BCG Matrix

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, US
A. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for
an organization to examine different businesses in it’s portfolio on the basis of their related market s
hare and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic B
usiness Units). In other words, it is a comparative analysis of business potential and the evaluation of
environment.
According to this matrix, business could be classified as high or low according to their industry growth rate and relative
market share.
Relative Market Share = SBU Sales this year leading competitors sales this year.
Market Growth Rate = Industry sales this year - Industry Sales last year.
The analysis requires that both measures be calculated for each SBU. The dimension of business stre
ngth, relative market share, will measure comparative advantage indicated by market dominance. The
key theory underlying this is existence of an experience curve and that market share is achieved due
to overall cost leadership.
BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical
axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBU’s
are in same industry, the average growth rate of the industry is used. While, if all the SBU’s are loc
ated in different industries, then the mid-point is set at the growth rate for the economy.
Resources are allocated to the business units according to their situation on the grid. The four cells
of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells rep
resents a particular type of business.

1. Stars- Stars represent business units having large market share in a fast growing industry. T
hey may generate cash but because of fast growing market, stars require huge investments to
maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as
they are located in a robust industry and these business units are highly competitive in the in
dustry. If successful, a star will become a cash cow when the industry matures.
2. Cash Cows- Cash Cows represents business units having a large market share in a mature,
slow growing industry. Cash cows require little investment and generate cash that can be utiliz
ed for investment in other business units. These SBU’s are the corporation’s key source of cas
h, and are specifically the core business. They are the base of an organization. These business
es usually follow stability strategies. When cash cows loose their appeal and move towards det
erioration, then a retrenchment policy may be pursued.
3. Question Marks- Question marks represent business units having low relative market share a
nd located in a high growth industry. They require huge amount of cash to maintain or gain
market share. They require attention to determine if the venture can be viable. Question marks
are generally new goods and services which have a good commercial prospective. There is n
o specific strategy which can be adopted. If the firm thinks it has dominant market share, the
n it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses
start as question marks as the company tries to enter a high growth market in which there i
s already a market-share. If ignored, then question marks may become dogs, while if huge inv
estment is made, then they have potential of becoming stars.
4. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They n
either generate cash nor require huge amount of cash. Due to low market share, these busine
ss units face cost disadvantages. Generally retrenchment strategies are adopted because these
firms can gain market share only at the expense of competitor’s/rival firms. These business fir
ms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unl
ess a dog has some other strategic aim, it should be liquidated if there is fewer prospects for
it to gain market share. Number of dogs should be avoided and minimized in an organization.
Limitations of BCG Matrix
The BCG Matrix produces a framework for allocating resources among different business units and m
akes it possible to compare many business units at a glance. But BCG Matrix is not free from limitati
ons, such as-
1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true
nature of business may not be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high costs also involved
with high market share.
4. Growth rate and relative market share are not the only indicators of profitability. This model
ignores and overlooks other indicators of profitability.
5. At times, dogs may help other businesses in gaining competitive advantage. They can earn
even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.

ENVIRONMENTAL SCANNING: INTERNAL ANALYSIS

Environmental scanning is the process of gathering information about events and their relationships within an
organization's internal and external environments. The basic purpose of environmental scanning is to help management
determine the future direction of the organization.
Environmental scanning refers to possession and utilization of information about occasions, patterns, trends,
and relationships within an organization’s internal and external environment. It helps the managers to decide the
future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While
strategy formulation, an organization must take advantage of the opportunities and minimize the threats. A threat for one
organization may be an opportunity for another.
Internal analysis of the environment is the first step of environment scanning. Organizations should observe the
internal organizational environment. This includes employee interaction with other employees, employee interaction with
management, manager interaction with other managers, and management interaction with shareholders, access to natural
resources, brand awareness, organizational structure,
main staff, operational potential, etc. Also, discussions, interviews, and surveys can be used to assess
the internal environment. Analysis of internal environment helps in identifying strengths and weaknesses of an
organization.
INTERNAL OR MICRO ENVIRONMENT
It refers to the environment within the business. Similar to the external environment, the different forces within the micro
environment are interrelated with other forces in the business environment.

