Resource Sharing and the BCG Matrix

A BCG Matrix serves to graphically illustrate the cash flow relationships of different divisions within a multidivisional firm. A BCG matrix can only be created if competitors within the industry report financial information by segment, (David, 2011, p. 185). For each industry the relative market share is calculated by comparing the company’s market share with that of their largest rival, and the industry growth rate is calculated by comparing the company’s financials by segment with those of their competitors. The matrices are therefore reliable to the extent that competitors within the various industries of a multidivisional organization report financial information by segment and also to the extent that all of the divisions within a company are represented. If all of their divisions are not represented within the matrix, they cannot accurately report on these cash flow relationships.
Generally organizations fail to support high market share products with low sales growth potential, or “cash cows”, preferring to rely upon them as income generating products. Alternatively they extensively fund products with low market share and high sales growth potential, or “question marks”, in the quest to turn them into “stars”. However, context is the key when interpreting a BCG matrix. It is dangerous for organizations to strategize according to what might be an oversimplified BCG matrix, however if the divisions do in fact accurately represent the entity, then profits generated by products in one division can be used to fund the development and introduction of products in another division.
Although one division can be used to generate cash flow for another division, one should be cautious in failing to support growth in both divisions. John A. Seeger states that in increasingly competitive economies no company should fail to support growth from a unit simply because it is not supposed to grow, (1984). Seeger also states that the necessary investment in high market share product divisions for these divisions to continue producing creatively is generally small and that no company can afford to reject good ideas in times of diminished economic growth.
David Collis and Cynthia Montgomery outline five factors that a division’s resources must have before they are strategically conducive to sharing; 1. The resource must be hard to copy, 2. It must depreciate slowly, 3. You must be in control of its value, 4. It cannot be easily substituted, and 5. It must be superior to your competitors, (2008). I would utilize these five factors to perform an analysis of the products produced by the electronics division before making a decision to invest too heavily to determine to what extent the organization should expect to rely upon these products for future growth. Comparatively an analysis of these five factors for the products in the appliances division would serve to determine how reliable this division is for supporting the development of the electronics division. Additionally, I would evaluate the research and development and the marketing budgets for both of the divisions to ensure that the resources are appropriately distributed, although there may be little industry sales growth potential in the appliance division, development and diversification of the product lines may be important here and it could still potentially be important to keep this division energized in order to maintain the high market share. Through resource sharing the question marks in the electronics division can become stars, but it is a balancing act in that if it fails to realize enough market share and industry growth to recoup the development and marketing budgets, and as technology changes quickly, what you could end up with an expensive dog.

References:

Collis, D. & Montgomery, C. (2008, July-August). Competing on resources. Harvard Business Review, 86 (7/8), 140-150. Retrieved from EBSCOhost Business Source Complete.
David, F. R. (2011). Strategic management: concepts and cases (13th ed.). Upper Saddle River, NJ: Pearson Prentice-Hall.
Seeger, J. A. (1984, January/March). Research note and communication: reversing the images of BCG’s growth/share matrix. Strategic Management Journal, 5(1), 93-97. Retrieved from EBSCOhost Business Source Complete.