“Marketing strategists term this a harvest strategy and consider it a no-brainer” (Hamel & Prahalad, 1994:125). “Few current business concepts are more prone to oversimplification than the growth/share model, with its labelling of products or divisions or whole companies as ‘dogs’, ‘question marks’, ‘stars’ or ‘cash cows’” (Seeger, 1984:94). “An apparent disadvantage of the matrix was that it assumed that market share was reliable indicator of future profitability” (Calandro & Lane, 2007:30). The above three quotations all criticise the BCG growth/share matrix and its practicality as a competitive tool. This paper discusses the advantages and limitations of the matrix and its application for Apple Inc. as a competitive tool. It concludes that the BCG matrix does have some advantages but is not appropriate for all businesses industries and should not be used as a sole analysis model. In the fast paced competitive modern business world using just the BCG matrix for evaluating a company’s portfolio can have disastrous consequences.
The paper is divided into five parts. Starting with an introduction, it moves on to the concepts of corporate strategy, portfolio analysis and the portfolio models. The third part discusses some of the advantages and limitations of the BCG matrix. The fourth deals with the implications of the BCG matrix when applied to Apple Inc. ending with the conclusion.
Corporate Strategy, Portfolio Analysis and Portfolio Matrix Models
“Always to be best, and to be distinguished above the rest”. This quote from Homer the 8th Century Greek Poet epitomizes the aim of all organizations. This is where strategy comes in. “Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations” (Johnson, Scholes & Whittington, 2005:9). One of the ways of achieving this is through competitive strategy. According to Porter “competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors” (1980: 47). To achieve this, careful analysis of the external and internal environment is required. PESTLE and Porter’s Five Forces Model can be used for external analysis. For internal analysis the most commonly used is the seven S framework as well as SWOT analysis, value chain, value chain (supply) analysis and portfolio analysis. The result is greater understanding of the environment in which the business operates.
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Organizations operate under three levels of strategy. Corporate-level strategy, business-level strategy and operational or functional strategy. Corporate strategies deal with the organization as a whole while business strategy “focuses on how to compete in a particular industry or product-market segment” (Hofer & Schendel, 1978 cited in: Beard & Dess, 1981:667). Operational strategy is how the organization accomplishes the strategies set out in the first two using its various resources. For an organization to be profitable it is important to have effective strategies on all levels but a successful corporate strategy is crucial to the success of business and operational strategy.
The late 1960’s and early 1970’s saw many conglomerates diversifying into different fields. New divisions or (Strategic Business Units) were evolving. The problem management faced was of effectively managing all these diversified units. One strategy could not work for all SBUs as they all experience different competitor threats, market growth rates and market shares. This problem was solved by the creation of the portfolio analysis. “Portfolio strategy pertains to the mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage for the corporation” (Daft, 2008:249). The aim of the corporation is to have a balanced corporate portfolio, so that they can decide which activities or products to expand,introduce and which businesses to acquire or dispose off. Thus, “diversified company portfolios are the normal and natural business form for efficiently channelling investment into the most productive use” (Henderson, 1977:203).
The most common form of evaluating the corporate portfolios is the portfolio matrix models. Igor Ansoff, developed his Product-Market Growth Matrix in the 1950’s. He believed that “just to retain its relative position, a business firm must go through continuous growth and change” (Ansoff, 1957:113). He used four possible combinations of market penetration, product development, market development and diversification and plotted them on a 2×2 model. McKinsey & Co developed a matrix where the variables were market strength and competitive position. Bruce Henderson in the mid 70’s using the same matrix principle developed his BCG growth/share matrix model. It had the same 2×2 matrix but was based on relative market share and market growth and used cash flow and the experience curve as a criterion. Arthur D. Little developed another model which used the product life cycle. “These [latter] three matrices form the basis of the various portfolio models that have been widely used to structure the strategic planning process of the firm in the 1970’s” (Coate, 1983:47).
Since then there have been many matrices developed e.g. the GE model which uses ROI for assessing an investment opportunity and Shell which used a similar refined matrix evaluating business prospects along with the competitive position of the company. However, the most commonly used matrix by organizations is still Henderson’s BCG Growth/Share Matrix. It has to be taken into consideration however that “it is important to see these models as aids to decision making, not a replacement for management choice” (Hooley, Saunders & Piercy, 2004:64).
