What is the BCG Matrix?

The BCG matrix – also known as the Boston Consulting Group matrix or Growth Market
Share matrix is a strategic management tool used to evaluate a company’s product
portfolio. It was developed by the Boston Consulting Group in the 1970s and is still
widely used today. 

BGC in other terms is a competitive analysis of business potential and the evaluation of
the environment. 

Understanding the BCG Matrix

The BCG matrix is based on the idea that a company’s products can be classified into four
categories based on their market share and market growth rate.

                       (Image source: management study guide)

The horizontal axis represents the portion of the market share of a product and its
strength in any particular market. Using Relative Market Share helps measure a
company’s competitiveness. The vertical axis depicts the growth rate of a product and its
potential to thrive in a particular market. 

Resources are assigned to the business units as per their situation on the grid. The four
cells of the BCG matrix are called – stars, cash cows, question marks and dogs. Each of
these cells illustrates a particular type of business.
  Question marks: Products with high market growth + low market share
 Stars: Products with high market growth + high market share
 Dogs: Products with low market growth + low market share
 Cash cows: Products with low market growth + high market share

Stars: 
Products having a high market share in a fast-growing market. These products are
expected to continue to grow and generate substantial profits. Companies should invest
in these products to maintain their market position and capitalize on their growth
potential. They do generate cash, but due to the fast-growing market, 

Cash Cows: 
Products having a high market share in a slow-growing market. These products generate
significant profits but have limited growth potential. Companies should milk these
products for cash to fund the growth of other products in their portfolio.

Question Marks: 
Products having a low market share in a fast-growing market. These products require
significant investment to increase their market share and become stars, or they should be
divested if they do not show promise.

Dogs: 
Products having a low market share in a slow-growing market. These products are not
expected to generate significant profits and should be divested or phased out unless they
provide a strategic advantage or complement other products in the portfolio.

The BCG matrix is a strategic management tool that helps companies evaluate their
product portfolio and make strategic decisions. By using the BCG matrix, companies can
identify which products to invest in, which products to milk for cash, which products to
invest in for growth, and which products to divest or phase out.

GE 9 CELL MODEL
GE means General Electric nine cell matrix. This matrix was developed in 1970’s by General Electric
Company with the assistance of the consulting firm, Mckinsey & Co, USA. This is also called GE
multifactor portfolio matrix or Directional policy matrix.

The GE matrix has been developed to overcome the obvious limitations of BCG matrix. It is a tool
used in brand marketing & product management to decide what products to add to the portfolio. It
identifies the optimum business portfolio as one that fits perfectly to the company’s strengths &
helps to explore the most attractive industry sectors or markets.

It identifies the optimum business portfolio as one that fits perfectly to the company’s strengths &
helps to explore the most attractive industry sectors or markets. The objective of the analysis is to
position each SBU on the chart depending on the SBU’s strength & the attractiveness of the industry
sector or market on which it is focused.

This matrix consists of nine cells [3*3] matrix used to perform business portfolio analysis as a step in
the strategic planning process & is based on 2 key variables:

✓ Business strength

✓ Industry attractiveness

1] Business strength:- It is a competitive strength replaces market share as the dimension by which
the competitive position of each SBU is assessed. The business strength is measured by considering
such factors as: Relative market share, Profit margins, Ability to compete on price & quality,
Knowledge of customer & market, Competitive strengths & weaknesses, Technological capacity,
Caliber of management, Brand image, Corporate image, Production capacity, R&D performance,
Promotional effectiveness etc.,

2] Industry attractiveness:- It replaces market growth as the dimension of industry attractiveness &
includes a boarder range of factor other than just the market growth rate. The business strength is
measured by considering such factors as: Market size & growth rate, Industry profit margin,
Competitive intensity, Economics of scale, Technology, Social, environment, legal & human aspects,
Current size of market, Market structure & market rivalry, Demand variability, Global opportunities
etc.,
SPOTLIGHT STRATEGY The 9 cells of the GE matrix represent various degrees of industry
attractiveness (high, medium & low) & business strength (strong, average & weak). After plotting
each product line or business unit on the nine cell matrix, strategic choices are made depending on
their position in the matrix. GE matrix is also called “Spotlight” strategy matrix because the 3 zones
are like Green, Yellow & red of Traffic lights.

1] Green – Grow It indicates invest / expand. If the product falls in green zone, the business strength
is strong & industry is at least medium in attractiveness, the strategic decision should be to expand,
to invest & to grow.

