BCG Matrix & GE/McKinsey Matrix Contents [hide]
1 Introduction
2 BCG Matrix
o
2.1 Background
o
2.2 How it Works
o
2.3 Strengths and Weaknesses
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2.4 Application to Competitive Intelligence: Automotive Industry
3 GE/McKinsey Matrix o
3.1 Background
o
3.2 How it Works
o
3.3 Strengths and Weaknesses
o
3.4 Application to Competitive Intelligence: Apple Inc.
4 BCG Matrix vs. GE/McKinsey Matrix
5 Conclusion
6 References
[edit]
Introduction
Competitive Intelligence (CI) often requires a great deal of analysis to convert gathered information into useable intelligence. Several different analytical techniques can be utilized in order to accomplish this task. This project looks at two analytical techniques, the Boston Consulting Group (BCG) Matrix and the GE/McKinsey Matrix, their respective advantages and disadvantages, what CI situations they are best suited for, and provides an example of their use when applied to the CI scenario of the smartphone industry. [edit]
BCG Matrix
[edit]Background The BCG Matrix (Growth-Share Matrix) was created in the late 1960s by the founder of the Boston Consulting Group, Bruce Henderson, as a tool to help his clients with
efficient allocation of resources among different business units. It has since been used as a portfolio planning and analysis tool for marketing, brand management and strategy development. In order to ensure successful long-term operation, every business organization should have a portfolio of products/services rather than just one product or service. This portfolio should contain both high-growth and low-growth products/services. Highgrowth products have the potential to generate lots of cash but also require substantial amounts of investment. Low-growth products with high market share, on the other hand, generate lots of cash while needing minimal investment. [edit]How
it Works
The BCG Matrix helps a company with multiple business units/products by determining the strengths of each business unit/product and the course of action for each business unit/product. An understanding of these factors will give the company the highest probability of winning against its competitors, since the intelligence generated can be used to develop portfolio management strategies. The BCG Matrix helps managers classify business units/products as low or high performers using the following criteria:
1. Relative market share (strength of a business unit's position in that market)
2. Market growth rate (attractiveness of the market in which a business unit operates)
Relative market share (RMS) is the percentage of the total market that is being controlled by the company being analyzed. It is calculated using the following formula: RMS = Unit sales this year / Unit sales this year by a leading rival The relative market share is measured on a scale where 1.0 is considered a cut-off point. An RMS of more than 1.0 indicates that this company/product/business unit has a higher market share than the leading competitor. Market growth (MGR) is used as a measure of a market’s attractiveness. It is calculated using the following formula: MGR = (Individual sales this year - individual sales last year) / Individual sales last year
High growth markets are the ones where the total available market share is expanding, offering plenty of opportunity for everyone to make money. Traditionally, a market growth rate of 10% has been used as a cut-off point for the purpose of classifying the units in the business portfolio. Any unit with a growth rate of more than 10% would be placed in the high growth segment of the BCG Matrix. This classification places business units/products in the following four categories:
1. Stars – BUs/products characterized by high-growth and high- market share. They often require heavy external investment to sustain their rapid growth as they may not be producing any positive cash flow. Eventually, their growth will slow, and they will turn into cash cows.
2. Cash Cows - BUs/products characterized by low-growth, high-market share. These are well established and successful BUs that do not require substantial investment to keep their market share. They produce a lot of cash to be used for other business units (Stars and Question Marks) of the company.
3. Question Marks - BUs/products characterized by low-market share in highgrowth markets. They require a lot of financial resources to increase their share since they cannot generate enough cash themselves. The crucial decision is to decide which Question Marks to phase out and which ones to grow into Stars.
4. Dogs - BUs/products with low-growth, low-market share. In addition, they often have poor profitability. The business strategy for a Dog is most often to divest. However, occasionally management might make a decision to hold a Dog for possible strategic repositioning as a Question Mark or Cash Cow.
The BCG model follows the following major steps:
1. Identify major organizational business units (BUs) and identify RMS and MGR for each BU
2. Plot the BUs on the BCG Matrix
3. Classify the BUs as Question Marks, Stars, Cash Cows and Dogs
4. Develop strategies for each BU based on their position and movement trends within the matrix
Figure 1: An example of the BCG Matrix
Image source: http://en.wikipedia.org/wiki/File:Folio_Plot_BCG_Matrix_Example.png
[edit]Strengths
and Weaknesses
Strengths of the BCG Model:
The BCG Matrix allows for a visual presentation of the competitive position of all units in a business portfolio.
The BCG model allows companies to develop a customized strategy for each product or business unit instead of having a one-size-fits-all approach.
Simple and easy to understand.
