Literal Thinking

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Stymied by the sacred cow

Posted by A Friend on 22 January 2009

BCG MatrixThe Boston Consulting Group (BCG) Growth-Share Matrix, or more simply known as the BCG Matrix, continues to be one of the more popular strategic management tools used today.

The BCG Matrix classifies business units or product portfolios into four distinct categories based on market growth and market share, measured against competitors.

In the diagram, various portfolios can be classified as dogs, question marks, stars, or cash cows. Cash cows are leaders in a mature (low growth) market, dogs are cash traps, question marks have the potential of becoming stars or dogs, and stars are the high maintenance high performers.

In simplest terms, organizations will have a mix of portfolios that fit into each of these quadrants. The idea is to retire the dogs; and make use of the cash cows to both promote question marks into new stars and continue to invest in stars until these become cash cows. The NetMBA site provides a good summary of the BCG Matrix, including some of its inherent limitations.

Our case today presents a situation where the BCG Matrix could have been applied effectively.

Over a period of 20 years, a family-owned business grew from being a small scale trader to becoming one of the biggest vendors of computer servers and peripherals in its region. This was mainly due to an exclusive distribution contract with Hewlett Packard (HP), one of the world’s leading computer manufacturers.

The company’s market dominance was, however, seriously threatened in the mid 1990s when its exclusive contract with HP expired. Not only did HP decide to sign distribution contracts with other vendors then, it also opened its own operations in the region.

The company had three main business streams at this time. Aside from still being the undisputed leader among HP resellers, it had also established an IT training arm with a good market reputation, and it was still the only company in the region providing re-calibration and other support services for HP products.

These three business streams were all cash cows: outright leadership or high market share in fairly mature segments. However, recognizing the longer-term possibility of losing market share because of increased competition, the company decided to diversify and opened its own consulting services arm.

The company correctly predicted a regional boom in ERP consultancy requirements, so it aggressively built an Oracle and SAP consulting practice. This initial investment saw the company pioneering the growth of ERP consulting in the region, where it became a clear market leader within just a two-year period.

Unfortunately, the company in its core was still a computer hardware vendor, with most of its senior executives having their performance and bonus schemes attached to volume selling of HP products. This led the company to lose sight of what should have been its strategic focus: utilizing its cash cows (computer hardware sales, calibration, and education services) to promote question marks (Oracle and SAP consulting practice) into stars.

Instead, bent on protecting its market share as a HP reseller, the company’s sales executives started offering its Oracle and SAP consulting services as cheap, value adding incentives for bulk hardware purchases. In the short term, this allowed the executives to continue to meet their sales quotas and earn their bonuses.

What they did, however, was also turn their biggest cash cow, computer hardware sales, into a very expensive star. This was always going to be difficult to maintain, considering the increased competition not only from other resellers, but from HP itself, its main product provider.

What the sales executives also inadvertently did was make the question marks, Oracle and SAP consulting, very expensive business units to maintain that provided very little real returns. And with resources having been re-allocated to protecting its share of the computer hardware market, the company was also not going to be able to sustain the momentum it built with its consulting businesses.

Soon, new competitors entered the ERP consulting market, and by virtue of its pioneering status, the company became a natural target for aggressive talent raids. This signaled the deterioration of the company’s consulting practice and not long after, the business units that had all the potential of becoming stars instead became dogs and had to be put down.

Meantime, the company continued to focus on protecting its share of the hardware sales market, even at the behest of its calibration and educational services units. But this was a battle it was never going to win, and it also very slowly lost its dominant market position. Perhaps realizing the inevitable, some of the company’s sales executives started leaving and sought better opportunities elsewhere.

With lost market share came reduced revenues and sliced profits. This significantly cut down the company’s ability to financially support its most expensive star, and it was just going to be a matter of time before its hardware sales business also becomes a dog. It eventually did, and with no other star prospects in sight, the company closed shop in 2005.

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