This article highlights the Boston Consulting Group's Advantage Matrix, which tries to capture the two most popular drivers of competitive advantage (i.e., economies of scale and differentiation). The BCG Advantage Matrix helps companies determine which business units have the greatest competitive advantage. Ideally, a company will want to invest more in the company with stronger advantages to increase profit without going head-to-head with other businesses in the same industry.
What is it?
The BCG Advantage Matrix is a tool that helps companies assess their competitive advantage against others; so that they can choose the right growth strategy that increases their competitive advantage and avoids putting them in direct competition with stronger, more established rivals.
This tool is often visually represented by two axes:
Horizontal Axis: The company's ability to gain economies of scale (i.e., becoming efficient due to its large size). From the industry-level point of view, BCG called this axis 'the size of the competitive advantage.'
Vertical Axis: The company's ability to differentiate from competitors (i.e., winning due to its unique offering). From the industry-level point of view, BCG called this axis 'the number of approaches to achieve an advantage.'
As you can see, the BCG Advantage Matrix is simply a combination of the two most popular theories on the sources of competitive advantage:
Economies of scale, a concept that dates back to Adam Smith in the 1780s; and
Differentiation, a concept popularized by Michael Porter in the 1980s.
With the intersection of these two axes, the BCG Advantage Matrix outlines four types of companies (or four types of business environments – if you see it from the industry-level point of view). These are:
Stalemate Industries: The possibility of gaining economies of scale is low in these industries, and the opportunity for differentiation is few. With limited differentiation methods and limited potential to win volume, companies in these industries have weak competitive advantages. As a result, a company in these industries can only make low profits. Examples of these industries are textiles and shipbuilding. The main strategies to win are lowering costs and lowering prices.
Volume Industries: The possibility of gaining economies of scale is high in these industries, but the opportunity for differentiation is few. As a result, companies cannot differentiate much and have to focus on volume. By winning more volume, the companies become bigger, obtain economies of scale, and become cost leaders. A company that seizes big volume in this kind of industry can make high profits. Examples of these industries are meat and consumer electronics. The main strategies to win are economies of scale and experience curve.
Fragmented Industries: The potential for differentiation in these industries is great, but the possibility of gaining scale is minimal. As a result, the potential competitive advantage is modest, despite the amount of differentiation. Nevertheless, a company in these industries can make high profits, especially if it has products and services that are highly sought after. Examples of these industries are restaurants and job-shop engineering. The main strategies to win are innovation and differentiation.
Specialized Industries: The potential for differentiation in these industries is great, and the possibility to gain scale is also great. If a company has the right resources in this kind of industry, it can make very high profits. Examples of these industries are branded foods and cosmetics. The main strategies to win are focus and segment leadership.
The BCG Advantage Matrix can help business leaders increase their companies' competitive advantages and identify potential growth opportunities.
When do we use it?
A company's competitive advantage somewhat depends on the nature of its industry. Therefore, a company can use the BCG Advantage Matrix to assess its potential for competitive advantage, e.g.,
Pinpoint their potential for competitive advantage.
Harness the opportunities that its industry provides.
Determine the feasibility of growth and differentiation opportunities.
Make decisions regarding entering or exiting an industry.
What business question is it helping us answer?
This tool helps business leaders answer the following questions:
What competitive advantage does a business command in its business environment?
Are there growth or differentiation opportunities in the industry, and how feasible are these potentials?
Based on the understanding of the above variables, what is the right business strategy to adopt?
How do we use it?
Company decision-makers who want to use this tool must start by adequately researching their business as well as the competition. You must start by investigating the strengths and weaknesses of your product or service and how it stacks up against other businesses in the same line. By doing this, you'll gain knowledge of your business's competitive advantage (in terms of differentiation opportunities).
The next step is to investigate the industry in which your company operates. Analyzing the industry (relationship between the customers/consumers, the competitors, the suppliers) reveals your business's potential to gain market share and obtain a competitive advantage (via economies of scale).
Once you've understood both the potential to gain scale and to create differentiation, then you can start identifying the appropriate initiatives for the quadrant you are in (for example, what kind of differentiation you can create in a fragmented industry; how to win scale by differentiation if you are in a specialized industry; or how to move out from a stalemate industry).
Practical Example
A startup company in the food service industry is looking for a way to grow. The company conducts in-depth market research to gain insights into the market. Based on the analysis of the research results, the company notes that it will face difficulty in gaining scale (as several food conglomerates with big reputations control the market). Yet, there is plenty of a sizeable opportunity for differentiation in the market (as the consumers enjoy having varied cuisines).
Therefore, instead of investing resources for scaling up, the company focuses on innovatory differentiation to gain a competitive advantage (i.e., the startup company develops a novel recipe for chicken nuggets and designs its marketing initiatives around that recipe). In a short time, the company achieves differentiation and wins customers.
By choosing the right focus, the company is able to grow its profits (had the company invested in a massive expansion project, it would have achieved minimal gains).
Advantages
The BCG Advantage Matrix has numerous advantages, i.e.,
It helps companies assess their business environments and focus on strategies compatible with the environment.
It helps executives assess their industries' current and future attractiveness.
It helps companies identify and leverage their competitive advantages.
It is a fact-based approach that helps minimize the risks of entering a new industry.
It is simple to understand and fairly straightforward to implement.
Disadvantage
But it is not without disadvantages, i.e.,
It requires a deep understanding of the industries.
It doesn't give specific prescriptions on what initiatives to pursue.
It doesn't pay much attention to cash flow.
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