BCG Matrix

The General Electric (GE) Matrix

SPACE Analysis
Blindspots Analysis - Strategic
Significance of Competitive Analysis.
 BCG Matrix
Boston Consulting Group (BCG)
developed its experience curve in
1965-66 as an attempt to explain why
some competitors outperform others.
What are the rules for success?
 BCG Matrix

According to BCG, success depends largely

on the impact of accumulated
experience.
For each cumulative doubling of
experience, says BCG, total costs decline by
about 20 to 30%, thanks to economies of
scale, organizational learning and
technological innovation.
 BCG Matrix

From BCGs experience curve came the

Growth-Share Matrix, a portfolio analysis
tool that allows diversified companies to
plot each of their business units on a grid.

Using the grid, companies can compare

each areas relative potential for
investment.
 BCG Matrix

Companies can thus maintain a

balance between cash cows and
stars, while identifying question
marks (potential stars) for further
observation and dogs to be put
down.
 Boston Consulting Groups
Growth-Share Matrix
G Relative Market Share
r
o
w
t
h
M
a
r
k
e
t
 BCG Matrix
Hence, Boston Consulting Group (BCG)
developed a model for managing a portfolio of
different strategic business units (SBUs) or
major product lines.

The BCG Growth-Share Matrix is a four-cell (2 by

2) matrix used to perform business portfolio
analysis as a step in the strategic planning
process.
 BCG Matrix

The BCG matrix provides a framework to

compare many SBUs/product lines at a
glance and for allocating resources
between the different SBUs or product
lines.
BCG Matrix
SBUs/Product Lines with a relative high
market share in a high growth market
are designated as Stars.

SBUs/Product Lines with a relative high

market share in a low growth market are
designated as Cash Cows.
 BCG Matrix

SBUs/Product Lines with a relative low market

share in a high growth market are designated as
Question Marks or Problem Children.

SBUs/Product Lines with a relative low

market share in a low growth market are
designated as Dogs.
 BCG Matrix
Investment Decision
Cash Cows typically have large market
shares in mature, slow growing markets.
Cash cows require little investment and
generate cash that can be used to invest in
other SBUs/product lines.
 BCG Matrix Investment Decision

Stars are SBUs/product lines that have a large

market share in a fast growing market. Because
the market is growing rapidly, stars frequently
require ongoing investment to maintain their
market leadership.

As marginal competitors withdraw and the

market matures and slows down, successful stars
become cash cows and generate significant cash.
 BCG Matrix Investment Decision

Question Marks operate in high growth

markets, but suffer from low market share. The
strategic options involve investing resources to
grow market share or withdrawing. Investing to
grow market does not guarantee these SBUs or
product lines will become stars and hence the
term Question Mark.
BCG Matrix

Dogs suffers from having low market share

in a market that is mature and slow
growing. Investment will usually have
little benefit and therefore, liquidation
and withdrawal is usually the best strategy
for those SBUs/product lines classified as
Dogs.
The General Electric (GE) matrix
 General Electric (GE) Matrix

The GE screen matrix is essentially a

derivation of the Boston Consulting
Groups Boston growth matrix.

It was developed by McKinsey and Co. for

General Electric as it had been
recognized that the Boston Consulting
Group matrix was not flexible enough to
take broader issues into account.
 General Electric (GE) Matrix

The GE matrix cross-references market

attractiveness and business position using three
criteria for each high, medium and low.
The market attractiveness considers variables
relating to the market itself, including the rate of
market growth, market size, potential barriers to
entering the market, the number and size of
competitors, the actual profit margins currently
enjoyed, and the technological implications of
involvement in the market.
 General Electric (GE) Matrix

The business position criteria look at the

businesss strengths and weaknesses in a variety
of fields.

These include its position in relation to its

competitors, and the businesss ability to handle
product research, development and ultimate
production.
It also considers how well placed the
management is to deploy these resources.
 General Electric (GE) Matrix

The matrix differs in its complexity

compared with the Boston Consulting Group
matrix. Superimposed on the basic diagram
are a number of circles. These circles are of
variable size.
 General Electric (GE) Matrix

The size of each represents the size of

each market. Within each circle is a clearly
defined segment which represents the
businesss market share within that
market.
The larger the circle, the larger the
market, and the larger the segment, the
larger the market share.
Financial Statements Analysis:
Analytical Tools.

21
 Business Ratio
Environment. Analysis.

Financial Statements
Analysis:
Analytical
Coping With Tools. Cash Flow
Manipulation. Analysis.

Cross-border
Differences In
Reporting Std.
 Evaluating &
Compensating Company
Managerial Valuation.
Performance.