BCG Matrix – Advantages and Limitations
The BCG matrix plots SBUs by looking at the relationship between market growth and market share. Henderson divided the matrix into cash cows, stars, question marks and dogs and asserted that “only a diversified company with a well balanced portfolio can use its strengths to truly capitalize on its growth opportunities” (Henderson, 1970:37). To show the relative significance of the SBU, size is shown in circles which can be calculated either from assets employed or sale turnover.
The growth/share matrix gained immense popularity among large organizations with many SBUs. They could now use the matrix and decide which units to nurture, invest or divest. Its main advantage was its attractive presentation and easy to remember terms. Using only two variables it was easy and quick to make as well as being versatile enough to be applied to different brands, products, customers and distribution channels. The matrix became popular with managers who preferred the idea of cash flow implications rather than profits which are more in the accounts domain. The PIMS database which was developed at the General Electric in the 60’s and further developed by the Management Science Institute at Harvard in the early 70’s also supported this view. Another reason for the BCGs popularity was fashion. “It is an idea that is well understood and liked by many mangers and therefore one that allows communication between headquarters and strategic business units (SBUs). It has become part of the common business vocabulary” (Hooley et al, 2004:71). Undoubtedly, the simplicity of the matrix was its major advantage but it had its limitations as well.
One of the major problems of the BCG matrix were the claims made by the developers that “such a single chart with a projected position five years out is sufficient alone to tell a company’s profitability, debt capacity, growth potential, dividend potential and competitive strength” (BCG, 2008:3). According to them the matrix would provide the complete solution but this is an erroneous belief. It does not provide the perfect solution for evaluating a company’s portfolio. This is also affirmed by Hooley et al who say that “if it is used it should be audited carefully to ensure its validity rather than followed blindly” (2004:2). Furthermore, there is no set definition of what an SBU is or what the definition of a market is e.g. a product might be a leader in a local market niche but at the same time a small player in the global market.
The matrix is also difficult to plot accurately using market share and market growth. Organizational strength cannot be measured by market share alone, it has to take into consideration other strengths e.g. financial strength, brand equity, exclusive distribution channels or unique product features etc. In the same way market growth is only one aspect of market attractiveness. Using the cash flow resources for evaluation can also be perceived as a flaw. “In times of high inflation, cash flow may indeed be the major constraint on a company’s action range, but other capabilities such as appropriate managerial talent, expertise, know how, skilled labor and organizational flexibility are also important” (Derkinderen & Crum, 1984:132).
Also, according to Henderson “we should kick the dogs, cloister the cows and throw our money at stars. Only the question mark category demands management thought” (Seeger, 1984:94). This assumption can be criticised as being over simplistic. Dogs, should not be divested off without thought. They can retain that important portion of market share keeping competitors at bay, and also an organization who has a dominant product may deliberately introduce a dog into its portfolio for the same purpose. Sometimes, “occasionally it is possible to restore a dog to viability by a creative business segmentation strategy, rationalizing and specializing the business into a small niche which it can dominate” (Hedley cited in Wit & Meyer, 2004:322).
The human aspects and behavioural implications of the matrix are also overlooked e.g. how managers of SBUs categorized as cash cows react when their hard earned cash is given to other SBUs, or of members within the organization whose brainchild is divested? This can affect the morale of management and may result in quick turnover of disgruntled staff which is not beneficial to the organization. The simplicity of the matrix where an advantage can also be harmful since competitors can easy identify the strategy being used and use it to their advantage. An example of this is the successful infiltration of the Japanese in the UK motorcycle industry. Another limitation as Coate says is that “independent strategies can’t be defined for all possible business units” (1983:52) i.e. a business unit producing multiple products cannot invest in one profitable product and ignore the others. Either they all get investment of all of them have to be divested.
