Techniques of strategy

selection

Thegrowthshare matrix(aka the

product portfolio,BCG-matrix, Boston
matrix,Boston Consulting
Groupanalysis, portfolio diagram) is
a chart that was created byBruce D.
Hendersonfor theBoston Consulting
Groupin 1970 to help corporations
to analyze their business units, that
is, theirproduct lines. This helps the
company allocate resources and is
used as an analytical tool inbrand
marketing,product
management,strategic
management, andportfolio analysis.

Market Growth Rate

The Boston Consulting Groups

Growth-Share Matrix
20%18%16%14%12%10%8%6%4%2%0

Stars

?
?
?

Dogs

Question marks

Cash cows

10x 4x 2x 1.5x 1x
.5x .4x .3x .2x .1x

Relative Market Share

Relative market share

This indicates likely cash generation, because the higher the share the
more cash will be generated.
As a result of 'economies of scale' (a basic assumption of the BCG
Matrix), it is assumed that these earnings will grow faster the higher
the share.
The exact measure is the brand's share relative to its largest
competitor.
Thus, if the brand had a share of 20 percent, and the largest
competitor had the same, the ratio would be 1:1.
If the largest competitor had a share of 60 percent; however, the ratio
would be 1:3, implying that the organization's brand was in a relatively
weak position. If the largest competitor only had a share of 5 percent,
the ratio would be 4:1, implying that the brand owned was in a
relatively strong position, which might be reflected in profits and cash
flows.
If this technique is used in practice, this scale is logarithmic, not linear.

Market growth rate

Rapidly growing in rapidly growing markets, are what organizations strive
for; but, as we have seen, the penalty is that they are usually net cash users
they require investment.
The reason for this is often because the growth is being 'bought' by the
high investment, in the reasonable expectation that a high market share will
eventually turn into a sound investment in future profits.
The theory behind the matrix assumes, therefore, that a higher growth rate
is indicative of accompanying demands on investment. The cut-off point is
usually chosen as 10 per cent per annum.
Determining this cut-off point, the rate above which the growth is deemed
to be significant (and likely to lead to extra demands on cash) is a critical
requirement of the technique; and one that, again, makes the use of the
growthshare matrix problematical in some product areas.
What is more, the evidence, fromfast-moving consumer goods markets at
least, is that the most typical pattern is of very low growth, less than 1 per
cent per annum. This is outside the range normally considered in BCG
Matrix work, which may make application of this form of analysis
unworkable in many markets.
Where it can be applied, however, the market growth rate says more about
the brand position than just its cash flow.

 Cash cowsis where a company has high

market share in a slow-growing industry.
These units typically generate cash in excess
of the amount of cash needed to maintain the
business. They are regarded as staid and
boring, in a "mature" market, yet corporations
value owning them due to their cash
generating qualities. They are to be "milked"
continuously with as little investment as
possible, since such investment would be
wasted in an industry with low growth.

 Dogs, more charitably calledpets, are units

with low market share in a mature, slow-growing
industry. These units typically "break even",
generating barely enough cash to maintain the
business's market share. Though owning a
break-even unit provides the social benefit of
providing jobs and possible synergies that assist
other business units, from an accounting point
of view such a unit is worthless, not generating
cash for the company. They depress a profitable
company'sreturn on assetsratio, used by many
investors to judge how well a company is being
managed.Dogs, it is thought, should be sold off.

 Question marks(also known asproblem

children) are business operating in a high
market growth, but having a low market
share. They are a starting point for most
businesses. Question marks have a potential
to gain market share and become stars, and
eventually cash cows when market growth
slows. If question marks do not succeed in
becoming a market leader, then after perhaps
years of cash consumption, they will
degenerate into dogs when market growth
declines. Question marks must be analyzed
carefully in order to determine whether they
are worth the investment required to grow
market share.

 Starsare units with a high market share in a fastgrowing industry.

They are graduatedquestion markswith a market or
niche leading trajectory, for example: amongst market
share front-runners in a high-growth sector, and/or
having amonopolisticor increasingly dominantUSP with
burgeoning/fortuitousproposition drive(s) from: novelty
(e.g.Last.FM upon CBS Interactive's due diligence),
fashion/promotion (e.g. newly prestigiouscelebrity
branded fragrances),customer loyalty(e.g.greenfieldor
military/gang enforcement backed, and/or
innovative,grey-market/illicit retail of addictive drugs,
for instance theBritish East India Company's, late-1700s
opium-based Qianlong Emperor embargo-busting,
Canton System),goodwill(e.g.monopsonies)
and/orgearing(e.g.oligopolies, for instancePortland
cement producersnearboomtowns).
The hope is that stars become next cash cows.

 Stars require high funding to fight

competitions and maintain a growth
rate. When industry growth slows, if
they remain a niche leader or are
amongst market leaders they have
been able to maintain their category
leadership stars become cash cows,
else they become dogs due to low
relative market share.

 As a particular industry matures and

its growth slows, all business units
become eithercash cowsordogs.
The natural cycle for most business
units is that they start asquestion
marks, then turn intostars.
Eventually the market stops growing
thus the business unit becomes
acash cow. At the end of the cycle
the cash cow turns into adog.

 Only a diversified company with a balanced

portfolio can use its strengths to truly
capitalize on its growth opportunities. The
balanced portfolio has:
stars whose high share and high growth
assure the future;
cash cows that supply funds for that future
growth; and
question marks to be converted into stars
with the added funds.

