1. Mcdonald 27s Bcg Matrix Test
2. Bcg Matrix Template

McDonald's Case Study - Free download as Word Doc (.doc), PDF File (.pdf), Text File (.txt) or read online for free. This is a comprehensive case analysis of McDonald's includes: Five forces framework PESTEL SWOT QSPM BCG and other. THE NEW BCG MATRIX Updating the original matrix, the revised BCG matrix maintains that a company has to achieve a competitive advantage to enjoy sustained profitability, and that the means for achieving such advantage are conditioned by the way in which industries evolve. A COMPANY HAS TO ACHIEVE COMPETITIVE ADVANTAGE. Boston consulting group growth share matrix Assists marketers to identify high and low potential business units or products. This two-by-two matrix has, on the vertical axis, market growth rate, which provides a measure of market attractiveness and, on the horizontal axis, market share relative to the largest competitor, which serves as a. The BCG Matrix is a business method that was created by the Boston Consulting Group in the 1970’s. This business method bases its theory on the life cycle of products. Also known as the Boston Box or Grid, BCG Charts are divided into four types of scenarios, Stars, Cash Cows, Dogs and Question Marks.

What You Always Wanted to Know About Marketing Strategy . .McDonald, Gael, Roberts, Christopher. Management Decision. London:1992. Vol. 30, Iss. 7, p. 54 (7 pp.)
Abstract (Summary)
Strategic planning is surrounded by a veil of complexity that many are unable to penetrate. The terminology outlining strategic options can be confusingly repetitive. The tools, options, and current buzzwords used in marketing strategy are reviewed in an effort to lift the veil of complexity surrounding marketing strategy. Conceptual tools used in the strategic planning process include: 1. business portfolio analysis, 2. the Boston Consulting Group (BCG) Growth Share Matrix, 3. company life cycle patterns, and 4. the new BCG Matrix. Corporate strategies may be classified under 4 broad headings: 1. stability, 2. growth, 3. retrenchment, and 4. combination. Market leader strategies include market penetration, market development, differentiation, and cost leadership. Market challenger strategies include product proliferation, diversification, and integration. Focus strategy and niche marketing are market specialization strategies.
Full Text (4300 words)
Copyright MCB University Press Limited 1992
Reading three texts on strategic marketing is rather like asking ten different economists for a definition of economics. One receives ten different answers and a distinct impression that one would have been better off not asking the question in the first place. Similarly, reading three texts on strategic marketing may be worse than reading one. For a start, the terminology gets confusing; what is referred to as diversification in one text may well be called integration in another. If that is not clear, then start to wrestle with the fact that integration strategies may be delineated between vertical, backward, and lateral alternatives. Given expressions such as by-pass attack, pre-emptive defence, counter-offensive and mobile defence, is it any wonder that marketers feel they are indulging in some form of martial arts, rather than making meaningful decisions about the future plans and investments of their organizations?
So, why has all the confusion arisen? Initially, it should be realized that many of the analytic and conceptual tools used in strategic marketing planning, such as the General Electric Multi-Factor Portfolio Matrix, and the Boston Consulting Group Growth Share Matrix, are exactly that --conceptual tools. These tools were developed to assist marketers in analysing the market situation; they do not provide strategic solutions, beyond a general level, to a particular problem. For example, having used the Growth Share matrix and identified a product as a 'dog'--that is, a product or division that occupies relatively low market share in a low growth market--such categorization, whilst informative from a strategic viewpoint, is of little help in formulating a strategic response. Marketing strategy, however, demands that marketers go beyond preliminary analysis and formulate a detailed strategic response that is appropriate in a given market situation. In the case of the 'dog' product, the appropriate strategic response would likely be divestment.
Much of the language used in strategic marketing is descriptive. For example, the General Electric matrix offers alternative general descriptions for companies in positions of relative competitive strength or weakness. This grid plots strategic position against measures of industry attractiveness and business strengths, projecting three general alternatives: to invest, selectively manage, or divest. However, this diagnosis is of limited value in that it does not address the issue of how the three strategic alternatives are to be implemented. Frequently, little reference is given to the practicalities of how a strategy is to be achieved, or illustrations of how a strategy has been successfully actualized in the past. Descriptions, therefore, act as guidelines that indicate general alternatives, but no more. They do not offer the finer detail of a tactical solution and therein lie their principal limitations.
