BCG Matrix: Strategy & Performance

Overview

• The study empirically explores the performance and strategic attributes of businesses within the Boston Consulting Group (BCG) product portfolio matrix
• The performance and strategic attributes of businesses differed based on product life cycle stage (growth rate) and market share.

Business-Level Strategy

• Discussions of business-level strategy fall into three groups:

  • Normative propositions: Strategic actions that make sense
  • Empirically based literature: Demonstrates universal "laws" of strategy
  • Empirical strategy varies: Strategy must be highly situational

• Contingent factors affect strategy

• Empirical "mid-range" theories about business-level strategy needed

Key Contingent Variables

• Product life cycle and market share are two key contingent variables
• Little empirical research has been done treating the above variables as contingent factors
• Together, the above variables form the framework for the Boston Consulting Group (BCG) product portfolio matrix

BCG Matrix

• The vertical dimension of the BCG matrix is "market growth"
• Growth rates correspond with certain stages of the life cycle
• Each stage is attributed with characteristics like customer adoption rates and the nature of competition
• The study focuses on product life cycle and market share, it has the potential for generating empirically strong and managerially meaningful results
• Study addresses two broad questions:
  • Businesses differences in performance based on profitability, risk, cash flow, and market share change within the BCG matrix
  • Strategic attributes differences within the BCG matrix

Theoretical Review

• The distinction between corporate and business-level strategy exists
• The study focuses on business-level strategy and the concept of "competing"
• All functional areas of the business are encompassed (operations, marketing, distribution, R&D, finance, and personnel)
• The business's basis for competing is determined by the above

Contingency Theories

• Contingency models are abundant in organizational theory, however, progress in investigating contingent models of strategy has been slow
• Identifying and testing contingencies has not been a main focus
• Contingent variables lead to the strongest theory
• Product life cycle is a fundamental variable in determining business strategy

Product Life Cycle

• The product life cycle concept is well established
• Theorists have prescribed strategic behaviors for success at each stage
• Emphasis on gaining a strong competitive foothold during early stages (introductory and growth)

Market Share

• Market share is empirically demonstrated to show that a key factor affects business unit performance
• High share businesses have significantly higher earnings than low share businesses
• Little systematic research has been done on different strategies for different share positions
• Recent studies identify discrete clusters of high and low performing businesses

Combining Both Dimensions

• Combining product life cycle and market share forms the BCG Matrix
• Despite limitations, the matrix is widely cited in academic and popular discussions of strategy
• Other portfolio matrices are consistent with the BCG framework

Considerations

• The BCG favors 10% real market growth as the point where someone can differentiate between high and low growth rates and market share
• 1.0 ratio, indicating highest market share
• 1.5 ratio is necessary to claim and exploit true dominance in a market
• Systematic data is absent which is an alternative, the study relies on 10% market growth rate and 1.0 relative market share points in the matrix
• Emphasis has been on how to allocate resources and what kinds of performance patterns to seek for each area
  • High share/low growth should want maximum cash generation
  • That cash should be directed to newer/higher growth
  • Low growth/low share are cash drains and should be divested

Propositions

• Businesses in the four cells will differ systematically in their performance and strategic attributes
• Approach will be to enhance understanding of a widely recognized, but little-documented strategic framework

PIMS Data Base

• Data was drawn from Profit Impact of Market Strategies (PIMS), which is an ongoing study of environmental, strategic, and performance variables for individual business units
• About 200 corps submit data on 2000 business units annually
• Each business is a product-market unit, often a division
• PIMS staffers help each business interpret and answer questions, assuring high data comparability
• Companies pay to participate, data accuracy provides ability to give meaningful conclusions
• Businesses that are participating are sophisticated, dominant and effective in the U.S

Classifying Businesses

• Based on most recent four years of PIMS data for businesses that manufacture industrial products
• Businesses classified into four cells of the BCG matrix:
  • Life cycle stage (market growth rate)
  • Relative market share
• Respondents indicate business' life cycle stage through a question
• Distinction between a growth and mature business is a real growth rate in primary demand of 10%

Market Share

• Relative market share is the ratio of the unit's market share to the competitor
• 1.00 is a high relative market share; below 1.00 is low relative market share

Variables

• There are two types of variables distinguished are strategic attributes and performance
• Environmental variables are not included

Resource Usage

• Dozens of strategic attributes were included in the study, specifically:
  • Investment/revenue
  • Plant and equipment newness
  • Capacity utilization
  • Capacity/market size
  • Sales/employee
• Working Capital Management includes:
  • Receivables/revenue
  • Inventory/revenue
• Domain includes:
  • Relative product line breadth
  • Relative customer type breadth
  • Relative number of customers
  • Customer fragmentation
• Vertical Integration includes:
  • Value/added revenue
  • Relative integration backward
  • Relative integration forward
• Expense Structure consists of:
  • Manufacturing/revenue
  • Product R&D/revenue
  • Process R&D/revenue
  • Sales force/revenue
  • Advertising and promotion/revenue
• Competitive Devices include:
  • Sales from new products
  • Relative sales from new products
  • Relative prices
  • Relative direct costs
  • Relative image
  • Relative services
  • Relative advertising expenses
  • Relative promotion expenses
  • Relative sales force expenses

Performances Measured

• ROI or return on investment is measured via pretax income less cost
• CFOI or cash flow on investment, percentage of average investment
• RPR or return per risk, average ROI divided by the variability of ROI
• MSC or market share change.

Analysis

• The primary theme that has been corroborated the four types of businesses tendencies to generate cash

• Wildcat - requires large cash inputs

• Star - may or may not generate all of its own cash

• Cash Cows - are net cash generators

• Dogs - Worthless

• ROI was higher for businesses with high share over low share

• Differences across the four cells reflect both profitability and stability of the share

• Cows score the highest

• Stars are in turbulent markets

• Dogs are next highest

• Wildcats are the lowest

• There were indications of greater share increases

• There are no apparent attempts to gain truly large share increases

• Little correlation existed between performance measures and market share, suggest no real tradeoff exists

• These results indicate managers will be relieved of profitability or cash flow goals while also charged to gain

Strategic Attributes

• Strategic Attributes indicate the differences in Businesses
• Some attributes varied primarily according to market share
• Some varied to life cycle stage

Resources and Resource Usage

• High share businesses can have more production capacity than low shares

Expenses Overview

• Growth have more "Future Oriented Expenses"
• High R&D Mature Businesses will have less growth R&D and capital can change

Domain

• Is a means of gaining share
• There is little Customer fragmentation
• Few high Customers

Vertical Integration

• As with domain broadness, there is no method knowing from these data to know if vertical integration has high market share

Competitive Differences

• Growth businesses will have new highs, and Dogs are the lowest
• If both Stars and Cash Cows will reap double the rewards from the force: there can be high price.

Conclusions

• Testing of the BCG product portfolio matrix
• BCG have quite different tendencies or consumers
• All 4 matrix types contribute to the balanced performance