Question

BCG growth matrix , Ansoff matrix and resource based variables

Many tools, such as various matrices, can be used by a company performing strategic analysis. Pick any three tools and briefly describe each and explain when a company could use them. What are their limitations? Use examples to illustrate the use of your three chosen tools.

Critically analyse and elaborate

Answer 1

BCG Matrix

• Created by the Boston Consulting Group & also known as the Boston or growth-share matrix
• Provides a framework for analyzing products on the basis of growth & market share
• Created either by drawing a matrix or using a BCG chart program online
• It consists of 4 quadrants, designated as stars, question marks, cash cows and dogs
• The business units or products that have the best market share & generate the most cash are considered stars. However, because of high growth rate, stars also consume large amounts of cash. Monopolies and first-to-market products are frequently termed stars
• Cash cows are the leaders in the marketplace and generate more cash than they consume, but have low growth prospects. They provide the cash required to turn question marks into market leaders, cover the administrative costs of the company, fund research and development, service the corporate debt, and pay dividends to shareholders
• Dogs are units or products that have both a low market share and a low growth rate. They frequently break even, neither earning nor consuming a great deal of cash
• Question marks have high growth prospects but a low market share. They consume a lot of cash but bring little in returnx
• Based on the results of BCG matrix analysis, companies can strategise to decide what they should do with the different business units. We can learn this by looking at these 4 potential strategies: Build – Increase investment in a product to increase its market share, like pusingh a question mark into a star and, finally, a cash cow, Hold – Not investing more into a product & keeping it in the same quadrant, Harvest – Reducing investment to take out the maximum cash flow from the product, which increases its overall profitability (best for cash cows), Divest – Release the amount of money already stuck in the business (best for dogs)
• BCG matrix is however limited to just 2 attributes - growth rate and market share. And where market share is not the only expression to define success of a business unit, growth rate may not be the right indicator for the attractiveness of product in the market

Ansoff Matrix

• Also called the Product/Market Expansion Grid, it proposes 4 strategies for growth & also helpsto analyze the risks associated with each one. The idea is that, moving into a new quadrant (horizontally or vertically) increases risk.
• Ansoff suggested that there were effectively only 2 approaches to developing a growth strategy; through varying what is sold (product growth) and who it is sold to (market growth)
• Market penetration is the lower left quadrant & is the safest option. The focus is on expanding sales of existing product in a existing market. So it is well known how the product works, and there are very few surprises in the market. Product development is the lower right quadrant & is slightly more risky. In this a new product is introduced in an existing market. Market development is the upper left quadrant. Here an existing product is put into an entirely new market. It can be done by finding a new use for the product, or by adding new features or benefits to it. Diversification is the upper right quadrant & the riskiest of the four options, because a new, unproven product is being introduces into an entirely new market that the company not fully understand.
• To understand how it works, we can look at some very famous examples. To see product development, McDonald's introduced salads in their outlets in order to retain existing customers (who were becoming more health conscious), owing to regulatory pressures, changing consumer behavior, and negative media coverage. Similarly iPod is a great example of diversification. Apple targeted a very large customer group, very different from its traditional following. Apple also entered into the music business that was completely new for the company.

PESTLE

• It is a method of assessing business environment, and its possible impact on the company's performance
• PESTLE is an acronym which stands for six external factors: political, economic, sociological, technological, legal and environmental. Each of these factors is used to look at an industry or business environment, and determine what could affect an organization’s health
• It is helpful in understanding market growth or decline, and as such the position, potential and direction for a business & commonly used in strategic and marketing planning or product development
• These factors can have a profound effect on business with varying implications such as duration of impact (short term/long term), type of change (positive/negative), rate of impact (increasing/ decreasing/unchanged) & importance (critical/important/unimportant)
• Provides the best output when used in collaboration with other analytical business tools like the SWOT analysis and Porter's Five Forces, to give a clear understanding of a situation & related internal and external factors
• For example, in overseas sale of a product, currency inflation, interest rates, taxation level, etc are the Economic factors and can have a negative & increasing rate of impact if these fafctors work in the favor of domestic players in the market. Similarly, technological innovation and level of automation is extremely important & can have a negative impact which would take months to draw level with the global processes