A further difficulty with strategic formulation is that it is difficult to extrapolate the experience of one firm, in that circumstances are very idiosyncratic. What suits one company in a given situation may poorly serve another. Indeed, companies engaged in the same marketplace, and in possession of similar market intelligence, may devise strategic prescriptions that are fundamentally different. For example, in the tyre business a massive volume, low-cost strategy was selected by Goodyear. A strong production emphasis generated significant manufacturing economies and a strategy of marketplace cost leadership. In contrast, the French tyre manufacturer Michelin, with an emphasis on research and development, chose the new technology route and pioneered the radial tyre which redefined customer needs and eventually rendered the cross-ply tyre obsolete. Interestingly, Dunlop's technical director dispensed with the radial tyre by declaring it a 'marketing gimmick' 1, p. 154!. The technology leadership strategy of Michelin is, however, removed from the specialist application strategy adopted by Armstrong Rubber, an American manufacturer that concentrates on the production of tyres for the aviation, agricultural, and civil engineering industries. The focused strategy used by Armstrong provides a profitable alternative approach to engaging in direct competition with global heavyweights in the tyre industry.
MARKETING IS MERELY A CIVILIZED FORM OF WARFARE
Marketing is merely a civilized form of warfare, in which most battles are won with words, ideas, and disciplined thinking 2, p. 3!, supplemented with generous portions of creativity. For one player, this combination may yield a strategic formulation that is a virtual inversion of a close competitor's strategy. In the civil airframe business, in the 1960s, European manufacturers opted for the high-tech solution with Concorde, whereas the American manufacturer, Boeing, chose to build on existing technology and develop a large capacity aircraft for the mass market, the B747. The two strategies are akin to the tortoise and the hare, in this case the tortoise won. The B747 has been operational for 22 years and it is, arguably, the world's most successful civil aircraft. Concorde has been operational for 16 years and less than a dozen planes are in service.
It has been said, 'Define your terms and we shall talk' but, then again, all definitions may be dangerous. This sort of dilemma is, without doubt, a source of confusion in strategic planning; the nomenclature is almost intimidating. Guerrilla, by-pass attack, and mobile defence strategies make marketing sound as if it were extracted from the curriculum of a military academy. The analogy between military and marketing strategy has some value, but it is imperfect. The similarities are obvious. Beat the enemy (competitors) to gain territory (customers). However, the objectives of military and marketing strategy are different. Marketing creates value and enhances product utility, warfare merely transfers value and is often destructive of life and property 3, p. 37!. The terminology outlining strategic options can also be confusingly repetitive. A strategic option may be justified by a company in a market-leader position and, similarly, by one in a market-follower position. Consequently, the same strategy reappears but under a different set of circumstances, one sometimes it is renamed by enthusiastic academics attempting to undertake their own form of differentiation. So what alternatives are available to the marketing strategist? The following provides a brief review of the tools, options and the current 'buzz' words used in the combat zone of marketing strategy.
CONCEPTUAL TOOLS IN STRATEGIC PLANNING
The conceptual tools used in the strategic planning process are not strategies in themselves; rather they are the means by which management may evaluate the strategic business units that constitute the company.
BUSINESS PORTFOLIO ANALYSIS
This identifies the strategic business units that make up the company and attempts to evaluate current effectiveness and vulnerabilities. A strategic business unit is any unit in the organization with its own mission, objectives and planning autonomy.
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
Assists marketers to identify high and low potential business units or products. This two-by-two matrix has, on the vertical axis, market growth rate, which provides a measure of market attractiveness and, on the horizontal axis, market share relative to the largest competitor, which serves as a measure of company strength in the market.
DEFINITIONS MAY BE DANGEROUS THE NOMENCLATURE IS ALMOST INTIMIDATING
Four categories are depicted in this matrix, briefly they are:
(1) Cash cows (low growth, high market share) produce large amounts of cash but future growth is limited. A harvest strategy is usually recommended, in that the organization is advised to reap whatever they can but not to resow the seed. Too many cash cows may indicate a degree of complacency on the part of the company. Exceptions are naturally to be found and McDonalds, in the United States, is a good example of a leader in a cash-cow market that is still heavily investing in new technologies and products designed to maintain market share and defend a dominant position.
