Technique 1: BCG Growth-Share Matrix
What is BCG Matrix?
Autonomous divisions (or profit centers) of an organization make up what is called a business portfolio. When a firm’s divisions compete in different industries, a separate strategy often must be developed for each business.
The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning. Using the matrix requires a firm’s businesses to be categorized as high or low along two dimensions: its share of the market and the growth rate of its industry.
The BCG Matrix is the simplest way to portray the organization’s portfolio of investments. It graphically portrays differences among divisions in terms of relative market share position and industry growth rate.
The BCG Matrix allows a divisional organization to manage its portfolio of businesses by examining the relative market share position and the industry growth rate of each division relative to all other divisions in the organization.
Relative market share position is defined as the ratio of a division’s own market share (or revenues) in a particular industry to the market share (or revenues) held by the largest rival firm in that industry.
In utilizing this technique, the key to success is assumed to be market share. Firms with the highest market share tend to have a cost leadership position based on economies of scale, among other things.
BCG Matrix: Company Market Share and Industry Growth Rate
Each of the corporation product lines or business units is plotted on the matrix according to both the growth rate of the current industry and its relative market share.
A relative market share position is given on the x-axis of the BCG Matrix. The mid-point on the x-axis usually is set at .50, corresponding to a division that has half the market share of the leading firm in the industry.
This axis of the matrix is a unit’s relative competitive position is defined as its market share in the industry divided by that of the largest other competitors. This calculation means a relative market share of above 1.0 would belong to the market leader.
The y-axis represents the industry growth rate in sales, measured in percentage terms. The growth rate percentages on the y-axis could range from -20 to +20 percent, with 0.0 being the midpoint.
This axis of the matrix is the business growth rate, which is the percentage of market growth, as in the percentage by which sales of a particular product have increased.
These numerical ranges on the x- and y-axes are often used, but other numerical values could be established as deemed appropriate for particular organizations, such as –10 to +10 percent.
Organization Types by BCG Matrix
Quadrant 1: Question Mark
The first type is Question mark, which demonstrates divisions with potential for success but requires a lot of expense for development.
These divisions have a low relative market share position, yet they compete in a high-growth industry. Generally, these firms’ cash needs are high, and their cash generation is low.
These businesses are called Question Marks because the organization must decide whether to strengthen them by pursuing an intensive strategy (market penetration, market development, or product development) or to sell them. Management needs to decide if the business is worth the investment needed before actual investment. They must decide whether to build these divisions into stars or to divest them.
Quadrant 2: Star
The second type is Star, which demonstrates divisions that are at the peak of its product life cycle and are able to generate enough cash to maintain their high share of the market and usually contribute to the company profits.
These divisions represent the organization’s best long-run opportunities for growth and profitability. These divisions have bright prospects and thus are good candidates for growth.
Divisions with a high relative market share and a high industry growth rate should receive substantial investment to maintain or strengthen their dominant positions.
Forward, backward, and horizontal integration; market penetration; market development; and product development are appropriate strategies for these divisions to consider.
Quadrant 3: Cash Cow
The third type is Cash cow, which demonstrates divisions that bring in far more money than is needed to maintain their market share. In this declining stage of their life cycle, these divisions are milked for cash.
These divisions have a high relative market share position but compete in a low-growth industry. They are called Cash Cows because they generate cash in excess of their needs, they are often milked.
Because their industries have bleak prospects, profits from cash cows should not be invested back into cash cows but rather diverted to more promising businesses.
Many of today’s Cash Cows were yesterday’s Stars. Cash Cow divisions should be managed to maintain their strong position for as long as possible. Product development or diversification may be attractive strategies for strong Cash Cows. However, as a Cash Cow division becomes weak, retrenchment or divestiture can become more appropriate.
Quadrant 4: Dog
The fourth type is Dog, which demonstrates divisions that have low market share and do not have the potential to bring in much cash. This type must be either sold off or managed carefully for the small amount of cash that they can manage to bring to the table.
These divisions the organization have a low relative market share position and compete in a slow- or no-market-growth industry. Because of their weak internal and external position, these businesses are often liquidated, divested, or trimmed down through retrenchment.
When a division first becomes a Dog, retrenchment can be the best strategy to pursue because many Dogs have bounced back, after strenuous asset and cost reduction, to become viable, profitable divisions. These divisions are good candidates for divestment.
Benefits of BCG Matrix
The major benefit of the BCG Matrix is that it draws attention to the cash flow, investment characteristics, and needs of an organization’s various divisions.
The divisions of many firms evolve over time: Dogs become Question Marks, Question Marks become Stars, Stars become Cash Cows, and Cash Cows become Dogs in an ongoing counter-clockwise motion. Less frequently, Stars become Question Marks, Question Marks become Dogs, Dogs become Cash Cows, and Cash Cows become Stars (in a clockwise motion).
