Bcg Matrix

Journal of Business Administration, Vol. 24, No. 3&4, July October, 1998. Extending the BCG Matrix: Strengthening the Portfolio Analysis Syed Ferhat Anwar1 Sharif Rayhan Siddique2 Shakil Huda3

Abstract: This paper critically assesses the Boston Consulting Group (BCG) Matrix and indicates how the matrix can be improved to solve portfolio problems. The extended technique incorporates situation arising out of “negative growth rate” and shows how it can aid in providing greater depth in portfolio analysis.

The Portfolio Analysis : Large companies normally manage quite different businesses, each requiring its own strategy, these are termed as strategic business units (SBU). An SBU has three characteristics (Kotler, 1999): 1. It is a single business or collection of related businesses that can be planned separately from the rest of the company. 2. It has its own set of competitors. 3. It has a team, which is responsible for strategic planning and profit performance and who control most of the factors affecting profit. A large company manages its portfolio (e.g. various SBUs) in order to hold the largest market share. The purpose of identifying the company’s SBUs is to outline separate strategies and assign appropriate financing. The BCG Matrix Managing a series of businesses strategically is the primary concern of portfolio management (Porter 1987). The objectives of portfolio strategies, strategies for managing a portfolio of SBU's are several. A number of techniques are employed to make these strategic choices. One of the more popular ones is the Boston Consulting Groups (Hedley, 1977). The assumptions underlying the matrix - and thus the strategies 1

Associate Professor, Institute of Business Administration, University of Dhaka Assistant Professor, Institute of Business Administration, University of Dhaka 3 Assistant Professor, Institute of Business Administration, University of Dhaka 2

to be used are that - higher market share in growth market leads to profitability but that in slow growth markets, obtaining high market share takes too much of cash (Hedley, 1976) The Boston Consulting Group (BCG) a leading management consulting firm, developed and popularized the growth-share matrix. The location of the business unit indicates its market growth rate and relative market share (Kotler, 1999).

20% 2

Question Mark

Star Market Growth Rate

1

10% 3

4

Cash Cow

Dog

0% 10

1

0.1

Relative market share Fig. 1 : The Traditional BCG Model

The market growth rate on vertical axis indicates the annual growth rate of the market in which the business operates. In the figure it ranges from 0 percent to 20 percent. A market growth rate above 10% is considered high. Relative market share, which is measured on the horizontal axis, refers to the SBU's market share relative to that of its largest competitor in the segment. It serves as a measure of the company's strength in the relative market segment. A relative market share of 0.1 means that the company's sales volume is only 10% of the leader's sales volume; a relative share of 10 means that the company's SBU is the leader and has 10 times the sales of the next-strongest competitor in that market. Relative market share is divided into high and low share, using 1.0 as the dividing line. Relative market share is drawn in log scale, so that equal distances represent the same percentage increase. The growth-share matrix is divided into four cells, each indicating a different type of business: 1.

Question marks: Question marks are business that operate in high growth markets but have low relative market shares. Most businesses start off as question marks as the company tries to enter a high-growth market in which there is already a market leader. A question mark requires a lot of cash because the company has to spend money on plant, equipment, and personnel to keep up with the fast growing market, 2

and because it wants to overtake the leader. The term question mark is appropriate because the company has to think hard about whether to keep pouring money in to this business. 2.

Stars: If the question-mark business is successful, it becomes a star. A star is the market leader in a high growth market. A star does not necessarily produce a positive cash flow for the company. The company must spend substantial funds to keep up with the high market growth and fight off competitors' attacks.

3.

Cash cows: When a market's annual growth rate falls to less than 10 percent, the star becomes a cash cow if it still has the largest relative market share. A cash cow produces a lot of cash of the company. The company does not have to finance capacity extension because the market’s growth rate has slowed down. Because the business is market leader, it enjoys economics of scale and higher profit margins. The company uses its cash-cow business to pay its bills and support its other businesses.

4.

Dogs: Dogs are businesses that have weak market shares low –growth markets. They typically generate low profits or losses. The company should consider whether it is holding on to these businesses for good reasons or for sentimental reasons.