(2) Sirs (high growth, high market share) are products that produce large amounts of cash in a fast-growing market, in which they hold a dominant share. An example of a star is the 'Post It' produced by 3M. Clearly an investment and growth strategy is recommended, particularly as the direct competition for this brand is weak.
(3) Question marks (high growth, low market share) exist under higher risk circumstances, in that the products are profitable but only manage to secure a small share of the total market. Commonly, a build strategy is recommended although rapid growth may attract the attentions of the 'big guns' who may convert a highly profitable niche into a fully-fledged segment of large volume, thereby frustrating the endeavours of lesser firms. The 'big guns' frequently possess greater production and marketing economies, which make it difficult for a smaller competitor to gain market share.
(4) Dogs (low growth, low market share). Because of the limited share size and low growth, products or strategic business units which are 'dogs' do not generate much revenue. A typical strategy would be to divest by selling off the 'dogs' in order to release money to support the 'question marks'.
COMPANY LIFE CYCLE PATTERNS
Company life-cycle patterns classify businesses into embryonic, growth, maturity, and decline stages. Utilizing the distinctions of market growth and market share, the model has some parallels with the Boston Consulting Group Matrix.
THE NEW BCG MATRIX
Updating the original matrix, the revised BCG matrix maintains that a company has to achieve a competitive advantage to enjoy sustained profitability, and that the means for achieving such advantage are conditioned by the way in which industries evolve.
A COMPANY HAS TO ACHIEVE COMPETITIVE ADVANTAGE
The two-by-two matrix employs distinctions of size, and the number of ways to achieve competitive advantage, yielding four industry classifications:
(1) Stalemate--few ways, small size. this implies limited means to obtain an advantage and the advantage, when obtained, is small.
(2) Volume--few ways, large size. There are only a few means to obtain an advantage but, if obtained it generates high volume.
(3) Specialization many ways, large size. There are several alternative ways to derive an advantage and, once obtained, it is large.
(4) Fragmentation many ways, small size. There are many ways to obtain an advantage, but the advantage is minimal.
BASIC STRATEGIC OPTIONS
From this examination of some of the tools associated with strategic planning, it is now appropriate to review options. Corporate strategies may be classified under four broad headings:
STABILITY
This strategy occurs when an organization achieves a satisfactory performance under stable market conditions. The usual practices engaged in to achieve stability involve the maintenance of market share and return on investment through better serving existing client groups. In mature marketplaces, demonstrating low or no growth, marketers are expected to execute their strategic plans more incisively. Under these conditions, stability could be achieved through intensive distribution, thereby enhancing convenience and levels of service, or by rejuvenating the brand by adjusting its image or packaging.
GROWTH
A growth strategy is usually formulated in the wake of establishing developmental goals that seek to take advantage of perceived market opportunities. When discussing growth strategies, it is common to hear suggestions of physical expansion, acquisitions, mergers and diversification. Growth strategies could be precipitated by the combined efforts of competitors to expand aggregate demand, or by one company that secures a larger slice of the pie as a direct consequence of its strategy, e.g. softening prices.
RETRENCHMENT
Retrenchment is a common strategic response in markers that are subject to adverse economic pressures, uncertainty, or cheap foreign competition. Retrenchment can be differentiated from divestment, in that the former is a reaction to temporary hardships whereas divestment has the element of permanency about it.
COMBINATION
A combination strategy refers to the pursuit of different strategies in separate strategic business units. The combination approach suggests that in multi-division, multi-product companies there might not be a unifying strategy that serves the best interests of all divisions. Different geographic, customer, or competitive variables necessitate more individualistic solutions, that operate concurrently within the corporate framework. Having said this, though, it is usual to expect strategic business unit approaches to be consistent with established corporate designs, i.e. the mission statement and group policies.
Inevitably, these four strategies are frequently viewed as being too generalized to be of any practical use and, therefore, more precise strategic formulations are necessary to direct action in a specific sense. Let us examine the category of 'growth strategies' because, invariably, this category generates the greater number of suggestions. These strategies are, to a large extent, dependent upon market position leader, challenger, follower, nicher.