Despite the fact that the matrix’s limitations far outweigh its benefits, it is still frequently used by organizations and in certain situations can be used as an effective competitive tool as well. The important thing is that it should not be used as the sole analysis method for decision making. Even the Boston Consulting Group has in recent years admitted that market share by itself does not necessarily mean competitive strength. “In a series of articles in the Financial Times in November 1981, Michael Gould of the BCG maintained that it is valuable to be the market leader for branded goods with the advantage of price leadership and the ability to spread marketing and distribution costs over a high volume; but economies of scale may be achieved even by a firm that is not the largest producer in the industry (Johnson et al, 2005:90). It is though, fair to say that “the simplicity of the Box makes it operationally useful and its ease of understanding makes it a useful operational tool provided its limitations are kept clearly in mind” (Hooley et al, 2004:87).
Apple Inc. & The BCG Matrix
1: Profile & Strategy:
Apple is a global company operating in the technology industry which designs, manufactures and markets personal computers, portable music players and mobile communication devices. It was established in 1977 as Apple Computer Inc. specialising in personal computers. Operating in the ever changing high growth market and extreme competition, Apple began losing its market share to its major competitors including IBM and Hewlett Packard as well as the entry of numerous other PC manufacturing companies determined to enter the highly profitable market.
Apple was faced with a weakening Mac line, stiff competition and demand for better value by the shareholders. There was need for a drastic change in strategy and product diversification was chosen as a mean of entering other consumer electronic market segments. In the Swot Analysis (fig 2) carried out by DataMonitor, we can clearly see their opportunities in the smart phones and MP3 player markets. In January 2007, the company changed its name to Apple Inc. as they diversified into other products.
Currently, Apple Inc. in its portfolio owns three SBUs. The first is the Mac range which comprises of desktop and notebook computers along with their accessories. Secondly, it offers music products and services which include ipod, itunes etc. The third SBU consist of the mobile communication devices i.e. iphone.
2. BCG Matrix and Apple’s Product Portfolio:
In the current competitive industry using the BCG matrix offers some benefits for Apple but there are disadvantages too. The flexibility that the matrix offers i.e. it can be used for plotting product portfolio of a firm can be beneficial to Apple. To introduce new products and revamp current ones a company needs vast amounts for investment. Apple needed money for R&D which is a major expenditure for companies operating in the technology industry. “The Company believes continual investment in research and development is critical to the development and enhancement of innovative products and technologies” (Apple Investor Relations, 2007:1). Between 2005 and 2007, Apple spent $535 million dollars on R&D. Part of this money was obtained by withholding dividend payments for two years between 2006 and 2007. The rest was from divesting within the Mac range. Using the BCG matrix, the decision of which products to invest in and which to divest would have been pretty straigtforward.
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Market growth for technological products very rarely slows long enough for a product to be classified as a cash cow. Therefore, most of these products would be classified either as a star, question mark or dog. At the time when Apple changed its strategy it had a large number of computers in its product range which it needed to reduce. The whole of the Mac Range would have been plotted with a few top selling products as stars which would have been carrying the whole load of the company with its profits. A few question marks which had low market share but were still making a profit which was being again utilized internally, but had low chances of becoming a star and quite a large number of products and their associated accessories and software would have been plotted in the dogs quadrant. By divesting in the dogs, Apple would have undoubtedly lost some market share but in introducing new products their aim was to attain market share in other markets. Spending huge amounts on R&D, Apple updated and introduced fewer but better computers like ibook and imac into its product line in direct competition with their competitors.
At the same time as updating its product line for the Mac range the ipod range can also be plotted on the matrix. The ipod currently holds 77% of the global market share , but to keep up with the current high demand Apple almost every year introduces a new version with more features and divest the oldest version which by that time has moved to the dog quadrant. It also uses the same strategy for the iphone range. Even though iphone is a relative new offering from Apple, it is already facing competition and to maintain and increase its market share Apple keeps introducing newer versions.
Therfore, even though the BCG matrix does offer Apple benefits for managing its product portfolio, it negates one of the main declarations of Hendrix that “only a diversified company with a well balanced portfolio can use its strengths to truly capitalize on its growth opportunities” (1970:37). For a well balanced portfolio, a company must have cash cows, however, with Apple and its products, the market growth rate never slows enough for a product to become a cash cow. Most of its products are in the star or question mark quadrants, and some are dogs which are then divested. Apple however sometimes does tend to retain some dogs, even though Henderson believed that “pets are not necessary” (1970:37), and should be divested off, Apple keeps some of its older versions of products because they retain a small share of the market which might be vital to the companies overall market share.
