The Principles of Scientific Management is a monograph published by Frederick Winslow Taylor in 1911. This influential monograph is the basis of modern organization and decision theory and has motivated administrators and students of managerial technique. Taylor was an American mechanical engineer and a management consultant in his later years. He is often called "The Father of Scientific Management." His approach is also often referred to, as Taylor's Principles, or Taylorism.
Summary of the monograph
The monograph consisted of three sections:
Introduction,
Chapter 1: Fundamentals of Scientific Management, and
Chapter 2 : The Principles of Scientific Management.
Introduction
Taylor started this paper by quoting then President of the United States, Theodore Roosevelt. The President, in his address to the Governors at the White House, prophetically remarked that "The conservation of our national resources is only preliminary to the larger question of national efficiency." Taylor pointed out that the whole country (USA) is suffering through inefficiency in almost all of daily acts of Americans. He pointed this out through a series of simple illustrations. He tried to convince the reader that the remedy for this inefficiency lies in systematic management, rather than in searching for extraordinary person. He also tried to prove that the best management is a true science, resting upon clearly defined laws, rules, and principles, as a foundation. He also showed that the fundamental principles of scientific management are applicable to all kinds of human activities, from the simplest individual acts to the work of the great corporations, which call for the most elaborate cooperation. And, through a series of illustrations, Taylor also tried to convince the reader that whenever these principles are correctly applied, the results are truly astounding. The paper was originally prepared for presentation to The American Society of Mechanical Engineers and the illustrations in the paper was such that it would appeal to engineers and to managers of industrial and manufacturing establishments, and also to all of the people who were working in these establishments. Taylor also hoped that other readers will understand that the same principle can be applied with equal force to all social activities such as, the management of homes, farms, small and large businesses, churches, philanthropic institutions, universities, and governmental departments.
Chapter 1: Fundamentals of Scientific Management
Taylor argued that the principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee. He also showed that maximum prosperity can exist only as the result of maximum productivity. He argued that the most important object of both the employee and the management should be the training and development of each individual in the establishment, so that he can do the highest class of work for which his natural abilities fit him.
Taylor was writing at a time when factories were creating big problems for the management. Workmen were quite inefficient. According to Taylor, there were three reasons for the ineffiency. They were:
1. The deceptive belief that a material increase in the output of each man or each machine in the trade would result in the end in throwing a large number of men out of work. This belief has from time immemorial been almost universal among workmen.2. The defective systems of management that were common in those days and which made it necessary for each workman to soldier, or work slowly, in order that he may protect his own best interests.3. The inefficient rule of thumb methods, which were almost universal in all trades in those days, and in practising which the workmen waste a large part of their effort.
The paper tried to show the enormous gains which would result from the substitution by workmen of scientific for rule-of-thumb methods.
Taylor argued that the cheapening of any article in common use almost immediately results in a largely increased demand for that article. This view contradicts the belief that a material increase in the output of each man or each machine in the trade would result in the end in throwing a large number of men out of work. As to the second cause for soldiering, Taylor pointed to many quotes from 'Shop Management' and hoped that it would explain fully the cause for soldiering. Some quotes that tried to illustrate his views are:
"This loafing or soldiering proceeds from two causes. First, from the natural instinct and tendency of men to take it easy, which may be called natural soldiering. Second, from more intricate second thought and reasoning caused by their relations with other men, which may be called systematic soldiering."
"This common tendency to 'take it easy' is greatly increased by bringing a number of men together on similar work and at a uniform standard rate of pay by the day."
"To illustrate: The writer has timed a naturally energetic workman who, while going and coming from work, would walk at a speed of from three to four miles per hour, and not infrequently trot home after a day's work. On arriving at his work he would immediately slow down to a speed of about one mile an hour. When, for example, wheeling a loaded wheelbarrow, he would go at a good fast pace even up hill in order to be as short a time as possible under load, and immediately on the return walk slow down to a mile an hour, improving every opportunity for delay short of actually sitting down. In order to be sure not to do more than his lazy neighbor, he would actually tire himself in his effort to go slow."
"The feeling of antagonism under the ordinary piece-work system becomes in many cases so marked on the part of the men that any proposition made by their employers, however reasonable, is looked upon with suspicion, and soldiering becomes such a fixed habit that men will frequently take pains to restrict the product of machines which they are running when even a large increase in output would involve no more work on their part."
