Techniques of strategy selection

The growth–share matrix (aka the product portfolio,BCG-matrix, Boston matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that was created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations to analyze their business units, that is, their product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis.

The Boston Consulting Group’s Growth-Share Matrix

20%-18%-16%-14%-12%-10%- 8%- 6%- 4%- 2%- 0M

arke

t Gro

wth

Rat

e

10x 4x 2x 1.5x 1x Relative Market Share

.5x .4x .3x .2x .1x

Dogs 87

3 ?Question marks? ?

2

1

Cash cows

6

Stars

5

4

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.

• If this technique is used in practice, this scale is logarithmic, not linear.

Market growth rate• Rapidly growing in rapidly growing markets, are what organizations strive for; but,

as we have seen, the penalty is that they are usually net cash users – they require investment.

• The reason for this is often because the growth is being 'bought' by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits.

• The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment. The cut-off point is usually chosen as 10 per cent per annum.

• Determining this cut-off point, the rate above which the growth is deemed to be significant (and likely to lead to extra demands on cash) is a critical requirement of the technique; and one that, again, makes the use of the growth–share matrix problematical in some product areas.

• What is more, the evidence, from fast-moving consumer goods markets at least, is that the most typical pattern is of very low growth, less than 1 per cent per annum. This is outside the range normally considered in BCG Matrix work, which may make application of this form of analysis unworkable in many markets.

• Where it can be applied, however, the market growth rate says more about the brand position than just its cash flow.

• Cash cows is where a company has 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, yet corporations value owning them due to their cash generating qualities. 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, are 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 (also known as problem children) are business operating in a high market growth, but having a low market share. They are a starting point for most businesses. Question marks have a potential to gain market share and become stars, and eventually cash cows when market growth slows. If question marks do not succeed in becoming a market leader, then after perhaps years of cash consumption, they will degenerate into dogs when market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

• Stars are units with a high market share in a fast-growing industry.

• They are graduated question marks with a market or niche leading trajectory, for example: amongst market share front-runners in a high-growth sector, and/or having a monopolistic or increasingly dominant USP with burgeoning/fortuitous proposition drive(s) from: novelty (e.g. Last.FM upon CBS Interactive's due diligence), fashion/promotion (e.g. newly prestigious celebrity branded fragrances), customer loyalty (e.g. greenfield or military/gang enforcement backed, and/or innovative, grey-market/illicit retail of addictive drugs, for instance the British East India Company's, late-1700s opium-based Qianlong Emperor embargo-busting, Canton System), goodwill (e.g. monopsonies) and/orgearing(e.g. oligopolies, for instance Portland cement producers near boomtowns).

• The hope is that stars become next cash cows.

• Stars require high funding to fight competitions and maintain a growth rate. When industry growth slows, if they remain a niche leader or are amongst market leaders they have been able to maintain their category leadership stars become cash cows, else they become dogs due to low relative market share.

• As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.

• 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

• "To be successful, a company should have a portfolio of products with different growth rates and different market shares. The portfolio composition is a function of the balance between cash flows. High growth products require cash inputs to grow. Low growth products should generate excess cash. Both kinds are needed simultaneously."—Bruce Henderson[3]

• For each product or service, the 'area' of the circle represents the value of its sales. The growth–share matrix thus offers a "map" of the organization's product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cashflows.

• 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.

Construction of the G.E Matrix

• The G.E matrix is constructed in a 3x3 grid with Market Attractiveness plotted on the Y-axis and Business Strength on the X-axis, both being measured on a high,medium,or low score. Five steps must be considered in order to formulate the matrix;

• The range of products produced by the SBU must be listed• Factors which make the particular market attractive must be

identified• Evaluating where the SBU stands in this market• Processes through which calculations about business strength and

market attractiveness can be made• Determining which category an SBU lies in; high, medium, or low.

