Bcg Matrix

INTRODUCTION At the end of the 1960s, Bruce Henderson, founder of the Boston Consulting Group, BCG, developed his portfolio matrix. The effect on the business world was dramatic. Henderson first came up with the concept of an experience curve, which differs widely from the learning curve, a concept formulated many years before and which states that staff productivity increases according to the number of times a particular work task is carried out. The experience curve does not have the inherent threshold effects of the learning curve. The experience curve states that when a particular task is duplicated, the cost of carrying it out the second time will fall by about 20 per cent. Thus, by doubling our sales force, customer sales costs will fall by about 20 per cent. The same thing applies to invoicing, production, etc. For more on this, see the entry Experience curve. The other important principle in the BCG concept was relative market share, which was calculated in relation to the biggest competitor. The experience curve was combined with relative market share and the life cycle curve in the well-known BCG matrix shown in the figure below. The matrix was popularized by the use of symbols mainly representing animals. Such terms as ‘dogs’, ‘wildcats’, ‘star’ and ‘cash cow’ subsequently came into business use, whereupon the Boston matrix was referred to as the ‘BCG zoo’.

If we look at the four squares of the BCG zoo and try to predict cash flow for the next 3.5 years, we begin to make out certain patterns. The dog or the star should have a minimal positive or negative cash flow. The cash cowdelivers very positive cash flow, while the wildcat has negative cash flow. When portfolio strategy was in its infancy, balancing the cash flow was one of group management’s most important functions. The theory was that cash flow should be created in the cash cow and invested in the wildcatting order to increase market share and reach a strong competitive position. This would then bring the unit into the star square. When the market gradually stopped growing, the star business would tumble into the cash cow. The underlying idea of the BCG matrix is that the best strategy is to dominate market share when the market is mature. The thinking goes like this: 1. Profitability is greatest when the market matures. 2. A dominating market share gives the highest accumulated production

volume. 3. According to the experience curve, high volume leads to lower production

costs. 4. Low production costs can either be used to lower prices and take market

share, or to increase profit margins. MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and market growth. They often are pointers to healthiness of a business (Kotler 2003; McDonald 2003). In other words,

products with greater market share or within a fast growing market are expected to wield relatively greater profit margins. The reverse is also true. The BCG matrix or also called BCG model relates to marketing. The BCG model is a well-known portfolio management tool used in product life cycle theory. BCG matrix is often used to prioritize which products within company product mix get more funding and attention. The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. The BCG model is based on classification of products (and implicitly also company business units) into four categories based on combinations of market growth and market share relative to the largest competitor.

When should I use the BCG matrix model? Each product has its product life cycle, and each stage in product's life-cycle represents a different profile of risk and return. In general, a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products. A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The is the milking cow that brings in the constant flow of cash. An example of this product would be a regular Colgate toothpaste.

But the question is, how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix? Should we promote one product more than the other one? The BCG matrix can help with this. The BCG matrix reaches further behind product mix. Knowing what we are selling helps managers to make decisions about what priorities to assign to not only products but also company departments and business units.

These groups are explained below: 

BCG STARS (high growth, high market share) Here you're well-established, and growth is exciting! These are fantastic opportunities, and you should work hard to realize them. Stars are defined by having high market share in a growing market.

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Stars are the leaders in the business but still need a lot of support for promotion a placement.

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If market share is kept, Stars are likely to grow into cash cows. BCG QUESTION MARKS (high growth, low market share) These are the opportunities no one knows what to do with. They aren't generating much revenue right now because you don't have a large market share. But, they are in high growth markets so the potential to make money is there. Question Marks might become Stars and eventual Cash Cows, but they could just as easily absorb effort with little return. These opportunities need serious thought as to whether increased investment is warranted.

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These products are in growing markets but have low market share.

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Question marks are essentially new products where buyers have yet to discover them.

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The marketing strategy is to get markets to adopt these products.

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Question marks have high demands and low returns due to low market share.

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These products need to increase their market share quickly or they become dogs.

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The best way to handle Question marks is to either invest heavily in them to gain market share or to sell them.

BCG CASH COWS (low growth, high market share)

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Here, you're well-established, so it's easy to get attention and exploit new opportunities. However it's only worth expending a certain amount of effort, because the market isn't growing and your opportunities are limited. Cash cows are in a position of high market share in a mature market.

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If competitive advantage has been achieved, cash cows have high profit

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margins and generate a lot of cash flow. •

Because of the low growth, promotion and placement investments are low.

