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Boston Consulting Group II – A Business Portfolio Analysis Matrix

Boston Consulting Group II – A Business Portfolio Analysis Matrix

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Published by IJEPT Journal
The continuous development and market introduction of new businesses can play an important role in the future performance of companies. The business portfolio analysis represents an analytical approach by means of which managers have the possibility to view the corporation as a set of strategic business units that must be managed in a profitable way. Also, by taking into account features specific to the area in which the company operates, by taking into account the competitive advantage and the modalities of earmarking financial resources thereof, the business portfolio analysis provides managers the opportunity to approach companies from a different point of view and to pay increased attention to all activities that need to be undertaken. The present paper aims at presenting from a conceptual standpoint the Boston Consulting Group II Matrix, its strategic consequences and the characteristic advantages and disadvantages. Moreover, the paper will emphasize the importance that the business portfolio analysis holds within a company.
The continuous development and market introduction of new businesses can play an important role in the future performance of companies. The business portfolio analysis represents an analytical approach by means of which managers have the possibility to view the corporation as a set of strategic business units that must be managed in a profitable way. Also, by taking into account features specific to the area in which the company operates, by taking into account the competitive advantage and the modalities of earmarking financial resources thereof, the business portfolio analysis provides managers the opportunity to approach companies from a different point of view and to pay increased attention to all activities that need to be undertaken. The present paper aims at presenting from a conceptual standpoint the Boston Consulting Group II Matrix, its strategic consequences and the characteristic advantages and disadvantages. Moreover, the paper will emphasize the importance that the business portfolio analysis holds within a company.

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International Journal of Economic Practices and Theories, Vol. 1, No. 2, 2011 (October), e-ISSN 2247 – 7225
www.ijept.org
65
 
Boston Consulting Group II – A Business Portfolio Analysis Matrix
 byFlorin Tudor IonescuBucharest Academy of Economic Studiesflorinionescu@mk.ase.ro
 Abstract:
 
The continuous development and market introduction of new businesses can play an important role in the future performance of companies. The business portfolio analysis represents an analytical approach by means of which managershave the possibility to view the corporation as a set of strategic business units that must be managed in a profitable way.Also, by taking into account features specific to the area in which the company operates, by taking into account thecompetitive advantage and the modalities of earmarking financial resources thereof, the business portfolio analysis providesmanagers the opportunity to approach companies from a different point of view and to pay increased attention to all activitiesthat need to be undertaken.
 
The present paper aims at presenting from a conceptual standpoint the Boston Consulting GroupII Matrix, its strategic consequences and the characteristic advantages and disadvantages. Moreover, the paper willemphasize the importance that the business portfolio analysis holds within a company.
 
 Key words:
B.C.G. II, business, matrix, strategic analysis, portfolio.JEL classification: M31
1 Introduction
 Nowadays, all companies operate in amarketing environment, facing a large number of uncertainties. Thus, in order to be successfulin a market place, a company should besubjected to a process of continuously adaptingto changes that occur in the process, eventhough some marketing environments showhigher levels of predictability, in comparisonwith others (Voinea and Filip, 2011).Over time, companies have tried each time toidentify various ways in order to cope withuncertainties more easily, which were their mostfeared enemy. After many attempts, which wereaimed at weakening or even annihilating thisenemy, companies have managed, finally, toidentify the most powerful weapon, by whichthe battle can be won definitively. This weaponof war is known in the management andmarketing literature as the strategic business planning.At the beginning of strategic business planning,almost all companies put emphasis ondiversification. Over time, due to changes in themarketing environment, generated by thetightening competition, technological, socialand political pressures and not only, it becameobvious that a company can no longer solve the problems brought by these changes, simply byaction of diversification of the business portfolio, leading to the company's business portfolio to grow quantitatively.As a result of this approach in the '70s thecompanies’ attention switched from the actionsof diversification to the optimization of theentire businesses portfolio. This modificationthat occurred in companies’ approaches has been determined by the fact that businesses theycarried, began to differentiate between themstrong enough, through the saturation stage of consumers’ demand, competitive climate,technological turbulence and levels of development, profitability and vulnerability.Being forced to deal very carefully with all thedifferences between businesses, the companieshave to take a major change in the business portfolio leading approach. As such, companieshave adopted an introvert behavior, by whichthe potential businesses began to be treated asstrategic business units.In order to face these big issues, the companieshave to make some changes in their way of doing business, especially in their business portfolio analysis process.Thus, as companies are diversifying more andmore, their managers confront a number of challenges arising from the management of 
 
International Journal of Economic Practices and Theories, Vol. 1, No. 2, 2011 (October), e-ISSN 2247 – 7225
www.ijept.org
66
 
resources for the business portfolio and the lowlevel of resources with which companies canidentify, at a time.Responding to these challenges, over time weredeveloped a series of analytical business portfolio methods through which managers can balance the sources of cash flows from themultiple businesses and also can identify the place and role of businesses, in strategic terms,within the business portfolio. Therefore thecontinuous development and marketintroduction of new businesses can play animportant role in the future performance of companies.The business portfolio analysis represents ananalytical approach by means of whichmanagers have the possibility to view thecorporation as a set of strategic business unitsthat must be managed in a profitable way. Also, by taking into account features specific to thearea in which the company operates, by takinginto account the competitive advantage and themodalities of earmarking financial resourcesthereof, the business portfolio analysis providesmanagers the opportunity to approachcompanies from a different point of view and to pay increased attention to all activities that needto be undertaken.
 
