BCG Matrix, SWOT Analysis and Porter Model

BCG Matrix
Introduction:
The Boston Consulting Group (BCG) Matrix is an uncomplicated tool to evaluate a companys position in terms of its product range. It facilitates a company think about its products and services and makes decisions about which it should keep, which it should let go and which it should invest in further. Also called the BCG Matrix, it provides a useful way of screening the opportunities open to the company and helps to think about where one can best allocate resources to maximize profit in the future. At the end of the 1960s, Bruce Henderson, creator of the Boston Consulting Group, BCG, developed portfolio matrix. The BCG Growth-Share Matrix is a fourcell (2 by 2) matrix used to execute business portfolio analysis as a footstep in the strategic planning process. BCG matrix is often used to prioritize which products within company product mix get more funding and attention BCG matrix takes into account two strategic parameter into consideration namely, market share and market growth. To understand the Boston Matrix, one must understand how market share and market growth are interrelated. Market share is the percentage of the total market that is being serviced by a company under consideration, measured either in revenue terms or unit volume terms. Higher the market share, the higher the proportion of the market one controls. The Boston Matrix assumes that if the company under consideration is enjoying a high market share then it will be making more money. (This assumption is based on the idea that company has been in the market for long enough to have learned how to be profitable, and will be enjoying scale economies that gives an advantage).

Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market is expanding, meaning that its relatively easy for businesses to grow their profits, even if their market share remains stable. While, competition in low growth markets is often bitter, and while you might have high market share now, it may be hard to retain that market share without aggressive discounting. This makes low growth markets less attractive. Understanding the Matrix: Question Marks / Problem Child (Low Market Share / High Market Growth) Question marks are the products that grow rapidly and as a result consume large amounts of cash, but because they have low market shares they dont generate much cash. The result is large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If it doesnt become a market leader it will become a dog when market growth declines.

Question marks need to be examined carefully to determine if they are worth the investment required to grow market share. Dogs (Low Market Share / Low Market Growth) Dogs have a low market share and a low growth rate and neither generates nor consumes a large amount of cash. However, dogs are a cash trap because of the money is being tied up in a business that has little potential. Such businesses are candidate for divestiture. Stars (High Market Share / High Market Growth) A Star is being able to generate huge sum of cash because of their strong relative market share, but simultaneously it also consumes large amounts of cash because of their high growth rate. So the cash being spent and brought in approximately nets out. If a star can maintain its large market share it will become a cash cow when the market growth rate declines. Cash Cows (High Market Share / Low Market Growth) As leaders in a mature market, a cash cow demonstrates a return on assets that is greater than the market growth rate so they generate more cash than they consume. These units should be milked extracting the profits and investing as modest as possible. After plotting the company one among the four matrix depending on its respective market share and growth of its market in which it is operating, determine what you will do with each product/product line. There are typically four different strategies to apply: Build Market Share: Make further investments (for example, to maintain Star status, or to turn a Question Mark into a Star). Hold: Maintain the status quo (do nothing). Harvest: Reduce the investment (enjoy positive cash flow and maximize profits from a Star or a Cash Cow). Divest: For example, get rid of the Dogs, and use the capital you receive to invest in Stars and Question Marks.

Question mark: Don't have a large market share in a growing market Question marks are essentially new products Question Marks might become Stars and eventually Cash Cows It need to increase their market share or they become dogs. Dog Market presence is weak Do not enjoy the scale economies Dogs should be avoided and minimized.

Stars: Well-established in the growing market Strong opportunities

Cash Cows Well-established in the market Market isn't growing, opportunities are limited Due to low growth, promotion & placement investments are low

Disadvantages: The model uses only two dimensions (i.e. growth and share) to assess competitive position, others are ignored. More focus on balancing cash flows rather than other interdependencies. More emphasis on cost leadership rather than differentiation as a source of competitive advantage. Poor correlation between market share and profitability. A high market share does not necessarily lead to profitability at all times. Low share or niche businesses can be profitable too (some Dogs can be more profitable than cash Cows).

SWOT analysis
The SWOT analysis is one of the very useful tool for understanding and decision-making for all sorts of situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. A scan of the internal and external environment is a crucial part of the strategic planning process, which is being covered by SWOT analysis. It is used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. Strengths, Weaknesses are considered to be internal to the corporation or organisation where as Opportunities, and Threats are part of the external environment. The analysis involves identifying the purpose of the business venture or project and recognizing the internal and external factors that are favorable and unfavorable to achieve that goal. The method is being developed by Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies. 1. Strengths: Uniqueness of the business or department that give it an advantage over others in the industry. 2. Weaknesses: These are characteristics that place the firm at a disadvantage relative to its peers. 3. Opportunities: These are the external factors that will boost the sales or profitability of the organisation. 4. Threats: These external elements in the environment could cause trouble for the business. The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective. Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs. SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps to focus on key issues.

