Sessions 6 - psbedu.net

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CORPORATE STRATEGY

Sessions 6

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BCG MATRIX

RELATIVE MARKET SHARE

MARKETGROWTH

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MARKET LEADERNOT

MARKET LEADER

BCG Matrix

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MARKET LEADERNOT

MARKET LEADER 1

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How to use BCG

Step 1. Choose the unit Mainly for SBUs, possible for separate brands, product categories or firms (of a

conglomerate)

Step 2. Define the marketincorrectly defined market may lead to poor classification

Step 3. Calculate relative market share

Step 4. Find out market growth rate (industry level) industry reports, or average revenue growth of the leading industry firms

midpoint depending on the industry and your judgment

Step 5. Draw the circles on a matrix

L’OREAL CATEGORY

MARKET SHARE(1)

LEADING RIVAL

RIVAL’S MARKET SHARE(2)

RELATIVE MARKET SHARE(1)/(2)

CATEGORY GROWTH RATE

Skincare $31.6 bn Unilever $24 bn 129% 6.5%

Make- Up $27.1 bn P&G $27.5 bn 98.5% 7.14%

Hair Care 3% Unilever 8.84% 33.9% 3.1%

Hair Colour 9% Henkel 6% 150% 8%

Fragrances 4.1% Chanel 4.5% 91% 2.5%

The chosen market is the Cosmetics Industry which includes

primarily- Skincare, Makeup, Haircare, Hair colour and Fragrances.

Overall Growth rate in Cosmetics Industry (as of 2018) = 4.8%

Stars

Products located in this quadrant have huge potential for high

revenue growth since they have a high market share and a high

growth rate. They may have been expensive to develop but are

worth spending money on for promotion given the long extent of

their Industry Life Cycle. If successful, a star will become a cash

cow when the category matures (assuming they maintain their

relative market share). Yet, not all stars become cash flows. This

happens mainly in continuously changing industries, where even

innovative products can be displaced by new technological

advancements, so a star becomes a dog, instead of a cash cow.

Strategic choices: Vertical integration, horizontal integration,

market penetration, market development, product development

Question Marks

Most businesses start off as question marks. These require huge

investments to capture or protect market share. Question marks have

the potential to become stars and eventually cash cows but can also

become dogs or exit. Investments should be high for question marks

otherwise may produce negative cash flow.

Like stars, Question marks too may not always succeed and if even

after large investment they aren’t able to gain market share, they

become dogs. Hence, very careful consideration is required before

making investment decisions in this category.

Strategic choices: Market penetration, market development,

product development, divestiture.

Cash Cows

They generate profits by investing as little cash as possible low-cost

support) and need to be managed for continued profits & cash flow.

These are large corporates or SBUs that are efficient in innovation

and have the potential to become stars. Cash cows need to maintain

the strong market position and defend your market share. Company

should take advantage of sales volume and leverage the size of

operations. Cash cows can also be used to support other businesses.

Strategic choices: Product development, diversification

Dogs

Due to low market share, these products face cost disadvantages so

they may generate enough cash to break-even, but they are rarely, if

ever, worth investing in. Unless a dog has some other strategic aim,

it should be liquidated if there are fewer prospects for it to gain

market share (there is Low scale of economies: so difficult to make a

profit). These are situated at a declining stage of the Industry Life

Cycle, therefore, the number of dogs in the company should be

minimized. A company should optimize its current operations. It

should get rid of all non-value added activities and features. It must

then reposition the offering to generate positive cash flow or sell this

business.

Strategic choices: Retrenchment, divestiture, liquidation

Purpose of BCG matrix:

Determine financial investment and divestment within their portfolios of business

Evaluate the attractiveness of a business unit. However, high growth demands heavy investment

There needs to be a balance within the portfolio

A good way of visualising the different needs and potential of all the diverse businesses within the corporate portfolio

Financial demands of what might look like a desirable portfolio of high-growth businesses

BCG matrix: balance is the key word

“To be successful, a company should have a portfolio of products with

different growth rates and different market shares.

The portfolio composition is a function of the balance between cash

flows.

High growth products require cash inputs to grow.

Low growth products should generate excess cash.

Both kinds are needed simultaneously.”

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Bruce D. Henderson, Founder of BCG

Bruce D. Henderson (1915-1992), in "The Product Portfolio“https://www.bcgperspectives.com/content/classics/strategy_the_product_portfolio/

case: ITC

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Q1: Identify your company’s SBUs, and map them into BCG matrix. Check if current strategy for given SBU fits with its business profile. If not, what would be more suitable strategy?

Q2: Then evaluate the balance of different SBUs in your company’s portfolio: does it fit with your company’s position (ex. risk tolerance, resources, …). If not, can you think of new SBUs to improve this, or would some SBUs need to be divest to refocus?

EXERCISES