By: Khushbu Bhavnani
Dale McConkey said, “A management truism says structure follows strategy. However, this truism is often ignored. Too many organisations attempt to carry out a new strategy with an old structure.”
To successfully implement any new reform in the corporation, a strong competitive strategy is required. Further, to carry out a new strategy, and hence as pre-requisite develop a new structure an important concept is portfolio analysis.
Globally operating firms with multiple product range and departments conduct a portfolio analysis to channelize resources to their greatest potentials. Portfolio analysis especially applicable in an organization dealing with diversified businesses.
For example, in India, the Tata Group is one of the largest contributors to the Gross Domestic Product. They operate in multiple business dimensions, some of them being communication systems, motors and automobiles, steel, energy, chemicals, hotels, consumer goods and so on. Tata Group even has an international presence in many countries.
To comprehensively gauge the wide-spread business and decide on where to deploy more resources, which division needs more liquidity, and is there any department that is incurring losses, an exhaustive portfolio analysis is vital.
Scrutiny of portfolio may begin with categorizing business into units and then pinpointing the key business. These key businesses are called as Strategic Business Units (SBU). Business can be categorized on the basis of products made. Strategic Business Units generally generate the most wealth and they have a separate marketing plan, objective, manufacturing center and are usually independent from other units. They even have specific set of competitors varying form other units of the group.
One of the widely used technique for corporate portfolio analysis is the Boston Consulting Group (BCG) Matrix or as popularly called- Product Portfolio Matrix. This growth share matrix was first introduced in 1968, through one of the popular essays of those times named ‘Perspectives’.
The Boston Consulting Group Growth Share matrix focuses on long term formulation of strategic plans. It helps in decisions such as:
· Which opportunities to invest in?
· Which new products to develop?
· Should the production of a product be discontinued?
· Cost- benefit analysis of Marketing campaigns; is the campaign successful?
The BCG matrix is not recently introduced technique with the coming of the digital era, its pragmatic application has drastically increased, especially in the fields of digital marketing like blogging etc. in fact, it is the basis for creation of digital marketing matrixes.
Boston Growth Sharing Matrix is a two-dimensional matrix, that is, it considers two factors- Growth Rate and Market Share.
In a simple, BCG matrix,
· The y-axis or the vertical axis represents market growth rate and market attractiveness.
· The x-axis or the horizontal axis represents relative market share and is an indicator of an entity’s hold and power in the market.
The strategic business units or products are classified into four quadrants. The four quadrants of the Boston Consulting Group Matrix are the following:
· Cash Cows
· Question Marks
High Growth, High Share: Stars-
Stars represent the items of strategic business units that have high potential in market, or are developing at an increasing rate. Due to high progression, the products or units represented by stars have to be backed by heavy capital support. Though investment requirement is high, this also the quadrant that guarantees best ventures for expansion.
Bisleri mineral water bottles are a good example of stars as they have huge consumption and presence in the market. In fact, they are one the leading suppliers of drinking water bottle suppliers.
Low Growth, High Share: Cash Cows-
Cash Cows are characterized by developed and high market share; however, their growth rate is low or stagnant. These cash cows are often products that have reached their maturity stage in the life cycle. There not many avenues for expansion of the cash cows represented strategic business units. Nevertheless, they are reputable and efficacious.
For example, many refer to the well built company- Procter and Gamble, which is engaged in manufacture of grooming and sanitary products, as a cash cow company. Generally, star products after reaching maturity stage level in as cash cows.
Many informative sites refer to Apple’s I-phone as ‘cash cow’. The surplus generated by I-phone can be used for research and developments of other products.
High Growth, Low Share: Question Marks-
The potential and availability of opportunities in the market in which these business units operate, or simply stated the market growth rate in their respective industries are high. But the products represented by Question Marks have negligible market share. They demand heavy capital investment. Often, the ability of such units to produce liquidity is low. Thus, there is situation of cash-crunch. Sometimes in the pursuit of ensuring existence in the market, they end up in a ‘cash trap’. Unit and/or products of this quadrant are also called as problem children or wild cats.
For instance, the ‘problem children’ are often understood by stating the example of soft drinks like Fanta and Minute Maid.
Low Growth, Low Share: Dogs (also named as pets)-
These pets either need to be repositioned or liquidated and divested. The major issue with them is the lack of future prospects, even though sufficient liquidity is accessible. An example frequently referred here is that of Diet Coke that could not have as wide a market reach as expected.
Boston Matrix is a highly effective tool in providing a portfolio management framework.
It highlights the necessity of an organistaion or multi-brand corporation to have a mix of high growth products which require huge investments complimented with low growth products with surplus liquidity. This combination reaps exponential benefits to the business entity in the long run.
The growth share matrix also brings to lime light emerging opportunities for diversification, which eventually also gives an edge over the competitors.
It also helps in allocation and deployment of limited resources in an optimum manner so as to get maximum profits.
The BCG Matrix and Product Life Cycle are inter-related. Their relationship is as follows:
· In the initial stages, when a product is launched it is question mark, that is the industry has high growth, but the product has low market share.
· Eventually, through marketing and promotions efforts, the product acquires greater market share along with increasing revenue and turns into a ‘star’.
· Through continuous leadership and guidance, the product becomes well established in the market. Eventually, the growth rate deteriorates. This is stage when the product is matured. At this level it can be referred to as a ‘cash cow’- having excess cash.
· In times of uncertainty, of if the products become obsolete due to technological upgradation or otherwise, cash cows convert into dogs, that need to be divested or liquidated.
All said and done, like a coin has two sides, the Boston Consulting Growth Matrix is also looked down upon, due to the black and white classification of quadrants into high and low, with zero consideration for medium range. It also gives an impression that high market share equates to high profits. This not be applicable in all scenarios. The growth-share market considers only two factors out of the many, that affect the portfolio management and consequent success of the companies.
Therefore, thorough analysis is essential before taking investment decisions, as huge capital decision, more often than not have irreversible effects.
To conclude, as management consultant, Kenichi Ohmae, right said- “Rowing harder doesn’t help, if the boat is headed in the wrong direction.”