This business portfolio analysis must becomeroutine activity undertaken by the company,through its carrying out on a regular basis, sothat decisions of earmarking of financialresources may be monitored, updated andmodified with a view to accomplishingcorporate objectives, correlated to the process of generation thereof carried out in an efficientway by each business (Armstrong and Brodie,1994).The basic decisions, that involve the earmarkingof corporate resources together with the generalapproach, by means of which a business will bemanaged, does not complete the strategicanalysis process and the selection of the viablestrategic alternative.Consequently, for each business must beexamined and selected a certain type of strategythat in the end should lead to the meeting of long-term strategic objective (Wensley, 1994).
2 B.C.G. II Matrix
A significant contribution in the field of strategic business portfolio analysis belongs toBruce Henderson. His name is synonymouswith the B.C.G. matrix. In the mid 1960s, whenhe was just a salesman at Westinghouse, thecompany wanted to know why unit costs fall,while it gained experience in production.Henderson adapted the experience curve (aderivative of the learning curve), which wasknown for many years as the answer to thisquestion. Further he deducted the policyimplications of the experience curve, foundedthe Boston Consulting Group (B.C.G.)consultancy agency and disseminated itsfindings to other companies in the form of theB.C.G. matrix. This matrix revolutionized thefield of strategic planning in the '70s.Henderson has popularized the idea that thestrategy may be universal. Businesses couldreduce risk and optimize their individual performance by managing specific strategic business units.At that time this idea was very successfulamong companies, but over time the B.C.G.matrix began to lose its popularity. Even if many ideas proposed by this matrix came under fire it can be said that there are a number of contributions that today are still treated asimportant.In other way of speaking, the B.C.G. matrix wasa foundation brick of strategic marketingthinking.Further, in order to meet the new environmentalconditions and taking into account thelimitations and criticisms of the B.C.G. matrix,the consulting firm Boston Consulting Grouphas developed, in 1980, a new model of  business portfolio analysis. This model, in themarketing and management literature, is alsoknown as: "BCG II Matrix" or "CompetitiveAdvantage Matrix” (Rue and Holland, 1986).The main reasons that have determined theBoston Consulting Group company to develop anew method to analyze the business portfoliowere closely related to environmentalconditions specific to the '80s, which sawradical changes. Among these changes it can bementioned the following ones:
 
International Journal of Economic Practices and Theories, Vol. 1, No. 2, 2011 (October), e-ISSN 2247 – 7225
www.ijept.org
67
 
• the
economic growth was not continue -sometimes was zero or even negative;
• consumer tastes changed with a high
frequency;
• rapid
changes were taking place in the production techniques;
• there
was an unstable global economicenvironment;
• the competition was very strong.
 The B.C.G. II matrix assumes that competitiveadvantage is a fundamental element of astrategic business unit profitability and the waysin which it is earned are distinct and specific toeach type of industry (O'Shaughnessy, 1995).Thus, the B.C.G. II matrix provides aclassification of industries in terms of two performance indicators: number of ways to gainthe competitive advantage and the size of thecompetitive advantage (Rue and Holland,1986). The matrix is presented in terms of graphics in the Figure 1.
Source: (Pearce and Robinson, 2007)
 Figure 1. B.C.G. II Matrix
The number of ways to increase the competitiveadvantage is influenced by the complexity of the products. Thus, a complex product offersmore opportunities for differentiation, while for simple products the company should look for opportunities that can reduce costs in order tosurvive (Pearce and Robinson, 2007).In terms of both performance indicators, theB.C.G. II matrix is divided into four boxescalled suggestive:
 specialized industries, fragmented industries, dilemma industries and volume industries
(Anghel and Petrescu, 2002).They have the following features:
 
 specialized industries
– this box highlights business area that have a great competitiveadvantage and a large number of ways to win it.However, these business areas are characterized by a large number of competitors present withineach specialized niches;
 
 fragmented industries
– this box shows the business areas that have a competitiveadvantage of small significance but with a largenumber of ways to obtain it. Within these business areas there is a strong financial productdifferentiation and firms are characterized by ahigh level of flexibility;
 
dilemma industries
- this box outline businessareas that are characterized by an insignificantcompetitive advantage, with a few ways to gainit. As such, companies should identify a number of solutions by which to overcome thiscompetitive dilemma; 
volume industries
- this box represents the business areas that have a limited number of ways to gain an important competitiveadvantage. Another characteristic of theseindustries is linked to the production of largequantities, which can be obtained througheconomies of scale, which in turn generatesignificant competitive advantages in the cost.However, product differentiation is difficult.This matrix helps managers to conduct adiagnostic analysis of business areas in whichthey operate or in which they would like toenter. Also, the method offers the possibility todetermine the importance of the competitiveadvantages associated with specific businessfrom the company’s portfolio and to determinethe number of ways to win them, taking intoaccount the specificities of each business area(
Pearce and Robinson, 2007
).
3 Strategic implications
The nature of strategic decisions that BCG IImatrix recommends are based on the followingassumptions ((Rue and Holland, 1986) :
the strategy is influenced by the competitiveenvironment and its capriciously character;
in order to maintain the long-term profitability
   W  a  y  s  o   f  g  a   i  n   i  n  g   t   h  e  c  o  m  p  e   t   i   t   i  v  e  a   d  v  a  n   t  a  g  e
ManyFRAGMENTEDINDUSTRIESSPECIALIZEDINDUSTRIESFewDILEMMAINDUSTRIESVOLUMEINDUSTRIESSmall BigThe size of the competitiveadvantage

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