FORCES OPERATING WITHIN THE INTERNAL ENVIRONMENT

BUSINESS RESOURCES
These are assets or properties owned it controlled by the business. The resources can either be tangible or intangible.
TANGIBLE RESOURCES are assets of the business that have physical appearance and form. They can be touched and
seen. Examples of tangible resources or assets of the business are money in the form of paper bills or coins, building,
equipment, machinery, office supplies, inventory, land, and human resources. The tangible resources can be classified
into CURRENT RESOURCES and NON CURRENT RESOURCES.

CURRENT RESOURCES are used, applied or consumed within a short period oftime one year. These include cash,
receivables from customers, and inventory or goods intended for sale or office supplies.

NON CURRENT RESOURCES are properties whose usefulness of benefits extend beyond one year. They include land
building and equipment.

INTANGIBLE RESOURCES are there assets of the business that do not have physical appearance or form. They
cannot be touched. Examples are copyright, patents, formula, computer software, reputation and Goodwill. These
resources are expected to provide benefits and serve as the basic foundation of the business.Another important concern
with business resources, in addition to the issue of availability, is the aspect of CAPABILITY. The entrepreneurial
venture should have the required capability to utilize the available resources. A business that can efficiently utilize it's
resources in the production of goods or delivery of services may be able to gain business advantage in the market in terms
of price and market share.

BUSINESS CULTURE
It is a collection of values, beliefs, principles and expectations learned and shared by the employees, founders,
stakeholders and members of the management.

TYPES OF CULTURE OPERATING IN THE INTERNAL ENVIRONMENT

*Culture of the business
*Culture of the employees

In the Philippines there are different cultures since there are various ethnic groups with different beliefs, customs,
religions, norms and values. The entries has the primary responsibility to handle the level of cultural acceptance and
cultural integration among workers in the business.
CULTURAL ACCEPTANCE referred to the degree by rich the employees accept the culture of the unit or business.
CULTURAL INTEGRATION refers to the degree by which all units across the business accept and share a common
culture.
BUSINESS STRUCTURE
It refers to the formal organiational arrangement of the business in terms of hierarchy of positions, flow of
communication, relationship of functional areas, and production and marketing processes. The complexity of the business
structure depends on the type of business, nature of operation, capital base requirement, leadership style and scope of
operation. A small business has a very simple business structure compared to a corporate entity that operates nationwide.

As business becomes more competitive, and there are rapid changes in the external environment, information from
external environment adds crucial elements to the effectiveness of long-term plans. As environment is dynamic, it
becomes essential to identify competitors’ moves and actions. Organizations have also to update the core competencies
and internal environment as per external environment. Environmental factors are infinite, hence, organization should be
agile and vigile to accept and adjust to the environmental changes. For instance - Monitoring might indicate that an
original forecast of the prices of the raw materials that are involved in the product are no more credible, which could
imply the requirement for more focused scanning, forecasting and analysis to create a more trustworthy prediction about
the input costs. In a similar manner, there can be changes in factors such as competitor’s activities, technology, market
tastes and preferences.

While in external analysis, three correlated environment should be studied and analyzed
 immediate / industry environment
 national environment
 broader socio-economic environment / macro-environment

Examining the industry environment needs an appraisal of the competitive structure of the organization’s industry,
including the competitive position of a particular organizationand it’s main rivals. Also, an assessment of the nature,
stage, dynamics and history of the industry is essential. It also implies evaluating the effect of globalization on
competition within the industry. Analyzing the national environment needs an appraisal of whether the national
framework helps in achieving competitive advantage in the globalized environment. Analysis of macro-environment
includes exploring macro-economic, social, government, legal, technological and international factors that may influence
the environment. The analysis of organization’s external environment reveals opportunities and threats for an
organization.
Strategic managers must not only recognize the present state of the environment and their industry but also be able to
predict its future positions.

