BOSTON CONSULTING GROUP MATRIX ( BCG )

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```					    BOSTON CONSULTING GROUP
MATRIX ( BCG )
This technique is particularly useful for multi-divisional or multi-
product companies. The divisions or products compromise the
organisations “business portfolio”. The composition of the portfolio
can be critical to the growth and success of the company.

The BCG matrix considers two variables, namely..

N MARKET GROWTH RATE

N RELATIVE MARKET SHARE

The market growth rate is shown on the vertical (y) axis and is
expressed as a %. The range is set somewhat arbitrarily. The
overhead shows a range of 0 to 20% with division between low
and high growth at 10% (the original work by B Headley “Strategy
and the business portfolio”, Long Range Planning, Feb 1977 used
these criteria). Inflation and/or Gross National Product have some
impact on the range and thus the vertical axis can be modified to
represent an index where the dividing line between low and high
growth is at 1.0. Industries expanding faster than inflation or GNP
would show above the line and those growing at less than inflation
or GNP would be classed as low growth and show below the line.

The horizontal (x) axis shows relative market share. The share is
calculated by reference to the largest competitor in the market.
Again the range and division between high and low shares is
arbitrary. The original work used a scale of 0.1, i.e. market
leadership occurs when the relative market share exceeds 1.0.

The BCG growth/share matrix is divided into four cells or
Divisions or products are represented by circles. The size of the
circle reflects the relative significance of the division/product to
group sales. A development of the matrix is to reflect the relative
profit contribution of each division and this is shown as a pie-
segment within the circle.
The Boston Consulting Group’s Growth Share Matrix

Stars                        Question Marks
20%

18%
Cash consumer                         Large
16%           Cash neutral                        negative
Market Growth Rate

cash flow
14%

12%
Optimum
10%                               Cash Flow
Cash Cow                          Dogs
8%

6%
Large                          Cash consumer
4%             positive                       Modest cash flow
cash flow
2%

0
10x

4x

2x
1.5x

1x

0.5x
0.4x
0.3x
0.2x

0.1x

Relative Market Share

SOURCE: Adapted from Hedley (1977), p12
Success and Disaster Sequences in the Product Portfolio

High
Stars              Question Marks
Market Growth Rate

Cash Cow                Dogs

Low
High                                           Low
Relative Market Share

Disaster sequences
Success sequences
N QUESTION MARKS

These are products or businesses, that compete in high growth
markets but where the market share is relatively low. A new
product launched into a high growth market and with an existing
market leader would normally be considered as a question mark.
Because of the high growth environment, they can be a “cash
sink”.

Strategic options for question marks include..

Market penetration

Market development

Product development

Which are all intensive strategies or divestment.

N STARS

Successful question marks become stars. i.e. market leaders in
high growth industries. However, investment is normally still
required to maintain growth and to defend the leadership position.
Stars are frequently only marginally profitable but as they reach a
more mature status in their life cycle and growth slows, returns
become more attractive. The stars provide the basis for long term
growth and profitability.

Strategic options for stars include..

Integration – forward, backward and horizontal

Market penetration

Market development

Product development

Joint ventures
N CASH COWS

These are characterised by high relative market share in low
growth industries. As the market matures the need for investment
reduces. Cash Cows are the most profitable products in the
portfolio. The situation is frequently boosted by economies of scale
that may be present with market leaders. Cash Cows may be used

It is desirable to maintain the strong position as long as possible
and strategic options include..

Product development

Concentric diversification

If the position weakens as a result of loss of market share or
market contraction then options would include..

Retrenchment (or even divestment)

N DOGS

These describe businesses that have low market shares in slow
growth markets. They may well have been Cash Cows. Often they
enjoy misguided loyalty from management although some Dogs
can be revitalised. Profitability is, at best, marginal.

Strategic options would include..

Retrenchment (if it is believed that it could be revitalised)

Liquidation

Divestment (if you can find someone to buy!)

