BCG Matrix, SWOT Analysis and

Porter Model

BCG Matrix

Introduction:

The Boston Consulting Group (BCG) Matrix is an uncomplicated tool to evaluate a

company’s position in terms of its product range. It facilitates a company think about its

products and services and makes decisions about which it should keep, which it should let

go and which it should invest in further.

Also called the BCG Matrix, it provides a useful way of screening the opportunities open to

the company and helps to think about where one can best allocate resources to maximize

profit in the future. At the end of the 1960s, Bruce Henderson, creator of the Boston

Consulting Group, BCG, developed portfolio matrix. The BCG Growth-Share Matrix is a four-

cell (2 by 2) matrix used to execute business portfolio analysis as a footstep in the strategic

planning process. BCG matrix is often used to prioritize which products within company

product mix get more funding and attention

BCG matrix takes into account two strategic parameter into consideration namely, market

share and market growth. To understand the Boston Matrix, one must understand how

market share and market growth are interrelated.

Market share is the percentage of the total market that is being serviced by a company

under consideration, measured either in revenue terms or unit volume terms. Higher the

market share, the higher the proportion of the market one controls. The Boston Matrix

assumes that if the company under consideration is enjoying a high market share then it

will be making more money. (This assumption is based on the idea that company has been

in the market for long enough to have learned how to be profitable, and will be enjoying

scale economies that gives an advantage).

Market growth is used as a measure of a market's attractiveness. Markets experiencing high

growth are ones where the total market is expanding, meaning that it’s relatively easy for

businesses to grow their profits, even if their market share remains stable. While,

competition in low growth markets is often bitter, and while you might have high market

share now, it may be hard to retain that market share without aggressive discounting. This

makes low growth markets less attractive.

Understanding the Matrix:

Question Marks / Problem Child (Low Market Share / High Market Growth)

Question marks are the products that grow rapidly and as a result consume large amounts

of cash, but because they have low market shares they don’t generate much cash. The

result is large net cash consumption. A question mark has the potential to gain market

share and become a star, and eventually a cash cow when the market growth slows. If it

doesn’t become a market leader it will become a dog when market growth declines.

Question marks need to be examined carefully to determine if they are worth the

investment required to grow market share.

Dogs (Low Market Share / Low Market Growth)

Dogs have a low market share and a low growth rate and neither generates nor consumes a

large amount of cash. However, dogs are a cash trap because of the money is being tied up

in a business that has little potential. Such businesses are candidate for divestiture.

Stars (High Market Share / High Market Growth)

A Star is being able to generate huge sum of cash because of their strong relative market

share, but simultaneously it also consumes large amounts of cash because of their high

growth rate. So the cash being spent and brought in approximately nets out. If a star can

maintain its large market share it will become a cash cow when the market growth rate

declines.

Cash Cows (High Market Share / Low Market Growth)

As leaders in a mature market, a cash cow demonstrates a return on assets that is greater

than the market growth rate – so they generate more cash than they consume. These units

should be ‘milked’ extracting the profits and investing as modest as possible.

After plotting the company one among the four matrix depending on its respective market

share and growth of its market in which it is operating, determine what you will do with

each product/product line. There are typically four different strategies to apply:

•Build Market Share: Make further investments (for example, to maintain Star status, or

to turn a Question Mark into a Star).

•Hold: Maintain the status quo (do nothing).

•Harvest: Reduce the investment (enjoy positive cash flow and maximize profits from a

Star or a Cash Cow).

•Divest: For example, get rid of the Dogs, and use the capital you receive to invest in Stars

and Question Marks.

Disadvantages:

The model uses only two dimensions (i.e. growth and share) to assess competitive position,

others are ignored.

More focus on balancing cash flows rather than other interdependencies.

More emphasis on cost leadership rather than differentiation as a source of competitive

advantage.

Poor correlation between market share and profitability.

A high market share does not necessarily lead to profitability at all times.

Low share or niche businesses can be profitable too (some Dogs can be more profitable than

cash Cows).

Question mark:

Don't have a large market share in a growing market

Question marks are essentially new products

Question Marks might become Stars and eventually Cash Cows

It need to increase their market share or they become dogs.

Dog

Market presence is weak

Do not enjoy the scale economies

Dogs should be avoided and minimized.