SWOT Analysis - Definition, Advantages and Limitations

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, Strengths (S) and Weaknesses
(W) are considered to be internal factors over which you have some measure of control. Also, by definition,
Opportunities (O) and Threats (T) are considered to be external factors over which you have essentially no control.
SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the business and its
environment. Its key purpose is to identify the strategies that will create a firm specific business model that will best align
an organization’s resources and capabilities to the requirements of the environment in which the firm operates.
In other words, it is the foundation for evaluating the internal potential and limitations and the probable/likely
opportunities and threats from the external environment. It views all positive and negative factors inside and outside the
firm that affect the success. A consistent study of the environment in which the firm operates helps in
forecasting/predicting the changing trends and also helps in including them in the decision-making process of the
organization.
An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below-
1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s mission. These are the basis on
which continued success can be made and continued/sustained.
Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise
in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give your
organization its consistency.
Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes
human competencies, process capabilities, financial resources, products and services, customer goodwill and brand
loyalty. Examples of organizational strengths are huge financial resources, broad product line, no debt, committed
employees, etc.
2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full
potential. These weaknesses deteriorate influences on the organizational success and growth. Weaknesses are the factors
which do not meet the standards we feel they should meet.
Weaknesses in an organization may be depreciating machinery, insufficient research and development
facilities, narrow product range, poor decision-making, etc. Weaknesses are controllable. They must be
minimized and eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased. Other
examples of organizational weaknesses are huge debts, high employee turnover, complex decision making process,
narrow product range, large wastage of raw materials, etc.

3. Opportunities - Opportunities are presented by the environment within which our organization operates. These arise
when an organization can take benefit of conditions in its environment to plan and execute strategies that enable it to
become more profitable. Organizations can gain competitive advantage by making use of opportunities.
Organization should be careful and recognize the opportunities and grasp them whenever they arise. Selecting
the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise
from market, competition, industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with existing
firms for revenue.
4. Threats - Threats arise when conditions in external environment jeopardize the reliability and
profitability of the organization’s business. They compound the vulnerability when they relate t
o the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival c
an be at stake. Examples of threats are - unrest among employees; ever changing technology;
increasing competition leading to excess capacity, price wars and reducing industry profits; etc.
Advantages of SWOT Analysis
SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves
a great subjective element. It is best when used as a guide, and not as a prescription. Successful b
usinesses build on their strengths, correct their weakness and protect against internal weaknesses and
external threats. They also keep a watch on their overall business environment and recognize and ex
ploit new opportunities faster than its competitors.
SWOT Analysis helps in strategic planning in following manner-
1. It is a source of information for strategic planning.
2. Builds organization’s strengths.
3. Reverse its weaknesses.
4. Maximize its response to opportunities.
5. Overcome organization’s threats.
6. It helps in identifying core competencies of the firm.
7. It helps in setting of objectives for strategic planning.
8. It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities with the
competitive environment in which the firm operates.

Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because
of which the organizations might overlook certain key strategic contact which may
occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as
there is great degree of uncertainty in market. SWOT Analysis does stress upon the
significance of these four aspects, but it does not tell how an organization can identify these aspects
for itself.

There are certain limitations of SWOT Analysis which are not in control of management. These include-

1. Price increase;
2. Inputs/raw materials;
3. Government legislation;
4. Economic environment;
5. Searching a new market for the product which is not having overseas market due to import
restrictions; etc.

Internal limitations may include-

1. Insufficient research and development facilities;
2. Faulty products due to poor quality control;
3. Poor industrial relations;
4. Lack of skilled and efficient labour; etc

SWOT Analysis of Starbucks

Starbucks is a globally recognized coffee and beverages brand that has rapidly made strides into all
major markets of the world. The company has a lead over its nearest competitors including Barista and other emerging
competitors. Indeed, Starbucks is so well known throughout the western hemisphere that it has become a household name
for coffee.