Successful products may well move from question mark though
star to Cash Cow and finally to Dog. Less successful products that
never gain market position will move straight from question mark to
Dog.
The BCG is simple and useful technique for strategic analysis. It is
convenient for multi-product or multi-divisional companies. It
focuses on cash flow and is useful for investment and marketing
decisions.

One should not however, ignore the limitations of the technique.

Definition (qualitative and quantitative) of the market is
sometimes difficult.

It assumes that market share and profitability are directly
related.

The use of high and low to form four categories is too
simplistic.

Growth rate is only one aspect of industry attractiveness and
high growth markets are not always the most profitable.

It considers the product or business in relation to the largest
player only. It ignores the impact of small competitors whose
market share is rising fast.

Market share is only one aspect of overall competitive
position.

It ignores interdependence and synergy.

Companies will frequently search for a balanced portfolio, since..

Too many stars may lead to a cash crisis

Too many Cash Cows puts future profitability at risk

And too many question marks may affect current profitability.

Group exercise..
Using the data provided construct a BCG and answer the following
questions,
Has the company a balanced portfolio?
From the BCG what do you see as strengths and why?
Propose generic strategies for each division or product.
BCG Exercise
Consider a multi-divisional / product organisation
Using the following data construct a BCG matrix

Division / Product                 1                 2                  3           4             5

Sales £ million                 0.4               1.8               1.7          3.5           0.6

No. of Competitors                 6                 20                16           3             8

Sales of Market leaders £ million 0.8, 0.7, 0.4                  1.8,1.8,1.2        1.7,1.3,0.9   3.5,1.0,0.8   2.8,2.0,1.5

Market Growth (%)                  16                 18                 8           5             2

Total Market £ million              2.3              12.2               8.4          5.3           7.3

Industry/Product Profitability          8                 6                  9           5             6
% sales
Is the company balanced?
Identify strengths and weaknesses of company
Propose strategies for each division/product
The nine-cell matrix was developed by General Electric with the
assistance of McKinsey. As with the BCG it comprises a matrix of 2
dimensions.
(a) Industry attractiveness
(b) Business strength / competitive postion

In contrast to the BCG, the GEBS includes much more input than simply
industry growth rate and relative market share to assess the
attractiveness of the industry and the competitive position of the

Industry attractiveness will include such factors as

Market growth rate
Industry profitability
Industry size
Pricing practices

Business strength may include such factors as

Profitability
Technological position
Size

Individual products or business units (SBU) are plotted as circles. The
area of the circles is proportional to the industry size (in term of sales),
The shaded pie represents the market share for each product or SBU.

The procedure for assessing industry attractiveness and business
strength / competitive position is similar to that of IFE/EFE/CPM
computations. In both cases it involves four steps.

1. Industry attractiveness

(a) Select key attractiveness criteria

(b) Weigh each criterion in terms of relative importance in achieving
corporate objectives.
(0 – 1.0 and total with equal 1.0)

(c) Rate the industry on these criteria
1 = very unattractive
5 = very attractive

(d) Calculate weighted score (see table 1)
2. Business strength / competitive position

(a) Identify key factors for success in the industry

(b) Weigh each success factor in terms of its relative
importance to profitability (or some other measure of
success such as achieving corporate objectives)

(c) Rate the product / SBU on each factor

1 = very weak competitive position
5 = very strong competitive position

(d) Calculate weighted score (see table 2)

3. Plot current or SBU portfolio

4. Plot the firms future portfolio

Future attractiveness and competitive position should be
assessed (of forecasting, scenario projections) and the new
portfolio examined to determine whether it is improving or
deteriorating. Is there a “performance gap” between the projected
and desired portfolios

…….. the strategic gap.

Shell Directional Policy Matrix

Very similar to the GE Business screen and was developed
independently by Shell and is used extensively by European
firms.

Hofer Product / Market Evolution Matrix

One of the shortcomings of the GE Screen is that it does not
effectively display the impact of new products or SBU’s in
developing industries.