Some examples when SWOT analysis can be used: Company (its position in the market, commercial viability, etc) Method of sales distribution Business idea Strategic option, such as entering a new market or launching a new product Opportunity to make an acquisition Potential partnership Changing a supplier Outsourcing a service, activity or resource Analyzing any investment opportunity etc. Matching and converting: Another way of utilizing SWOT is matching and converting. Matching is used to find competitive advantages by matching the strengths to opportunities. Converting is to apply conversion strategies to convert weaknesses or threats into strengths or opportunities. An example of conversion strategy is to find new markets. If the threats or weaknesses cannot be converted a company should try to minimize or avoid them. Disadvantage: SWOT analysis is a method of categorization and has its own weaknesses. For example, it may tend to persuade companies to compile lists rather than think about what is actually important in achieving objectives. It also presents the resulting lists uncritically and without clear prioritization so that, for example, weak opportunities may appear to balance strong threats.

List of some general Strengths, Weaknesses, Opportunities, and Threats:

Strengths
An innovative product/service Marketing expertise Location of the business Quality processes & procedures Any other aspect that adds value to product /service

Weakness
Lack of marketing expertise Undifferentiated product /services Poor quality Inefficient staff Poor Infrastructure Poor management Damaged reputation etc.

Opportunities
Developing market Mergers, joint ventures or strategic alliances new international market Government intiative and support etc.

Threat s
New competitor Additional Taxation introduced Adverse macroeconomic matter Some technological changes Adverse legislation socio-cultural changes etc.

 Benefits of proposal Capabilities Competitive advantages USP's (unique selling points) Resources, Assets, People Experience, knowledge, data Financial reserves, expected returns Marketing - reach, distribution, awareness Innovative aspects Location advantage Price, value, quality certifications Processes, systems, IT, communications Cultural, attitudinal, behavioural aspects Management cover etc.

Disadvantages of the proposal Gaps in capabilities Lack of competitive strength Reputation, presence & reach Financials Timescales, deadlines & pressures Cashflow, start-up cash-drain Continuity, supply chain robustness Effects on core activities, distraction Reliability of data Morale, commitment, leadership Processes and systems inability

S O

W T
itical effects Legislative effects Environmental effects IT developments Competitor intentions Market demand New technologies, services, ideas Vital contracts and partners Sustaining internal capabilities Obstacles faced Irresistible weaknesses Loss of key staff Sustainable financial backing Economy - home, abroad Seasonality, weather effects

Market developments Competitors' vulnerabilities Industry or lifestyle trends Technology development and innovation Global influences New markets, vertical, horizontal Niche target markets Geographical, export, import New USP's Tactics - surprise, major contracts Business and product development Information and research Partnerships, agencies, distribution Volumes, production, economies Seasonal, weather, fashion influences

Porter's five forces model

Michael Porter's Five Forces of Competitive Position model provides a simple perspective for assessing and analyzing the competitive strength and position of a corporation or business organization. In 1990's American Michael Porter had established a reputation as a strategy guru. Apart from his novel thinking, Porter has a unique talent to represent complex concepts in relatively easy to handle formats, notably his Five Forces model, in which market factors can be analyzed so as to make a strategic assessment of the competitive position of a given supplier in a given market. The model originated from Michael E. Porter's 1980 book "Competitive Strategy: Techniques for Analyzing Industries and Competitors." The five forces that Porter suggests drive competition are:

New Market Entrants

Threat of Substitute

Buyer Power

Supplier Power

Competitive Rivalry

The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. It helps to understand both the strength of present competitive position and the strength of a position one is willing to aspire. With a clear understanding of where power lies, one can take a fair advantage of the situation by improving a situation of weakness and avoid taking wrong steps. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable.

Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are briefed as under: Supplier Power: Here we need to assess how easy it is for suppliers to drive up the prices. This is to determine how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial power. Here are a few reasons that suppliers might have power: There are very few suppliers of a particular product Uniqueness of their product or service i.e. there are no substitutes Switching to another (competitive) product is very costly The product is extremely important to buyers - can't do without it Buyer Power: In this factor we need to analyse how easy it is for buyers to drive prices down. This is to determine how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then the customer holds a substantial power. Here are a few reasons that customers might have power: Importance of each individual buyer to business, i.e. Small number of buyers Purchases large volumes Switching to another (competitive) product is simple The product is not extremely important to buyers; they can do without the product for a period of time Customers are price sensitive Cost to them of switching from our products and services to those of someone else Competitive Rivalry: What is important here is the number and capability of competitors. If business we are operating in has many competitors, and they offer equally attractive products and services, then we most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal. On the other hand, if no-one else can do what we do, then we can often have tremendous strength. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from:

Many players of about the same size; there is no dominant firm Little differentiation between competitors products and services A mature industry with very little growth; companies can only grow by stealing customers away from competitors. Threat of Substitution: What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses a serious threat. If substitution is easy and substitution is viable, then this weakens your power.Here are a few factors that can affect the threat of substitutes:

The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker may switch over to a beverage like tea. If substitutes are similar, it can be viewed in the same light as a new entrant. Threat of New Entry: Power is also affected by the ability of people to enter the market. The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:

Existing loyalty to major brands Incentives for using a particular buyer (such as frequent shopper programs) High fixed costs Scarcity of resources High costs of switching companies Government restrictions or legislation

Research Team
Mr. Amit Gupta Ms. Binal Vora Ms. Sandhya Tungatkar Research Team amitg@iseindia.com binalv@iseindia.com Sandhyat@iseindia.com research@iseindia.com

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