Taylor argued that the substitution of scientific for rule of thumb methods would be benefit both employers and employees.
Chapter 2 : The Principles of Scientific Management
In this section, Taylor explained his principles of scientific management. Taylor's scientific management consisted of four principles:
1. Replace rule of thumb work methods with methods based on a scientific study of the tasks.2. Scientifically select and then train, teach, and develop the workman, whereas in the past the employee (or workmen) chose his own work and trained himself as best he could.3. Provide "Detailed instruction and supervision of each worker in the performance of that worker's discrete task" (Montgomery 1997: 250).4. Divide work nearly equally between managers and workers, so that the managers apply scientific management principles to planning the work and the workers actually perform the tasks.
According to F. W. Taylor, the above combination of the initiative of the employee, coupled with the new types of work done by the management, that makes scientific management so much more efficient than the old plans.
Under the management of "initiative and incentive", the first three elements exist in many cases, but their importance is minor. However, under the scientific management, they form the very essence of the whole system.
According to Taylor, the summary of the fourth element is: Under the management of "initiative and incentive practically the whole problem is "up to the workman," while under scientific management fully one-half of the problem is "up to the management
Importance of the monograph
This highly influential monograph has been cited by several books. The monograph was translated into several languages, giving the ideas of Taylor an influence around the world. ROLAN-Division Of Work: Division of work means dividing the total work into small convenient components and giving each component to one employee. This brings specialisation and enables people to concentrate effectively on the assigned responsibility. This improves performance, ability and accuracy in the work. Authority and Responsibility: Authority should be equal to responsibility. These two terms are integral aspects of the managerial process AND inter-related as responsibility is the corollary of authority. Those who have authority to give orders must be willing to accept responsibility for the results. Responsibility arises when the authority is used and hence authority and responsibility cannot be separated. Discipline: Discipline is the obedience and outward mark of respect shown by an employee. Fayol considers that discipline is absolutely essential for smooth and orderly running of a business unit. For proper discipline, attention needs to be given to good supervision,fair agreements and judicious use of Penalty.
Thursday, August 21, 2008
Scientific management
Scientific management (also called Taylorism, the Taylor system, or the Classical Perspective) is a theory of management that analyzes and synthesizes workflow processes, improving labor productivity. The core ideas of the theory were developed by Frederick Winslow Taylor in the 1880s and 1890s, and were first published in his monographs, Shop Management (1905) and The Principles of Scientific Management (1911).[1] Taylor believed that decisions based upon tradition and rules of thumb should be replaced by precise procedures developed after careful study of an individual at work.
In management literature today, the greatest use of the concept of Taylorism is as a contrast to a new, improved way of doing business. In political and sociological terms, Taylorism can be seen as the division of labour pushed to its logical extreme, with a consequent de-skilling of the worker and dehumanisation of the workplace.
General approach
1 Developed standard method for performing each job.
2 selected workers with appropriate abilities for each job.
3 trained workers in standard method.
4 supported workers by planning their work and eliminating interruptions.
5.provided wage incentives to workers for increased output.
Contributions
Elements
Labour is defined and authority/responsibility is legitimised/official
Positions placed in hierarchy and under authority of higher level
Selection is based upon technical competence, training or experience
Actions and decisions are recorded to allow continuity and memory
Management is different from ownership of the organization
Managers follow rules/procedures to enable reliable/predictable behaviour
Mass production methods
Taylorism is often mentioned along with Fordism, because it was closely associated with mass production methods in manufacturing factories. Taylor's own name for his approach was scientific management. This sort of task-oriented optimisation of work tasks is nearly ubiquitous today in industry, and has made most industrial work menial, repetitive and tedious; this can be noted, for instance, in assembly lines and fast-food restaurants. Ford's arguments began from his observation that, in general, workers forced to perform repetitive tasks work at the slowest rate that goes unpunished. This slow rate of work (which he called "soldiering", but might nowadays be termed by those in charge as "loafing" or "malingering" or by those on the assembly line as "getting through the day"), he opined, was based on the observation that, when paid the same amount, workers will tend to do the amount of work the slowest among them does: this reflects the idea that workers have a vested interest in their own well-being, and do not benefit from working above the defined rate of work when it will not increase their compensation. He therefore proposed that the work practice that had been developed in most work environments was crafted, intentionally or unintentionally, to be very inefficient in its execution. From this he posited that there was one best method for performing a particular task, and that if it were taught to workers, their productivity would go up.