The fifteen-cell matrix developed by Hofer goes someway to
addressing this limitation. The Hofer matrix has axes of

(a) competitive position
(b) stage of product / market evolution
Table 1
An example of an Industry Attractiveness Assessment Matrix

ATTRACTIVENESS CRITERIA            WEIGHT*      RATING **   WEIGHTED
SCORE

Size                                  0.15           4         0.60
Growth                                0.12           3         0.36
Pricing                               0.05           3         0.15
Market diversity                      0.05           2         0.10
Competitive structure                 0.05           3         0.15
Industry profitability                0.20           3         0.60
Technical role                        0.05           4         0.20
Inflation vulnerability               0.05           2         0.10
Cyclicality                           0.05           2         0.10
Customer financials                   0.10           5         0.50
Energy impact                         0.08           4         0.32
Social                                GO             4           -
Environmental                         GO             4           -
Legal                                 GO             4           -
Human                                 0.05           4         0.20

1.00                     3.38

* Some criteria may be of a GO/NO GO type. For example, many firms
probably would decide not to invest in industries that are viewed
negatively by our society, such as gambling, even if it were both legal
and very profitable to do so.

** 1 (very unattractive ) through 5 (highly attractive)
Table 2
An example of a Business Strength / Competitive Position
Assessment Matrix for an SBU

KEY SUCCESS FACTORS                             WEIGHT*      RATING **    WEIGHTED
SCORE

Market share                                       0.10           5             0.50
SBU growth rate                                     X             3               -
Breadth of product line                            0.05           4             0.20
Sales distribution effectiveness                   0.20           4             0.80
Propriety and key account advantages                X             3               -
Price competitiveness                               X             4               -
Advertising and promotion effectiveness            0.05           4             0.20
Facilities location and newness                    0.05           5             0.25
Capacity and productivity                           X             3               -
Experience curve effects                           0.15           4             0.60
Raw materials cost                                 0.05           4             0.20
Relative product quality                           0.15           4             0.60
Cash throw-off                                     0.10           5             0.50
Calibre of personnel                                X             4               -
General image                                      0.05           5             0.25

1.00                         4.30

* For any particular industry, there will be some factors that, while
important in general, will have little or no effect on the relative
competitive position of firms within that industry. It is usually better to
drop such factors from the analysis than to assign them very low
weights.

** 1 (very weak competitive position) through 5 (very strong competitive
position)
PORTFOLIO ANALYSIS 2
The General Electric/McKinsey & Co. ‘Business Screen’ Matrix
(a.k.a. The ‘Internal – External’ Matrix)

COMPETITIVE POSITION

(Internal factor evaluation total
weighted scores)

STRONG            AVERAGE               WEAK

4.0
WINNER            WINNER        QUESTION
MARK
HIGH      - grow and         - grow and
build              build             -hold and
maintain
INDUSTRY
3.0
ATTRACTIVENESS                       WINNER        AVERAGE
LOSER
(External factor     MEDIUM     - grow and            -hold and
build              maintain      -harvest or


evaluation total
divest
weighted scores)
PROFIT
PRODUCER               LOSER             LOSER
LOW
-hold and      -harvest or      -harvest or
maintain         divest           divest

4.0               3.0               2.0               1.0
THE INTERNAL – EXTERNAL (IE) MATRIX

The IE matrix positions the company’s businesses in a nine cell
matrix. It is an improvement on the BCG and is similar to the GE
Business Screen. As with the BCG it uses two criteria to determine
position.

INTERNAL STRENGTH (as measured by IFE)

And

INDUSTRY ATTRACTIVENESS (as measured by EFE)

The individual products / divisions are represented as circles. As
with the BCG the size of the circles and the pie slices therein
reflect the relative significance of each business in terms of sales
and profit.

The horizontal axis reflecting internal strength is divided into

Weak (1.0 – 1.99)

Average (2.0 – 2.99)

Strong (3.0 – 3.99)

The vertical axis reflecting industry attractiveness is divided
similarly

Low (1.0 – 1.99)

Medium (2.0 – 2.99)

High (3.0 – 3.99)
The IE Matrix requires more information than the BCG and is felt to
be a more rigorous technique although it is much more dependant
on value judgements of the strategist(s) in the preparation of the
IFE and EFE.