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Investments into supporting infrastructure can improve efficiency and increase cash flow more.

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Cash cows are the products that businesses strive for.

BCG DOGS (low growth, low market share)

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In these areas, your market presence is weak, so it's going to take a lot of hard work to get noticed. Also, you won't enjoy the scale economies of the larger players, so it's going to be difficult to make a profit. •

Dogs are in low growth markets and have low market share.

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Dogs should be avoided and minimized.

• Expensive turn-around plans usually do not help.

Some limitations of the BCG matrix model include: o

The first problem can be how we define market and how we get data about market share

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

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The model employs only two dimensions – market share and product or service growth rate

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

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The model does not reflect growth rates of the overall market

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The model neglects the effects of synergy between business units

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Market growth is not the only indicator for attractiveness of a market There are probably even more aspects that need to be considered in a particular use of the BCG model. Market Share and Market Growth To understand the Boston Matrix you need to understand how market share and market growth interrelate. Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher proportion of the market you control. The Boston Matrix assumes that if you enjoy a high market share you will normally be making money (this assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).

The question it asks is, "Should you be investing your resources into that product line just because it is making you money?" The answer is, "not necessarily." This is where market growth comes into play. Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market is expanding, which should provide the opportunity for businesses to make more money, even if their market share remains stable. By contrast, competition in low growth markets is often bitter, and while you might have high market share now, what will the situation look like in a few months or a few years? This makes low growth markets less attractive.

BCG MATRIX ON PEPSI COMPANY Introduction Business organizations are subject to different aspects which affect the function and operations of the firm as a whole. In this regard, there are specific ways or techniques which can be noted in order to emerge and continue to be competitive in the market environment. The marketing context have been noted as the key factor to achieve company objectives and the marketing aspect rests on customer-orientation, market focus and coordinated marketing as well as profitability. In profit making business, the firm obviously has to do their best to achieve the level of customer satisfaction as a manner of staying ahead of the competitive position and making a profit. In traditional ways, marketing has been used by different firms to be able to increase the capabilities of the company in the market. Its concept can be considered as one of the most essential element underpinning the success of business (1994). In the competitive market environment, connecting with the target market is getting more complicated for different industries (2003). Accordingly, it takes an effective management and approaches to win over the skeptical target market which suggest that it is the moment to forget everything that has been learned regarding marketing and branding (2003). It is mentioned that it is the target market that is in control of improving the power of the products or brands. In this regard, it is not the company who brand their target market, but the clients are the one which brands the company and their products and services offered.

The main goal of this report is to provide an in-depth analysis about the products of PepsiCo. In addition, these will also analyse the marketing strategies used by the company to compete with each other and aims on discussing if customer services is a most important part which let the company setting on the leading post in the market segment. In order to analyze the company, the use of BCG matrix will be considered. Overview of the Company PepsiCo Inc. is one of the world’s leading food and Beverage Company. PepsiCo started on 1965, during that time Pepsi-Cola’s CEO and President approached , Chairman and CEO with a proposition of merging the two company in providing food and beverage with complementary products that would give a lesser opportunity for cost sharing, joint merchandising and knowledge and skill transfer. Its expertise is to create different food and beverage products that would soothe the taste of its consumer. The new company was founded with annual revenues of $510 million and such wellknown brands as Pepsi-Cola, Mountain Dew, Fritos, Lay’s, Chee-tos, Ruffles, and Rold Gold. PepsiCo’s roots can be traced to 1898, when , a pharmacist in New Bern, North Carolina, created the formula for a carbonated beverage he named Pepsi-Cola. The reinvention of different products, the introduction of new product, expansion into international markets and clever advertising campaigns are the primary focus of PepsiCo Inc. PepsiCo’s considerable marketing expertise could be leveraged in the marketing of fried chicken, pizza, and Mexican fast foods. In 2001, PepsiCo was the second-largest food products company in the United States (behind Kraft Foods) and was diversified into salty and sweet

