The Matrix Quantified

In this chart, growth rate and relative competitive position are plotted on continuous scales. Each circle in the display represents a single business or business segment, appropriately defined.

To convey an impression of the relative significance of each business, size is indicated by the area of the circle, which can be made proportional to either turnover or assets employed.

Relative competitive position is plotted on a logarithmic scale, in order to be consistent with the experience curve effect, which implies that profit margin or rate of cash generation differences between competitors will tend to be related to the ratio of their relative competitive positions (market shares).

A linear axis is used for growth, for which the most generally useful measure is volume growth of the business concerned, as in general rates of cash use should be directly proportional to growth. The lines dividing the portfolio in four quadrants are inevitably somewhat arbitrary.

As one of the BCG Matrix's original purposes was to help firms decide which businesses should grow and which businesses should exit, the matrix has been used in corporate strategic decisions.

Ge Business Screen

Another and more complex business portfolio framework was developed by General Electric with the help of McKinsey and Company, a consulting firm. There are nine cells in the GE Business Screen.

The two composite values for Competitive Position and Industry Attractiveness are the plotted to locate that business's position in the matrix. On it, both industry attractiveness and competitive position are composite measures determined through an analysis and weighting of a variety subfactors, including rate and market share. Some of the criteria used to determine industry attractiveness and business strength are shown in Table 4-3.

Calculation of a score for Industry Attractiveness per product or strategic business unit is a five-step process:

* First, select the criteria used to evaluate the industry. Some of the criteria used to determine industry attractiveness and business strength are shown in Table 4-3.

* Second, weight each criterion in accordance with the strategic decision makers' judgment of the importance of the criterion to the firm's objectives.

* Third, rate the industry on each of the criteria selected in the first step, usually with a scale ranging from 1 to 5.

* Fourth, multiply the weights from the second step by the ratings from the third step to achieve a weighted score per criterion.

* Fifth, sum the weighted scores to find a total attractiveness score for the industry. The area of each circle is proportional to the size of the industry, and the size of the pie slice within each circle reflects the business's market share.

The following steps outline a methodology for using the industry attractiveness-business strength matrix:

* Step 1: Definition of critical internal and external factors. The internal factors are those which are controllable by the firm. The are mainly the functional activities that can be deployed by business units to succeed against competition. The critical external factors, that are essentially uncontrollable by the firm, are basic characteristics of the industry and competitive structure in which the business operates and a host of other factors, such as socio- political, economic, legislative, regulatory, and demographic factors.

* Step 2: Assessment of external factors. Once external factors are identified, we have to determine each contributes to the attractiveness of the industry to which the business belongs each factor is grated according to a five - point scale:

--Extremely unattractive
-Mildly unattractive

E Even attractive
+ Middle Attractive
++ Extremely attractive

In the quantitative approach a weighted average is computed on the basis of assigned weight and ratings for each factor. Calculation of a score for Industry Attractiveness per product or strategic business unit is a five- step process.

First, select the criteria used to evaluate the industry. Some of the criteria used to determine industry attractiveness and business strength are shown in Table 4-3.

Second, weight each criterion in accordance with the strategic decision makers' judgment of the importance of the criterion to the firm's objectives.

Third, rate the industry on each of the criteria selected in the first step, usually with a scale ranging from 1 to 5.

Fourth, multiply the weights from the second step by the ratings from the third step to achieve a weighted score per criterion.

Fifth, sum the weighted scores to find a total attractiveness score for the industry.

* Step 3: Assessment of internal factors. Again a five-point scale is used (Figure 4-11). The five points of the scale correspond to:

--Severe competitive disadvantage,
-Mild competitive standing,
E Equal competitive standing,
+ Mild competitive advantage, and
++ Great competitive advantage.

Business Strength/Competitive Position is mathematically computed in a similar fashion to the one described in Step 2.

* Step 4: Positioning of the Business in the attractiveness-strength matrix. In the growth-share matrix approach popularized by the Boston Consulting Group (BCG) a different procedure is used. For example Hofer and Schendel use a graphical display in which the areas of the circles are proportional to the sizes of the various industries and the business's current market share in that industry is represented by a shaded pie-shaped wedge.