1, 2 and 4 where the appropriate strategies might be “GROW AND
BUILD”. In generic terms such strategies would include

INTENSIVE
Market penetration

Market development

Product development

INTEGRATIVE
Backward integration

Forward integration

Horizontal integration

The prescription for cells 3, 5 and 7 is likely to be “HOLD AND
MAINTAIN” and might include

Market penetration
And
Product development

Finally, cells 6, 8 and 9, which are characterised by a relatively
weak competitive position in a hostile environment, would suggest
the appropriate strategies are either HARVEST or DIVEST.

Successful companies will endeavour to build a portfolio of
businesses in or around cell 1 in the IE matrix.

(Individual exercise: Using IFE and EFE scores, construct an IE
matrix for your organisation and derive some strategic proposals
An Example of an IE Matrix

THE IFE TOTAL WEIGHTED SCORES

Strong                 Average                  Weak
3.0 to 4.0             2.0 to 2.99   2.0       1.0 to 1.99
3.0                                           1.0
4.0
2
1
High
3.0 to 4.0                                     25%
50%

3.0
THE EFE                                                                     4
TOTAL                                           3
Medium
WEIGHTED   2.0 to 2.99                                                            5%
SCORES                                 20%
2.0

Low
1.0 to 1.99

1.0
The Internal – Ex te rnal Mat rIx

THE IFE TOTAL WEIGHTED SCORES
Grow and build
Strong                  Average
3.0 to 4.0              2.0 to 2.99            Weak
1.0 to 1.99

4.0                  3.0                    2.0                  1.0

High
3.0 to 4.0                I                   II                   III
3.0
THE EFE
TOTAL           Medium
WEIGHTED         2.0 to 2.99              IV                   V                    VI
SCORES
2.0

Low
1.0 to 1.99              VII                 VIII                  IX
1.0

Hold and maintain                                                        Harvest or divest
SWOT/TOWS Matrix

The analysis brings together the key elements of the internal
auditing. The analysis involves answering two questions.

N Where are the major opportunities and threats?

N How can we capitalise on our strengths and reduce our
weaknesses?

The first question relates to the environment and the second to
resources. The matrix construction involves the listing of key
threats, opportunities, weaknesses and strengths (IFE, EFE) and
then matching the factors to generate four different groups of
strategic options, namely ….

N SO where internal strength(s) are matched to external
opportunities.

N WO aimed at improving internal weaknesses by exploiting
external opportunities.

N ST where the organisation uses its strengths to avoid or
reduce the impact of external threats.

N WT where defensive strategies are adopted to reduce
internal weaknesses and avoid external threats.

Unlike the portfolio (e.g. BCG) or directional (e.g. Shell) matrices, it
is suggested that specific rather than generic strategies are
generated from the exercise.

(individual exercise …. Construct a TOWS matrix and generate
SO, WO, ST and WO strategies for your organisation)
SWOT Evaluation (Current)

STRENGTHS      WEAKNESSES

Current
Aims and
Objectives
OPPORTUNITIES

SO Decisions   WO Decisions

ST Decisions   WT Decisions
THREATS
TOWS Analysis

FUTURE          OPPORTUNITIES              THREATS

Aims, objectives   As identified by       As identified by
and policies as    scenario               scenario
developed from     projection             projection
TOWS analysis      techniques             techniques

STRENGTHS           STRATEGY                STRATEGY

Calculated as      To grasp the           To fend off the
necessary to       future                 future threat
future             opportunity
performance

WEAKNESSES          STRATEGY                STRATEGY

To be eradicated   To ensure that         To avoid or
or to be           future                 pre-empt the
prevented          opportunities are      future threat
not lost

Developed from ideas of
H Weihrich, 1982
Grand Strategy Mix (GSM)

The Grand Strategy Mix (GSM) would appear to be growing in
popularity as a tool for formulating strategic alternatives. The
matrix considers two parameters, namely

N COMPETITIVE POSITION
N MARKET GROWTH
(cf BCG, GEBS and IE matrices)

Competitive position could be measured by an IFE. The matrix can
be used for both organisations or SBU’s. The matrix shows
“appropriate” strategies for the organisation or business unit in
order of attractiveness.

