STRATEGIC MANAGEMENT MODELS

The Boston Consulting Group (BCG) Matrix

The Boston classification classifies business units in terms of their;

i. Capacity for growth within the market
ii. and the market's capacity for growth as a whole.

The Boston Consulting Group (BCG) developed a matrix based on empirical research that
assesses businesses in terms of potential cash generation and cash expenditure requirements.

SBUs are categorised in terms of market growth rate and relative market share.

Market share: 'One entity's sale of a product or service in a specified market expressed as a
percentage of total sales by all entities offering that product or service.'

a) Assessing rate of market growth as high or low depends on the conditions in the
market. No single percentage rate can be set, since new markets may grow explosively
while mature ones grow hardly at all. High market growth rate can indicate good
opportunities for profitable operations. However, intense competition in a high growth
market can erode profit, while a slowly growing market with high barriers to entry can
be very profitable.

b) Relative market share is assessed as a ratio: it is market share compared with the
market share of the largest competitor. Thus a relative market share greater than
unity indicates that the SBU is the market leader. BGG settled on market share as a
way of estimating costs and thus profit potential, because both costs and market
share are connected with production experience: as experience in satisfying a
particular market demand for value increases, market share can be expected to increase
also, and costs to fall.

The connection between lower costs and higher market share was independently
confirmed by PIMS studies.

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Basically, the business portfolio should be balanced, with cash cows providing finance for stars
and question marks; and a minimum of dogs.

i. Stars require capital expenditure in excess of the cash they generate, in order to
maintain their position in their competitive growth market, but promise high returns
in the future.
Strategy: build.

ii. In due course, stars will become cash cows. Cash cows need very little capital
expenditure, since mature markets are likely to be quite stable, and they generate high
levels of cash income. Cash cows can be used to finance the stars.
Strategy: hold or harvest if weak.

iii. Question marks must be assessed as to whether they justify considerable capital
expenditure in the hope of increasing their market share, or should they be allowed to
die quietly as they are squeezed out of the expanding market by rival products?
Strategy: build or harvest.

iv. Dogs may be ex-cash cows that have now fallen on hard times. Although they will
show only a modest net cash outflow, or even a modest net cash inflow, they are cash
traps which tie up funds and provide a poor return on investment. However, they may
have a useful role, either to complete a product range or to keep competitors out.
There are also many smaller niche businesses in markets that are difficult to consolidate
that would count as dogs but which are quite successful.

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 Strategy: divest or hold.

VALUE CHAIN
The value chain concept is an important tool in analysing the organisation's strategic
capability, since it focuses on the overall means by which value is created rather than on
structural functions or departments.

There are two important, connected aspects to this analysis:

a) It enables managers to establish the activities that are particularly important in
providing customers with the value they want: this leads on to a consideration of
where management attention and other resources are best applied, either to improve
weakness or to further exploit strength. A further possible consequence would be
decisions about outsourcing.
b) This analysis can be extended to include an assessment of the costs and benefits
associated with the various value activities

Porters Value Chain

Porter (in Competitive Advantage) grouped the various activities of an organisation into a
value chain. Here is a diagram.

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The margin is the excess the customer is prepared to pay over the cost to the firm of
obtaining resource inputs and providing value activities. It represents the value created by
the value activities themselves and by the management of the linkages between them.

PRIMARY ACTIVITIES

Primary activities are directly related to production, sales, marketing, delivery and service.
Comment
- Inbound logistics: Receiving, handling and storing inputs to the production system:
warehousing, transport, inventory control and so on.
- Operations: Converting resource inputs into a final product: resource inputs are not only
materials. People are a resource, especially in service industries.
- Outbound logistics: Storing the product and its distribution to customers: packaging,
testing, delivery and so on; for service industries, this activity may be more concerned
with bringing customers to the place where the service is available; an example would
be front of house management in a theatre.
- Marketing and sales: Informing customers about the product, persuading them to buy
it, and enabling them to do so: advertising, promotion and so on.
- After sales service: Installing products, repairing them, upgrading them, providing spare
parts and so forth.

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SUPPORT/ SECONDARY ACTIVITIES

Support activities provide purchased inputs, human resources, technology and infrastructural
functions to support the primary activities.

- Procurement: All of the processes involved in acquiring the resource inputs to the
primary activities (eg purchase of materials, subcomponents equipment).
- Technology development: Product design, improving processes and resource utilisation.
- Human resource management Recruiting, training, managing, developing and
rewarding people; this activity takes place in all parts of the organisation, not just in the
HRM department.
- Firm infrastructure Planning, finance, quality control, the structures and routines that
make up the organisation's culture.