In some organizations, no cyclical motion is apparent. Over time, organizations should strive to achieve a portfolio of divisions that are Stars.
Having present and projected matrixes can help firms identify major strategic issues facing the organization. Companies must maintain a balanced portfolio so they can be self-sufficient in cash, harvest products in mature industries, and support new ones in emerging industries.
Limitation of BCG Matrix
BCG Matrix technique also has several limitations: (1) the link between market share and profitability is questionable, (2) growth rate is only one aspect of industry attractiveness, (3) market share is only one aspect of overall competitive position, and (4) product lines or business units are considered only in relationship with market leaders.
Technique 2: The Internal-External (IE) Matrix
The Internal-External (IE) Matrix positions an organization’s various divisions in a nine-cell display.
Key Dimensions of IE Matrix
The IE Matrix is based on two key dimensions: the IFE total weighted scores on the x-axis and the EFE total weighted scores on the y-axis. The total weighted scores derived from the divisions allow the construction of the corporate-level IE Matrix.
On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak internal position; a score of 2.0 to 2.99 is considered average; and a score of 3.0 to 4.0 is strong.
On the y-axis, an EFE total weighted score of 1.0 to 1.99 is considered low; a score of 2.0 to 2.99 is medium; and a score of 3.0 to 4.0 is high.
Major Regions of IE Matrix
The IE Matrix can be divided into three major regions that have different strategy implications.
First, the prescription for divisions that fall into cells I, II, or IV can be described as growing and building. Intensive (market penetration, market development, and product development) or integrative (backward integration, forward integration, and horizontal integration) strategies can be most appropriate for these divisions.
Second, divisions that fall into cells III, V, or VII can be managed best with a hold and maintain strategy; market penetration and product development are two commonly employed strategies for these types of divisions.
Third, a common prescription for divisions that fall into cells VI, VIII, or IX is harvest or divest. Successful organizations can achieve a portfolio of businesses positioned in or around cell I in the IE Matrix.
Similarities and Differences between IE Matrix and BCG Matrix
There are several similarities between IE Matrix and BCG Matrix.
The IE Matrix is similar to the BCG Matrix in that both tools involve plotting organization divisions in a schematic diagram. Also, the size of each circle represents the percentage sales contribution of each division, and pie slices reveal the percentage profit contribution of each division in both the BCG and IE Matrix.
There are some important differences between the BCG Matrix and the IE Matrix.
First, the axes are different. Also, the IE Matrix requires more information about the divisions than the BCG Matrix. Furthermore, the strategic implications of each matrix are different. For these reasons, management in divisional firms often develops both the BCG Matrix and the IE Matrix in formulating alternative strategies.
A common practice is to develop a BCG Matrix and an IE Matrix for the present and then develop projected matrices to reflect expectations of the future.
This before-and-after analysis forecasts the expected effect of strategic decisions on an organization’s portfolio of divisions.
Technique 3: GE Business Screen
What is a GE Business Screen?
GE Business Screen is an attractiveness-strength matrix to examine the corporate’s diverse activities. This planning approach involves rating each of a firm’s businesses in terms of the attractiveness of the industry and the firm’s strength within the industry.
Each dimension is divided into three categories, resulting in nine boxes. Each of these boxes has a set of recommendations associated with it.
Overall, the GE Business Screen is an improvement over the BCG Growth-Share Matrix.
This technique considers many more variables and does not lead to simplistic conclusions. It takes into consideration the attractiveness of an industry which can be assessed in many different ways, and it thus allows users to select whatever criteria they feel are most appropriate to their situation.
Limitations of GE Business Screen
The technique also has several limitations: (1) it can be complicated and cumbersome, (2) the estimates of industry attractiveness and business strength/competitive position are subjective judgments, and (3) positions of new products or business units in developing industries are not effectively depicted.
How to Conduct a GE Business Screen
This technique focuses on a matrix with 9 cells based on 2 axes: (1) long-term industry attractiveness, and (2) business strength/competitive position.
Long-term industry attractiveness includes market growth rate, industry profitability, size, and pricing practices, among other possible opportunities and threats.
Business strength/competitive position includes market share as well as technological position, profitability, and size, among other possible strengths and weaknesses.
Technique 4: The Grand Strategy Matrix
What is a Grand Strategy Matrix?
Grand Strategy Matrix is based on two evaluative dimensions: competitive position and market (industry) growth.
Any industry whose annual growth in sales exceeds 5 percent could be considered to have rapid growth. Appropriate strategies for an organization to consider are listed in sequential order of attractiveness in each quadrant of the matrix.
The Quadrants of Grand Strategy Matrix
Grand Strategy Matrix has become a popular tool for formulating alternative strategies. All organizations can be positioned in one of the Grand Strategy Matrix’s four strategy quadrants. A firm’s divisions likewise could be positioned.
