Creative Bugs - Marketing Lesson

BCG Growth-Share Matrix

Relative market share. One of the dimensions used to evaluate business portfolio is relative market share. Higher corporate’s market share results in higher cash returns. This is because a firm that produces more, benefits from higher economies of scale and experience curve, which results in higher profits. Nonetheless, it is worth to note that some firms may experience the same benefits with lower production outputs and lower market share.

Market growth rate. High market growth rate means higher earnings and sometimes profits but it also consumes lots of cash, which is used as investment to stimulate further growth. Therefore, business units that operate in rapid growth industries are cash users and are worth investing in only when they are expected to grow or maintain market share in the future.

There are four quadrants into which firms brands are classified:

Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing market. In general, they are not worth investing in because they generate low or negative cash returns. But this is not always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other brands or SBUs or simple act as a defense to counter competitors moves. Therefore, it is always important to perform deeper analysis of each brand or SBU to make sure they are not worth investing in or have to be divested.

Strategic choices: Retrenchment, divestiture, liquidation

Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as much cash as possible. The cash gained from “cows” should be invested into stars to support their further growth. According to growth-share matrix, corporates should not invest into cash cows to induce growth but only to support them so they can maintain their current market share. Again, this is not always the truth. Cash cows are usually large corporations or SBUs that are capable of innovating new products or processes, which may become new stars. If there would be no support for cash cows, they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment

Stars. Stars operate in high growth industries and maintain high market share. Stars are both cash generators and cash users. They are the primary units in which the company should invest its money, because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become cash flows. This is especially true in rapidly changing industries, where new innovative products can soon be outcompeted by new technological advancements, so a star instead of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market development, product development

Question marks. Question marks are the brands that require much closer consideration. They hold low market share in fast growing markets consuming large amount of cash and incurring losses. It has potential to gain market share and become a star, which would later become cash cow. Question marks do not always succeed and even after large amount of investments they struggle to gain market share and eventually become dogs. Therefore, they require very close consideration to decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product development, divestiture

How to perform BCG matrix analysis?

Although BCG analysis has lost its importance due to many limitations, it can still be a useful tool if performed by following these steps:

• Step 1. Choose the unit
• Step 2. Define the market
• Step 3. Calculate relative market share
• Step 4. Find out market growth rate
• Step 5. Draw the circles on a matrix

Step 1. Choose the unit. BCG matrix can be used to analyze SBUs, separate brands, products or a firm as a unit itself. Which unit will be chosen will have an impact on the whole analysis. Therefore, it is essential to define the unit for which you’ll do the analysis.

Step 2. Define the market. Defining the market is one of the most important things to do in this analysis. This is because incorrectly defined market may lead to poor classification. For example, if we would do the analysis for the Daimler’s Mercedes-Benz car brand in the passenger vehicle market it would end up as a dog (it holds less than 20% relative market share), but it would be a cash cow in the luxury car market. It is important to clearly define the market to better understand firm’s portfolio position.

Step 3. Calculate relative market share. Relative market share can be calculated in terms of revenues or market share. It is calculated by dividing your own brand’s market share (revenues) by the market share (or revenues) of your largest competitor in that industry. For example, if your competitor’s market share in refrigerator’s industry was 25% and your firm’s brand market share was 10% in the same year, your relative market share would be only 0.4. Relative market share is given on x-axis. It’s top left corner is set at 1, midpoint at 0.5 and top right corner at 0 (see the example below for this). 

Step 4. Find out market growth rate. The industry growth rate can be found in industry reports, which are usually available online for free. It can also be calculated by looking at average revenue growth of the leading industry firms. Market growth rate is measured in percentage terms. The midpoint of the y-axis is usually set at 10% growth rate, but this can vary. Some industries grow for years but at average rate of 1 or 2% per year. Therefore, when doing the analysis you should find out what growth rate is seen as significant (midpoint) to separate cash cows from stars and question marks from dogs.

Step 5. Draw the circles on a matrix. After calculating all the measures, you should be able to map your brands on the matrix. You should do this by drawing a circle for each brand. The size of the circle should correspond to the proportion of business revenue generated by that brand.

Example

Corporate ‘A’ BCG matrix
Brands	Revenues	% of corporate revenues	Largest competitor’s market share	Your brand’s market share	Relative Market Share	Market Growth Rate
1	$500,000	54%	25%	25%	1	3%
2	$350,000	38%	30%	5%	0.17	12%
3	$50,000	6%	45%	30%	0.67	13%
4	$20,000	2%	10%	1%	0.1	15%

Nike Case Study

Nike

THE 'SWOOSH' - IT'S EVERYWHERE! JUST for fun, try counting the swooshes whenever you pick up the sports pages, watch a tennis match or basketball game, or tune into a televised golf match. Nike has built the ubiquitous swoosh (which represents the wing of Nike, the Greek goddess of victory) into one of the best-known brand symbols on the planet. The symbol is so

well known that the company routinely runs atis without even mentioning the Nike name. In fact, you may be surprised to find that your latest pair of Nike shoes, or your Nike hat or T-shirt, carries no brand identification at all other than the swoosh.

The power of its brand and logo speaks loudly to Nike's superb marketing skills. The company's now-proven strategy of building superior products around popular athletes has changed the face of sports marketing for ever. Nike spends hundreds of millions of dollars eaeh year on big-name endorsements, splashy promotional events and lots of attention-getting ads.

