With the help of BCG Matrix Boston Consultancy Group Matrix of classifying the business of a firm into four distinct categories namely: Stars, Question Marks, Cash Cows and Dogs; please classify different products/ companies in the same industry.
Several definitions have been proposed for the term marketing. Each tends to emphasize different issues. Memorizing a definition is unlikely to be useful; ultimately, it makes more sense to thinking of ways to benefit from creating customer value in the most effective way, subject to ethical and other constraints that one may have. The 2006 and 2007 definitions offered by the American Marketing Association are relatively similar, with the 2007 appearing a bit more concise. Note that the definitions make several points:
A main objective of marketing is to create customer value.
Marketing usually involves an exchange between buyers and sellers or between other parties.
Marketing has an impact on the firm, its suppliers, its customers, and others affected by the firm’s choices.
Marketing frequently involves enduring relationships between buyers, sellers, and other parties.
Processes involved include “creating, communicating, delivering, and exchanging offerings.”
ELEMENTS OF MARKETING:
There four elements are as follows.
1) Research – If you want to launch your own company or a product what will you do? The first thing that you will do will be market research. You will like to determine what the market actually wants. Similarly, during marketing too, market research is needed to determine what message should the company adopt and which medium will be best, what positioning needs to be achieved to target the right segment. By doing market research, we can gather data which can help us in analysis and action.
2) Strategy – Once you have your data ready, you know where your product stands and also the standing of your company in the market in terms of strengths and weaknesses. You also have an idea of what strategies will need to be implemented and what factors will need to be adopted by the company to beat competitors and succeed in the market. Thus, after research, strategies decide the vision of the company, its goal, its mission and in general where the company wants to be. The strategic plan needs to be well thought of by realistically considering all possibilities.
3) Planning – Now that you know, Where you want to be, naturally you have to plan How you are going to reach there. That is the job of the marketing planning department. The marketing plan involves sales forecasting, financial planning, communications strategy and many such benchmarks which define how the company is going to achieve its strategic goals in the future. The planning department also keeps a track of the timeline so that time to time we can determine whether we are on track with the strategic plan or not.
4) Tactics – Where planning happens at the topmost level, tactics are the street smart, short term plans you implement to attract customers, beat your competitors, increase sales, provide a better value for your customers or for any other short term objective which needs to be achieved. Giving an offer such as “Buy 1, get 1 free” is a sales tactic. Lessening the price of your product during festival time is a promotional tactic. Several such tactics can be implemented by the company to make sure that it is inline with the planning done in the earlier stage. Some industries, such as FMCG and consumer durable, mainly survive on time to time tactics that the implement. Due to the competitive nature of these industries, smart tactics ar absolutely necessary to achieve good revenues and for customer acquisition.
Thus overall, there may be 100â€²s of marketing activities such as branding, advertising etc. But all these marketing activities are a part of the four key elements of marketing. Using these four key elements as base, you can compare where you stand currently, which department are you weak in and then plan your future accordingly.
The Boston Consulting matrix is the most popular technique considered under corporate portfolio analysis. Kazim (2002), Jauch and Glueck (1998), Cherunilan (2004) Hill and Jones (1988) all agreed that the BCG Matrix is a very important technique in corporate portfolio analysis. The main objective of the Boston Consulting Group (BCG) technique is to help senior managers identify the cash flow requirement of the different businesses in their
portfolio. The BCG approach involves three main steps:
(1) Dividing a company into strategic business units (SBUs) and
assessing the long term prospect of each;
(2) Comparing SBUs against each other by means of a matrix that
indicates the relative prospects of each; and
(3) Developing strategic objectives with respect to each SBU.
The importance of relative market share:
High relative market share is of central importance as the key to competitive success argues the BCG. This is principally based on its earlier discovery of experience curves.An experience curve is in many ways similar to a learning curve effect: the organization becomes more efficient in producing and marketing a given product as it produces more of it. This leads to the statement that unit cost declines and cumulative volume increases. BCG claim this typically amounts to a 15% fall in unit costs for every doubling of cumulative volume.
BCG argue that all firms in the industry face essentially the same experience curve effects. Consequently as the industry progresses the unit costs of each participant will fall. Inevitably this will lead to falling prices. The firm that survives this process will be the firm with the lowest costs which, by extension, will be the one with the highest cumulative volume.