Market attractiveness

• The attractiveness of a market is demonstrated by how beneficial it is for a company to enter and compete within this market. It is based on various factors; the size of the market and the rate at which it is growing, the possibility of profit, the number of competitors within the industry and their weaknesses

Business/competitive strength

• This helps decide whether a company is competent enough to compete in the given market(s). It can be determined by factors within the company itself such as its assets and holdings, the share it company holds in the market and the development of this share, the position in the market of its brand and the loyalty of customers to this brand,its creativeness in coming up with new and improved products and in dealing with the fluctuating situations of the market, as well as keeping in mind environmental/government concerns such as energy consumption, waste disposal etc.

GE-McKinsey 9-Box Matrix

GE-McKinsey 9-Box Matrix

GE-McKinsey 9-Box Matrix

Advantages

• Raises awareness between managers about the performance of their products in the market and aids in developing strategies to get maximum returns from the resources available.

• Helps extract information about a business unit's strengths and weaknesses and to devise strategies to accelerate and improve performance.

• Aids the business in growing and in providing information about potential market opportunities.

It is more complex in comparison to the BCG matrix.

Limitations

There is no set rule to 'weight' factors and this process may be subjective across different business unit's. For example, the weight given to a factor by one business may be different to the weight/importance given to it by another.The formulation of a G.E. matrix is very expensive and time consuming.Investment strategies are often not implemented in an accurate and proper manner.The dynamics among SBU's themselves are not taken into account.

Comparison with the BCG matrix

When compared to the BCG matrix consisting of four cells, the GE matrix is more complex with its nine cells. This means it not only takes longer to construct, but also to implement. The BCG matrix is a lot more simpler and the factors needed to construct it are accessed more easily and quickly.It takes into account a wide range of factors when determining market attractiveness and business strengths, which is replaced by market share and market growth in the BCG matrix. Also, where factors are classified in the G.E matrix as high, medium and low, those in the BCG matrix are divided between high and low. Moreover, the G.E matrix overcomes many of the limitations and constraints of the BCG matrix.

Hofer’s Product Market Matrix

Product Market Evolution Matrix displays thematrix where strategic business units are graphically represented according to twobasic indicators: Competitive position on the market stage corresponding to the product/market evolution.

Charles W. Hofer described seven stages of the life cycle, each with certain characteristics by which the position of the market can be identified.

DEVELOPMENT GROWTH SHAKE-OUT MATURITY DECLINE PETRIFICATION

Business unit A It would to be a developing winner. Its relatively large share of the market combined with its being at the development stage of product- market evolution and its potential for being in a strong competitive position make it a good candidate for receiving more corporate resources. Business unit B It is somewhat similar to A. However, it has a relatively small share of the market given its strong competitive position. A strategy would have to be developed to overcome this low market share in order to justify more investments.

Business unit CIt might be classified as a potential loser. A strategy must be developed to overcome the low market share and weak competitive position in order to justify future investments.

Business unit D It is in a shakeout period, has a relatively large share of the market, and is in a relatively strong position. Investment should be made to maintain that position.

Business units E and F They have relatively large market share and has strong competitive position. It should be used for cash generation.

Business unit G It has low market share and weak competitive position. It should be managed to generate cash in the short run, if possible; however, the long-run strategy will more the likely be divestment or liquidation.

STRENGHTS

o Set objective and allocate resourceso Use of externally oriented datao Cash flow availabilityo Illustrates distribution of business in an industryo Encourages promotion of competitive analysiso Reduce risks, increases concentration and

involvement in competitive world

WEAKNESS

o Difficulty in defining product/market segment.o Suggests impractical standard strategies.o Naively following portfolio prescriptions may reduce

profit.o Provides an illusion of scientific rigor.o No clear idea what makes an industry attractive .

The power of the Hofer matrix resides in the fact that it may outline the distribution of strategic businessunits during stages specific to life cycle of the market.

Similar to the McKinsey matrix, the present matrixoffers the company the possibility to make a diagnosisregarding the portfolio, in order to establish if it exhibitsa balanced or unbalanced structure.

A balanced portfolio should be composed ofstrategic business units of the type corresponding to ”Stars” and to ”Cash Cows” and to a few ”QuestionMarks”, which have recently penetrated the market or which are about to become ”Stars”.