Compiled by Roshan pant (Nepal commerce campus-MBM)

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Corporate level Analytical tools

Corporate level analytical tools-BCG Matrix

• The BCG Matrix (Growth-Share Matrix) was designed In the late 1960s the Boston Consulting Group, a leading management consulting company.

• It was designed a four-cell matrix to help his clients with efficient allocation of resources among different business units.It has since been used as a portfolio planning and analysis tool for marketing, brand management and strategy development.

• In order to ensure successful long-term operation, every business organization should have a portfolio of products/services rather than just one product or service. This portfolio should contain both high-growth and low-growth products/services.

• High-growth products have the potential to generate lots of cash but also require substantial amounts of investment. Low-growth products with high market share, on the other hand, generate lots of cash while needing minimal investment.

• The BCG Matrix presents graphically the differences among these business units in terms of relative market share and industry growth rate in four cells.The BCG Matrix helps managers classify business units/products as low or high performers using the following criteria:1. Relative market share (strength of a business unit’s position in that market) Relative market share (RMS) is the percentage of the total market that is being controlled by the company being analyzed.2. Market growth rate (attractiveness of the market in which a business unit operates)

BCG matrix places business units/products in the following four categories:

• 1. Stars – BUs/products characterized by high-growth and high- market share. They often require heavy external investment to sustain their rapid growth as they may not be producing any positive cash flow. Eventually, their growth will slow, and they will turn into cash cows.

Strategic choices: Vertical integration, horizontal integration, market penetration, market development, product development

• 2.Cash Cows – BUs/products characterized by low-growth, high-market share. These are well established and successful BUs that do not require substantial investment to keep their market share. They produce a lot of cash to be used for other business units (Stars and Question Marks) of the company.

Strategic choices: Product development, diversification, divestiture, retrenchment

• 3. Question Marks – BUs/products characterized by low-market share in high-growth markets. They require a lot of financial resources to increase their

share since they cannot generate enough cash themselves. The crucial decision is to decide which Question Marks to phase out and which ones to grow into Stars.

Strategic choices: Market penetration, market development, product development, divestiture

• 4. Dogs – BUs/products with low-growth, low-market share. In addition, they often have poor profitability. The business strategy for a Dog is most often to divest. However, occasionally management might make a decision to hold a Dog for possible strategic repositioning as a Question Mark or Cash Cow.

Strategic choices: Retrenchment, divestiture, liquidation

Strengths and weaknesses of BCG model

Strengths• The BCG Matrix allows for a visual presentation of

the competitive position of all units in a business portfolio.

• The BCG model allows companies to develop a customized strategy for each product or business unit instead of having a one-size-fits-all approach.

• Simple and easy to understand.• It works well for companies with multiple divisions

and products• Allows for quick and simple screening of business

opportunities in order to determine investment priorities in the portfolio of products/business units.

• It is used to identify how corporate cash resources can be best allocated to maximize a company’s future growth and profitability.

Weakness• 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.

Corporate level analytical tools-GE nine cell matrix

• The GE Matrix was developed jointly by McKinsey and General Electric in the early 1970s as a derivation of the BCG Matrix.

• GE-McKinsey nine-box matrix is a strategy tool that offers a systematic approach for the multi business corporation to prioritize its investments among its business units.

• BCG Matrix showed to have some limitations. It was considered not flexible enough to include all the broader issues that a company was facing while operating in a fast changing global environment. The GE/McKinsey Matrix solves most of the issues of the BCG model and proposes a more sophisticated and comprehensive approach to investment decision making.

• The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix and it is primary used to perform business portfolio analysis on the strategic business units (SBU) of a corporation

• The nine-box matrix plots the BUs on its 9 cells that indicate whether the company should invest in a product, harvest/divest it or do a further research on the product and invest in it if there’re still some resources left. The BUs are evaluated on two axes: industry attractiveness and a competitive strength of a unit. Each axis is then divided into Low, Medium and High.

Contd..• In the business world, much like anywhere else, the problem of

resource scarcity is affecting the decisions the companies make.• With limited resources, but many opportunities of using them, the

businesses need to choose how to use their cash best. • The fight for investments takes place in every level of the company:

between teams, functional departments, divisions or business units. The question of where and how much to invest is an ever going headache for those who allocate the resources

• At least, it was hard until the BCG matrix and its improved version GE-McKinsey matrix came to help. These tools solved the problem by comparing the business units and assigning them to the groups that are worth investing in or the groups that should be harvested or divested.

Axis in GE matrix(x and y axis components)

• Industry Attractiveness:The vertical axis denotes industry attractiveness, which is a weighted composite rating based on eight different factors. Industry attractiveness indicates how hard or easy it will be for a company to compete in the market and earn profits. The more profitable the industry is the more attractive it becomes. Industry attractiveness consists of many factors that collectively determine the competition level in it. There’s no definite list of which factors should be included to determine industry attractiveness, but some are the most common.

• Competitive strength of a business unit or a product:It indicates business strength or in other words competitive position, which is again a weighted composite rating based on several factors in the next slide

Factors of industries attractiveness and competitive strength of a business

Advantages and disadvantagesAdvantages• Helps to prioritize the limited

resources in order to achieve the best returns.

• Managers become more aware of how their products or business units perform.

• It’s more sophisticated business portfolio framework than the BCG matrix.

• Identifies the strategic steps the company needs to make to improve the performance of its

business portfolio.

Disadvantages• Requires a consultant or a highly

experienced person to determine industry’s attractiveness and business unit strength as accurately as possible.

• It is costly to conduct.• It doesn’t take into account the

synergies that could exist between two or more business units

Using the tool GE matrix(steps)• Step 1. Determine industry attractiveness of each business units_ for the sake of simplicity in

the table we have taken only two but there can be many( First Make a list of factors-second Assign weights from 0.01 (not important) to 1.0 (very important)- third Rate the factors in say 5 point likert scale- finally Calculate the total scores by multiplying weights and ratings

• Step 2. Determine the competitive strength of each business unit• ‘Step 2’ is the same as ‘Step 1’ only this time, instead of industry

attractiveness, the competitive strength of a business unit is evaluated

• Step 3. Plot the business units on a matrix

• Each business unit is represented as a circle. The size of the circle should correspond to the proportion of the business revenue generated by that business unit. For example, ‘Business unit 1’ generates 20% revenue and ‘Business unit 2’ generates 40% revenue for the company. The size of a circle for ‘Business unit 1’ will be half the size of a circle for ‘Business unit 2’.

• Step 4. Analyze the information

• There are different investment implications you should follow, depending on which boxes your business units have been plotted.

• Step 5. Identify the future direction of each business unit• the company should consult with the industry analysts to

determine whether the industry attractiveness will grow, stay the same or decrease in the future. You should also discuss with your managers whether your business unit competitive strength will likely increase or decrease in the near future.

• For example, our previous evaluations show that the ‘Business Unit 1’ belongs to invest/grow box, but further analysis of an industry reveals that it’s going to shrink substantially in the near future. Therefore, in the near future, the business unit will be in harvest/divest group rather than invest/grow box.so the investment decision will be NO

Step 6. Prioritize your investments• The last step is to decide where and how to invest the company’s

money. While the matrix makes it easier by evaluating the business units and identifying the best ones to invest in, it still doesn’t answer some very important questions:

• Is it really worth investing into some business units?• How much exactly to invest in?• Where to invest into business units (more to R&D, marketing, value

chain?) to improve their performance?• Doing the GE McKinsey matrix and answering all the questions takes

time, effort and money, but it’s still one of the most important product portfolio management tools that significantly facilitate investment decisions.