MARKET LEADER STRATEGIES EXPANDING MARKET SHARE
It should be noted that these strategies are not the monopoly of market leaders; however, it is common to observe the following strategic practices among leaders.
MARKET PENETRATION
The main task here is to increase sales by encouraging wider usage of existing products by existing customers --for example, this could be achieved in the market for sunglasses by promoting the product as a fashion accessory. Increased frequency could be achieved by suggesting two applications of floor wax rather than one, or by formulating an extra-mild shampoo with the directive to consumers to wash their hair every day, e.g. Timotei shampoo produced by Elida Gibbs. Years ago, Wrigley's chewing gum successfully implemented this strategy with their advertisements for pellet-form chewing gum. The advertisements depicted an open hand receiving not one but two pellets of gum from a generous friend, thus creating future behavioural expectations of two pieces rather than one.
MARKET DEVELOPMENT
The entering of new markets could involve expansion into new geographic areas, both local and foreign, a shift from consumer to industrial markets or, possibly, marketing the product or service to new segments or demographic groups. An instance of the latter was provided by the banks which once perceived their role to be servicing commercial clients. Subsequently, they initiated concerted efforts to attract school leavers, students and new graduate depositors. Targeting these new demographic groups has provided new market development opportunities. More recently, high net worth customers have become the focus of many banks. New uses were extensively created by Hallmark cards, who regard themselves as being in the 'social greetings business'. A casual glance at their product range demonstrates a large variety of circumstances in which a card could be purchased, e.g. secretaries' day, pets' day, and congratulations on your divorce! In response to a decline in home baking, and with the advent of cake mixes, Arm & Hammer, makers of baking soda, promoted the use of their product not only as an ingredient for baking, but as a deodorizer for use in the refrigerator as well.
DIFFERENTIATION
With a strategy of differentiation the product itself may not be altered, or improved in some way. While reformulation is a possibility, it may well be that emphasis is placed on product positioning efforts and the attendant perceptions of consumers. One brand of tomato ketchup is very much like another, with the exception of the way in which it is perceived by consumers in relation to competing brands. The liquor industry utilizes image concept differentiation strategies and the successful marketing of whisky is strongly dependent upon establishing distinctive positioning, e.g. Chivas Regal.
ATTENTION NEEDS TO BE GIVEN TO THE COMMUNICATIONS MIX
Successful differentiation frequently confers higher perceived value or status, which enables marketers to price up, command a prominent market position, and enjoy superior profits. With this strategy a lot more attention needs to be given to the communications mix and the way in which it contributes to a brand's perceptual development among target consumers. Beecham's successfully implemented this strategy with Lucozade. Without changing the product formula, Beecham's, with a little help from Daley Thompson, were able to reposition the brand as an energy/sports drink as opposed to a beverage for invalids and convalescing children.
COST LEADERSHIP
This alternative is often used as a counter-offensive strategy, in that the company attempts to achieve the lowest costs of production and distribution to price lower than its competitors, thereby winning market share. Texas Instruments is a commonly quoted example of a high-tech manufacturer that concentrates its efforts on improved efficiencies, enhanced technology, and production volumes, as the means for driving costs down. Lower costs are passed on to the consumer in the form of lower prices, thereby making Texas Instruments highly competitive in world markets. Likewise, McDonald's pursuit of value for money constantly drives the company to seek newer and better ways to achieve greater economies and cost reductions. Virgin Atlantic's pricing on the North Atlantic route is another prominent example of a cost leadership strategy that successfully drew business away from considerably larger, and more established, competitors such as British Airways.
PROTECTING MARKET SHORE
PRODUCT DEVELOPMENT
This is sometimes referred to as a continuous innovation strategy, the intention of which is to protect or develop market share by the use of product modifications and enhancement. An example of this was the introduction of Pampers diapers, made especially for male and female infants. Further product development, by Proctor and Gamble, resulted in the introduction of higher absorbency diapers that offered enhanced benefits to mothers and users alike. This commitment to product refinement has more recently resulted in a response to calls from environmentalists charging diaper manufacturers with excessive wastage, i.e. demands are being made for the recycled diaper.
