BCG

Meaning The BCG Growth-Share Matrix is a portfolio planning

model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth-share". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability.

BCG Growth-Share Matrix

Assumption This framework assumes that an increase

in relative market share will result in an increase in the generation of cash. This assumption often is true because of the experience curve; increased relative market share implies that the firm is moving forward on the experience curve relative to its competitors, thus developing a cost advantage.

A second assumption is that a growing market requires investment in assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indication of its cash generation and its cash consumption.

BCG Growth Share Matrix Four Categories ;- Dogs Question marks Stars Cash Cows

Dogs Dogs have low market share and a low

growth rate and thus neither generate nor consume a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.

Question marks Question marks are growing rapidly and thus consume

large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash comsumption. A question mark (also known as a "problem child") has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

Stars Stars generate large amounts of cash because

of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. If a star can maintain its large market share, it will become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation.

Cash cows As leaders in a mature market, cash cows exhibit a return

on assets that is greater than the market growth rate, and thus generate more cash than they consume. Such business units should be "milked", extracting the profits and investing as little cash as possible. Cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders. Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis

Limitations

Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability.

The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage.

GE Nine Cell Matrix

The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used to perform business portfolio analysis as a step in the strategic planning process.

The GE/McKinsey Matrix identifies the optimum business portfolio as one that fits perfectly to the company's strengths and helps to explore the most attractive industry sectors or markets.

The objective of the analysis is to position each SBU on the chart depending on the SBU's Strength and the Attractiveness of the Industry Sector or Market on which it is focused. Each axis is divided into Low, Medium and High, giving the nine-cell matrix as depicted below.

GE Nine Cell Matrix

Up to 10 different factors can be used to define Industry Attractiveness. Major factors are Market Size, Market Growth Rate, Demand variability, Industry

Profitability, Competitive Rivalry, Global Opportunities, Entry and exit barriers, Capital requirement, Macro environmental Factors (PEST)

Up to 10 factors can also be used to define SBU Strength. Typical factors are Market Share, Distribution Channel Access, Financial Resources, R&D

Capability, Brand equity, Production Capacity, Knowledge of customer and market, Caliber of management. Relative cost position

The factors and their relative weightings are selected. The rating values for each factor are entered for each SBU and Industry.

GE Nine Cell Matrix

Each factor can be given a different weighting in calculating the overall attractiveness of a particular industry. The sum of weights must be 1. Use 1-10 rating scale and assign appropriate weights to each factor. Multiply the weights with the ratings of the respective factor.

Typically:

Industry Attractiveness = Attractiveness Factor 1 Value by Factor 1 weighting + Attractiveness Factor 2 Value by Factor 2 weighting, etc.

Business Unit Strength = Strength Factor 1 Value by Factor 1 weighting + Strength Factor 2 Value by Factor 2 weighting, etc.

GE Nine Cell Matrix

Market Size is represented by size of circle. Market share is represented by using the circle as a pie chart. The expected future position of circle is represented by an arrow

GE Nine Cell Matrix

GE Nine Cell Matrix

Industry Attractiveness

Business Unit StrengthStrong Average Weak

High Grow Grow Hold

Medium Grow Hold Harvest

Low Hold Harvest Harvest

GE Nine Cell Matrix

Grow – Business units that fall under grow attract high investment. Firms may go for product differentiation or Cost leadership. Huge cash is generated in this phase. Market leaders exist in this phase.

Hold – Business units that fall under hold phase attract moderate investment. Market segmentation, Market penetration, imitation strategies are adopted in this phase. Followers exist in this phase.

Harvest - Business units that fall under this phase are unattractive. Low priority is given in these business units. Strategies like divestment, Diversification, mergers are adopted in this phase.

GE Nine Cell Matrix

Strength a) It allows intermediate ratings between high and low and between

strong and week. b) It helps in channeling the corporate resources to business and

achieving competitive advantage and superior performance. c) It helps in better strategic decision making and better

understanding of business scope.

Weaknessa) It tends to obscure business that are become to winners because

their industries are entering at exit stage.b) Assessment of business in terms of two factors is not fair.

Hoffer's life cycle matrix Hoffer developed 15 cell matrix. Businesses are plotted in terms of industry’s stage in evolutionary

life cycle and business unit’s competitive position.

Industry’s stage in evolutionary life cycle consists following stages –

Development, Growth, Shakeout, Maturity, Decline

Business unit’s competitive position consists following positions- Strong, Average and Weak

THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX

TWO DIMENSIONS (Charles Hofer & A. D. Little, Co)

Stage of Industry / Market EvolutionEARLY DEVELOPMENTRAPID GROWTH / TAKE-OFFSHAKE-OUTMATURITY / SATURATIONDECLINE / STAGNATION

Business Strength / (Competitive Position) SAME DIMENSIONS AS USED IN THE GE BUSINESS

SCREEN

ADVANTAGES

Can be used to identify and track developing winners

Illustrates how the firm’s businesses are distributed across the stages of industry evolution

THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX

BUSINESS STRENGTH / COMPETITIVE POSITION

STRONG AVERAGE WEAKEARLY - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -DEVELOPMENT

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -STAGE OF RAPID GROWTH /

TAKE-OFFINDUSTRY / MARKET - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

SHAKE-OUTEVOLUTION

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -MATURITY /SATURATION- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -DECLINE /STAGNATION- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

ONLY ONE DIMENSION IS DIFFERENT FROM THE GE BUSINESS SCREENExcept for the Stage of Market Evolution, this model is identical to the GE Business Screen

Hofer’s Matrix