore have high returns on investment and competitive advantage. They should receive financial and managerial support to maintain their strong position and to continue contributing to long-term profitability. Invest for Growth Businesses here are in very attractive industries but have average business strength. They should be invested in to improve their long-term competitive position. Selective Investment or Divestment - These businesses are in very attractive markets but their business strength is weak. Investment must be aimed at improving the business strengths. These businesses will probably have to be funded by other businesses in the group as they are not selffunding. Only businesses that can improve their strengths should be retained if not they should be divested. Selective Harvest or Investment Businesses in this box have good business strength in an industry that is losing its attractiveness. They should be supported if necessary but they may be self-supporting in cash flow terms. Selective harvesting is an option to extract cash flow but this should be done with caution so as not to run down the business prematurely. Segment and Selective Investment Businesses with average business strengths and in average industries can improve their positions by creative segmentation to create profitable segments and by selective investment to support the segmentation strategy. The business needs to create superior returns by concentrating on building segment barriers to differentiate themselves. Controlled Exit or Harvest Businesses with weak business strengths in moderately attractive industries are candidates for a controlled exit or divestment. Attempts to gain market share by increasing business strengths could prove to be very expensive and must be done with caution Harvest for Cash Generation Strong businesses in unattractive markets should be net cash generators and could provide funds for use throughout the rest of the portfolio. Investment should be aimed at keeping these businesses in a dominant position of strength but over investment can be disastrous especially in a mature market. Be aware of competitors trying to revitalize mature industries

Controlled Harvest They have average business strengths in an unattractive market and the strategy should be to harvest the business in a controlled way to prevent a defeat or the business could be used to upset a competitor. Rapid Exit or Attack Business These businesses have neither strengths nor an attractive industry and should be exited. Investments made should only be done to fund the exit.

Best Use of GE Matrix


Use of the GE McKinsey matrix is recommended if an organization is made up of many business units or if a business unit is made up of a number of different product lines. General Electric used this matrix at five different levels in the organization: product, product line, market segment, SBU, business sector. The GE McKinsey matrix is important for assigning priorities for investment in the various businesses of the firm and is guidance for resource allocation. This matrix can be used at all levels within the organization. At the corporate level, the portfolio of businesses making up the firm can be analysed on the matrix, at the business unit level, the products making up the businesss portfolio can be mapped out onto the matrix This matrix allows one to set a strategy for the future after mapping the portfolio in the present and forecasting the future positions by assessing the factors constituting the business strengths. It allows an organization to focus on the strengths and weaknesses of the business units or products.

Limitations
This model has been criticized by some authors for its pseudo-scientific approach referring to the method of weighting the factors before assessing them. Some critics ascertain that the factors of business strength and some of the industry attractiveness factors cannot be measured. It can also be difficult to impose a uniform standard among businesses so that the final portfolio matrix will be consistent in terms of the criteria. Some firms

develop standard lists of internal and external factors but each business/product is different and factors will vary accordingly. This portfolio model relies heavily on managerial judgment in identifying, weighting and assessing the relevant factors Composite dimension matrices such as this one may mask important differences among products. (e.g. If business strength is made up of two factors weighted similarly, one product may be assessed as very low on the one factor and very high on the other one. Another product may score vice versa but both will be positioned on the same spot on the business strength axis.) The simplicity of the BCG matrix has been criticized in the past but the more complex GE matrix has also been accused of being too complicated and taking too long to complete. The GE McKinsey matrix pays too little attention to the business environment