2] Yellow – Hold It indicates select / earn. If the product falls in yellow zone, the business strength is
low but industry attractiveness is high, it needs caution & managerial discretion for making the
strategic choice.

3] Red – Harvest It indicates divest / harvest. If the product falls in the red zone, the business
strength is average or weak & attractiveness is also low or medium, the appropriate strategy should
be divestment.
The horizontal axis represents business strength & the vertical axis represents industry
attractiveness. Thus products or business units in the green zone are almost equivalent to stars or
cash cows, yellow zone are like question marks & red zone are similar to dogs.

ADVANTAGES

✓It used 9 cells instead of 4 cells of BCG

✓It considers many variables & does not lead to simplistic conclusions

✓High/Medium/Low & Strong/ Average/ Low classification enables a finer distinction among
business portfolio ✓It uses multiple factors to assess industry attractiveness & business strength,
which aloe users to select criteria appropriate to their situation.

✓It allows intermediate ratings between high & low & b/w strong & weak

✓It helps in channeling the corporate resources to business & achieving competitive advantage &
superior performance.

✓It helps in better strategic decision making & better understanding of business scope.
DISADVANTAGES

✓It can get quite complicated & cumbersome with the increase in businesses

✓Though industry attractiveness & business strength appear to be objective, they are in reality
subjective judgments that may vary from one person to another.

✓ It cannot effectively depict the position of new business units in developing industry

✓It only provides broad strategic prescriptions rather than specifies of business policy.

✓It tends to obscure business that are become to winners because their industries are entering at
exist stage

✓Assessment of business in terms of two factors is not fair.

Grand strategy matrix
Grand strategy matrix is the instrument for creating alternative and different
strategies for the organization. All companies and divisions can be
positioned in one of the Grand Strategy Matrix's four strategy quadrants.
The Grand Strategy Matrix is based on two dimensions: competitive
position and market growth.
Porter's Model of Generic
Strategies for Competitive
Advantage
Porter suggested four
"generic" business strategies
that could be adopted in
order to gain
competitive advantage. The
strategies relate to the
extent to which the scopeof
a business'
activities are narrow versus
broad and the extent to which
a business seeks to
differentiate its
products.
The short video below
provides an overview of
Porter's Generic Strategies and
there are some
additional study notes below
the video.
The key strategic challenge
for most businesses is to find
a way of achieving a
sustainable
competitive advantage over the
other competing products and
firms in a market.
A competitive advantage is an
advantage over competitors
gained by offering consumers
greater
value, either by means of
lower prices or by providing
greater benefits and service
that justifies
higher prices.
The four strategies are
summarized in the figure
below
Porter's Model of Generic
Strategies for Competitive
Advantage
Porter suggested four
"generic" business strategies
that could be adopted in
order to gain
competitive advantage. The
strategies relate to the
extent to which the scopeof
a business'
activities are narrow versus
broad and the extent to which
a business seeks to
differentiate its
products.
The short video below
provides an overview of
Porter's Generic Strategies and
there are some
additional study notes below
the video.
The key strategic challenge
for most businesses is to find
a way of achieving a
sustainable
competitive advantage over the
other competing products and
firms in a market.
A competitive advantage is an
advantage over competitors
gained by offering consumers
greater
value, either by means of
lower prices or by providing
greater benefits and service
that justifies
higher prices.
The four strategies are
summarized in the figure
below
PORTER'S FIVE FORCES MODEL OF COMPETITION

Michael E. Porter. Born in 1947. He is the Professors in Harvard Business School. Porter's introduced
the 5 Forces Model. He has Written 18 books & over 125 Articles. He is called as “Guru of modern
day business strategy”.

The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an
analysis of the attractiveness (value...) of an industry structure. It captures the key elements of
industry competition. It is one of the most recognized frameworks for the analysis of business
strategy. It is used as theoretical framework derived from Industrial Organization [IO] economics to
derive five forces which determine the competitive intensity & therefore attractiveness of a market.

This theoretical framework is based on 5 forces, describes the attributes of an attractive industry &
thus suggests when opportunities will be greater & threats are less, in these of industries.

✓ Attractiveness in this context refers to overall industry profitability & also reflects upon the
profitability of the firm under analysis.

✓ An “Unattractive” industry is one where the combination of forces acts to drive down overall
profitability.

✓ A “Very Unattractive” industry would be one approaching “pure competition”, from the
perspective of pure industrial economics theory. Porter’s model is based on the insight that a
corporate strategy should meet the opportunities & threats in the organizations external
environment. This model supports analysis of the driving forces in an industry. It helps to decide how
to influence or to exploit particular characteristics of their industry.

