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Names of Group members: Asadullah khan Niazi Sohaib Ali Qureshi Ghulam Murtaza Faisal Sadiq Faisal Parvez

sheikh Zaid Sultan (1431-310029) (1431-310028) (1431-310273) (1431-310018) (1431-310001) (1431-310010)

Subject:

Strategic Management

Assignment No : Submitted To : Date: Institute: (Islamabad Campus)

02 Sir Mr. Usman Siddiq 28TH March 2012 Preston University

Question:
Critically evaluate BCGS GROWTH SHARE MATRIX?

Ans:
The Boston Matrix Definitions:
A graphical approach to resource allocation within a multi-segmented corporation. The growth-share matrix analyzes different divisions within a corporation and compares their growth rates and market shares with those of competitors. And the BCG Matrix also provides a useful way of screening the opportunities open to you, and helps you think about where you can best allocate your resources to maximize profit in the future.

Before going to understand the BCGS GROWTH SHARE MATRIX one should understand Market Share and Market Growth
To understand the Boston Matrix, you need to understand how market share and market growth interrelate. Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher the proportion of the market you control. Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market is expanding, meaning that its relatively easy for businesses to grow their profits, even if their market share remains stable. By contrast, competition in low growth markets is often bitter, and while you might have high market share now, it may be hard to retain that market share without aggressive discounting. This makes low growth markets less attractive.

FOR EXAMPLE
A case in point is Apple Computers flagship product called the iPod, which occupies a dominant 73% share the portable music player market (Cantrell 2006). Analysts believe it is the impetus for Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product line (Cantrell 2006). Similarly, Dells PC line shares the same market dominance theory as the iPod. The PC manufacture giant occupies a worldwide market share of 18.1%, which is commensurate to its large market revenue above its competitors (see figure 2).

HOW

TO

DEVELOP

GOOD

BCG

GROWTH-SHARE

MATRIX

OF

COMPANY?

SBUs or products are represented on the model by circles and fall into one of the four cells of the matrix already described above. Mathematically, the mid-point of the axis on the scale of Low-High is represented by 1.0 (Drummond & Ensor 2004; Kotler 2003). At this point, the SBUs or products market share equals that of its largest competitors market share (Drummond & Ensor 2004; Kotler 2003). Next, calculate the relative market share and market growth for each SBU and product. Figure 3 depicts the formulas to calculate the relative market share and market growth. Figure 3

Oftentimes, if you are versed with a particular industry and companies operating in it, you could draw up a BCG matrix for any company without necessarily computing figures for the relative market share and market growth. Figure 4 depicts a fairly accurate BCG growth-share matrix for Apple Computer developed in the spring of 2005 without the author calculating the relative market share and market growth.

Understanding the Matrix


The Boston Matrix categorizes opportunities into four groups, shown on axes of Market Growth and Market Share:

These groups are explained below: Dogs: Low Market Share / Low Market Growth In these areas, your market presence is weak, so it's going to take a lot of hard work to get noticed. You won't enjoy the scale economies of the larger players, so it's going to be difficult to make a profit. And because market growth is low, it's going to take a lot of hard work to improve the situation. Cash Cows: High Market Share / Low Market Growth Here, you're well-established, so it's easier to get attention and exploit new opportunities. However it's only worth expending a certain amount of effort, because the market isn't growing, and your opportunities are limited. Stars: High Market Share / High Market Growth Here you're well-established, and growth is exciting! There should be some strong opportunities here, and you should work hard to realize them. Question Marks (Problem Child): Low Market Share / High Market Growth These are the opportunities no one knows what to do with. They aren't generating much revenue right now because you don't have a large market share. But, they are in high growth markets so the potential to make money is there. Question Marks might become Stars and eventual Cash Cows, but they could just as easily absorb effort with little return. These opportunities need serious thought as to whether increased investment is warranted.

To use the Boston Matrix to look at your opportunities use the following steps:

Step One: Plot your products on the worksheet according to their market share and market growth. Step Two: Classify them into one of the four categories. If a product seems to fall right on one of the lines, take a hard look at the situation and rely on past performance to help you decide which side you will place it.

Step Three: Determine what you will do with each product/product line. There are typically four different strategies to apply:

Build Market Share: Make further investments (for example, to maintain Star status, or to turn a Question Mark into a Star). Hold: Maintain the status quo (do nothing). Harvest: Reduce the investment (enjoy positive cash flow and maximize profits from a Star or a Cash Cow). Divest: For example, get rid of the Dogs, and use the capital you receive to invest in Stars and Question Marks.

Limitations
The BCG model is criticized for having a number of limitations

There are other reasons other than relative market share and market growth that could influence the allocation of resources to a product or SBU: reasons such as the need for strong brand name and product positioning could compel resource allocation to an SBU or product

What is more, the model rests on net cash consumption or generation as the fundamental portfolio balancing criterion. That is appropriate only in a capital constrained environment. In modern economies, with relatively frictionless capital flows, this is not the appropriate metric to apply rather, risk-adjusted discounted cash flows should be used (ManyWorlds 2005).

Also, the matrix assumes products/business units are independent of each other, and independent of assets outside of the business. In other words, there is no provision for synergy among products/business units. This is rarely realistic. The relationship between cash flow and market share may be weak due to a number of factors including (Cipher 2006): competitors may have access to lower cost materials unrelated to their relative share position; low market share producers may be on steeper experience curves due to superior production technology; and strategic factors other than relative market share may affect profit margins.

In addition, the growth-share matrix is based on the assumption that high rates of growth use large cash resources and that maturity of the life cycle brings about the expected profit returns. This may be incorrect due to various reasons (Cipher 2006): capital intensity may be low and the business/product could be grown without major cash outlay; high entry barriers may exist so margins may be sustainable and big enough to produce a positive cash flow and a growth at the same time; and industry overcapacity and price competition may depress prices in maturity.

Furthermore, market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market. A fast growing market is not necessarily an attractive one. Growth markets attract new entrants and if capacity exceeds demand then the market may become a low margin one and therefore unattractive. A high growth market may lack size and stability.