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The bcg matrix

The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a Strategic Business Unit (SBU). To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. This model can be explained in two dimensions: relative market share and market growth. The basic idea behind this model is that the larger the market share a product has relative to its competitors or the faster the product's market grows, the better it is for the company in an economic sense. The key components of the matrix are illustrated in [link] and discussed below:

Relative market share, categorized as high or low, as columns, and market growth rate, categorized as low or high, as rows. High growth rate and high relative market share make stars. High market growth rate and low relative market share make question marks. Low market growth rate and high relative market share makes cash cows. Low market growth rate and low relative market share makes dogs.
BDG Matrix
Source: (External Link)

  1. Stars (high market growth, high relative market share). These are products that require large amounts of cash and are also leaders in the business and therefore they should also generate large amounts of cash. They are frequently roughly in balance on net cash flow.
  2. Cash Cows (low market growth, high relative market share). These are products that generate high amounts of profit and cash, and because of the low growth, investments needed should be low.
  3. Given its characteristics, companies should avoid and minimize the number of products in this category. If the product does not deliver cash, it may be discontinued.
  4. Question Marks (high market growth, low relative market share). These products have the worst cash characteristics of all, because of high cash demands and low returns due to low market share. If nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, it may become a dog. So, managers should either invest heavily in order to improve market share, or sell off/invest nothing and generate whatever cash is possible.

The mckinsey matrix

The McKinsey matrix is a later and more advanced form of the BCG Matrix. It has several differences with BCG’s matrix, as discussed below. It is illustrated in Exhibit 6.

McKinsey Matrix
Source: (External Link)

  1. Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness. Market attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry/market. For example, market attractiveness could be determined using Porter’s five forces model.
  2. Competitive strength replaces market share as the dimension by which the competitive position of each Strategic Business Unit is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit.
  3. Finally the McKinsey matrix works with a 3x3 grid, while the BCG Matrix has only 2x2. This also allows for more insight in the analysis of the business.

Downes’ three new forces

Larry Downes (1999) identifies three new forces that require a totally different perspective towards a strategic framework and a set of very different analytic and business design tools: digitalization, globalization, and deregulation.

Digitalization: As the power of information technology grows, all players in a market will have access to far more information. Thus, totally new business models will emerge in which even players from outside the industry are able to vastly change the basis of competition in a market. Downes gives the example of the rise of electronic shopping malls, operated for instance by telecom operators or credit card organizations. Those who use the Five Forces Model and who base their thinking on today’s industry structure would never see these changes coming in time.

Globalization: Improvements in distribution logistics and communications have allowed nearly all businesses to buy, sell, and cooperate on a global level. Customers, meanwhile, have the chance to shop around and compare prices globally. As a result, even locally oriented mid-sized companies find themselves in a global market, even if they do not export or import themselves. In addition, global and networked markets impose new requirements on organizations' strategies. It is not enough any more to position oneself as a price-leader or quality-leader (as Porter suggests in his Generic Strategies model). Rather, competitive advantages emerge now from the ability to develop lasting relationships to more mobile custumers and to manage far-reaching networks of partners for mutual advantage.

Deregulation: The past decade has seen a dramatic shrinking of government influence in many industries like airlines, communications, utilities, and banking in the US and in Europe. Fueled by the new opportunities provided by information technology, organizations in these industries were able and forced to completely restructure their businesses and to be on the lookout for new opportunities and competitive threats. For example, traditional land line telephone companies that did not enter the wireless telephony market found themselves with a shrinking customer base. This is because young people frequently use only cell phones now and do not bother to have a land line phone in their homes.

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Source:  OpenStax, Business fundamentals. OpenStax CNX. Oct 08, 2010 Download for free at http://cnx.org/content/col11227/1.4
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