Boston Consulting Group Matrix - Assignment Example

Due PREPARING A COMPREHENSIVE CASE ANALYSIS, PART 2 In Portfolio analysis the Boston Consulting group matrix/ Growth- Share Matrix was developed with the view to critically analyse and propose strategic options by firm to improve the growth and share of the business organizations. The BCG matrix comprises of two variables namely: Market growth rate and relative market share. The market growth rate is labelled on the vertical (y) axis and is expressed in percentage, in an arbitrary set range. Headley (1977) used criteria of a range of 0 to 20 %. He further notes that since the inflation and the Gross National product (GNP) have a substantial impact on the market growth, they are included an index. The range is divided between two divisions: high growth depicting industries and firms growing and expanding faster than inflation and the gross domestic products and are shown above the line while low growth depicts those industries and firms growing slower and at a less than inflation rate or GNP rate. Headley (1977) notes that the horizontal axis (x) shows the relative market share. The share is computed relative to the largest competitor in the market. Consequently, both the range and the division are arbitrary. He incorporated the scale of 1.0 to show the line where market leadership will occur. This implied that market leadership would occur where the market share exceeded 1.0 As put forward by David (2011) and Headley (1977), the BCG Growth/share matrix is divided into four quadrants, each representing a particular type of business. The circles represent products. Therefore, the size of the circle reflects the relative significance of the product to group sales. Furthermore, its development reflects the profit contribution to each division and occasionally represents in the pie segments within the circle. The Boston Consulting Group’s Growth Share Matrix Fig 2 (DISASTER SEQUENCE AND SUCCESS IN PRODUCT PORTFOLIO STARS QUESTION MARKS CASH COWS DOGS The disaster sequence moves from the dogs to stars to dogs in that order while the success sequence moves from the dogs to stars. Key Y AXIS – MARKET GROWTH RATE X AXIS – RELATIVE MARKET SHARE Disaster sequence (anticlockwise) The clockwise is the success sequence a) THE QUESTION MARKS These product or businesses compete in high growth markets, but where the markets share of the firm is relatively low. For instance, a new product launched into a high growth market and with an existing market leader is normally considered a question mark. Business firms with such products normally align themselves with either of the following intensive or divestment strategic options in order to improve the competitive position, sales volume and reputation of the firm: market penetration, market development and product development (David, 2011; Headley, 1977) b) THE STARS These are successful question marks (David, 2011). However, as Headley notes an investment is still normally required to maintain growth and defend the leadership position of the firm. As noted by Headley (1977), occasionally, they are marginally profitable products. However, as they achieve a more mature status in their life cycle and growth levels, they appear more attractive. He further notes that these products provide a basis for the long-term growth and profitability for the firm. During this business period, the firms normally adopt some strategic options such as market penetration; market and product development, joint ventures and integration. These defensive strategies are aimed at defending the market share and the leadership position from its competitors (David, 2011). C) THE CASH COW These are characterised by a relatively high market share in low growth industries. As the market matures, the need for the investment reduces due to a reduction in operating costs. As noted by the David (2011) and Headley (1977), these products are the most profitable products in the business portfolio. In addition, usually the market situation is boosted by the economies of scale already achieved by the market leaders in the industry. In financial constraints, cash cows can be used to fund the businesses when the organization is in the situation of the other three quadrants. Firms desire to maintain this strong position by a continued undertaking of both product development and concentric diversifications. This widens the market share as developed products are more attractive and can satisfy consumers better. However, if this position weakens because of the loss of the market share, a firm can retrench or even divest. d) THE DOGS This quadrant describe products and businesses that have low market shares and in a low growth markets. In most cases, they enjoy misguided authority from the management. However, some dogs can be revitalized, although the profitability is at best, marginal. David(2011) notes that successful products may move from question marks to stars to cash cows and finally to Dogs in their product life cycles while less successful products may just move from question marks to dogs (David, 2011). ADVANTAGES OF BCG GROWTH/SHARE MATRIX It is simple and useful technique in strategic analysis It is convenient for multi-product or multi-divisional companies. It also focuses on cash flows and useful tool in investment and market decisions of the firm. LIMITATIONS Definition (in terms of qualitative and quantitative) of the markets segments is cumbersome. It operates on assumptions that market share and profitability are related. The use of high and low to form categories is too simplistic and does not cater for other significant market variables such as consumer behaviour. Growth rate is only one aspect of the industry attractiveness and high growth market is not the only most important variable in the market. It considers the product or business in relation to the largest player ignoring the impact of the small competitors whose market share is rising fast and may favourably compete for the same market. It also ignores the interdependence and the synergy Lastly, it fails to present a fair and balanced portfolio since too many stars may lead a cash crisis, while too many cash cows may put profitability index at risk while too many question marks may affect the current profitability. PORTFOLIO ANALYSIS 2 THE INTERNAL-EXTERNAL MATRIX This matrix examines the internal and external environment’s strength and weaknesses so that appropriate strategic response can be initiated for business growth, survival and profitability. It positions the business in a nine-cell matrix. As noted by the Headley (1977), it uses two criteria to determine the position. These are internal strength and industry attractiveness. The individual product is represented by circles. As noted by the Headley, the horizontal axis reflects the internal strength and is divided into weak (1.0- 1.99); Average (2.0- 2.99); strong (3.0- 3.99) while the vertical axis reflects the industry attractiveness and is divided into weak (1.0-1.99); average (2.0-2.99); strong (3.0- 3.99). (David, 2011) Business strength (Internal factor) STRONG AVERAGE WEAK 4.0 Industry HIGH WINNER WINNER QUESTION MARK Attractiveness grow & build grow & build hold& maintain 3.0 (External factor) MEDIUM, WINNER AVERAGE LOSER Grow & build Hold & Maintain harvest & divest 2.0 LOW PROFIT LOSER LOSER PRODUCER harvest & divest harvest & divest Hold & maintain 4.0 3.0 2.0 1.0 Advantages It requires more information implying that it caters for more variables than BCG. Disadvantages It is dependent upon value judgement of the strategist. Cells that take up strategic options to ‘grow and build’ adopt intensive generic strategies such as market penetrations; both product and market development and integrative strategies such as integration. The cells that ‘Hold and maintain’ aimed at stabilizing the momentum of the business. These might include the following: market penetration and product development. However, cell marked with ‘loser’ are characterised by the relatively weak competitive position in a hostile environment and would suggest an appropriate defensive strategies such as harvest and divest. Successful companies will endeavour to build the company around as shown in cell marked Winner on a high scale. This will ensure that it stays competitively enjoying a larger market share, stronger position and larger pie of profits in long run (David, 2011). Recommendations As a strategist, I will recommend that the firm take up the Internal-external strategic option as it caters for several variables, which implies that it might reveal a lot of information and avoid a lot of ‘window dressing’ by managers and other strategic management practioners. The management issues such as conflicts, communication barriers and lack a good social goodwill will affect the manner in which strategies are planned, implemented and evaluated. Furthermore, the continued dynamics of technology and complexity of the environment continues to make strategic formulation a difficult and a tedious process that takes time to coin better and informed strategic choices. References David, F. (2011). Strategic management: concepts and cases. Upper Saddle River, NJ: Prentice Hall / Pearson. Headley, B (1977),’Strategy and business Portfolio’, Long Range Planning, Feb 1977. Read More