A CONTINUOUS INNOVATION STRATEGY PROTECTS OR DEVELOPS MARKET SHARE
It is often the case, therefore, that a good product, with attractive features, sustains market advantage by carefully incorporating modifications that develop both utility and function. For example, the Pentax Zoom camera started with a 70mm zoom lens and progressed to 90mm and 105mm lenses. A variegated model is currently being marketed for outdoor use in wet conditions.
MARKET CHALLENGER STRATEGIES
PRODUCT PROLIFERATION STRATEGY
This is similar to a product development strategy. Here the emphasis is not necessarily on technological leadership, but on the diversity of product models produced by the company. Seiko have approximately 3,000 watch designs in their catalogues. In a retail context, this diversity would take up a considerable amount of counter space in a jewellery or department store. Another good example is provided by the Sony Corporation who market dozens of models of the Walkman, ranging from 'My First Walkman' for children which is a brightly coloured, easy-to-use, fun model, to the 'Professional Walkman', which sports numerous features that reflect the technical wizardry of the manufacturer.
DIVERSIFICATION
This term, in fact, is an umbrella phrase for what could be three different strategies: concentric diversification, horizontal diversification, and conglomerate diversification. Diversification has the primary objective of reducing risk by moving into new areas that afford good growth opportunities, better profit prospects and greater levels of certainty. Such a strategy is commonly adopted in a 'cash cow' situation when there is reason to believe that the golden days of profitability are gone for good.
PRODUCT DIVERSIFICATION
Product diversification may sometimes be referred to as concentric diversification. This requires a firm to develop, or acquire, new products which have market or technological synergies with current products. These products may, or may not, be intended for sale to the company's present markets. In this way, the firm derives the accumulated benefits of experience and knowledge, thereby reinforcing Peters and Waterman's advice to, 'stick to the knitting'. An example of this was provided by Philip Morris's purchase of Miller Brewing. Beer and cigarettes are distributed through similar, if not identical, outlets; consequently, Philip Morris was able to utilize much of its existing knowledge and marketing intelligence concerning customer profiles. Another example of concentric diversification is provided by the 3M corporation. Its strengths in abrasives technology have given rise to products ranging from industrial rubbing compounds to household items such as pot scourers.
HORIZONTAL DIVERSIFICATION
The firm adds new products that could appeal to existing clients, e.g. a producer of sunglasses distributing tanning lotion, or a pizza home-delivery company offering home rental videos.
CONGLOMERATE DIVERSIFICATION
The adding of products or businesses that have no relation to current technologies, products or markets. The Mitsubishi Corporation manufactures an immense range of products, ranging from disposable ballpoint pens to bulk carriers. There is considerable debate about the desirability of conglomeration and this is understandable in the light of the hard experience of some companies. A case in point would be the Coca Cola Corporation which, during the 1980s, diversified into the wine industry, desalination plants, and the movie business, only to discover, in a relatively short space of time, that they had over-reached their corporate capabilities by straying from their core business.
INTEGRATION
Commonly confused with diversification, integration relates more precisely to the vertical aspects of manufacturing and distribution logistics. Integration generally takes four forms: backward, forward, horizontal, and perfect integration.
BACKWARD INTEGRATION
If a company were to undertake a strategy of backward integration, investment would result in the acquisition of vendors--for example, 7-Up purchasing their flavour supplier, and Japanese car manufacturers buying into component part makers. However, in the case of General Motors, this very same strategy was one of the factors contributing to the company's lack of competitiveness.
SOME ORGANIZATIONS HAVE ACTIVELY RESISTED TEMPTATION...
The explanation was that the sourcing of parts from within the General Motors group of companies failed to produce both quality and price advantages that could have been secured if they had opened up their procurement practices to international vendors. Some organizations have actively resisted the temptation to backwardly integrate, e.g. McDonalds, who maintain strong buying leverage by remaining independent of their numerous suppliers.
FORWARD INTEGRATION
This strategy usually involves the movement into logistical, distributive, or retailing activities--for example, Firestone's investment in tyre service centres. The Korean furniture manufacturer, BIF, has also pursued a strategy of forward integration through investment in its own retailing operations to complement both its design and production capabilities.