IMPORTANCE OF 5 FORCES

✓ What strategy to use?

✓ Basic knowledge of business strategy & forces that influence the decision making

✓ Industry analysis [Industry relevance, Industry players, Industry structure, Future changes]
 ✓ Strategize [Competitive advantage, Cost advantage, Market dominance, New product
development, Contraction / Diversification, Price leadership, Global, Re-engineering, Downsizing, De-
layering, Restructuring.

✓ Measure and monitor strategy effectiveness The purpose of Five-Forces Analysis The five forces
are environmental forces that impact on a company’s ability to compete in a given market. The
purpose of five-force analysis is to diagnose the principal competitive pressures in a market and
assess how strong and important each one is.

[1] Threat of New Entrants This force determines how easy it is to enter a particular industry. If an
industry it is a profitable are few barriers to enter, rivalry soon intensifies. When more organization
compete for same market shares, profit start to fall. It is essential existing organization to create high
barriers to enter to deter new entrants. 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:

✓ Economies of Scale

✓ Product Differentiation

✓ Capital Requirements

✓ Customer Switching Costs

✓ Access to Distribution Channels

✓ Government Policy

✓ Expected Retaliation

[2] Bargaining Power of Suppliers The term suppliers comprise all sources for inputs that are needed
in order to provide goods & services. The bargaining power of supplier is also described as the
market of inputs. Suppliers of raw material, components, labor, and services to the firm can be a
source of power over the firm when there are few substitutes. If you’re making biscuits and there is
only one person who sells flour, you have no alternative but to buy it from them. Supplier may
refuse to work with the firm or charge excessively high prices for unique resources.
Suppliers are likely to be powerful if: ✓ Supplier industry is dominated by a few firms ✓ Suppliers’
products have few substitutes ✓ Buyer is not an important customer to supplier ✓ Suppliers’
product is an important input to buyers’ product ✓ Suppliers’ products are differentiated ✓
Suppliers’ products have high switching costs

[3] Bargaining Power of Buyers The bargaining power of customers determines how much
customers can impose pressure on margins & volumes. The bargaining power of customer of is also
described as the market of outputs. The ability of customer to put them firm under pressure, which
also affects the customer’s sensitivity to price changes. Firms can take to measures to reduce buyer
power, such as implementing a loyalty program. The buyer power is high if the buyer has many
alternatives. The buyer power is low if they act independently. Their power is likely to be high.

Buyer groups are likely to be powerful if: ✓ Buyers are concentrated Purchase accounts for a
significant fraction of supplier’s sales ✓ Products are undifferentiated ✓ Buyers face few switching
costs ✓ Buyer presents a credible threat of backward integration ✓ Buyer has full information

[4] Threat of Substitute Products Threats of Substitute in the Porter’s theory actually mean goods
and services that do similar functions. When there is one product successful, it also leads to the
creation of other products that can perform the same functions as the product of the same industry.
The existence of product outside of the realm of the common product boundaries increase the
propensity of customer to switch to attractiveness.

✓ Keys to evaluate substitute products:

✓ Products with improving ✓ price/performance tradeoffs ✓ relative to present industry products

[5] Rivalry Among Existing Competitors For most industries the intensity of competitive rivalry is the
major determinant of the competitiveness of the industry.

Intense rivalry often plays out in the following ways:

✓ Using price competition ✓ Staging advertising battles ✓ Making new product introductions ✓
Increasing consumer warranties or service Occurs when a firm is pressured or sees an opportunity ✓
Price competition often leaves the entire industry worse off ✓ Advertising battles may increase total
industry demand, but may be costly to smaller competitors

ADVANTAGES ✓ To create a defendable position in an industry, in order to cope successfully with

competitive forces. ✓ It provides as Cost leadership (low cost advantage) ✓ It creates differentiation
in market or product ✓ The model is strong tool for competitive analysis at industry level. ✓ It
provides useful input for performing a SWOT analysis.

DISADVANTAGES ✓ Inside-out strategy is ignored (core competence) ✓ It does not cope with
synergies and interdependencies of large corporation ✓ The environments which are characterized
by rapid, it requires more flexible, dynamic or emergent approaches ✓ Sometimes it may be possible
to create completely new markets instead of selecting from existing ones (blue ocean strategy) [blue
ocean strategy: - it refers to a market for a product where there is no competition or very less
competition.