According to the BCG matrix, companies’ business units can be categorized into 4 categories. These categories are based on the amalgamations of market share and market growth relative to the biggest competitor. Based on BCG matrix, it is very good for the company when its products have large market share or the product’s market is growing very fast.
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The Boston Consulting Group Portfolio Matrix
Stars indicate that the business or the product has high market share and high growth.
•Large amount of money are invested and so these businesses/products are expected to generate considerable amount of cash. They are the leaders in that particular business.
•Usually approximately in balance on net cash flow. Nevertheless, if any effort is needed to be made to keep the share it should been done because if the market share is maintained then the returns will be a cash cow. Cash cows are companies or products which have low market growth and high market share.
•These are mature and successful businesses with high profit and cash generation
•There is little need for investment because of the low growth. Dogs represent companies or products which have low growth and low market share.
•These businesses neither generate nor consume a large amount of money.
•The number of dogs in a company should be avoided and minimized. Question marks display organizations or products with high growth and low market share.
•Question marks require huge amount of investment and have low returns because the market share is low.
•If the market share stays low than question marks will constantly demand large amounts of money and as the growth terminates, they will convert in a dog.
•However, if the market share increases then the question marks may return into a star and ultimately a cash cow as the market growth slows.
The BCG Matrix Method helps to understand a common strategy mistake make by the companies which is: having a one-size-fits-all-approach to strategy. In such circumstances: A.Cash cows Business Units will reach easily their profit target and their managers will be permitted to invest more money in the businesses which are developed but not growing any more. B.Dogs Business Units will not stop investing in order to ‘turn the business around’ C.Subsequently the investment made in Question Marks and Stars Business Units is mediocre and thus they do not have the opportunity to become cash cows. In this scenario there are only two things that the companies should do. Either these SBU should receive decent amount of cash to allow them to become a cash cow (or star), or companies should not invest anymore and try to take whatever amount of cash out of the question marks. Some of the drawbacks of the BCG Matrix are:
1.Having a high market share does not mean that the company or the product will be successful. 2.The attractiveness of markets is not indicated only by the market growth 3.It may happen that Dogs can achieve higher returns than Cash Cows.
Profit impact on market strategy (PIMS)
The Profit Impact of Market Strategy (PIMS) is a program which started initially in the USA, to determine how profit impacted on marketing strategy and vice versa. Based on the information collected from participating companies, PIMS estimated businesses’ market position and proposed feasible strategies. According to Lancaster, Massingham and Ashford (Essentials of Marketing, 4th edition, McGraw Hill), PIMS seeks to address three basic questions: •What is the typical profit rate for each type of business?
•Given current strategies in a company, what are the future operating results likely to be?
•What strategies are likely to help improve future operating results?
Dibb, Simkin, Pride and Ferrell (Marketing Concepts and Strategies, 4th European edition, Houghton Mifflin) cite six principal areas of information that PIMS holds on each business:
•characteristics of the business environment
•competitive position of the business
•structure of the production process
•how the budget is allocated
Businesses which want to use the service have to present detailed information, containing details of their: •competitors and market
•assumptions about future sales.
In return, PIMS produces four reports, described by Lancaster, Massingham and Ashford as: 1. A ‘PAR’ report – demonstrates the ROI and cash flows that are considered ‘normal’ for that particular kind of business, displaying its market, competition, technology, and cost structure. 2. A ‘Strategy Analysis’ report – shows the likely effects of strategy changes on ROI/cash flow both short and long term. This is achieved by analyzing the information of other companies in an analogue business making similar moves, from an equal starting-point and in similar business environment. 3. A ‘Report on Look-Alikes’ (ROLA) – analyzes strategically equivalent businesses more closely and then predicts the best combination of strategies for that particular company 4. An ‘Optimum Strategy’ report – is almost the same as ROLA because it recommends the best strategy for the company based on the experience of other companies in the same position. One of the disadvantages of this model is that the data has been misinterpreted in some cases. In addition, another area which can be argued is connecting the profitability to the market share.
Shell Directional Policy Matrix
The Shell Directional Policy Matrix is another refinement upon the Boston Matrix. It has two dimensions, vertical and horizontal. Next to the vertical axe are company’s competitive capabilities and next to the horizontal axe are the prospects for sector profitability.
Different strategic decisions will be implied depending on the position of a Strategic Business Unit (SBU) in the matrix.
Each of the cells is explained below:
Disinvest: Disinvesting is the best option when the SBU is running in losses with ambiguous cash flow because the situation is not going to ameliorate in the future. These liquidate or move the assets. Phased withdrawal: SBU’s with average competitive capability in low growth market has almost no chance to generate cash and as such they should be eliminated sequentially. Double or quit: this is all about gambling. There are two possible options to gamble and these are either to invest more in order to take full advantage of the prospects displayed by the market or to abandon the business. Custodial: SBU’s are just like a cash cow, milk it and do not commit any more resources. In this situation the corporate has to make a decision whether to get help from other SBU’s or exit the scene to concentrate more on other attractive business.
Try harder: SBU may be doing fine for the moment but the future does not look promising and thus additional resources to strength their capabilities will be required. By trying harder, the company may take advantage of the business prospects thoroughly. Cash Generator: This is like a cash cow where no further amounts of cash are invested and SBU may carry on with their operations because the generation of cash is strong and satisfactory profit is made. Growth: In order to support product invention and R&D activities the SBU’s need investment. So ensuring that enough resources are available is crucial to grow the market. Market Leadership: Significant resources are concentrated on the SBU and so it must be the first priority.
SHELL DPM has its limitations. The first limitation is that it assumes that the similar factors are entirely applicable for appraising the prospects of any product/business.