snacks, soft drinks, orange juice, bottled water, ready-to-drink teas and coffees, nutraceutical and isotonic beverages, hot and ready-to-eat breakfast cereals, grain-based products, and breakfast condiments. Many PepsiCo brands held number one or number two positions in their respective food and beverage categories (2008). PepsiCo Inc. became the first foreign product sold in the Soviet Union in 1972, expanded into China in 1982, and by 1984 sold products in nearly 150 countries and territories. The company enters the Soviet Union market by having trade relations with the USSR, giving PepsiCo exclusive rights to import Stolichnaya Russian vodka in the US while letting the products of PepsiCo be promoted in the nation. On the other hand, the company has entered the Chinese market by investing in the country and having a business operation in the nation. New brands launched under tenure as president and CEO included Pepsi Light in 1975, Grandma’s cookies in 1980, Tostitos in 1981, Pepsi Free in 1982, and Slice in 1984. In addition, Pearson crafted a corporate strategy that called for PepsiCo’s diversification into quick service restaurants. PepsiCo Inc. had diversified beyond snack foods and soft drinks with the acquisitions of North American Van Lines in 1968 and Wilson Sporting Goods in 1970, but the company’s acquisition of Pizza Hut in 1977 significantly shaped the strategic direction of PepsiCo for the next years to come. The acquisition of different companies for the expansion of PepsiCo was believed by

and

that whereas soft drinks and snack foods were

complementary businesses offering skills transfer and cost sharing benefits, quick-service restaurants offered a captive market for Pepsi-Cola’s fountain drinks will positioned the company in an additional high-growth industry.

During the late 1990s, PepsiCo acquired Cracker Jack from Borden Foods, Tropicana from Seagram Company Ltd., and Smith’s Snack food Company in Australia from United Biscuits Holdings. The company also introduced Doritos 3D’s tortilla chips and Pepsi One during the 1990s. In 2000, PepsiCo launched its Fruit Works line of fruit drinks and Sierra Mist lemonlime soda, and Aquafina became the number one brand of bottled water sold in the United States. South Beach Beverage Company, the maker of SoBe teas and alternative beverages; Tasali Snack Foods, the leader in the Saudi Arabian salty snack market; and the Quaker Oats Company were acquired by PepsiCo in 2001. BCG Growth Matrix Analysis As mentioned above, this study aims on analyzing the products and services offered by PepsiCo. The BCG matrix approach is based on the product life cycle concepts which can be utilized to identify what priorities should be given in the product portfolio of a business level. To make sure that the company is creating long-term value, an industry should have a portfolio of products which contains both high-growth products in need of cash inputs as well as low-growth products which establishes a lot of profit or cash. BCG matrix relies on 2 dimensions: market growth and market share. The basic notion behind it is that the higher the market share of a specific product has or the faster the product’s marketability grows, the better it is for the industry. Placing appropriate products in the BCG matrix, results in 4 categories, in the business portfolio of an industry. The four categories include the Stars, cash cows, dogs, question marks. Each of these categories has their own measurement. First, the stars are considered as those products

which have high market growth and market share. The stars products use large amounts of cash and considered to have competitive position in the business which results in generating more profit. The stars products are frequently noted as rough in balance on net cash flow. But if needed, any attempt should be created to hold market share to avoid becoming cash cow. The second category is Cash cows which are commonly considered to have low growth with high market share. Herein, the profits and generation of cash are considered high but because of the low market growth, the investment required should be low. It is said that cash cows should keep the profit high and is noted to be the foundation of the company. The next category is Dogs which is low market growth and share. It is noted that an industry should avoid or reduce the number of dog’s products in the industry. In addition, the company is also recommended to beware of the expensive turn around plans. The last category is question markets which is high growth with low market share. Question marks products are considered to be the worst cash features of all, because high demands make it to have low returns due to low market share. Herein, if the company would not be able to solve the issue of question market products, these may be able to absorb great amount of cash and may result from stopping dogs to grow. Accordingly, BCG matrix approach can help the business companies to understand a frequently made approach mistake. Boston Consulting Group Matrix is a tool used for product portfolio planning 2005). This tool has two controlling elements which includes market growth relative market share. In this manner, the current situation PepsiCo in the standpoint of the market environment will be analyzed using this marketing tool. This analysis will give emphasis on the product and service portfolio of PepsiCo. Thus, the

product and services that the company offers will be analyzed using the following figure. It can be said that PepsiCo products and business portfolio can be divided in four major products or services; each service operates in accordance with its functions along with the products and services in different areas especially made as a distinction of each division. The PepsiCo analysis will be based in assessment of the services offered by the company. BOSTON CONSULTING GROUP MATRIX The product portfolio analysis of the PepsiCo using BCG Matrix analysis. Accordingly, PepsiCo is consisted of 5 major brands: Gatorade, Quaker, Pepsi products, Frito-Lay and Tropicana. As mentioned the assessment has been based on each products provided by the company. With this, it shows that the products that belong to the question mark are Gatorade and also Tropicana. Because of the emergence of different healthy drinks and beverages in the global market, the market share of Tropicana and Gatorade are being threatened. Although these brands have already established in the marketplace, the company still needs to have an effective marketing approach to increase the sale of these brands or brands. Accordingly, question mark category means that these products have a low share of a possible high growth market and may become a star product because of the positive response of the customers. As can be seen in the figure, the services that fall in star category are is the pay-is Pepsi brands. The star category shows the products with a high share of a gradual growth of market and these products have a tendency to produce