It works well for companies with multiple divisions and products
Allows for quick and simple screening of business opportunities in order to determine investment priorities in the portfolio of products/business units.
It is used to identify how corporate cash resources can be best allocated to maximize a company’s future growth and profitability.
Useful for the development of investment, marketing and operating decisions:
a. Investment in the business unit in order to build its market share
b. Sufficient investment to maintain the business unit's market share at the current level
c. Determine which business unit/product will function as a cash cow to provide necessary cash flow for the other business units/products
d. Divest a business unit
Weaknesses of the BCG Model:
The BCG model assumes that high market share and market growth are the only success factors. Based on numerous real life examples, we can conclude that high market share does not always lead to profitability. Businesses with low market share can be highly profitable as well. Relative market strength is also determined by the following factors which the BCG does not take into account:
a. Technological competence
b. Ability to maintain low manufacturing costs
c. Financial strength of competition
d. Distribution capabilities
e. Human resources
The BCG model focuses on major competitors when analyzing the relative market share of a company. However, it neglects some small competitors with fast growing market shares.
It is a rather short-term model that doesn’t fully show how characteristics of business units change over the long term.
The BCG model is more focused on business units than individual products
Assumes that high rates of profit are directly related to high market share
The BCG model looks at a business unit in isolation without taking into consideration the possible cooperation among various business units within the organization
BCG is a primarily qualitative model
The Y axis represents the annual market growth which fails to see the full picture that goes beyond a one year span
It does not take into consideration other important factors such as: market barriers/restrictions, market density, profitability, politics
With this or any other such analytical tool, ranking business units has a subjective element involving guesswork about the future, particularly with respect to growth rates.
[edit]Application
to Competitive Intelligence: Automotive
Industry The BCG model could be helpful in situations where big economic swings produce significant changes in the original classification of companies, BUs and products. For example, 10-15 years ago, the automobile manufacturers in the US dismissed the market for small economy cars in favour of big SUVs. At that time, small cars were considered Dogs while SUVs were Stars. That happened because car manufacturers did not take into consideration the important factors of rising oil/gasoline prices and the changes in the environmental consciousness of the society. What if the management of major car manufacturers in the US had ran the BCG model under different scenarios (high gas prices; increased environmental awareness) to decide which cars would be Stars and Dogs under each of those scenarios? We believe that doing so would have better prepared the individual players in the industry for the rising competition with foreign car manufacturers. It is also important to constantly analyze business news to look at what other companies are selling/divesting or acquiring. If they are selling a product/BU with a small market share in a declining market then we know they are most probably selling a Dog. The question is why are they selling it? Do they need the cash to fund a new Star? If GM tomorrow announces that they are selling its hybrid vehicle division, does it mean that they are in possession of a new technology that will revolutionize the entire industry? Looking at the competition through the prism of the BCG Matrix would help managers ask the right questions and then collect necessary intelligence in the process of answering them.
The BCG Matrix could also be used by business analysts for the purpose of forecasting future trends. These analysts would analyze whole industries/technologies using the BCG Matrix in order to predict future changes. For example, business analysts at GM could develop various scenarios to predict the future of the automobile. With the price of oil and other commodities rising, they need to look beyond traditional technologies and sources of energy and evaluate other alternatives. From this point of view, the analysts could plot various traditional and breakthrough technologies on the BCG Matrix in order to determine the current Question Marks, Starts, Cash Cows and Dogs and forecast how the Matrix will change in the next 5-10 years under various scenarios (high inflation, scarcity of resources, change in consumer tastes and demands). Another application of the BCG Matrix in CI would be to see where the currently emerging technologies will be five years from now from the point of view of relative market share and market growth. Most of the breakthrough technologies today would appear in the Question Mark quadrant of the BCG Matrix. How will this picture change in 2-3 years from now? By monitoring and plotting these changes the business leaders at GM could get an insight into what will drive the future of the automotive industry in the future. In fact, in this context the BCG Matrix could become an important part of the business foresight which combines deep analysis of the past patterns and emerging trends with business insight. Those who are able to come up with the most accurate foresight and timely capitalization on it will be the future leaders in the industry. [edit]
GE/McKinsey Matrix
[edit]Background The GE/McKinsey Matrix was developed jointly by McKinsey and General Electric in the early 1970s as a derivation of the BCG Matrix. GE, by that time, had approximately 150 different business units and was disappointed with the profits derived from its investments. This raised internal concerns about the approach the organization had to investment decision making. While exploring new models to implement, GE started to be interested in visual strategic frameworks like the Growth-Share Matrix created by the Boston Consulting Group (BCG) a few years before. However, the BCG Matrix showed to have some limitations. It was considered not flexible enough to include all the broader issues that a company was facing while operating in a fast changing global environment. The GE/McKinsey Matrix solves most of the issues of the BCG model and proposes a more sophisticated and comprehensive approach to investment decision making.