Taylor introduced many concepts that were not widely accepted at the time. For example, by observing workers, he decided that labour should include rest breaks so that the worker has time to recover from fatigue. He proved this with the task of unloading ore: workers were taught to take rest during work and output went up.
Today's armies employ scientific management. Of the key points listed; a standard method for performing each job, select workers with appropriate abilities for each job, training for standard task, planning work and eliminating interruptions and wage incentive for increased output. All but wage incentives for increased output are used by modern military organizations. Wage incentives rather appear in the form of skill bonuses for enlistments.
Division of labour
Unless people manage themselves, somebody has to take care of administration, and thus there is a division of work between workers and administrators. One of the tasks of administration is to select the right person for the right job:
Now one of the very first requirements for a man who is fit to handle pig iron as a regular occupation is that he shall be so stupid and so phlegmatic that he more nearly resembles in his mental make-up the ox than any other type. The man who is mentally alert and intelligent is for this very reason entirely unsuited to what would, for him, be the grinding monotony of work of this character. Therefore the workman who is best suited to handling pig iron is unable to understand the real science of doing this class of work. (Taylor 1911, 59)
This view – match the worker to the job – has resurfaced time and time again in management theories.
Extension to "Sales Engineering"
Taylor believed scientific management could be extended to "the work of our salesmen." Shortly after his death, his acolyte Harlow S. Person began to lecture corporate audiences on the possibility of using Taylorism for "sales engineering." (Dawson 2005) This was a watershed insight in the history of corporate marketing.
Criticism
Applications of scientific management sometimes fail to account for two inherent difficulties:
It ignores individual differences: the most efficient way of working for one person may be inefficient for another;
It ignores the fact that the economic interests of workers and management are rarely identical, so that both the measurement processes and the retraining required by Taylor's methods would frequently be resented and sometimes sabotaged by the workforce.
Both difficulties were recognised by Taylor, but are generally not fully addressed by managers who only see the potential improvements to efficiency. Taylor believed that scientific management cannot work unless the worker benefits. In his view management should arrange the work in such a way that one is able to produce more and get paid more, by teaching and implementing more efficient procedures for producing a product.
Although Taylor did not compare workers with machines, some of his critics use this metaphor to explain how his approach makes work more efficient by removing unnecessary or wasted effort. However, some would say that this approach ignores the complications introduced because workers are necessarily human: personal needs, interpersonal difficulties and the very real difficulties introduced by making jobs so efficient that workers have no time to relax. As a result, workers worked harder, but became dissatisfied with the work environment. Some have argued that this discounting of worker personalities led to the rise of labour unions.
It can also be said that the rise in labour unions is leading to a push on the part of industry to accelerate the process of automation, a process that is undergoing a renaissance with the invention of a host of new technologies starting with the computer and the Internet. This shift in production to machines was clearly one of the goals of Taylorism, and represents a victory for his theories.
However, tactfully choosing to ignore the still controversial process of automating human work is also politically expedient, so many still say that practical problems caused by Taylorism led to its replacement by the human relations school of management in 1930. Others (Braverman 1974) insisted that human relations did not replace Taylorism but that both approaches are rather complementary: Taylorism determining the actual organisation of the work process and human relations helping to adapt the workers to the new procedures.
However, Taylor's theories were clearly at the roots of a global revival in theories of scientific management in the last two decades of the 20th century, under the moniker of 'corporate reengineering'. As such, Taylor's ideas can be seen as the root of a very influential series of developments in the workplace, with the goal being the eventual elimination of industry's need for unskilled, and later perhaps, even most skilled labour in any form, directly following Taylor's recipe for deconstructing a process. This has come to be known as commodification, and no skilled profession, even medicine, has proven to be immune from the efforts of Taylor's followers, the 'reengineers', who are often called derogatory names such as 'bean counters'.
Legacy
Scientific management was an early attempt to systematically treat management and process improvement as a scientific problem. With the advancement of statistical methods, the approach was improved and referred to as quality control in 1920s and 1930s. During the 1940s and 1950s, the body of knowledge for doing scientific management evolved into Operations Research and management cybernetics. In the 1980s there was total quality management, in the 1990s reengineering. Today's Six Sigma and Lean manufacturing could be seen as new kinds of scientific management, though their principles vary so drastically that the comparison might be misleading. In particular, Shigeo Shingo, one of the originators of the Toyota Production System that this system and Japanese management culture in general should be seen as kind of scientific management.[citation needed]
Peter Drucker saw Frederick Taylor as the creator of knowledge management, as the aim of scientific management is to produce knowledge about how to improve work processes. Although some have questioned whether scientific management is suitable only for manufacturing, Taylor himself advocated scientific management for all sorts of work, including the management of universities and government.