Strong strategic position. Strong competitive position in a high
growth market. It would seem logical for such organisations to
concentrate on their current markets and products, e.g.

MARKET DEVELOPMENT

MARKET PENETRATION

PRODUCT DEVELOPMENT

There may be reasons why an organisation or business unit would
wish to change, e.g.

Utilise excess resources (physical, financial, human) by

Limited product portfolio may suggest CONCENTRIC
INTEGRATION

DIVERSIFICATION for future security.

Opportunities exist for growth in Quadrant 2 but the organisations
in this quadrant are ineffective (Resources?, Products?,
Management? etc). The first option must surely be an INTENSIVE
strategy bur other options include HORIZONTAL integration. If the
organisation is unable to find the competitive advantage to exploit
the market growth DIVESTMENT or even LIQUIDATION are
options.

Organisations in this quadrant have a weak competitive position
and compete in slow growth industries. The options are obviously
DIVESTMENT or LIQUIDATION but RETRENCHMENT or even
DIVERSIFICATION could be considered if exit costs were
unacceptable.

Organisations with competitive strength but operate in low growth
industries. Preferred option is to move into a more attractive
industry by CONCENTRIC, HORIZONTAL or CONGLOMERATE
DIVERSIFICATION.
The Grand Strategy matrix

RAPID MARKET GROWTH

20%

1.   Market development         1.   Market development
2.   Market penetration         2.   Market penetration
3.   Product development        3.   Product development
4.   Horizontal integration     4.   Forward integration


5.   Divestment                 5.   Backward integration


Liquidation                6.   Horizontal integration
Concentric
WEAK                                              Diversification                      STRONG
10%
COMPETITIVE                                                                            COMPETITIVE

1. Retrenchment                 1. Concentric diversification
2. Concentric diversification   2. Horizontal diversification
3. Horizontal diversification   3. Conglomerate

 Joint ventures
4. Conglomerate                    diversification
diversification

 Liquidation
5. Divestment

0%
-6                               -3                            0
SLOW MARKET GROWTH
Some Matching Tools in Strategy Formulation

7.1 SPACE (After Fred David)

The Strategic Position and Action Matrix was developed by Rowe, Mason and
Dickel (Strategic Management and Business Policy – a methodical approach,
Addison Wesley 1982). It is a matching tool that indicates what general type
of strategy and organisation should follow..

AGGRESSIVE

CONSERVATIVE

DEFENSIVE
COMPETITIVE

The technique involves the production of a vector on a matrix where the axes
represent…

Financial strength (FS)

that are both internal dimensions and

Environmental stability (ES)

Industry Strength (IS)

that are external dimensions

The steps in the construction of the matrix are ..

a. Select a set of variables that reflect the internal and external
dimensions (see David P 214)
b. Assign a rating to each variable
FS and IS will be between +1 and +6 where +1 is the worst situation
and +6 the best.
ES and CA will be between –1 and –6 where –1 is the best situation
and –6 the worst.
c. Compute the average score for each dimension (ie FS, CA, IS, ES)
d. Plot the average scores for each dimension on the relevant axes
e. Add the scores on the x axis and plot the result
Add the scores on the y axis and plot the result
f. Finally, draw a directional vector from the origin through the
intersection point.
The vector will lie in one of the four quadrants

AGGRESSIVE strategies that might include ..

Market penetration

Market development

Product development

Integration
Diversification

CONSERVATIVE strategies that might include..

Market penetration

Market development

Product development
Concentric diversification

DEFENSIVE strategies that might include…

Retrenchment

Divestment

Concentric diversification

COMPETITIVE strategies that might include..

Integration

Market penetration

Market development

Product development
Joint venture
PORTFOLIO ANALYSIS:

The Strategic Position and Action Evaluation (SPACE) matrix

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