3. BCG Matrix and Apple’s SBU Portfolio:
However using the BCG matrix with Apple’s corporate portfolio poses quite a few problems. First of all the developers claims that “such a single chart with a projected position five years out is sufficient alone to tell a company’s profitability, debt capacity, growth potential, dividend potential and competitive strength” (BCG, 2008:3), cannot be applied to Apple Inc. Apple operates in a fast changing environment where the introduction of one product can radically change the competitive strength and market share of a company. An example is Dell Computers who in 2007 lost its market leader title to HP. Within one year HPs market share increased dramatically to 17.6% while Dells managed only 13.9%. Apple comes third with a global market share of 2.6%, but that can change rapidly. Also for Apples iphone the current market share is only 6.5% compared to Blackberry which holds 41% and Palm at 9%, but the iphone is relatively new. It was introduced in July 2007 and immediately took over 28% market share of the US smart phone industry showing competitive strength of the product. Apple with iphone is challenging the market leaders and its market share is increasing every quarter. Therefore, a five year forecast cannot be accurate for analysing its future position.
Also, however, if we plot the Mac computer range using market share and market growth rates, it would be positioned in the question mark quadrant. But that would make analysis difficult since two products of the mac range i.e. the ibook and imac are stars but as a SBU plotted in question marks. To manage all the products together would be difficult since some products require investment and some do not, according to the matrix you plan a unit strategy not an individual one.
Once again Henderson’s criteria of having a balanced portfolio for success would not be applicable in the SBU matrix either. Currently, Apple’s ipod business unit is a market leader with majority market share and high market growth and would be plotted as a star, and the iphone and mac ranges would be placed in the question mark quadrant. It does not have any cash cows or dogs. A successful organization has to have cash cows from where cash flow is diverted into stars and question marks. The ipod sales at present is generating enough cashflow, not only to sustain itself but the other SBUs as well. If we blindly believe Henderson’s assumption then logically Apple should be in dire trouble whereas it is actually increasing its market share and cash flow with all three units.
Another drawback of using the BCG matrix would be giving its competitors easier understanding of its strategy. With the company’s annual reports and market shares available publically, if competitors like HP and Blackberry know that Apple is using the BCG matrix as the sole analysis method they can easily construct a matrix for Apple and figure out its future strategies.
Therefore, even though the BCG matrix could be useful to Apple Inc. for analysing its products strength and could be used as a decision tool, it would not be useful for future decision concerning its SBUs. It has to be admitted though that the BCG in its simplicity maybe can be more effective in another industry. It can be used as an internal analysis method but using it as the sole decisions making analysis method could be hazardous for the company. This is further confirmed by Seeger who says that “no management model can safely substitute for analysis and common sense” (1984:97). Apple would benefit using the SID techniques, risk analysis e.g. the monte carlo risk analysis model as well as personal experience and judgement before making any future decisions for its strategic business units.
We have thus seen how as a competitive tool the BCG matrix has its advantages and disadvantages. The main advantage being its simplicity and ease of plotting, “but elegance and simplicity in a theory’s presentation cannot guarantee sanity in its use” (Seeger, 1984:93). At the same time the matrix has its disadvantages in not having clear boundaries of what a market is and the criterion for market share and growth and the effect of external factors on it. To gain a competitive advantage a company aims towards “making an outlay of cash now in the expectation of extra cash coming in the future” (Dixon, 1994:21). For that they need to be in a competitive position and know which units to invest in and which to divest. BCG matrix makes this decision easier for managers but it has to be utilized in a carefully evaluated way.
The matrix does give an indication of SBUs performance in the current market but it is not a model that should be followed without use of other methods of analysis and use of judgment by managers. This can be summarized in the words of Porter who affirms this by saying that “the growth/share matrix can be one component of a competitor analysis when combined with other kinds of analysis” (Porter, 1980:364) or Hooley et al who say that “it is clearly inadequate as a complete solution, but is of undisputed value as a starting point in many analyse” (2004:72). Therefore, not begrudging BCG matrix the benefits it offers mangers; it is defective as a sole analysis model for competitive strategy and still needs careful evaluation before any decision can be finalized.
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