Practical use
"To be successful, a company should have a portfolio of products with
different growth rates and different market shares. The portfolio
composition is a function of the balance between cash flows. High
growth products require cash inputs to grow. Low growth products
should generate excess cash. Both kinds are needed
simultaneously."Bruce Henderson[3]
For each product or service, the 'area' of the circle represents the
value of its sales. The growthshare matrix thus offers a "map" of the
organization's product (or service) strengths and weaknesses, at
least in terms of current profitability, as well as the likely cashflows.
The need which prompted this idea was, indeed, that of managing
cash-flow. It was reasoned that one of the main indicators of cash
generation was relative market share, and one which pointed to cash
usage was that of market growth rate.

Construction of the G.E Matrix

The G.E matrix is constructed in a 3x3 grid withMarket
Attractivenessplotted on the Y-axis andBusiness
Strengthon the X-axis, both being measured on a
high,medium,or low score. Five steps must be considered in
order to formulate the matrix;
The range of products produced by the SBU must be listed
Factors which make the particularmarket attractive must be
identified
Evaluating where the SBU stands in this market
Processes through which calculations about business strength
and market attractiveness can be made
Determining which category an SBU lies in; high, medium, or
low.

Market attractiveness
The attractiveness of a market is
demonstrated by how beneficial it is for
a company to enter and compete within
this market. It is based on various
factors; the size of the market and the
rate at which it is growing, the possibility
of profit, the number of competitors
within the industry and their weaknesses

Business/competitive strength
This helps decide whether a company is competent
enough to compete in the given market(s). It can
be determined by factors within the company itself
such as its assets and holdings, the share it
company holds in the market and the development
of this share, the position in the market of its brand
and the loyalty of customers to this brand,its
creativeness in coming up with new and improved
products and in dealing with the fluctuating
situations of the market, as well as keeping in mind
environmental/government concerns such as
energy consumption, waste disposal etc.

GE-McKinsey 9-Box Matrix

GE-McKinsey 9-Box Matrix

GE-McKinsey 9-Box Matrix

Advantages
Raises awareness between managers
about the performance of their
products in the market and aids in
developing strategies to get maximum
returns from the resources available.
Helps extract information about a
business unit's strengths and
weaknesses and to devise strategies to
accelerate and improve performance.
Aids the business in growing and in
providing information about potential
market opportunities.

Limitations
There is no set rule to 'weight' factors and this
process may be subjective across different
business unit's. For example, the weight given to
a factor by one business may be different to the
weight/importance given to it by another.
The formulation of a G.E. matrix is very
expensive and time consuming.
Investment strategies are often not implemented
in an accurate and proper manner.
The dynamics among SBU's themselves are not
taken into account.

Comparison with the BCG matrix

When compared to the BCG matrix consisting of

four cells, the GE matrix is more complex with its
nine cells.This means it not only takes longer to
construct, but also to implement. The BCG matrix is
a lot more simpler and the factors needed to
construct it are accessed more easily and quickly.It
takes into account a wide range of factors when
determining market attractiveness and business
strengths, which is replaced by market share and
market growth in the BCG matrix. Also, where
factors are classified in the G.E matrix as high,
medium and low, those in the BCG matrix are

Hofers Product Market Matrix

Product Market Evolution Matrix

displays the
matrix where strategic business units
are
graphically represented according to
two
basic indicators:
Competitive position on the market
stage corresponding to the
product/market
evolution.

Charles W. Hofer described seven

stages of the life cycle, each with
certain characteristics by which the
position of the market can be
identified.

DEVELOPMENT
GROWTH
SHAKE-OUT
MATURITY
DECLINE
PETRIFICATION

Business unit A
It would to be a developing winner. Its relatively large
share of the market combined with its being at the
development stage of product- market evolution and its
potential for being in a strong competitive position make it
a good candidate for receiving more corporate resources.
Business unit B
It is somewhat similar to A. However, it has a relatively
small share of the market given its strong competitive
position. A strategy would have to be developed to
overcome this low market share in order to justify more
investments.

Business unit C
It might be classified as a potential loser. A strategy must be
developed to overcome the low market share and weak
competitive position in order to justify future investments.
Business unit D
It is in a shakeout period, has a relatively large share of the
market, and is in a relatively strong position. Investment
should be made to maintain that position.
Business units E and F
They have relatively large market share and has strong
competitive position. It should be used for cash generation.

Business unit G
It has low market share and weak competitive
position. It should be managed to generate cash in
the short run, if possible; however, the long-run
strategy will more the likely be divestment or
liquidation.

STRENGHTS
o
o
o
o

Set objective and allocate resources

Use of externally oriented data
Cash flow availability
Illustrates distribution of business in an
industry
o Encourages promotion of competitive
analysis
o Reduce risks, increases concentration and
involvement in competitive world

WEAKNESS
o Difficulty in defining product/market
segment.
o Suggests impractical standard strategies.
o Naively following portfolio prescriptions
may reduce profit.
o Provides an illusion of scientific rigor.
o No clear idea what makes an industry
attractive .

The power of the Hofer matrix resides in the fact

that it may outline the distribution of strategic business
units during stages specific to life cycle of the market.
Similar to the McKinsey matrix, the present matrix
offers the company the possibility to make a diagnosis
regarding the portfolio, in order to establish if it exhibits
a balanced or unbalanced structure.
A balanced portfolio should be composed of
strategic business units of the type corresponding to
Stars and to Cash Cows and to a few Question
Marks, which have recently penetrated the market
or which are about to become Stars.