Financial
Statements
Business
Analysis:
Analysis Operational Credit
& Evaluating USE Analysis.
Business
Growth.
ECONOMIC ENVIRONMENT
AND POLICY

CORPORATES BUSINESS:

FINANCIAL STATEMENT

24
CORPORATE BUSINESS:
FINANCIAL STATEMENT

STRATEGIC POSITION
AND
ACTION EVALUATION
( SPACE)
25
The Strategic Position and Action Evaluation or
the SPACE Matrix is a four-quadrant framework
which indicates whether aggressive,
conservative, defensive, or competitive
strategies are most appropriate for a given
company. The SPACE Matrix Analysis is most
often employed during market analysis of a
firm.

26
A generic SPACE Matrix is detailed below:

27
The axes of the SPACE Matrix represent the two
internal dimensions of a competitive firm which
are its financial strength [FS] and its competitive
advantage or [CA] and two external dimensions
which are environmental stability [ES] and
industry strength or IS.

These four factors are the most important

determinants of an enterprise's overall strategic
position in the marketplace.
28
 Factors Determining
Factors Determining
Competitive Advantage. Financial Health.

STRATEGIC
POSITION
AND ACTION
EVALUATION
( SPACE)
Factors Determining Factors Determining
Industry Strength. Environmental Stability.

29
 9.Economies of 1. Return on
Scale. Investment.
Leverage.

Inventory
Turnover. FACTORS
DETERMINING Liquidity.
FINANCIAL
Risk Involved
In Business. STRENGTH: Capital Reqd.
vs.
Capital Avalbe
Ease Of Exit
From Market Cash Flow.
30
 1.Market Share. Product Quality.

Customer Loyalty.

9. Speed of
New Product
FACTORS
Introductions. DETERMINING
Technological
COMPETITIVE Know-How.
Competitions ADVANTAGE (Generic
Capacity
Utilization.
Strategy).
Vertical
Integration.
Product
Replacement Product
Cycle. Life Cycle.
31
 1. Growth
Potential.
Profit
8. Productivity/
Potential.
Capacity
Utilization. FACTORS
DETERMINING
INDUSTRY Financial
Stability.
Easy Of Entry STRENGTH (Five
Into Market. Competitive
Forces):
Technological
Capital Know-How.
Intensity.
Resource
Utilization.
32
 FACTORS DETERMINING
ENVIRONMENTAL STABILITY.

1. Technological 5.Barriers To Entry

Into Market.
Changes.

2. Rate of Inflation. 6.Competitive Pressure.

3. Demand Variability. 7. Price Elasticity

Of Demand.

4. Price Range of 8. Pressure From

Competitive Products. Substitute Products.
33
ENVIRONMENTAL FACTORS

What is the competitive market (output)

profile of the industry? Are there few
competitors with well-differentiated
products or many competitors with similar,
commodity-like products? Is foreign
competition a factor of concern?

34
Environmental Factors - Cont.

What is the production (input) profile

of the industry? Is it labor intensive or
capital intensive? Is it unionized or
not? Are there constraints on the
availability of raw materials or labor?

35
Environmental Factors - Cont.

How important is technological change?

Are products mature with few
technological innovations or do new
products continually emerge to shorten
the life cycle of existing products?

36
Environmental Factors - Cont.

What are the growth characteristics of the

industry? Is the industry growing rapidly,
holding stable or declining?

What is the regulatory status? Are there entry

barriers such as licenses or patents? Is the anti-
trust environment encouraging or discouraging
mergers in the industry?

37
Environmental Factors - Cont.

How sensitive is the industry to

demographic changes or trends (aging of
the population, two-income families)?

How sensitive is the industry to

macroeconomic forces such as inflation
or deflation, changes in interest rates,
unemployment and business cycles?

38
Depending upon the type of firm and its industry, a
number of variables could make up each of the
dimensions represented on the axes of the typical SPACE
Matrix.
Factors that are typically included are those found in the
firm's External Factor Analysis and its Internal Factor
Analysis (EFA & IFA) and these should be considered in
developing a SPACE Matrix.

39
Other important variables that can be included
in a SPACE Matrix examination are a firm's
financial performance such as return on
investment, leverage, liquidity, working capital,
and cash flow commonly are considered
determining factors of an organization's
financial strength.

40
The SPACE Matrix should be completely
customized to the particular firm /
company being studied and based on
factual information derived from industry
and market data.

41
The steps required to develop a SPACE Matrix are
listed below:
1. Select a set of variables to define financial
strength (FS), competitive advantage (CA),
environmental stability (ES), and industry
strength (IS)

42
2. Assign a numerical value ranging from +1
(worst) to +6 (best) to each of the variables that
make up the FS and IS dimensions.