HORIZONTAL INTEGRATION
A pure form of growth, horizontal integration encourages ownership or control of other firms in the industry. For example, horizontal integration was witnessed in the 1980s when a number of European and American producers of automobiles purchased producers of high-end or exotic cars--e.g. Ford's acquisition of Jaguar, and Fiat's acquisition of Ferrari.
PERFECT INTEGRATION
Some very large and complex industries are comprised of major players that are perfectly integrated. An example is provided by the multinational oil companies which have evolved from exploration, refinement and conversion, to downstream distributors and marketers of a massive range of products. Companies like Exxon and Shell own everything from oil wells through to retail petrol stations. This has provided them with formidable marketing strengths.
MARKET SPECIALIZATION STRATEGIES FOCUS STRATEGY
This is more commonly known as specialization and denotes a company that focuses its efforts on serving a few markets. Usually specialization involves a technology base that has restricted product and market applications. Such an example is the focus strategy, as undertaken by the West Australian company, Solarhart, that specializes in solar energy equipment for domestic, residential, and industrial properties. Solarhart is not concerned with developing products powered by more conventional energy sources.
NICHE MARKETING
This is a highly specialized strategy, where the firm concentrates on one narrowly defined, but profitable, market. Dr Scholl, the manufacturer of foot-care products, illustrates the beauty of good nichemanship. The attractiveness is that a good nicher can make the brand synonymous with the generic product and, in the best examples, their influence over the marketplace becomes almost 'competition proof'. Can you name a competitor for Dr Scholl or Tabasco sauce?
CONCLUSION
In life, we experience numerous opportunities to take alternative courses of action, each decision leading in a direction that we hope will be successful. Many of the decisions are, of course, mutually exclusive. For example, it is unlikely that we would want to attend two business schools simultaneously. More normally, we would want to decide which one was most suitable in terms of facilitating the achievement of personal objectives.
STRATEGIC MARKETING CONCERNS ITSELF WITH OPTIMAL SOLUTIONS
In business organizations we are faced with similar decisions. Some of these decisions are imposed on us by external forces, others reflect decisions that are derived more proactively as we strive for greater profit, power, or prominence. All too often, however, managers do not make strategic decisons; rather, they sit on the fence and allow themselves to be buffeted by changing market influences. Reluctance to make strategic business decisions stems from a number of factors that are both organizational and personal in origin. What are the personal factors? For these factors are at least in our arena of control. Primarily, personal factors revolve around a lack of knowledge, experience or confidence in the strategic planning process. The strategic decision-making frameworks that we have been exposed to in the past may have looked intimidatingly complex, too theoretical, or prone to problems in their application and have, consequently, not been heavily utilized by potential practitioners.
Strategic decision making is not about the pursuit of the 'best way'. This is elusive, if indeed a 'best way' actually exists at all. Executives have to take decisions, confronted by particular sets of internal constraints and external market conditions. It is more accurate, therefore, to look on strategic marketing as concerning itself with optimal solutions that appear to offer reasonable prospect of quantifiable returns, given certain circumstances.
This article has attempted to lift the veil surrounding the complexities that shadow strategic planning and to provide managers with an insight into the current terminology and the strategic alternatives which are available. The review is by no means extensive, but it is hoped that, by removing an element of confusion, managers will be in a better position to consider a more sophisticated approach to strategic planning.
REFERENCES
1. Goldsmith, W., and Clutterbuck, D., The Winning Streak, Penguin, London, 1988.
2. Emery, A., in Kotler. P. and Singh, R., The Great Marketing Wars, Prentice-Hall International, Englewood Cliffs, NJ, 1984.
3. Enis, B., in Kotler, P. and Singh, R., The Great Marketing Wars, Prentice-Hall International, Englewood Cliffs, NJ. 1984.
FURTHER READING
Jain, S., Marketing Planning and Strategy, (third ed.), Thomson Publishing Group, Dundee, 1990.
Kotler, P., Marketing Management: Analysis, Planning and Control, (seventh ed.), Prentice-Hall International, Englewood Cliffs, NJ, 1991.
Gael McDonald is an Associate Professor of Asia Pacific International; Christopher Roberts is the Director of Conceptual Marketing Consultancy, Hong Kong.
Indexing (document details)
Subjects:

Mcdonald 27s Bcg Matrix Test

Strategic planning, Objectives, Niche marketing, Market strategy, Market shares
Classification Codes
2310
Author(s):
McDonald, Gael, Roberts, Christopher
Publication title:
Management Decision. London: 1992. Vol. 30, Iss. 7; pg. 54, 7 pgs
Source type:
Periodical
ISSN:
00251747
ProQuest document ID:
603482
Text Word Count
4300
Document URL:
http://proquest.umi.com/pqdweb?did=603482&Fmt=3&clientId=66959&RQT=309&VName=PQD
Copyright © 2007 ProQuest-CSA LLC. All rights reserved. Terms & Conditions

Definition

BCG matrix

(or growth-share matrix) is a corporate planning tool, which is used to portray firm’s brand portfolio or SBUs on a quadrant along relative market share axis (horizontal axis) and speed of market growth (vertical axis) axis.

Growth-share matrix

is a business tool, which uses relative market share and industry growth rate factors to evaluate the potential of business brand portfolio and suggest further investment strategies.

Understanding the tool

BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of the business brand portfolio and its potential. It classifies business portfolio into four categories based on industry attractiveness (growth rate of that industry) and competitive position (relative market share). These two dimensions reveal likely profitability of the business portfolio in terms of cash needed to support that unit and cash generated by it. The general purpose of the analysis is to help understand, which brands the firm should invest in and which ones should be divested.

Relative market share. One of the dimensions used to evaluate business portfolio is relative market share. Higher corporate’s market share results in higher cash returns. This is because a firm that produces more, benefits from higher economies of scale and experience curve, which results in higher profits. Nonetheless, it is worth to note that some firms may experience the same benefits with lower production outputs and lower market share.

Market growth rate. High market growth rate means higher earnings and sometimes profits but it also consumes lots of cash, which is used as investment to stimulate further growth. Therefore, business units that operate in rapid growth industries are cash users and are worth investing in only when they are expected to grow or maintain market share in the future.

There are four quadrants into which firms brands are classified:

Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing market. In general, they are not worth investing in because they generate low or negative cash returns. But this is not always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other brands or SBUs or simple act as a defense to counter competitors moves. Therefore, it is always important to perform deeper analysis of each brand or SBU to make sure they are not worth investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation

Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as much cash as possible. The cash gained from “cows” should be invested into stars to support their further growth. According to growth-share matrix, corporates should not invest into cash cows to induce growth but only to support them so they can maintain their current market share. Again, this is not always the truth. Cash cows are usually large corporations or SBUs that are capable of innovating new products or processes, which may become new stars. If there would be no support for cash cows, they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment

Stars. Stars operate in high growth industries and maintain high market share. Stars are both cash generators and cash users. They are the primary units in which the company should invest its money, because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become cash flows. This is especially true in rapidly changing industries, where new innovative products can soon be outcompeted by new technological advancements, so a star instead of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market development, product development

Question marks. Question marks are the brands that require much closer consideration. They hold low market share in fast growing markets consuming large amount of cash and incurring losses. It has potential to gain market share and become a star, which would later become cash cow. Question marks do not always succeed and even after large amount of investments they struggle to gain market share and eventually become dogs. Therefore, they require very close consideration to decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product development, divestiture

BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly. They can help as general investment guidelines but should not change strategic thinking. Business should rely on management judgement, business unit strengths and weaknesses and external environment factors to make more reasonable investment decisions.