Over the years, Nike has associated itself with some of the biggest names in sports. No matter what your sport, the chances arc good that one of your favourite athletes wears the Nike swoosh. Nike knows, however, that good marketing rnns much deeper than promotional hype and promises. Good marketing means consistently delivering real value to customers. Nike's initial success resulted from the technical superiority of its running and basketball shoes, pitched to serious athletes who were frustrated by the lack of innovation in athletic equipment. To this day, Nike leads the industry in product development and innovation. But Nike gives its customers more than just good athletic gear. As the company notes on its Web page (www.nike.com): 'Nike has always known the truth - it's not so much the shoes but where they take you.' Beyond shoes, apparel and equipment. 

Nike markets a way ot' life, a sports culture, a 'Just do it!' attitude. When you lace up your Nikes, you link yourself, in at least some small way, with all that Nike and its athletes have come to represent - a genuine passion for sports, a maverick disregard for convention, hard work and serious sports performance. Through Nike, you share a little of Michael Jordan's intense competitiveness. Tiger Woods' cool confidence, Jackie Joyncr-Kersee's gritty endurance, Ken Griffey, Jr's selfless consistency or Michael Johnson's blurring speed. Nike is athletes, athletes are sports, Nike is spans.

Nike's marketers build relationships - between Nike, its athletes and customers. For example, a recent ad in a tennis magazine shows only a Nike tennis shoe with the red swoosh and a freephone number. Readers who call the number hear tennis favourite Jim Courier talking drums with his favourite drummer, Randy (Joss of Toad the Wet Sprocket. (Jail the number in a similar basketball ad and you'll overhear a humorous phone conversation in which Father Guido Sardueci tries to get Michael Jordan to invest in his newest invention, edible bicycles.

Nike seems to care as much about its customers' lives as their bodies. It doesn't just promote sales, it promotes sports for the benefit of all. For example, its 'If you let me play' campaign lends strong support to women's sports and the many benefits of sports participation for girls and young women. Kike also invests in a wide range of lesser-known sports, even though they provide less lucrative marketing opportunities. Such actions establish Nike not just as a producer of good athletic gear, but as a good and earing company. Taking care of customers has paid off handsomely for Nike. Over the past decade, Nike's revenues have grown at an incredible annual rate of 21 per cent; annual return to investors has averaged 47 per cent. Over 1996 alone, total revenues increased by 36 per cent. Nike, with 27 per cent share, twice that of nearest competitor Reebok, flat-out dominates the world's athletic footwear market.

Nike founder and chief executive Phil Knight has brashly predicted that Nike will double its sales within the next five years. To meet this ambitious goal in the face of a maturing US footwear market, Nike is moving aggressively into new product categories, sports and regions of the world. In only a few years, Nike's sports apparel business has grown explosively, now accounting for nearly a quarter of Nike's 88 billion in yearly sales. And Nike is slapping its familiar swoosh logo on everything from sunglasses and footballs to batting gloves and hockey sticks. Nike has recently invaded a dozen new sports, including baseball, golf, ice and street hockey, inline skating, wall climbing, and hiking and other outdoor endeavours.

Still, to meet its goals, much of Nike's growth will have to come from overseas. And to dominate globally, Nike must dominate in football, the world's most popular sport. Nike has previously all but ignored the multibillion dollar world football market, which currently accounts for only 3 per cent of its sales. Now, soccer is Nike's top priority. In typical fashion, Nike has set World Cup 2002 as its deadline for becoming the world's no. 1 supplier of football boots, clothing and equipment.

Elbowing its way to the top by 2002 won't be easy. World football has long been dominated by Adidas, which claims an 80 per cent global market share in football gear. Nike will have to build in just a few years what Adidas has built over the past fifty. Employing classic in-your-face marketing tactics, Nike is spending hundreds of millions of dollars in an all-out assault on competitors. Its open-wallet spending has dazzled the football world and its vast resources are rapidly changing the economics of the game. For example, it recently paid a record-setting $200 million over ten years to snatch sponsorship of the World Cup champions, Brazil's national team, from Umbro.

l, winning in worldwide football, or in anything else Nike does, will take more than just writing fat cheques. Some Nike watchers fear that Nike's massive global expansion, coupled with its entry into new sports and products, will result in a loss of focus and overexposure of the Nike brand name.

They worry that the swoosh could suddenly become imhip. To prevent this, Nike will have to deliver worldwide a consistent image of superior quality, innovation and value compared to its rivals. It will have to earn respect on a country-by-country basis and become a part of the cultural fabric of each new market.

Competitors can only hope that Nike will overreach, but few are counting on it. For now, most can only sit back and marvel at Nike's marketing prowess. As for football, rival Puma sees Nike's taeties as heavy handed but has little doubt that Nike's superb marketing will prevail. Its president states flatly, 'Nike will control the soccer world.'1
            
                                      

            

QUESTIONS

You should attempt these questions only after completing your reading of this chapter

1. What do you understand by the term 'marketing'?

2. What would you consider to be Nike's 'superb marketing skills'?

3. Why does Nike require these skills to compete in the marketplace?

4. Why does Nike spend hundreds of millions of dollars on promoting its brand and logo?

5. Who are Nike's consumers? What might their needs be?

6. Show how marketing principles and practices will enable Nike to satisfy these needs, bearing in mind the diverse range of product and geographic markets die company operates in.