Assign a numerical value ranging from -1 (best)

to -6 (worst) to each of the variables that make
up the ES and CA dimensions.

43
3. Compute an average score for FS, CA, IS, and
ES by summing the values given to the variables
of each dimension and dividing by the number of
variables included in the respective dimension.

4. Plot the average scores for FS, IS, ES, and CA

on the appropriate axis in the SPACE Matrix.

44
5. Add the two scores on the x-axis and plot the
resultant point on X. Add the two scores on they-
axis and plot the resultant point on Y. Plot the
intersection of the new xy point.

45
6. Draw a directional vector from the
origin of the SPACE Matrix through the
new intersection point. This vector
reveals the type of strategies
recommended for the organization:
aggressive, competitive, defensive, or
conservative.

46
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

FS

+4, +4
CA IS

ES
47
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

Aggressive Profiles

48
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

FS
+1, +5

CA IS

ES
49
Aggressive Profiles

50
Conservative Profile

51
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

FS

-5, +2

CA IS

ES
52
Conservative Profile

53
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

FS

CA IS

+5, -1

ES
54
Competitive Profile

55
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

FS

CA IS

+1, -2

ES
56
Competitive Profile

57
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

FS

CA IS

-5, -1

ES
58
Defensive Profile

59
Some examples of strategy profiles that can
emerge from a SPACE analysis are shown
below:

FS

CA IS

-1, -5
ES
60
Defensive Profile

61
The directional vector associated with each
given profile suggests the type of strategies to
pursue which are: aggressive, conservative,
defensive, or competitive. When an
organization's directional vector is located in
the aggressive quadrant (upper-right quadrant)
of the SPACE Matrix, an firm is in an excellent
position to use its internal strengths to

62
(1)take advantage of external opportunities, (2)
overcome internal weaknesses, and (3) avoid
external threats.
Therefore, market penetration, market
development, product development,
backward integration, forward integration,
horizontal integration, conglomerate
diversification, concentric diversification,

63
horizontal diversification, or a combination
strategy all can be feasible, depending on
the specific circumstances that the
company is facing at the time.

64
Blindspots Analysis
is a method aimed at uncovering obsolete
assumptions in a decision makers mental
scheme of the environment.

The concept was first introduced by Barbara

Tuchman, in her book, The March of Folly, to
describe political decisions and strategies which
were clearly wrong in their assumptions.
Michael Porter picked up on the theme and
created the term blind spots as synonym
with conventional wisdom which no longer
holds true, but which still guides business
strategy
 Role of Competitive analysis

Competitive analysis is the cornerstone of

effective strategy formulation and
implementation.

This analysis helps executives understand and

predict strategic moves by competitors.

It also allows executives to develop, select, and

test appropriate strategies.
However, competitive analysis is
complicated and time-consuming, and it
requires significant organizational
resources, creativity, imagination, and
insight. This complexity often breeds
flawed analysis.
Undetected, such analysis leads to
ineffective, if not disastrous, strategies.
There are six potential blind spots or flaws
in competitive analysis and offers
guidelines for executives to safeguard
against them.
 Two cases of Blind Spot:

1.A chief executive officer (CEO) of a large U.S.

manufacturing corporation of heavy equipment
and machinery was surprised: his rivals were
almost invisible; they were Japanese and
Korean firms of whom he had never heardand
they continued to multiply.
"Where did they come from? Why
didn't we seem them coming? How
could we get blindsided like this!"
the CEO asked his strategic planning
staff.
2. A manufacturing company launched an
intensive marketing campaign to promote
its new product. Senior executives
described the product as a breakthrough
that would strengthen their firm's market
position, propelling it unquestionable
industry dominance.
Executives boasted that the technology embedded
in their product was so advanced that it would be
several years before competitors could catch up
with it.

However, as soon as the company announced its

product, a lesser known and much smaller firm
introduced a product that clearly preempted the
leader's claim of technological superiority. Why?
The substitute was cheaper and easier to
use than the product of the self-
proclaimed industry leader.

These examples illustrate flaws in

competitive analysisareas that have been
ignored in identifying competitors and
their possible moves.

74
Reasons for these Flaws or Blind Spots?

1. company's mistaken or incomplete view

of its industry and competition,
2. poor design of the competitive analysis
system,
3. inaccurate managerial perceptions, or
ineffective organizational processes.
Before identifying flaws, first we
must understand the basic
objectives of strategic
competitive analysis.
 Strategic Significance of
Competitive Analysis

Competitive analysis is the process by which

a company attempts to
1. define and understand its industry,
2. identify its competitors,
3. determine the strengths and weaknesses
of its rivals, and
4. anticipate their moves.
It embodies both competitive intelligence to
collect data on rivals and the analysis and
interpretation of the data for managerial decision
making.