Scientific management has had an important influence in sports, where stop watches and motion studies rule the day. (Taylor himself enjoyed sports –especially tennis and golf – and he invented improved tennis racquets and improved golf clubs, although other players liked to tease him for his unorthodox designs, and they did not catch on as replacements for the mainstream implements.)
Scientific management and the Soviet Union
Historian Thomas Hughes (Hughes 2004) has detailed the way in which the Soviet Union in the 1920s and 1930s enthusiastically embraced Fordism and Taylorism, importing American experts in both fields as well as American engineering firms to build parts of its new industrial infrastructure. The concepts of the Five Year Plan and the centrally planned economy can be traced directly to the influence of Taylorism on Soviet thinking. Hughes quotes Stalin:
American efficiency is that indomitable force which neither knows nor recognises obstacles; which continues on a task once started until it is finished, even if it is a minor task; and without which serious constructive work is impossible . . . The combination of the Russian revolutionary sweep with American efficiency is the essence of Leninism. (Hughes 2004: 251 – quoting Stalin 1976: 115)
Hughes offers this equation to describe what happened:
Taylorismus + Fordismus = Amerikanismus
Hughes describes how, as the Soviet Union developed and grew in power, both sides, the Soviets and the Americans, chose to ignore or deny the contribution that American ideas and expertise had had – the Soviets because they wished to portray themselves as creators of their own destiny and not indebted to a rival, and the Americans because they did not wish to acknowledge their part in creating a powerful rival.
Saturday, August 2, 2008
Balanced Scorecard
Balanced Scorecard: Striking the Right Balance
The Balanced Scorecard is a strategic management and measurement system that links strategic objectives to comprehensive indicators.
It recognizes that companies have a tendency to fixate on only a few measurements – and this blinkers their assessment of how the business is performing overall. The Balanced Scorecard focuses management attention on a set of other key performance indicators to provide an overall view.
The concept was originally created by Robert Kaplan, the Marvin Bower Professor of Leadership Development at Harvard Business School, and David Norton, co-founder of the consulting company Renaissance Solutions. The two explore the concept at length in their co-authored 1996 bestseller The Balanced Scorecard: Translating Strategy into Action (1996).
Kaplan and Norton compared running a company to flying a plane. The pilot who relies on a single dial is unlikely to be safe. Pilots must utilize all the information contained in the cockpit. “The complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously,” wrote Kaplan and Norton. “Moreover, by forcing senior managers to consider all the important operational measures together, the Balanced Scorecard can let them see whether improvement in one area may be achieved at the expense of another,” they added.
Kaplan and Norton suggested there are four important elements that need to be balanced.
The Balanced Scorecard is a strategic management and measurement system that links strategic objectives to comprehensive indicators.
It recognizes that companies have a tendency to fixate on only a few measurements – and this blinkers their assessment of how the business is performing overall. The Balanced Scorecard focuses management attention on a set of other key performance indicators to provide an overall view.
The concept was originally created by Robert Kaplan, the Marvin Bower Professor of Leadership Development at Harvard Business School, and David Norton, co-founder of the consulting company Renaissance Solutions. The two explore the concept at length in their co-authored 1996 bestseller The Balanced Scorecard: Translating Strategy into Action (1996).
Kaplan and Norton compared running a company to flying a plane. The pilot who relies on a single dial is unlikely to be safe. Pilots must utilize all the information contained in the cockpit. “The complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously,” wrote Kaplan and Norton. “Moreover, by forcing senior managers to consider all the important operational measures together, the Balanced Scorecard can let them see whether improvement in one area may be achieved at the expense of another,” they added.
Kaplan and Norton suggested there are four important elements that need to be balanced.
- First, is the “customer perspective”. Companies must ask how customers perceive them.
- The second element is “internal perspective.” Companies must ask what it is at which they must excel.
- Third is the “innovation and learning perspective”. Companies must ask whether they can continue to improve and create value.
- Finally, there is the “financial perspective”. Companies must ask how they view shareholders.
By focusing on all four of these dimensions, companies become driven by their mission rather than by only short-term financial performance.
