Only a diversified company with a balanced portfolio can use its strengths to

Only a diversified company with a balanced portfolio

This preview shows page 104 - 105 out of 157 pages.

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has: Stars whose high share and high growth assure the future; Cash cows that supply funds for that future growth; and Question marks to be converted into stars with the added funds. Practical Use of the Boston Matrix For each product or service the 'area' of the circle represents the value of its sales. The Boston Matrix thus offers a very useful 'map' of the organization's product (or service) strengths and weaknesses (at least in terms of current profitability) as well as the likely cash flows. The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate. Relative market share This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of 'economies of scale' (a basic assumption of the Boston Matrix), it is assumed that these earnings will grow faster the higher the share. The exact measure is the brand's share relative to its largest competitor. Thus, if the brand had a share of 20 per cent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 per cent, however, the ratio would be 1:3, implying that the organization's brand was in a relatively weak position. If the largest competitor only had a share of 5 per cent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flow. If this technique is used in practice, it should be noted that this scale is logarithmic, not linear. On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is that the most stable position (at least in FMCG markets) is for the brand leader to have a share double that of the second brand, and treble that of the third. Brand leaders in this position tend to be very stable - and profitable The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective. Limitations 1. Viewing every business as a star, cash cow, dog, or question mark is overly simplistic. 2. Many businesses fall right in the middle of the BCG matrix and thus are not easily classified. 3. The BCG matrix does not reflect whether or not various divisions or their industries are growing over time.
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