Market Definition Bank A is one of the main banks in Malta. Based on its financial statements, it roughly has 45% of the banking market. Another bank, Bank B also has roughly 45% of the banking market. The remaining 10% are spread between three other minor banks. This however implies a few questions – What is the business market of Bank A? Is it in the banking market? Or is it in the financial services market? Answering these questions correctly is important as it exposes one of the limitations of the growth/share matrix – poor definition of what constitutes a business market. Let us assume that Bank A defines itself in the banking market, and rates the relative competitive position in Investments against Bank B resulting in a relative market share of 1.2 and defining investments as a Cash Cow (in a low growth market). Hedley (cited in De Wit and Meyer, 2005) describes cash cows as generating large cash surpluses and being the foundations on which the organisation rests, in short to be milked for their cash and with minimal investment. Now if Bank A defines itself in the financial services market and rates the relative competitive position of 0.7 investments are now defined as a Question Mark against Company C (now in a high growth market). According to Hedley question marks require high amounts of investment, while their cash generation capabilities are low. Clearly this shows the limitation of the growth/share matrix when business markets are not defined well. In the above example, had Bank A just considered itself in the banking market it would have overlooked Company C which is an agent of a foreign financial services company and offers a large range of investment possibilities. The non-recognition of Company C as a competitor would mean having the wrong picture of the competitive position of Investments within Bank A’s portfolio, with the consequence of potential wrong strategic decisions leading to decline. However since Investments is correctly identified in the proper quadrant of the growth/share matrix, the chances of incorrect strategic decisions in its regard are reduced (but not eliminated!). Following from the identification of competitors, another limitation of the growth/share matrix is that it rates the SBU/product/service against the market leader only. Let us consider that Bank A has 7 million of sales in investments, while Company C has 10 million. These figures give us the relative market share of 0.7 for Bank A as we have seen above. Now if we assume that Bank B has 6 million of sales in investments how does that change the scenario? The calculation of relative market share against the largest competitor only would ignore the fact that Bank A has a very close competitor in Bank B. Bank A would not only have to consider offensive tactics in relation Company C but also defensive tactics in relation to Bank B. This has a direct bearing on the strategic options available to Bank A as not clearly defining competition could mean that when it is then realised that a modified strategy is necessary, this would require resources that would have already been committed elsewhere. In addition to that, had Bank A pursued an offensive tactics in relation to Company C, Bank B could spot the vulnerability of Bank A and launch a flank attack on it when the latter would not be in a strong position to defend itself. Another limitation in relation to the growth/share matrix is the difficulty of obtaining data on market share and growth rate. Bank A should not find it difficult to know its sales volumes, providing the necessary data has been gathered. Now is one of the instances when good accountancy and management information systems come into play. What is important at this point is to recognise that data pertaining to other organisations may not be available and would have to be reasonably assumed. Publicly listed organisations would by regulations have to publish their financial statements but the information contained therein would be abstracted at a high level. Bank A would only know cumulative figures from the published financial statements of Bank B. Data pertaining to sectors as a whole might be obtained from legislative/regulatory sources but these seldom, if ever, go down to the granularity of single organisations (and products/services within those organisations). This directly links to the limitation of establishing relative competitive position in respect to the largest competitor only. The essence of this is that the growth/share matrix might present a position that is different from reality and this would cause an organisation to take the wrong decisions that would eventually weaken it in respect to competitors.
Corporate Composition De Wit and Meyer (2005) describe the corporate scope of a multi-business firm as being composed of two or more businesses. When they then define corporate scope they imply that the business areas are diversified, or distinct from each other. This definition is not incorrect, but by keeping strictly to it when compiling a growth/share matrix one may overlook a benefit of the growth/share matrix where it may also be used for evaluating product lines. If we only considered business units when compiling Bank A’s growth/share matrix, there would be only one bubble which is not meaningful at all. This is not to say that such a scenario is unrealistic. A similar scenario is stated by Hedley (cited in De Wit and Meyer, 2005) “Some companies tend to fit almost entirely into a single quadrant” and Hedley then goes on to describe General Motors as being a predominantly cash cow company. Likewise, Bank A could be described as a predominantly cash cow company. It would be however more realistic to define the corporate scope of Bank A as its products and services rather than a single business unit. This would enable Bank A to evaluate better the competitive position of its portfolio of products and services in relation to its competitor(s) provided that the limitations mentioned in the Market Definition section are also considered. As a benefit of the growth/share matrix, a better evaluation of the competitive position should in theory highlight the points of interest. For example, Bank A has a deposits-to-advances (personal and business lending, mortgages) ratio of 1.96 whilst that of Bank B is 1.18. Bank B is known to have a relatively better advances sanctioning process, as well as more stringent advances reviewing. This enables it to keep it low levels of impairment charges. Bank A has a more bureaucratic advances sanctioning process and a higher level of impairment charges. On the whole Bank B seems to be more efficient than Bank B in these areas. This would be quickly evident from the growth/share matrix and should prompt Bank A to reconsider the strategic position in respect of Bank B between the deposits and advances portfolios. De Wit and Meyer also describe corporate distribution as the other component of corporate composition as “The composition of the corporation also depends on the relative size of the activities in each business area covered”. In our case the business areas are the products and services of Bank A. A benefit of the growth/share matrix is that it should make one question whether the corporate distribution is optimal. The growth/share matrix of Bank A shows a great disparity between the relative size of deposits and advances, and the other products and services. This is not unusual for a bank as deposits and advances are their core products. But the question that should be asked is if the corporate distribution is optimal in relation to competition. It would be useful to try and construct a growth/share matrix for the competition, e.g. Bank B. This would not be as precise as Bank A’s growth/share matrix but having an educated guess of the corporate distribution (and scope) of competition would make Bank A more aware of the position of Bank B and be in a better position to take proactive steps to rectify strategic intent insofar as where corporate distribution is concerned. |