The authors claim that over 60% of US companies are using some form of scorecard that uses both financial and non-financial metrics. Over the last many years, large Indian corporates (like TATA Motors) too have started using the Balanced Scorecard.
Strategy - Competitive Advantage
Competitive Advantage - Definition
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.
Competitive Strategies
Following on from his work analysing the competitive forces in an industry, Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses' activities are narrow versus broad and the extent to which a business seeks to differentiate its products.
The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.
Strategy - Differentiation
This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.
Examples of Differentiation Strategy: Mercedes cars; Bang & Olufsen
Strategy - Cost Leadership
With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimising costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.
Examples of Cost Leadership: Nissan; Tesco; Dell Computers
Strategy - Differentiation Focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.
Examples of Differentiation Focus: any successful niche retailers; (e.g. The Perfume Shop); or specialist holiday operator (e.g. Carrier)
Strategy - Cost Focus
Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's".
Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.
Competitive Strategies
Following on from his work analysing the competitive forces in an industry, Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses' activities are narrow versus broad and the extent to which a business seeks to differentiate its products.
The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.
Strategy - Differentiation
This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.
Examples of Differentiation Strategy: Mercedes cars; Bang & Olufsen
Strategy - Cost Leadership
With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimising costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.
Examples of Cost Leadership: Nissan; Tesco; Dell Computers
Strategy - Differentiation Focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.
Examples of Differentiation Focus: any successful niche retailers; (e.g. The Perfume Shop); or specialist holiday operator (e.g. Carrier)
Strategy - Cost Focus
Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's".
Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.
7S Framework
It's all very well devising a strategy, but you have to be able to implement it if it's to do any good. The Seven S Framework first appeared in "The Art Of Japanese Management" by Richard Pascale and Anthony Athos in 1981. They had been looking at how Japanese industry had been so successful, at around the same time that Tom Peters and Robert Waterman were exploring what made a company excellent. The Seven S model was born at a meeting of the four authors in 1978. It went on to appear in "In Search of Excellence" by Peters and Waterman, and was taken up as a basic tool by the global management consultancy McKinsey: it's sometimes known as the McKinsey 7S model.
Managers, they said, need to take account of all seven of the factors to be sure of successful implementation of a strategy - large or small. They're all interdependent, so if you fail to pay proper attention to one of them, it can bring the others crashing down around you. Oh, and the relative importance of each factor will vary over time, and you can't always tell how that's changing. Like a lot of these models, there's a good dose of common sense in here, but the 7S Framework is useful way of checking that you've covered all the bases.
The Seven Factors are:
Managers, they said, need to take account of all seven of the factors to be sure of successful implementation of a strategy - large or small. They're all interdependent, so if you fail to pay proper attention to one of them, it can bring the others crashing down around you. Oh, and the relative importance of each factor will vary over time, and you can't always tell how that's changing. Like a lot of these models, there's a good dose of common sense in here, but the 7S Framework is useful way of checking that you've covered all the bases.
The Seven Factors are:
Strategy : A set of actions that you start with and must maintain
Structure: How people and tasks / work are organised
Systems: All the processes and information flows that link the organisation together
Style: How managers behave
Staff: How you develop managers (current and future) Superordinate Goals Longer-term vision, and all that values stuff, that shapes the destiny of the organisation
Skills: Dominant attributes or capabilities that exist in the organisation
There's a lot more to the 7S framework of course, especially how you apply it in practice. It may appear as an outmoded concept in today's environment of "constant change and learning", but the basic principle that you've got to watch a lot of factors all the time as you implement any strategy still applies. Just don't let the apparent rigidity of the framework make you heavy on your feet.BCG Matrix
The Boston Matrix
(Also called the BCG Matrix, the Growth-ShareMatrix and Portfolio Analysis)Focusing effort to give the greatest returns
If you enjoy visual representations and vivid descriptions of your business then you'll love the Boston Matrix!
Also called the BCG Matrix, it provides a useful way of looking at the opportunities open to you, so that you can pick the ones that will give you the best results.
In a world where we're bombarded with seeming opportunities (some good, some bad) this brings welcome clarity, helping you make the very most of your current position.
Understanding the Model
Market Share and Market Growth
To understand the Boston Matrix you need to understand how market share and market growth interrelate.
Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher proportion of the market you control.
The Boston Matrix assumes that if you enjoy a high market share you will normally be making money (this assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).
