BCG matrix and SWOT analysis for the Strategic Business Unit UEN
The Growth - Participation Matrix (BCG)
During the 1960s, several techniques were developed to analyze the operations of a diversified company and see it as a business portfolio. These techniques provided a frame of reference to categorize the different businesses of a company and determine their implications in terms of resource allocation. We are going to outline one of the most used techniques, which is identified as the creation of The Boston Consulting Group (BCG): the growth-participation matrix.
The growth - participation matrix is based on two main dimensions:
• The industry growth rate, which indicates the annual growth rate of the industry market to which the company belongs.
• Relative market share, which refers to the Strategic Business Unit's market share in relation to its most important competitor. It is divided into high and low and is expressed on a logarithmic scale.
The concept of Strategic Business Unit (SBU) appears here, which has three characteristics:
• It is a single business of the company or a set of its interrelated businesses, which the company can plan separately from the rest of the company.
• Has its own competitors
• The Unit is in charge of a manager responsible for its operation and its economic results, to whom the home base assigns strategic planning objectives and appropriate resources.
The growth-participation matrix seeks to establish two aspects:
• The competitive position of the Strategic Business Unit within its industry.
• The net cash flow necessary to operate the SBU.
The growth-share matrix starts from the principle that the experience curve is operating and that the company with the largest market share is both the leader in low total costs.
The figure shows a growth-participation matrix, divided into four quadrants. The idea is that each SBU that is located in one of these quadrants will have a different cash flow position, a different administration for each of them, and a position of the company in terms of how it should treat its portfolio. The UEN's are categorized according to the quadrant where they are located in stars, question marks, dairy cows and dogs. Its characteristics are as follows:
Stars
• High relative participation in the market
• High growth market
• Consumers of large amounts of cash to finance growth
• Significant profits
Question Marks (also called Wild Cats or Problem Children)
• Low market share
• Markets growing rapidly
• They demand large amounts of cash to finance their growth
• Weak cash generators
• The company must evaluate if it continues to invest in this business
Milky cows
• High market share
• Slow growing markets
• They generate more cash than they need to grow in the market
• Can be used to create or develop other businesses
• High profit margins
Dogs
• Low market share
• Slow growing markets
• They can generate little profit or sometimes loss
• Generally they must be restructured or eliminated
With the UEN's located within the growth-participation matrix, the next step that the company takes is to structure its businesses, sustain them, milk them or eliminate them. The analysis of the UEN's should not be done in a static way. The scenario must be dynamic to see where the SBUs were in the past, where they are now and where they are expected to be in the future. UENs with a future have a life cycle: they start out as question marks, then become stars, then become dairy cows and at the end of their life they become dogs.
The growth-participation matrix is fundamentally a useful diagnostic tool to establish the competitive position of a business, but it is from there when the company enters another phase and with other analysis systems to determine the strategy that its UENs should follow. s.
The Market Attractive Matrix - Business Position (3 × 3)
In the 1960s it was known as the three-by-three matrix because it is divided into nine quadrants distributed in three zones (High, Medium and Low). Today it is known more as the General Electric approach or as the market attractiveness-competitive position matrix of the Strategic Business Unit (UEN), an approach that belongs to Portfolio Techniques for the analysis of competition.
The graph shows a model of this matrix, where the SBUs are classified with respect to two main dimensions, for which the company must identify the factors that make them up, as will be seen below:
Industry Market Appeal
It is the horizontal axis. The factors that can make up this dimension may be the following:
• Size of the market
• Prices
• Market growth
• Market Diversity
• Intensity of Competition
• Industry Profitability
• Technological level
• Environmental impact
• Political, social, legislative, economic environment
Competitive Position of the Strategic Business Unit
It is the vertical axis. The factors that can make up this dimension are the following:
• Market share
• Market share growth
• Unit costs
• Distribution channels
• Suppliers capacity
• Quality of the product or service
• Brand image
• Productive capacity
• Management capacity
• Structure of the competition
• Strengths and weaknesses of the UEN
• Technological level
• Performance in research and development
How to locate the UEN in the matrix
The analysts mark within the quadrants of the matrix a point that represents the intersection of the total values obtained from the valuation tables. Around this point they draw a circle that represents the market of the industry where the UEN competes. The area of this circle will be given a relative size, compared to the size of the markets of the other SBUs represented in the matrix, which expresses the relevance of that market. Then, the analysts will draw within each circle, a shaded triangle that represents the market share of the SBU within the market of its industry.
Depending on where the SBU is located within the parent company, the company must invest / grow, maintain a balanced position between the generation and use of funds, or milk or withdraw.