Critical Analysis Though the BCG matrix is currently the most widely used method for portfolio analysis, it is also considered to be embedded with flaws. Some of the major criticisms of the BCG Matrix are as follows: 1. It places too much emphasis on entry into the high growth businesses and thus may neglect the current businesses, which are not a part of the high growth, high share market (Kotler, 1999). 2. Many businesses will end up in the middle of the matrix as a result of compromises in rating, and this makes it hard to know what appropriate strategies should be undertaken by such business (Kotler, 1999). 3. The Matrix gives market share and market growth fundamental positions in the development strategy, but market division and market structure are difficult and often illdefined quantities (Lilien, 1992). 4. Real life problems are associated with negative growth of the market. The negative growth could be both in terms of annual growth rate or even when considering a life time tracking. Negative growth does not necessarily mean that the product has entered the decline phase, but could be a result of certain controllable or uncontrollable resource constraint. The BCG Matrix does not consider the negative growth rate.

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5. The approach assumes that all competitors have the same overhead structures and experience curves and that position on the experience curve corresponds to market position. Thus the limitation of dimension seems to be the major weakness in the BCG Matrix, which to a great extent is responsible for most of the limiting factors identified above.

The Extension of the BCG Matrix The extension of BCG Matrix can only be undertaken provided a new dimension is added to the traditional model. This is possible only if a negative dimension is added to the matrix. Table 1 indicates how a business could have a negative growth rate (calculated on the basis of annual growth as well as growth based on base value). The extended BCG model has the flexibility to included negative growth rate. It included additional 2 quadrants to the traditional 4-quadrant model. Table – 1 : Arbitrary demand showing negative growth rate. Year

Demand (in Growth rate '000 Tk.) on the basis of Base year

1 2 3 4 5 6 7 8 9 10

135 95 100 105 112 136 132 170 180 165 Average Growth Rate

Growth rate on the basis of annual change

-30% 5% 5% 7% 21% -3% 29% 6% -8% -9%

-30% -26% -22% -17% 1% -2% 26% 33% 22% -13%

Quadrant 5 can be termed as the Orphan, since these businesses though hold a good market share, are either ignored by the company or face temporary set-backs resulting in the growth rate. Quadrant-6 in reality are the products, which are actually dead.

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Figure 2 depicts the extended BCG Model, the individual business represented by the cells 1 – 3 are traditional, while dogs is redefined. According to the new model the businesses representing the new concepts can be defined. The dog should be renamed Under-developed. The model suggests that under-developed phase does not essentially call for a permanent discontinuation or divestment of a product, rather only when both the relative market share as well as the growth is in question, should the company consider the divestment option. It represents business having low to moderate business growth and share, in addition the size of the business (smaller firms) may be represented by this cell. Furthermore it can be considered as the middle position of the matrix. The under-developed in realty are quite diverse in nature, when representing businesses having lower growth and share they tend to act like followers taking less risk. On the other hand being small they may not be able to compete with the larger firms due to financial constraints. Such business should consider expansion as their strategy. The expansion plan must be aided through external financing. Orphan : These businesses require proper care, through high promotion, product extension, market extension, etc. and may shift to cash cow or star. Such products are evident in the real life and show how Product Life Cycle (PLC) shifts have been observed to have taken place while products had entered the later maturity or even decline stages. Such business will require more of strategic support rather than financial support. Dead : Businesses that have negative growth rate and extremely low market share cannot survive stiff competition and thus should be divested. Such businesses are usually a result of emotion rather than profit and harm the entire company. 20% 2

Question Mark

Star

1 Note – A negative growth of more than –5% is unwanted, since the company in this case will require greater effort to reap the benefits out of the product. In addition it might result in higher costs and thus resulting in loss.

10% 3

Market Growth Rate

4

Cash Cow

Underdeveloped

0% 5

6

Orphan

Dead

-5% 10

1

0.1

Relative market share 5

In conclusion this article clearly answers to the problem embedded in the classical model. The re-positioning of dog to under-developed results in solving the problem associated with small businesses and businesses having low risk orientation. The inclusion of orphan takes care of business having high prospects but not being properly attended. The ideas clearly highlight immediate discontinuation of the business. The new model is thus much more comprehensive and dynamic compared to the classical BCG model.

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Reference : Michael E Porter. "From Competitive Advantage to Corporate Strategy." Harvard Business Review, (May-June 1987), PP: 53-56 Hedley, Barry. "Strategy and the Business Portfolio". Long range planning, February 1977, P: 10 Hedley Barry, "A Fundamental Approach to Strategy Development", Long range planning, December 1976, PP: 2-11 BCG, "The Experience Curve Reviewed, IV, The growth share matrix of the product portfolio" 1973, BCG. Lilien, G L, and others, Marketing Models, Prentice Hall, New Jersey, 1992 Messinger, P R., The Marketing Paradigm, South-Western College Publishing, USA, 1995 Kotler, Philip, Marketing Management, The millennium edition, Prentice Hall of India, New Delhi, 1999

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