The question it asks is, "Should you be investing your resources into that product line just because it is making you money?" The answer is, "not necessarily."
This is where market growth comes into play. Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market share available is expanding, and there's plenty of opportunity for everyone to make money.
By contrast, competition in low growth markets is often bitter, and while you might have high market share now, what will the situation look like in a few months or a few years? This makes low growth markets less attractive.
Note:
The origin of the Boston Matrix lies with the Boston Consulting Group in the early 1970s. It was devised as a clear and simple method for helping corporations decide which parts of their business they should allocate cash to. Since the 1970s, it’s become much easier to borrow money cheaply (in many parts of the world) making this less of an issue.
However the Boston Matrix is still a good tool for thinking about where to apply resources (of effort as well as money) and that’s how we use it here.
The Matrix ItselfThe Boston Matrix categorizes opportunities into four groups, shown on axes of Market Growth and Market Share:
(Also called the BCG Matrix, the Growth-ShareMatrix and Portfolio Analysis)Focusing effort to give the greatest returns
If you enjoy visual representations and vivid descriptions of your business then you'll love the Boston Matrix!
Also called the BCG Matrix, it provides a useful way of looking at the opportunities open to you, so that you can pick the ones that will give you the best results.
In a world where we're bombarded with seeming opportunities (some good, some bad) this brings welcome clarity, helping you make the very most of your current position.
Understanding the Model
Market Share and Market Growth
To understand the Boston Matrix you need to understand how market share and market growth interrelate.
Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher proportion of the market you control.
The Boston Matrix assumes that if you enjoy a high market share you will normally be making money (this assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).
The question it asks is, "Should you be investing your resources into that product line just because it is making you money?" The answer is, "not necessarily."
This is where market growth comes into play. Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market share available is expanding, and there's plenty of opportunity for everyone to make money.
By contrast, competition in low growth markets is often bitter, and while you might have high market share now, what will the situation look like in a few months or a few years? This makes low growth markets less attractive.
Note:
The origin of the Boston Matrix lies with the Boston Consulting Group in the early 1970s. It was devised as a clear and simple method for helping corporations decide which parts of their business they should allocate cash to. Since the 1970s, it’s become much easier to borrow money cheaply (in many parts of the world) making this less of an issue.
However the Boston Matrix is still a good tool for thinking about where to apply resources (of effort as well as money) and that’s how we use it here.
The Matrix ItselfThe Boston Matrix categorizes opportunities into four groups, shown on axes of Market Growth and Market Share:
These groups are explained below:
Dogs: Low Market Share / Low Market Growth:
In these areas, your market presence is weak, so it's going to take a lot of hard work to get noticed. Also, you won't enjoy the scale economies of the larger players, so it's going to be difficult to make a profit.
Cash Cows:
High Market Share / Low Market Growth:
Here, you're well-established, so it's easy to get attention and exploit new opportunities. However it's only worth expending a certain amount of effort, because the market isn't growing and your opportunities are limited.
Stars:
High Market Share / High Market Growth:
Here you're well-established, and growth is exciting! These are fantastic opportunities, and you should work hard to realize them.
Question Marks (Problem Child):
Low Market Share / High Market Growth:
These are the opportunities no one knows what to do with. They aren't generating much revenue right now because you don't have a large market share. But, they are in high growth markets so the potential to make money is there.
Question Marks might become Stars and eventual Cash Cows, but they could just as easily absorb effort with little return. These opportunities need serious thought as to whether increased investment is warranted.
Strengths, Weaknesses, Opportunites and Threats (SWOT) Analysis.
SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors.
In SWOT, strengths and weaknesses are internal factors. For example:A strength could be:
Your specialist marketing expertise.
Location of your business. Quality processes and procedures. Any other aspect of your business that adds value to your product or service. Mergers, joint ventures or strategic alliances. Moving into new market segments that offer improved profits. A new international market. A market vacated by an ineffective competitor. Price wars with competitors. A competitor has a new, innovative product or service. Competitors have superior access to channels of distribution. Taxation is introduced on your product or service. SWOT analysis should distinguish between where your organization is today, and where it could be in the future. SWOT should always be specific. Avoid grey areas. Always apply SWOT in relation to your competition i.e. better than or worse than your competition. Keep your SWOT short and simple. Avoid complexity and over analysis SWOT is subjective.
In SWOT, strengths and weaknesses are internal factors. For example:A strength could be:
Your specialist marketing expertise.