Both the growth-participation matrix and the attractive-position matrix are used to contribute to the diagnosis of the weaknesses, opportunities, strengths and threats that the UEN has, that is, the internal and external situation of the UEN in the SWOT analysis (SWOT) and to evaluate the allocation of resources to be provided. These matrices should not be used to display the strategic action plans that we have conceived for the Business Units in the quadrants, nor are they tools to replace these plans. Regarding these techniques, it must also be taken into account that they were conceived as inextricably tied to the concept of the experience curve.
Limitations of this technique
• The selection of the factors of each dimension, their weight and qualification, is subject to negotiation and commitment processes between analysts from different functional areas of the company. Consequently, it has a large dose of subjectivity and can be manipulated to produce political results by locating a UEN within the matrix.
• Subjectivity and commitments can mask SBUs with mediocre performances and several SBUs will cluster towards the middle of the matrix, making the planning process difficult.
• The UEN's that are located in the lower quadrants of the matrix and that are generating losses may be eliminated, even if they provide essential complementary services for other UEN's.
• In general, the models used in portfolio analysis techniques do not show the synergy that can exist between the SBUs, therefore decision-making based only on these tools is rather unwise.
SWOT Analysis
SWOT (SWOT) is the acronym used to refer to an analytical tool that will allow you to work with all the information you have about your business, useful to examine your Weaknesses, Opportunities, Strengths and Threats.
This type of analysis represents an effort to examine the interaction between the particular characteristics of your business and the environment in which it competes. SWOT analysis has multiple applications and can be used by all levels of the corporation and in different analysis units such as product, market, product-market, product line, corporation, company, division, strategic business unit, etc.). Many of the conclusions obtained as a result of the SWOT analysis may be of great use to you in the market analysis and in the marketing strategies that I designed and that qualify to be incorporated into the business plan.
The SWOT analysis should focus only on the key factors for the success of your business. It should highlight internal differential strengths and weaknesses by objectively and realistically comparing it with the competition and with the key opportunities and threats in the environment.
This means that the SWOT analysis consists of two parts: one internal and one external.
• The internal part has to do with the strengths and weaknesses of your business, aspects over which you have some degree of control.
• The external party looks at the opportunities offered by the market and the threats that its business must face in the selected market. Here you have to develop your full capacity and ability to take advantage of those opportunities and to minimize or nullify those threats, circumstances over which you have little or no direct control.
Strengths and weaknesses
Consider areas such as the following:
• Resource Analysis: Capital, human resources, information systems, fixed assets, intangible assets.
• Analysis of Activities: Management resources, strategic resources, creativity
• Risk Analysis: In relation to the resources and activities of the company.
• Portfolio Analysis: The consolidated contribution of the different activities of the organization.
Ask yourself questions like these:
• What are the five to seven areas where you think you outperform your main competitors?
• What are the five to seven things where you think your competitors outperform you?
When evaluating the strengths of an organization, keep in mind that these can be classified as follows:
1. Common Organizational Strengths: When a certain strength is possessed by a large number of competing companies. Competitive parity occurs when a large number of competing companies are able to implement the same strategy.
2. Distinctive Strengths: When a certain strength is owned only by a small number of competing companies. Companies that know how to exploit their distinctive strength generally achieve a competitive advantage and earn financial returns above the industry average. Distinctive strengths may not be imitable when:
• Its acquisition or development may depend on a unique historical circumstance that other companies cannot copy.
• Its nature and character may not be known or understood by competing companies. (It is based on complex social systems such as business culture or teamwork).
3. Strengths of Imitation of Distinctive Strengths: It is the ability to copy the distinctive strength of another company and turn it into a strategy that generates economic profit.
Competitive advantage will be temporarily sustainable, when it subsists after all attempts at strategic imitation by the competition cease.
When evaluating the weaknesses of the organization, keep in mind that you are referring to those that prevent the company from selecting and implementing strategies that allow it to develop its mission. A company has a competitive disadvantage when it is not implementing strategies that generate value while other competing firms are.
Opportunities and Threats
Organizational opportunities are found in those areas that could generate very high performance. Organizational threats are in those areas where the company finds it difficult to achieve high levels of performance.
Consider:
• Environment Analysis: Structure of your industry (Suppliers, distribution channels, clients, markets, competitors).
• Stakeholders: Government, public institutions, unions, unions, shareholders, community.
• The environment seen in a broader way: demographic, political, legislative aspects, etc.
Ask yourself:
• What really are the biggest threats you face in the environment?
• What are the best opportunities you have?
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