Stars:

Well-established in the growing market

Strong opportunities

Cash Cows

Well-established in the market

Market isn't growing, opportunities are limited

Due to low growth, promotion & placement investments are low

SWOT analysis

The SWOT analysis is one of the very useful tool for understanding and decision-making for

all sorts of situations in business and organizations. SWOT is an acronym for Strengths,

Weaknesses, Opportunities, and Threats. A scan of the internal and external environment is

a crucial part of the strategic planning process, which is being covered by SWOT analysis. It

is used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a

project or in a business venture. Strengths, Weaknesses are considered to be internal to the

corporation or organisation where as Opportunities, and Threats are part of the external

environment. The analysis involves identifying the purpose of the business venture or

project and recognizing the internal and external factors that are favorable and unfavorable

to achieve that goal. The method is being developed by Albert Humphrey, who led a

convention at Stanford University in the 1960s and 1970s using data from Fortune 500

companies.

1. Strengths: Uniqueness of the business or department that give it an advantage over others

in the industry.

2. Weaknesses: These are characteristics that place the firm at a disadvantage relative to its

peers.

3. Opportunities: These are the external factors that will boost the sales or profitability of the

organisation.

4. Threats: These external elements in the environment could cause trouble for the business.

The internal factors may be viewed as strengths or weaknesses depending upon their

impact on the organization's objectives. What may represent strengths with respect to one

objective may be weaknesses for another objective. Identification of SWOTs is essential

because subsequent steps in the process of planning for achievement of the selected

objective may be derived from the SWOTs. SWOT analysis is a tool for auditing an

organization and its environment. It is the first stage of planning and helps to focus on key

issues.

Some examples when SWOT analysis can be used:

Company (its position in the market, commercial viability, etc)

Method of sales distribution

Business idea

Strategic option, such as entering a new market or launching a new product

Opportunity to make an acquisition

Potential partnership

Changing a supplier

Outsourcing a service, activity or resource

Analyzing any investment opportunity etc.

Matching and converting:

Another way of utilizing SWOT is matching and converting. Matching is used to find

competitive advantages by matching the strengths to opportunities. Converting is to apply

conversion strategies to convert weaknesses or threats into strengths or opportunities. An

example of conversion strategy is to find new markets. If the threats or weaknesses cannot

be converted a company should try to minimize or avoid them.

Disadvantage:

SWOT analysis is a method of categorization and has its own weaknesses. For example, it

may tend to persuade companies to compile lists rather than think about what is actually

important in achieving objectives. It also presents the resulting lists uncritically and without

clear prioritization so that, for example, weak opportunities may appear to balance strong

threats.

List of some general Strengths, Weaknesses, Opportunities, and Threats:

Strengths An innovative product/service

Marketing expertise

Location of the business

Quality processes & procedures

Any other aspect that adds value to product /service

Weakness Lack of marketing expertise

Undifferentiated product /services

Poor quality

Inefficient staff

Poor Infrastructure

Poor management

Damaged reputation etc.

Opportunities Developing market

Mergers, joint ventures or strategic alliances

new international market

Government intiative and support etc.

Threat s New competitor

Additional Taxation introduced

Adverse macroeconomic matter

Some technological changes

Adverse legislation

socio-cultural changes etc.

• itical effects

• Legislative effects

• Environmental effects

• IT developments

• Competitor intentions

• Market demand

• New technologies, services, ideas

• Vital contracts and partners

• Sustaining internal capabilities

• Obstacles faced

• Irresistible weaknesses

• Loss of key staff

• Sustainable financial backing

• Economy - home, abroad

• Seasonality, weather effects

• Market developments

• Competitors' vulnerabilities

• Industry or lifestyle trends

• Technology development and innovation

• Global influences

• New markets, vertical, horizontal

• Niche target markets

• Geographical, export, import

• New USP's

• Tactics - surprise, major contracts

• Business and product development

• Information and research

• Partnerships, agencies, distribution

• Volumes, production, economies

• Seasonal, weather, fashion influences

• Disadvantages of the proposal

• Gaps in capabilities

• Lack of competitive strength

• Reputation, presence & reach

• Financials

• Timescales, deadlines & pressures

• Cashflow, start-up cash-drain

• Continuity, supply chain robustness

• Effects on core activities, distraction

• Reliability of data

• Morale, commitment, leadership

• Processes and systems’ inability

• Benefits of proposal

• Capabilities

• Competitive advantages

• USP's (unique selling points)