Competitive analysis provides rich data that helps

a company to avoid surprises in the marketplace
by anticipating its competitors' moves, and
shorten the time required to respond to them.
The analysis also offers a forum for executives to
discuss and evaluate their assumptions about the
firm's capabilities, market position, and the
competition.

It also helps in selecting viable strategies that

position the firm strongly in its market.

Therefore, competitive analysis serves as the

foundation for a firm's strategy formulation
processes.
Competitive analysis also contributes to the
successful implementation of a company's
strategy.

Competitive analysis enables companies to learn

from rivals, as occurred when Xerox analyzed its
Japanese rivals, concluding that product quality
was a key factor of their global success.
Consequently, Xerox then embarked on a
massive corporate-wide project to establish
excellence in quality as the core of its
strategy, helping the company to regain its
market leadership.
 Flaws or Blindspot
(1) misjudging industry boundaries;
(2) poor identification of the competition;
(3) overemphasis on competitors visible
competence;
(4) overemphasis on where, not how, rivals will
compete;
(5) faulty assumptions about the competition;
and
(6) paralysis by analysis.
 Blindspot 1. Misjudging Industry
Boundaries.
A major contribution of competitive analysis is
the clear definition of a firm's industry and its
boundaries.
This definition is usually the starting point in
determining the competition, formulating a
company's strategy, and allocating resources
among businesses.

Surprisingly, misjudging industry boundaries has

handicapped well-known companies.
 Consider the following examples:

America's most venerable industries -

newspaper industry is currently in a state
of disarray because of the success of cable
television, cable news, financial, sports,
style, and home shopping services have
caused a major decline in readership.
It has taken nearly a decade for well-
established giants such as the New York
Times, The Washington Post, Chicago
Tribune, and Los Angeles Times to
recognize that their concept of the printed
newspaper has become outdated and that
they must reexamine their definition of
the industry's boundaries.
Although newspapers still play a
major role in society, the emerging
boundaries of the industry are
broader, covering printed, broadcast,
and telecast media.

86
Pharmaceutical companies have been
surprised at the increased entry of
chemical firms into their industry.
Faced with industry maturity, fierce
competition, and declining margins, several
leading chemical companies entered the
profitable pharmaceutical industry by
forming strategic alliances with upstart
biotechnology companies.
For years, pharmaceutical companies
fiercely jockeyed for position within
their traditionally defined industry,
and ignored the threat posed by young
biotechnology companies.
Recognizing the significant changes
in their industry, some
pharmaceutical companies have
recently created their own
biotechnology divisions or formed
strategic alliances with start-up
biotechnology firms.

89
Clearly, the alliance between
chemical and biotechnology
companies has profoundly
transformed the pharmaceutical
industry, forcing incumbents to
rethink their industry's definition.

90
Blindspot 2. Poor Identification of
Competitors.

One of the most damaging (if not puzzling)

flaws of competitive analysis is the poor
identification of the competition.
In 1982, Apple paused only for a minute when
IBM announced its entry into the PC market.
Apple executives quickly dismissed IBM as a
serious contender.

Steve Jobs, Apple's founder and first CEO, stated

"When IBM entered the market, we did not take
it seriously enough. It was a pretty heady time at
Apple.

92
We were shipping tens of thousands of
machines a monthmore computers than
IBM.
Apple underestimated IBM's excellent skills
and strong commitment to the industry.
Apple could not see IBM as a credible rival,
who within five years emerged as the
industry's leader.
 Blindspot 3. Emphasis on
Competitors' Visible Functions.

This flaw occurs when the analysis centers

primarily on competitors' most visible
resources while deemphasizing their less
visible but potentially more important
functions.
Typically, manufacturing companies focus
on their competitors' finance, R&D, and
production functions.
Other functions such as product
design, logistics, and human resources
do not always receive the same
attention.

95
In a study of 308 firms, Sutton found that
companies were interested primarily in
collecting information on competitors'
pricing, sales, strategic plans, market
share, key customers, new products, and
expansion plans Production Cost.
Conventional cost accounting focuses only on the Tip-of-the-
Iceberg costs...

Material Direct Labor

Production Product
Overhead Management
Administrati Customer Service
ve Support
Sales/
Quality Marketing
Service Support

Companies need to understand the size & depth of their cost structures in
order to survive in todays competitive waters
 Overhead
Components of
business costs
Material
Direct labour
Technology
Time
structure of business costs is changing from
primarily variable to predominantly fixed the
importance of overhead functions is increasing
The companies paid little attention to their
competitors' less visible aspects such as
organization, structure, and culture, possibly
leading to an incomplete assessment of their
strengths and weaknesses.