The conclusion is that domination of the market is essential for low costs and hence competitive success. Hence high relative market share is sought within the BCG matrix.
High relative share therefore brings several benefits:
ô€‚‰ The enjoyment of lower unit costs and therefore higher current margins than competitors at
the same price levels;
ô€‚‰ The ability to be a price leader- if the firm decides to cut price, others must follow to
maintain their sales, but in so doing may find themselves selling at below unit costs;
ô€‚‰ The dominance of the market means that the product will become the benchmark product-‘the real thing’ against which others may be seen as pale imitations.
According to the BCG, a company must create an SBU for each economically distinct business area that it competes. When top managers identify SBUs, their objective is to divide a company into strategic entities that are relevant for planning purposes. Normally, a company defines its SBU in terms of the product markets they are competing in. Having defined SBUs, top managers then assess each according to two criteria:
i. The SBU’s relative market share and
ii. The growth rate of the SBU’s industry.
The objective of identifying an SBU’s relative market share is to establish whether that SBU’s market position can be classified as a strength or a weakness. Relative market share is defined as the ratio of an SBU’S market share to the market share held by the largest rival company in its industry. According to the Boston Consulting Group, market share gives a company cost advantages from economics of scale and learning effects.
The Matrix is divided into four cells. SBU in cell I are defined as Stars, in cell 2 as Question marks, in cell 3 as cash cows, and in cell 4 as dogs. BCG argues that these different types of SBUS have different long-term prospects and different implication for cash accounts.
The Boston Consulting Group (BCG) matrix provides a firm an opportunity to assess how well its business units work together. Each business unit is evaluated in terms of two factors: market share and the growth prospects in the market. Generally, the larger a firm’s share, the stronger its position, and the greater the growth in a market, the better future possibilities. Four combinations emerge:
A star represents a business unit that has a high share in a growing market. For example, Motorola has a large share in the rapidly growing market for cellular phones.
A question mark results when a unit has a small share in a rapidly growing market. The firm’s position, then, is not as strong as it would have been had its market share been greater, but there is an opportunity to grow. For example, Hewlett-Packard has a small share of the digital camera market, but this is a very rapidly growing market.
A cash cow results when a firm has a large share in a market that is not growing, and may even be shrinking. Brother has a large share of the typewriter market.
A dog results when a business unit has a small share in a market that is not growing. This is generally a somewhat unattractive situation, although dogs can still be profitable in the short run. For example, Smith Corona how has a small share of the typewriter market.
Firms are usually best of with a portfolio that has a balance of firms in each category. The cash cows tend to generate cash but require little future investment. On the other hand, stars generate some cash, but even more cash is needed to invest in the future-for research and development, marketing campaigns, and building new manufacturing facilities. Therefore, a firm may take excess cash from the cash cow and divert it to the star. For example, Brother could “harvest” its profits from typewriters and invest this in the unit making color laser printers, which will need the cash to grow. If a firm has cash cows that generate a lot of cash, this may be used to try to improve the market share of a question mark. A firm that has a number of promising stars in its portfolio may be in serious trouble if it does not have any cash cows to support it. If it is about to run out of cash-regardless of how profitable it is- is becomes vulnerable as a takeover target from a firm that has the cash to continue running it.
A SWOT (“Strengths, Opportunities, Weaknesses, and Threats”) analysis is used to help the firm identify effective strategies. Successful firms such as Microsoft have certain strengths. Microsoft, for example, has a great deal of technology, a huge staff of very talented engineers, a great deal of experience in designing software, a very large market share, a well respected brand name, and a great deal of cash. Microsoft also has some weaknesses, however: The game console and MSN units are currently running at a loss, and MSN has been unable to achieve desired levels of growth. Firms may face opportunities in the current market. Microsoft, for example, may have the opportunity to take advantage of its brand name to enter into the hardware market. Microsoft may also become a trusted source of consumer services. Microsoft currently faces several threats, including the weak economy. Because fewer new computers are bough during a recession, fewer operating systems and software packages.