[edit]How
it Works
The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix and it is primary used to perform business portfolio analysis on the strategic business units (SBU) of a corporation. A business portfolio is the collection of all the business units within a corporation and a large corporation has normally many SBUs. Each SBU is a distinctive and unique unit that falls under the same strategic hat. A well balanced portfolio is one of the top priorities of a large organization. The strategic business units are the basic blocks that compose a business portfolio. A unit can be a divisions or even a whole company owned by the parent organization. The nine-box matrix provides decision makers with a systematic and effective framework for a decentralized corporation to make better supported investment decisions and for developing strategies for future product development or new market segment entries. Instead of looking solely at each unit's future prospects, a corporation can adopt a multi-dimensional approach based on two components that will indicate how well the unit will perform in the future. The two components used to evaluate businesses, which also serve as the axes of the matrix, are the 'attractiveness' of the relevant industry and the unit's 'competitive strength' within the same industry. Each axis is then divided into Low, Medium and High.
Figure 2: Factors that influence the axes of the GE/McKinsey Matrix Six steps are necessary to implement the GE/McKinsey analysis:
1. Determine which factors are relevant for the corporation in the industry where it operates
2. Assign a weight to each factor
3. Score each factor
4. Multiply the relative scores and weights
5. Sum all up and interpret the graph
6. Perform a review / sensitivity analysis
The plotted circles convey the information in the following way:
The size of the circle represents the market size of the SBU
The share owned by the SBU is expressed as a pie slice with its relative percentage inside
The expected future direction of the SBU is represented with an arrow
The circles representing SBUs are then placed within the matrix. As a result, the executives of the corporation will have a clear and powerful analytic map for
understanding and managing their entire multi-unit business. The units that fall above the diagonal indicate the investment and growth to be pursued; the units along the diagonal require a thorough analysis and individual selection for investment; finally the units below the diagonal might indicate divestments are necessary or otherwise that businesses can be kept only for cash reasons. The placement of the units within the matrix is a necessary first step before the analysis phase that requires human judgement can begin. For example, a strong unit in a weak industry is in a very different situation than a weak unit in a highly attractive industry.
Figure 3: An example of the GE/McKinsey Matrix
Image source: http://iimc-adprclassroomreporting201011.blogspot.com/2010/11/iimc-ad-pr-classroom-reporting-october.html
[edit]Strengths
and Weaknesses
The GE/McKinsey Matrix, as an extension of the BCG framework, shares the aforementioned advantages of the BCG model. Though the GE/McKinsey Matrix is more sophisticated than the BCG matrix and can provide higher value information for the executive management, it has several flaws and limitations:
No proven relationship between market attractiveness and business position.
The relationships between different units are not taken into account.
The core-competencies that lead to value creation are not taken into consideration.
The approach requires extensive data gathering.
Scoring is personal and subjective (risk of bias)
There is no hard and fast rule on how to weight elements.
The GE/McKinsey Matrix offers a broad strategy and does not indicate how best to implement it.
For the above limitations and issues, the GE/McKinsey Matrix can serve more as a quick strategic visual framework rather than as a resource allocation tool. [edit]Application
to Competitive Intelligence: Apple Inc.
Apple Inc. is a large technology company with several business units operating in different markets, including desktop computers, laptops, tablet computers (iPads), portable music players (iPods), smartphones (iPhones) and software to support these products. A competitor wishing to gain competitive intelligence on the activities of Apple Inc. could do so by placing its business units into a GE/McKinsey Matrix. By analyzing this matrix, it could determine which business units Apple is likely to invest in heavily, develop selectively, or divest. The market attractiveness axis would be relatively easy for the competitor to assess if it is currently operating in that market, since this consists of factors external to Apple. This includes easily obtainable information such as the current market size and market growth rate. However, some factors would have to be assessed subjectively, such as barriers to entry and the state of technological development. In contrast, the business unit strength axis would be more difficult to assess since it consists of factors internal to the company, such as customer loyalty, access to resources, and management strength. However, a great deal of information could be obtained from secondary sources, such as the Internet, the media, and shareholder reports.