Successful firms have used their invisible

characteristics to achieve market eminence -
Pfizer
99
For example, Pfizer, Inc. has benefited greatly
from its international operations as a major
source of information about the new
competitors, their product offerings, and their
distribution channels.

Pfizer uses this information in identifying its

international rivals and developing its
competitive strategy.
 Blindspot 4. Emphasis on Where,
Not How, to Compete.

Sometimes, competitive analysis

focuses primarily on defining the
markets where a firm will face
intensive competition, ignoring how
competitors intend to position
themselves.
 Consider the following examples:

Texas Instruments (TI) and Motorola took

the market away from the well-established
producers like Hughes and Sylvania by
introducing new semiconductor silicon-
based technology.

102
The new technology was cheaper, easier to
process and more reliable.

Existing companies were slow in responding,

believing that TI and Motorola would focus on the
low end of the market;

they ignored how these companies would

competeby using the new technology to attack
different segments of the market.
The success of Nike as a major producer of
athletic shoes is explained by its ability to
work closely with athletes, coaches, and
shoe retailers, and distributors.
Close contact with these groups gave the
company clues about the desirable changes in
the design of shoes to make them comfortable
and to quickly position itself,

by sponsoring promotional marathons, when the

national trend toward fitness appeared.

105
Nike capitalized on a major flaw in the
way the industry leaders (Adidas and
Puma) marketed their products.
For decades, they designed their
shoes and pushed them through the
distribution channels without close
contact with distributors.
In contrast, Nike listened to distributors'
suggestions in developing company
production plans and even made special
financial arrangements to reduce their
inventory cost (Reducing inventories across
value chain). Adidas and Puma ignored
Nike's innovative competitive approach.
These examples show that competitive
analyses sometimes fail to determine their
rivals' strategic intent, defined as
competitors' approach to winning in the
marketplace and plans for allocating
resources over time to build or acquire
capabilities.
 Blindspot 5. Faulty Assumptions
about the Competition.

Underestimating rivals competence can create

and reinforce faulty assumptions about these
companies.

U.S. semiconductor producers believed that their

Japanese competitors had an advantage in the
form of low wages. As a result, these producers
relocated their production facilities to Southeast
Asia.
However, these producers failed to
recognize two emerging trends:
technological and production
improvements introduced by their
Japanese counterparts have become a
major source of competitive advantage for
foreign producers, and there was an
ongoing change in industry dynamicsaway
from low cost to being capital intensive.
 Blindspot 6. Paralysis by Analysis.

Effective competitive analysis requires

extensive data collection, analysis and
interpretationgiving data meaning that
enables executives to understand or
develop specific strategic moves. One
cause of this paralysis is obsessive data
collection.
Several executives have expressed serious
concerns in this regard. A survey by Sutton
concluded that "one of the main inhibitions
to competitive analysis is that there's far
too much information, and it's hard to
separate the essential from the inessential.
For example, Coors Company
executives reported that a frequent
problem was that the majority of
competitive intelligence efforts
centered on collecting rather than
analyzing and disseminating data.
In response, Coors redefined the
priorities of its competitive analysis
staff, by allocating forty percent of
their time to data collection and sixty
percent to analysis and reporting.

114
 Consequence of Blindspots

These blind spots reflect flaws in a

company's perception and understanding
of its rivals.
Blind spots are the "areas where a
competitor will either not see the
significance of events at all, will perceive
them incorrectly, or will perceive them
very slowly."
These blind spots can slow a company's
response to its competitors' moves or even
cause the selection of the wrong
competitive approach.

Blind spots also lead some companies to

underestimate the ability of their rivals.
Flawed competitive analysis, resulting from
these blind spots, weakens a company's
capacity to seize opportunities or interact
effectively with its rivals, ultimately
leading to an erosion in the company's
market position and profitability.
Then next is what?
How do you avoid
these six BLINDS ?
Ans: Find out on your
own
1.List your five nearest competitors.
2.Identify the two top competitive factors
in your market.
3.Create groups of competitors that fall
into the same strategic space. How can
we do it? .
Assess each competitors strengths and
weaknesses against the competitive factors.
Consider strengths that the companies
have individually and strengths that they
share.
Consider unique characteristics of each
companys product or service as well as any
feature a companys product or service lacks.
Consider market share, marketing approach, and
product mix as well as any other relevant,
industry-specific factors.
Thank You

123