Rather than merely listing strengths, weaknesses, opportunities, and threats, a SWOT analysis should suggest how the firm may use its strengths and opportunities to overcome weaknesses and threats. Decisions should also be made as to how resources should be allocated. For example, Microsoft could either decide to put more resources into MSN or to abandon this unit entirely. Microsoft has a great deal of cash ready to spend, so the option to put resources toward MSN is available. Microsoft will also need to see how threats can be addressed. The firm can earn political good will by engaging in charitable acts, which it has money available to fund. For example, Microsoft has donated software and computers to schools. It can forego temporary profits by reducing prices temporarily to increase demand, or can “hold out” by maintaining current prices while not selling as many units.
Strategies based on the BCG Matrix.
There are four strategies possible for any product / SBU and these are the strategies which are used after the BCG analysis. These strategies are
1) Build – By increasing investment, the product is given an impetus such that the product increases its market share. Example – Pushing a Question mark into a Star and finally a cash cow (Success sequence)
2) Hold – The company cannot invest or it has other investment commitments due to which it holds the product in the same quadrant. Example – Holding a star there itself as higher investment to move a star into cash cow is currently not possible.
3) Harvest – Best observed in the Cash cow scenario, wherein the company reduces the amount of investment and tries to take out maximum cash flow from the said product which increases the overall profitability.
4) Divest – Best observed in case of Dog quadrant products which are generally divested to release the amount of money already stuck in the business.
Thus the BCG matrix is the best way for a business portfolio analysis. The strategies recommended after BCG analysis help the firm decide on the right line of action and help them implement the same.
Strategies for each quadrant:
1. Question marks- These products are in a high growth market which means that it is early in the product life cycle and therefore has the potential to repay present investment over its life cycle. Indeed the high market growth rate means that the firm will already be investing considerable sums in it. The low relative market share, however, means that this business unit is unlikely to survive in the long run because it will have a lower cost competitor. Management must decide between investing considerably more in the product to build its market share or shutting it down now before it absorbs any further investment which it will never repay. Investing to build can include:
ô€‚‰ Price reductions;
ô€‚‰ Additional promotion & securing of distribution channels;
ô€‚‰ Acquisition of rivals;
ô€‚‰ Product modification.
2. Stars.-Very competitively strong due to high relative market share, although their current results will be poor due to the need to invest considerable funds into keeping up with the market growth rate. The strategy here is to hold market share by investing sufficient to match the commitment of rivals and the requirements of the marketplace.
3. Cash cows. These are mature products (low growth rate) which retain a high relative market share. The mature stage means that their prospects are limited to falling prices and volumes. Therefore investment will be kept under strict review and instead the priority is to maximize the value of free cash flows through a policy of harvesting the product. Harvest means to minimize additional investment in the product to maximize the case the division is spinning off. This cash can be used to support the question mark products as well as satisfy demands for dividends and interest. Holding may also be used for early-mature stage products where the market may repay the extra investment
4. Dogs.-Dogs come into being from two directions:
ô€‚‰ Former cash cows that have lost market share due to management’s refusal to
invest in them;
ô€‚‰ Former question marks which still had a low relative share when the market reached
In either case the BCG recommends divestment of the product or division. This can mean selling it to a rival, or shutting it down to liquidate its assets for investment in more promising business units. In deciding whether or not to divest a dog, the following considerations should be taken into account:
(a) Whether the dog still provides a positive contribution or not.
(b) What is the opportunity cost of the assets it uses? For example, the contribution from
products that could be made using its factory or the interest on the net proceeds from
liquidation of the SBU.
(c) The impact on the rest of the portfolio that would result from divesting the SBU. Is it
essential to attract customers for example?
In later versions the BCG introduced the notion of a cash dog to accommodate another
strategy of creating a niche position for a dog product based on its nostalgia value (e.g. Mini
cars) or because a group of loyalist customers remain who will continue to pay high prices
for the product (e.g. hand-made cigars).
Evaluation of the BCG matrix:
The principal benefits of the BCG matrix are that it:
1. Provides a convenient way for management to visualize a diverse range of businesses or
2. Ensures that management perceive of the portfolio of businesses holistically, rather than
assessing each unit independently. Specifically management will:
ô€‚‰ Pay attention to cash-flow balances within the product portfolio;
ô€‚‰ Recognize the need for question mark and star products to be developed to ultimately
replace present cash cows.
3. Can be used to analyse the portfolios of rival firms:
ô€‚‰ To Identify which products they may decide to devote resources to;
ô€‚‰ To spot potential areas for attack such as knocking out a crucial cash cow with an
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