Advantages and disadvantages

Benefits of the matrix:

• Easy to perform;
• Helps to understand the strategic positions of business portfolio;
• It’s a good starting point for further more thorough analysis.

Growth-share analysis has been heavily criticized for its oversimplification and lack of useful application. Following are the main limitations of the analysis:

• Business can only be classified to four quadrants. It can be confusing to classify an SBU that falls right in the middle.
• It does not define what ‘market’ is. Businesses can be classified as cash cows, while they are actually dogs, or vice versa.
• Does not include other external factors that may change the situation completely.
• Market share and industry growth are not the only factors of profitability. Besides, high market share does not necessarily mean high profits.
• It denies that synergies between different units exist. Dogs can be as important as cash cows to businesses if it helps to achieve competitive advantage for the rest of the company.

Using the tool

Although BCG analysis has lost its importance due to many limitations, it can still be a useful tool if performed by following these steps:

• Step 1. Choose the unit
• Step 2. Define the market
• Step 3. Calculate relative market share
• Step 4. Find out market growth rate
• Step 5. Draw the circles on a matrix

Step 1. Choose the unit. BCG matrix can be used to analyze SBUs, separate brands, products or a firm as a unit itself. Which unit will be chosen will have an impact on the whole analysis. Therefore, it is essential to define the unit for which you’ll do the analysis.

Step 2. Define the market. Defining the market is one of the most important things to do in this analysis. This is because incorrectly defined market may lead to poor classification. For example, if we would do the analysis for the Daimler’s Mercedes-Benz car brand in the passenger vehicle market it would end up as a dog (it holds less than 20% relative market share), but it would be a cash cow in the luxury car market. It is important to clearly define the market to better understand firm’s portfolio position.

Step 3. Calculate relative market share. Relative market share can be calculated in terms of revenues or market share. It is calculated by dividing your own brand’s market share (revenues) by the market share (or revenues) of your largest competitor in that industry. For example, if your competitor’s market share in refrigerator’s industry was 25% and your firm’s brand market share was 10% in the same year, your relative market share would be only 0.4. Relative market share is given on x-axis. It’s top left corner is set at 1, midpoint at 0.5 and top right corner at 0 (see the example below for this).

Step 4. Find out market growth rate. The industry growth rate can be found in industry reports, which are usually available online for free. It can also be calculated by looking at average revenue growth of the leading industry firms. Market growth rate is measured in percentage terms. The midpoint of the y-axis is usually set at 10% growth rate, but this can vary. Some industries grow for years but at average rate of 1 or 2% per year. Therefore, when doing the analysis you should find out what growth rate is seen as significant (midpoint) to separate cash cows from stars and question marks from dogs.

Step 5. Draw the circles on a matrix. After calculating all the measures, you should be able to plot your brands on the matrix. You should do this by drawing a circle for each brand. The size of the circle should correspond to the proportion of business revenue generated by that brand.

Examples

Bcg Matrix Template

Corporate ‘A’ BCG matrix

Brand	Revenues	% of corporate revenues	Largest rival’s market share	Your brand’s market share	Relative market share	Market growth rate
Brand 1	$500,000	54%	25%	25%	1	3%
Brand 2	$350,000	38%	30%	5%	0.17	12%
Brand 3	$50,000	6%	45%	30%	0.67	13%
Brand 4	$20,000	2%	10%	1%	0.1	15%

This example was created to show how to deal with a relative market share higher than 100% and with negative market growth.

Corporate ‘B’ BCG matrix

Brand	Revenues	% of corporate revenues	Largest rival’s market share	Your brand’s market share	Relative market share	Market growth rate
Brand 1	$500,000	55%	15%	60%	1	3%
Brand 2	$350,000	31%	30%	5%	0.17	-15%
Brand 3	$50,000	10%	45%	30%	0.67	-4%
Brand 4	$20,000	4%	10%	1%	0.1	8%