• Resources, Assets, People

• Experience, knowledge, data

• Financial reserves, expected returns

• Marketing - reach, distribution, awareness

• Innovative aspects

• Location advantage

• Price, value, quality

• certifications

• Processes, systems, IT, communications

• Cultural, attitudinal, behavioural aspects

• Management cover etc. S W

T O

Porter's five forces model Michael Porter's Five Forces of Competitive Position model provides a simple perspective for

assessing and analyzing the competitive strength and position of a corporation or business

organization. In 1990's American Michael Porter had established a reputation as a strategy

guru. Apart from his novel thinking, Porter has a unique talent to represent complex

concepts in relatively easy to handle formats, notably his Five Forces model, in which

market factors can be analyzed so as to make a strategic assessment of the competitive

position of a given supplier in a given market. The model originated from Michael E. Porter's

1980 book "Competitive Strategy: Techniques for Analyzing Industries and Competitors."

The five forces that Porter suggests drive competition are:

The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies

in a business situation. It helps to understand both the strength of present competitive

position and the strength of a position one is willing to aspire. With a clear understanding of

where power lies, one can take a fair advantage of the situation by improving a situation of

weakness and avoid taking wrong steps. Conventionally, the tool is used to identify whether

new products, services or businesses have the potential to be profitable.

New Market Entrants

Buyer Power

Competitive Rivalry

Supplier Power

Threat of Substitute

Five Forces Analysis assumes that there are five important forces that determine

competitive power in a business situation. These are briefed as under:

Supplier Power: Here we need to assess how easy it is for suppliers to drive up the prices.

This is to determine how much pressure suppliers can place on a business. If one supplier

has a large enough impact to affect a company's margins and volumes, then it holds

substantial power. Here are a few reasons that suppliers might have power:

There are very few suppliers of a particular product

Uniqueness of their product or service i.e. there are no substitutes

Switching to another (competitive) product is very costly

The product is extremely important to buyers - can't do without it

Buyer Power: In this factor we need to analyse how easy it is for buyers to drive prices

down. This is to determine how much pressure customers can place on a business. If one

customer has a large enough impact to affect a company's margins and volumes, then the

customer holds a substantial power. Here are a few reasons that customers might have

power:

Importance of each individual buyer to business, i.e. Small number of buyers

Purchases large volumes

Switching to another (competitive) product is simple

The product is not extremely important to buyers; they can do without the product for a

period of time

Customers are price sensitive

Cost to them of switching from our products and services to those of someone else

Competitive Rivalry: What is important here is the number and capability of competitors.

If business we are operating in has many competitors, and they offer equally attractive

products and services, then we most likely have little power in the situation, because

suppliers and buyers will go elsewhere if they don't get a good deal. On the other hand, if

no-one else can do what we do, then we can often have tremendous strength. Highly

competitive industries generally earn low returns because the cost of competition is high. A

highly competitive market might result from:

Many players of about the same size; there is no dominant firm

Little differentiation between competitors’ products and services

A mature industry with very little growth; companies can only grow by stealing customers

away from competitors.

Threat of Substitution: What is the likelihood that someone will switch to a competitive

product or service? If the cost of switching is low, then this poses a serious threat. If

substitution is easy and substitution is viable, then this weakens your power.Here are a few

factors that can affect the threat of substitutes:

The main issue is the similarity of substitutes. For example, if the price of coffee rises

substantially, a coffee drinker may switch over to a beverage like tea.

If substitutes are similar, it can be viewed in the same light as a new entrant.

Threat of New Entry: Power is also affected by the ability of people to enter the market.

The easier it is for new companies to enter the industry, the more cutthroat competition

there will be. Factors that can limit the threat of new entrants are known as barriers to

entry. Some examples include:

Existing loyalty to major brands

Incentives for using a particular buyer (such as frequent shopper programs)

High fixed costs

Scarcity of resources

High costs of switching companies

Government restrictions or legislation

Research Team Mr. Amit Gupta amitg@iseindia.com

Ms. Binal Vora binalv@iseindia.com

Ms. Sandhya Tungatkar Sandhyat@iseindia.com

Research Team research@iseindia.com

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