Quadrant I
Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic position.
For these firms, continued concentration on current markets (market penetration and market development) and products (product development) is an appropriate strategy. It is unwise for a Quadrant I firm to shift notably from its established competitive advantages.
When a Quadrant I organization has excessive resources, then backward, forward, or horizontal integration may be effective strategies. When a Quadrant I firm is too heavily committed to a single product, then related diversification may reduce the risks associated with a narrow product line. Quadrant I firms can afford to take advantage of external opportunities in several areas. They can take risks aggressively when necessary.
Quadrant II
Firms positioned in Quadrant II need to evaluate their present approach to the marketplace seriously.
Although their industry is growing, they are unable to compete effectively, and they need to determine why the firm’s current approach is ineffective and how the company can best change to improve its competitiveness.
Because Quadrant II firms are in a rapid-market-growth industry, an intensive strategy (as opposed to integrative or diversification) is usually the first option that should be considered.
However, if the firm is lacking a distinctive competence or competitive advantage, then horizontal integration is often a desirable alternative. As a last resort, divestiture or liquidation should be considered. Divestment can provide funds needed to acquire other businesses or buy back shares of stock.
Quadrant III
Quadrant III organizations compete in slow-growth industries and have weak competitive positions.
These firms must make some drastic changes quickly to avoid further decline and possible liquidation. Extensive cost and asset reduction (retrenchment) should be pursued first.
An alternative strategy is to shift resources away from the current business into different areas (diversify). If all else fails, the final options for Quadrant III businesses are divestment or liquidation.
Quadrant IV
Quadrant IV businesses have a strong competitive position but are in a slow-growth industry.
These firms have the strength to launch diversified programs into more promising growth areas: Quadrant IV firms have characteristically high cash-flow levels and limited internal growth needs and often can pursue related or unrelated diversification successfully. Quadrant IV firms also may pursue joint ventures.
Technique 5: The QSPM
What is Quantitative Strategic Planning Matrix (QSPM)?
Quantitative Strategic Planning Matrix (QSPM) is an analytical technique designed to determine the relative attractiveness of feasible alternative actions.
This technique objectively indicates which alternative strategies are best. The QSPM is a tool that allows management to evaluate alternative strategies objectively, based on previously identified external and internal critical success factors. Like other strategy formulation analytical tools, the QSPM requires good intuitive judgment.
Conceptually, the QSPM determines the relative attractiveness of various strategies based on the extent to which key external and internal critical success factors are capitalized upon or improved.
The relative attractiveness of each strategy within a set of alternatives is computed by determining the cumulative impact of each external and internal critical success factor. Any number of sets of alternative strategies can be included in the QSPM, and any number of strategies can make up a given set, but only strategies within a given set are evaluated relative to each other.
Advantages of QSPM
The QSPM has several positive features.
A positive feature of the QSPM is that sets of strategies can be examined sequentially or simultaneously. For example, corporate-level strategies could be evaluated first, followed by division-level strategies, and then function-level strategies. There is no limit to the number of strategies that can be evaluated or the number of sets of strategies that can be examined at once using the QSPM.
Another positive feature of the QSPM is that it requires management to integrate external and internal factors into the decision process. Developing a QSPM makes it less likely that key factors will be overlooked or weighted inappropriately. A QSPM draws attention to important relationships that affect strategic decisions.
Although developing a QSPM requires a number of subjective decisions, making small decisions along the way enhances the probability that the final strategic decisions will be best for the organization. A QSPM can be adapted for use by small and large organizations. A QSPM can especially enhance strategic choice in multinational firms because many key factors and strategies can be considered at once.
Disadvantages of QSPM
The QSPM is not without some limitations.
First, it always requires intuitive judgments and educated assumptions. The ratings and attractiveness scores require judgmental decisions, even though they should be based on objective information. Discussion among strategists, managers, and employees throughout the strategy formulation process, including the development of a QSPM, is constructive and improves strategic decisions.
Constructive discussion during strategy analysis and choice may arise because of genuine differences of interpretation of information and varying opinions.
Another limitation of the QSPM is that it can be only as good as the prerequisite information and matching analyses upon which it is based.
Resources
Further Reading
- Corporate Portfolio Analysis – Meaning, Importance, Techniques (indiaclass.com)
- Corporate Portfolio Analysis Techniques (pocketsense.com)
- What Is Corporate Portfolio Analysis? (smallbusiness.chron.com)
- Portfolio Analysis- 7 Methods And Techniques For Product Position (thekeepitsimple.com)
- Portfolio Analysis In Strategic Management (thekeepitsimple.com)
- What is the Porfolio Analysis? (wallstreetmojo.com)
Related Concepts
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
- Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.
- Mastering Strategic Management. (2016, January 18). Open Textbooks for Hong Kong.