Figure 4: Assessment of Apple business units in the GE/McKinsey Matrix From an assessment of the above GE/McKinsey Matrix, it becomes clear that Apple is at least moderately strong in each of its business units and it competes in a number of attractive and fast-growing segments, such as tablet computers and smartphones. A competitor performing this analysis would realize that Apple is unlikely to divest any of these business units and is likely using its personal computer and music products as cash cows in order to fund R&D and growth in the faster-growing markets. The barriers to entry in all of these markets are considerable, since entry would require a large amount of funding for either R&D or the acquisition of the necessary technology and expertise. If the company performing this analysis decides to compete with Apple, it should do so in the newest, fastest-growing markets (tablets and smartphones), as these represent the areas of greatest opportunity, despite Apple’s early dominance. [edit]
BCG Matrix vs. GE/McKinsey Matrix
The BCG and the GE/McKinsey analytical models have been created and used for the last 40 years as portfolio analysis frameworks, with the main objective of supporting managers in taking more informed investment and/or divestment decisions. Both
models adopt visual frameworks that map internal strategic business units versus predetermined external factors. Although these models strongly focus on strategic decisions for large corporations, they can also be effectively used in the more comprehensive competitive intelligence environment. Competitive intelligence is often wrongly identified with marketing practices or competitive analysis. Competitive intelligence does not deal only with products and competitors, and it is a broader subject. It can be defined as the action of defining, gathering, analyzing, and distributing intelligence about products, customers, competitors and any aspect of the environment needed to support executives and managers in making strategic decisions for an organization. Going back to the models being analyzed, a few differences have to be considered. The GE/McKinsey Matrix is a far more sophisticated and powerful tool than the BCG Matrix because it takes into consideration more factors to measure the market attractiveness (external factors) and the strength of each SBU (internal factors). In the GE/McKinsey Matrix, market attractiveness and competitive strength substitute the BCG's market growth and market share, respectively. Another difference is that GE/McKinsey is a 3*3 matrix while the BCG's is a 2*2. This allows for more sophistication. Being more complex, the framework takes a longer time to be implemented since the retrieval of all the necessary information could be lengthy. Because of that, in certain cases corporations can either loose the proper time to market or at the end of the collection process the data could be already old and thus not useful anymore. Another drawback of the tool is that it could be misleading if not used properly. Assigning weights and scoring factors can be a very difficult work, and has to be done by expert hands. When these are not done in the right way, results can lead executives in the wrong direction. Often companies need to rely on external consultant organizations to get the necessary professionalism. The BCG Matrix's advantage is being a simple and effective tool. The market size of the business unit and the market share of the business under analysis are easily retrievable factors and the framework provides executives with a quick and valuable overview of the SBU's position. The GE/McKinsey and the BCG models can be effectively used in intelligence projects in different ways. Instead of considering only internal SBUs compared to the market, an effective approach would be to use the frameworks in
analyzing the competitive landscape. This way, corporations can see where internal SBUs stand compared to competitors'. Ideally, the two tools can be used together in sequence to take advantage of each other's strengths. For example, initially when considering a large number of competitor's products, the BCG Matrix can be adopted as a first step. The easy and quick approach that is the main advantage of this model, would let corporations perform a first skim, thus reducing the number of SBUs under analysis from many to just a few. The remaining competitors can be thoroughly analyzed with the GE/McKinsey Matrix, which provides a better and more inclusive framework. When running intelligence projects, a particular attention should be given to the type and quality of data that is used with these tools. The data has to always be validated with a non-correlated secondary source of information and corporations should tap both into internal and external data to get a broader picture. Below is an example of internal and external sources that could be used: * Inside People (Internal to the organization) * Inside Documents (Internal to the organization) * Outside People (External to the organization) * Outside Documents (External to the organization) [edit]
Conclusion
Both the BCG and GE/McKinsey Matrix have proven over the years to be useful tools in order to assess the strength of a company’s portfolio of products relative to the attractiveness of the market they inhabit. They can be used both internally as a strategy tool and externally as a competitive intelligence technique, with their strength lying in their ease of use and interpretation. Despite these strengths, users must be aware of their limitations and would be wise to use them primarily as an overview or as a complement to other analytical techniques. [edit]
References
http://www.netmba.com/strategy/matrix/bcg/
http://www.vectorstudy.com/management_theories/BCG_matrix.htm
http://www.slideshare.net/wadekar/bcg-matrix?src=related_normal&rel=1164421
http://www.scribd.com/doc/4202596/Bcg-Matrix
http://excel4marketing.com/BCG_Matrix.htm
http://www.citeman.com/1634-bcg-model-of-product/
http://www.alagse.com/leadership/l13.php
http://www.12manage.com/methods_ge_mckinsey.html
http://www.quickmba.com/strategy/matrix/ge-mckinsey/
https://www.mckinseyquarterly.com/Enduring_ideas_The_GE-McKinsey_ninebox_matrix_2198
http://www.zanthus.com/databank/strategy/business_strategy.php?aspr
http://gigaom.com/apple/apple-10-k-rise-of-the-iphone/
http://arstechnica.com/apple/news/2009/11/apple-grabs-17-of-smartphone-marketin-latest-quarter.ars
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