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Strategic Management

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Strategic Management ­ MGT603
VU
Lesson 27
BOSTON CONSULTING GROUP (BCG) MATRIX
Learning objective
After understanding this chapter you are able to understand BCG and IE matrices and also understand
how to prepare these matrices for any organization and what its practical implementation in various
organizations.
Boston Consulting Group (BCG) Matrix
The Boston Consulting Group (BCG) is a management consulting firm founded by Harvard
Business School alum Bruce Henderson in 1963. The growth-share matrix is a chart created by group
in 1970 to help corporation analyze their business units or product lines, and decide where to allocate
cash. It was popular for two decades, and is still used as an analytical tool.
To use the chart, corporate analysts would plot a scatter graph of their business units, ranking their
relative market shares and the growth rates of their respective industries. This led to a categorization of
four different types of businesses:
Cash cows Units with high market share in a slow-growing industry. These units typically generate
cash in excess of the amount of cash needed to maintain the business. They are regarded as staid
and boring, in a "mature" market, and every corporation would be thrilled to own as many as
possible. They are to be "milked" continuously with as little investment as possible, since such
investment would be wasted in an industry with low growth.
Dogs More charitably called pets, units with low market share in a mature, slow-growing industry.
These units typically "break even", generating barely enough cash to maintain the business's market
share. Though owning a break-even unit provides the social benefit of providing jobs and possible
synergies that assist other business units, from an accounting point of view such a unit is worthless,
not generating cash for the company. They depress a profitable company's return on assets ratio,
used by many investors to judge how well a company is being managed. Dogs, it is thought, should
be sold off.
Question marks Units with low market share in a fast-growing industry. Such business units
require large amounts of cash to grow their market share. The corporate goal must be to grow the
business to become a star. Otherwise, when the industry matures and growth slows, the unit will
fall down into the dog's category.
Stars Units with a high market share in a fast-growing industry. The hope is that stars become the
next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is
worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become
cash cows if they have been able to maintain their category leadership.
103
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Strategic Management ­ MGT603
VU
As a particular industry matures and its growth slows, all business units become either cash cows or
dogs.
The overall goal of this ranking was to help corporate analysts decide which of their business units to
fund, and how much; and which units to sell. Managers were supposed to gain perspective from this
analysis that allowed them to plan with confidence to use money generated by the cash cows to fund
the stars and, possibly, the question marks. As the BCG stated in 1970:
Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its
growth opportunities. The balanced portfolio has:
Stars whose high share and high growth assure the future;
Cash cows that supply funds for that future growth; and
Question marks to be converted into stars with the added funds.
Practical Use of the Boston Matrix
For each product or service the 'area' of the circle represents the value of its sales. The Boston Matrix
thus offers a very useful 'map' of the organization's product (or service) strengths and weaknesses (at
least in terms of current profitability) as well as the likely cash flows.
The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one
of the main indicators of cash generation was relative market share, and one which pointed to cash
usage was that of market growth rate.
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 Boston 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 per cent, and the largest competitor had the
same, the ratio would be 1:1. If the largest competitor had a share of 60 per cent, 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 per cent, 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 flow. If this technique is used
in practice, it should be noted that this scale is logarithmic, not linear.
On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is
that the most stable position (at least in FMCG markets) is for the brand leader to have a share double
that of the second brand, and treble that of the third. Brand leaders in this position tend to be very
stable - and profitable
The reason for choosing relative market share, rather than just profits, is that it carries more
information than just cash flow. It shows where the brand is positioned against its main competitors,
and indicates where it might be likely to go in the future. It can also show what type of marketing
activities might be expected to be effective.
Limitations
1. Viewing every business as a star, cash cow, dog, or question mark is overly simplistic.
2. Many businesses fall right in the middle of the BCG matrix and thus are not easily classified.
3. The BCG matrix does not reflect whether or not various divisions or their industries are growing
over time.
4. Other variables besides relative market share position and industry growth rate in sales are
important in making strategic decisions about various divisions.
Conclusion
After discussion, the BCG matrix is an important matrix regarding strategy adopted by firm. Still this
matrix concern four strategy first growth or build strategy enhance market share), second is hold
strategy (hold existing position), third Harvesting strategy (no further growth or select other
opportunity), fourth is diversity (sell out the part of business)
104
Table of Contents:
  1. NATURE OF STRATEGIC MANAGEMENT:Interpretation, Strategy evaluation
  2. KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements
  3. INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives
  4. BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition
  5. COMPREHENSIVE STRATEGIC MODEL:Mission statement, Narrow Mission:
  6. CHARACTERISTICS OF A MISSION STATEMENT:A Declaration of Attitude
  7. EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces
  8. KEY EXTERNAL FACTORS:Economic Forces, Trends for the 2000ís USA
  9. EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS):Political, Governmental, and Legal Forces
  10. TECHNOLOGICAL FORCES:Technology-based issues
  11. INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM)
  12. IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit
  13. FUNCTIONS OF MANAGEMENT:Planning, Organizing, Motivating, Staffing
  14. FUNCTIONS OF MANAGEMENT:Customer Analysis, Product and Service Planning, Pricing
  15. INTERNAL ASSESSMENT (FINANCE/ACCOUNTING):Basic Types of Financial Ratios
  16. ANALYTICAL TOOLS:Research and Development, The functional support role
  17. THE INTERNAL FACTOR EVALUATION (IFE) MATRIX:Explanation
  18. TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies
  19. TYPES OF STRATEGIES:Horizontal Integration, Michael Porterís Generic Strategies
  20. TYPES OF STRATEGIES:Intensive Strategies, Market Development, Product Development
  21. TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification
  22. TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation
  23. STRATEGY-FORMULATION FRAMEWORK:A Comprehensive Strategy-Formulation Framework
  24. THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS (TOWS) MATRIX:WT Strategies
  25. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  26. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  27. BOSTON CONSULTING GROUP (BCG) MATRIX:Cash cows, Question marks
  28. BOSTON CONSULTING GROUP (BCG) MATRIX:Steps for the development of IE matrix
  29. GRAND STRATEGY MATRIX:RAPID MARKET GROWTH, SLOW MARKET GROWTH
  30. GRAND STRATEGY MATRIX:Preparation of matrix, Key External Factors
  31. THE NATURE OF STRATEGY IMPLEMENTATION:Management Perspectives, The SMART criteria
  32. RESOURCE ALLOCATION
  33. ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure
  34. RESTRUCTURING:Characteristics, Results, Reengineering
  35. PRODUCTION/OPERATIONS CONCERNS WHEN IMPLEMENTING STRATEGIES:Philosophy
  36. MARKET SEGMENTATION:Demographic Segmentation, Behavioralistic Segmentation
  37. MARKET SEGMENTATION:Product Decisions, Distribution (Place) Decisions, Product Positioning
  38. FINANCE/ACCOUNTING ISSUES:DEBIT, USES OF PRO FORMA STATEMENTS
  39. RESEARCH AND DEVELOPMENT ISSUES
  40. STRATEGY REVIEW, EVALUATION AND CONTROL:Evaluation, The threat of new entrants
  41. PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities
  42. STRATEGY EVALUATION:Consistency, The process of evaluating Strategies
  43. REVIEWING BASES OF STRATEGY:Measuring Organizational Performance
  44. MEASURING ORGANIZATIONAL PERFORMANCE
  45. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM:Contingency Planning