The BCG Group developed the Growth Share Matrix to achieve the economies of scale and to learn the curve economies. The Competitive Advantage Matrix helped in bringing out the assumptions behind the scale and Growth Share Matrix.
BCG Advantage Matrix developed by the Boston Consulting Group (BCG) is to help the organizations to develop the strategy to gain the competitive advantage. It is two by two Matrix divided in to 4 quadrants based on the 2 dimensions
- The number of different approaches to competitive advantage available
- The potential size of the competitive advantage
The Matrix shows the type of strategy that one should adopt for the opportunity in a particular environment.
The four types of competitive systems are:
In stalemate industries there is limited approaches of differentiation and small size of competitive advantage. The technological knowledge is present for all competitors and the economies of scale decrease after reaching optimal size and mostly all the competitors have reached the optimal size. Therefore, the competition depends upon the prices. Finally, it results in low profitability, slow growth, high exit barriers and overcapacity.
In Volume businesses there is less opportunity to differentiate but the impact of differentiation is large. That means the volume businesses benefit from the economies of scale which would help the businesses to lower the production cost. Hence there is an opportunity to profit from economies of scale. For example, software industry the initial cost of developing and setting up is high but the next subsequent costs decrease per unit as volume increases due to economies of scale.
In fragmented businesses the opportunity to differentiate is substantial but the impact is small. The number of approaches of competitive advantage is large but the potential size of the competitive advantage is small. Hence the organization can be profitable if it’s a leader in products and services. For example, some specialty restaurants like Nandos or some local restaurant that specializes in few dishes. In such places there is less to no premium on growth.
In this the opportunity to differentiate is high and also the impact of that is also high. The profit potential is also high in the organizations if they have proper resources. For example FMCG companies like HUL, P&G use their size to have lower cost and the brand name to pull the customers.
Case – Apple
Apple was founded by Steve Jobs and Stephen Wozniak in 1976. It has revolutionized both the computer and mobile industries. It has a competitive advantage over its competitors because of various factors like product offerings, customer service, and product differentiations. The differentiation has helped Apple to gain customer loyalty and thus they charge a premium price. Apple products are costly as they target a particular niche segment by providing high-quality and unique products. One of the major strategies that Apple has adopted is the product differentiation strategy. The cost associated with product differentiation acts as a barrier to entry for various companies and thus reduces the threat of new entrants. It also reduces the threat of substitutes. If we look at the threat to suppliers, if the suppliers increase the cost, then that cost can be passed on to customers. Therefore, reducing the threat of suppliers. Also, there is no threat from the buyers as well. This makes the product differentiation strategy the more viable strategy for the company.
Impact of BCG Advantage Matrix
It helps in risk mitigation and management. Having knowledge about the environment of the industry you are working in would help in focusing on strategies that are compatible with the environment. It is similar to working with the strengths and sticking to it.
The success metrics defined for the particular project should be properly aligned with the quadrant. For example in fragmented quadrant the focus should be on differentiation to increase the impact.
Project Speed and Duration
The speed, duration and size of the project changes with the type of environment. In a stable environment the projects speed is slow and last for a longer duration. The environment which is more adaptive the pace of change is high and duration of project is short.
Advantages and Disadvantages
This Matrix has the advantage of highlighting the assumptions that are there in the Growth-Share Matrix. It may also provide a better sense of the best approach and expected earnings, but it does not provide any sense of cash flow, which was the original Matrix’s key benefit.
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