Strengths

 The main strength of Starbucks is its strong financial performance which has resulted in the company occupying the
number one spot among coffee and beverage retailers in the world
 The company is valued at more than $4 Billion which is a key strength when compared to its competitors
 The intangible strengths of Starbucks include its top of the mind recall among consumers
and by virtue of its brand, which symbolizes excellence, and quality at an affordable rate, the
company enjoys a dominant position in the worldwide market for coffee and beverages.
 The company is the largest coffeehouse in the world and because of its size and high volumes; it can afford to price
its products in the premium as well as the middle tier range to attract more consumers.
 The company is known for its pioneering people management in an industry where people skills and soft skills make
the difference between success and failure. In other words, Starbucks has actualized a positive and welcoming
workplace for its employees, which translates into happier associates serving customers in a superior way leading to
all round benefits for the company.

Weaknesses

 The company is heavily dependent on its main and key input, which is the coffee beans and hence, is acutely
dependent on the price of coffee beans as a determinant of its profitability. This means that Starbucks is overly price
sensitive to the fluctuations in the price of coffee beans and hence, must diversify its product range to reduce the risk
associated with such dependence.
 The company has come under fire in recent times for its procurement practices with many social and environmental
activists pointing to the unethical procurement practices of coffee beans from impoverished third world farmers.
Further, the company has also been accused of violating the “Fair Coffee Trade” principles that were put in place a
few years ago to tackle this precise problem.
 The company prices its products in the premium to the middle tiers of the market segment which places its products
outside the budgets of many working consumers who prefer to frequent McDonald’s and other outlets for their
coffee instead of Starbucks.
 The company must immediately diversify its product range if it has to compete with full spectrum competitors like
McDonald’s and Burger King in the breakfast segment which is rapidly growing as a consequence of compressed
schedules of consumers who would like to grab abite and drink something instead of making it at home.

Opportunities

 The company has an opportunity to expand its supplier network and expand the range ofsuppliers from whom it
sources in order to diversify its sources of inputs and not be at the mercy of whimsical suppliers. Further, this would
also help the company in becoming less sensitive to the prices of coffee beans and make it resilient against supply
chain risks.
 The company has a huge opportunity waiting for it as far as its expansion into the emerging markets is concerned.
With a billion consumers likely to join the pool of those who want instant coffee and breakfast in China and India,
the company can expand into these countries and other emerging markets, which represents a lucrative opportunity
for the taking.
 Starbucks also has the opportunity to expand its product offerings to take on the full spectrum food and beverage
retailers like McDonald’s and Burger King as the consumer segment which these retailers target is expanding leading
to more business opportunities for Starbucks to take advantage of.
 The company can significantly expand its network of retail stores in the United States as part of its push towards
greater market share and more consumer segments. This opportunity ties in with the other opportunities described
 above related to the expansion into newer markets, diversifying into newer consumer segments, and increasing its
footprint across the US and globally.

Threats

 The company faces threats from the rising prices of coffee beans and is subject to supply chain risks related to
fluctuations in the prices of this key input. Further, the increase in the prices of dairy productsimpacts the company
adversely leading to another threat to its profitability.
 The company is beset with trademark and copyright infringements from lesser-known rivals who wish to piggyback
on its success. As with other multinational retailers in the emerging markets, Starbucks has fought litigation against
those misusing its brand and famous logo.
 The company faces intense competition from local coffeehouses and specialty stores that give the company a run for
its money as far as niche consumer segments are concerned. In other words, the company faces a tough challenge
from local stores that are patronized by a loyal clientele, which is not enamored of big brands.
 Starbucks has to expand into emerging markets as a necessity as the developed markets that it has traditionally relied
on are saturated and given the fact that the ongoing recession has made the going tough for many retailers, it faces
significant threats from this aspect.
 Finally, as mentioned earlier, Starbucks faces significant challenges because of its global supply chain and is subject
to disruptions in the supply chain because of any reason related to either global or local conditions.