high amount of profits. The next category that can be seen in the figure is the cash cows. Herein, the products are considered to have a high share of a slow growth market ( 2005). With regards to the PepsiCo, services that can be considered in the cash cows are the Quaker. Lastly, it can be seen that Tropicana, Gatorade and Frito-Lay are products that can be considered in the dogs’ category. It can be said that PepsiCo has been able to market their products and increase their market share and market growth by using different strategies and approaches. The company enhances the market share of their brands by considering different marketing entry modes. Through collaborative venture PepsiCo has been able to se merger and acquisition along with joint venture approach. Furthermore, franchising is another method that PepsiCo used to enhance the market share of the brands of the company ( 1990). This model used by (1990) has been utilized by PepsiCo in order to expand its business portfolio in other regions in the world. In this manner, the management of PepsiCo considers franchising an existing company in an international market while applying the methods of collaborative venture. In order to make this foreign operational mode combination a success, PepsiCo consider the most suitable and effective expansion strategy. It can be said that the spread of PepsiCo is truly global. The company has hundreds of brands, which can be found in almost 200 countries and territories around the world. Market concentration is the result of interaction between the market size and a few vital factors. It is said that the industry of Carbonated Soft Drinks (CSD) is highly concentrated. There are three major industries that compete in this business (PepsiCo, Coca-Cola and Cadbury

Schweppes). These industries are accounted for more than 90% if market share per case volume in 1998. Exhibit 1: Growth of Market share by Case Volume

1998

32.4%

30.9%

3.2%

15.1%

23.3%

11.7%

14.7%

Others 9.8%

42.3%

31.4%

Cadbury Schweppes (*) 14.3%

41.1%

44.1%

PepsiCo, Inc 31.4%

1995

2000E

Coca Cola Company 44.5%

1990

9.8%

This shows that PepsiCo have a high market concentration and has a strong market share. In this manner, the strategies used PepsiCo in its brands is a good expansion strategy so as to maintain its position in the global market. PepsiCo is a global company and one of its strategies is the use of

diversification approach. Aside from this approach, the BCG matrix results for PepsiCo is also considered to be inspired by the branding strategy of the company for enhancing the market share and growth of their brands like Frito-lay, Pepsi, Quaker, Tropicana and Gatorade. Conclusion Companies like PepsiCo perceived that their brand and products have some personalities and characteristics in which clients and customers use as a channel for expressing themselves or to experience the predicted emotional benefits that differentiate a specific brand from another. The considered product characteristics evolved through the different approaches used by the company and it is the one used for identifying which products should be put in the stars, dogs, cash cows or question marks categories in the BCG matrix. Nevertheless, studies on brand personality or characteristics and the representational utilization of brands has been confined to how target markets and audiences express themselves by purchasing the brands and has not given consideration on how the company perceived their brand characteristics 1998). Accordingly, there are various management approaches that the company may use to have a strong and effective brand image and to determine which brands are more appealing to the market and which brands are not doing well. In order to build a strong brand and effective image, the management who of PepsiCo should think of two things in planning a strategy. Such things are first is to sell the service of the company as a short-term goal and second is to build a strong brand image in the long run. In time of the process of promoting the brand name, the industry can apply integrated

marketing communications to ensure the efficient introduction of the quality of service that the organization stands for (2007). It can be concluded that through the use of BCG Matrix analysis, companies like PepsiCo has been able to know which products can be considered as the foundation of the company and which products needs effective marketing approach to enhance its market share and growth in the marketplace. All in all, it can be said that BCG matrix is really a helpful marketing tools for different companies to know their competitive position in the market. It can also be said that effective marketing approach is a complex phenomena and it can easily be understood using metaphors such as understanding the current situation of the brands in the market. Analysis has shown that to be able to have a strong and effective brand, it must be able to meet the needs and demands of the clients and the company itself. In addition, analysis shows that the use of promotional activities is an important aspect to make the brand be more attractive and appealing to the target market.