A weakness could be:
- Lack of marketing expertise.
- Undifferentiated products or services (i.e. in relation to your competitors).
- Location of your business.
- Poor quality goods or services.
- Damaged reputation.
In SWOT, opportunities and threats are external factors. For example: An opportunity could be:
A threat could be:
A word of caution, SWOT analysis can be very subjective. Do not rely on SWOT too much. Two people rarely come-up with the same final version of SWOT. TOWS analysis is extremely similar. It simply looks at the negative factors first in order to turn them into positive factors. So use SWOT as guide and not a prescription.
Simple rules for successful SWOT analysis.
Once key issues have been identified with your SWOT analysis, they feed into marketing objectives. SWOT can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five-Forces analysis. So SWOT is a very popular tool with marketing students because it is quick and easy to learn. During the SWOT exercise, list factors in the relevant boxes. It's that simple. Below are some FREE examples of SWOT analysis - click to go straight to them
Do you need a more advanced SWOT Analysis?
Some of the problems that you may encounter with SWOT are as a result of one of its key benefits i.e. its flexibility. Since SWOT analysis can be used in a variety of scenarios, it has to be flexible. However this can lead to a number of anomalies. Problems with basic SWOT analysis can be addressed using a more critical POWER SWOT.
SWOT Analysis Examples
A summary of FREE SWOT analyses case studies are outlined as follows (those in the table above are far more detailed and FREE!):
Example 1 - Wal-Mart SWOT Analysis. Strengths - Wal-Mart is a powerful retail brand. It has a reputation for value for money, convenience and a wide range of products all in one store.Weaknesses - Wal-Mart is the World's largest grocery retailer and control of its empire, despite its IT advantages, could leave it weak in some areas due to the huge span of control.Opportunities - To take over, merge with, or form strategic alliances with other global retailers, focusing on specific markets such as Europe or the Greater China Region. Threats - Being number one means that you are the target of competition, locally and globally.
Example 2 - Starbucks SWOT Analysis. Strengths - Starbucks Corporation is a very profitable organisation, earning in excess of $600 million in 2004.Weaknesses - Starbucks has a reputation for new product development and creativity. Opportunities - New products and services that can be retailed in their cafes, such as Fair Trade products. Threats - Starbucks are exposed to rises in the cost of coffee and dairy products.
Example 3 - Nike SWOT Analysis. Strengths - Nike is a very competitive organisation. Phil Knight (Founder and CEO) is often quoted as saying that 'Business is war without bullets.'Weaknesses - The organisation does have a diversified range of sports products. Opportunities - Product development offers Nike many opportunities. Threats - Nike is exposed to the international nature of trade.
Example 4 - Indian Premier League (IPL) SWOT Analysis. Where will you find the Mumbai Indians, the Royal Challengers, the Deccan Chargers, the Channai Super Kings, the Delhi Daredevils, the Kings XI Punjab, the Kolkata Knight Riders and the Rajesthan Royals? In the Indian Premier League (IPL) - the most exciting sports franchise that the World has seen in recent years, with seemingly endless marketing opportunities (and strengths, weaknesses and threats of course!).
Example 5 - Bharti Airtel SWOT Analysis. Weaknesses - An often cited original weakness is that when the business was started by Sunil Bharti Mittal over 15 years ago, the business has little knowledge and experience of how a cellular telephone system actually worked. So the start-up business had to outsource to industry experts in the field.
Marketing Mix
The marketing mix is probably the most famous marketing term. Its elements are the basic, tactical components of a marketing plan. Also known as the Four P's, the marketing mix elements are price, place, product, and promotion. Read on for more details on the marketing mix.
The concept is simple. Think about another common mix - a cake mix. All cakes contain eggs, milk, flour, and sugar. However, you can alter the final cake by altering the amounts of mix elements contained in it. So for a sweet cake add more sugar!
It is the same with the marketing mix. The offer you make to you customer can be altered by varying the mix elements. So for a high profile brand, increase the focus on promotion and desensitize the weight given to price. Another way to think about the marketing mix is to use the image of an artist's palette. The marketer mixes the prime colours (mix elements) in different quantities to deliver a particular final colour. Every hand painted picture is original in some way, as is every marketing mix.
Some commentators will increase the marketing mix to the Five P's, to include people. Others will increase the mix to Seven P's, to include physical evidence(such as uniforms, facilities, or livery) and process (i.e. the whole customer experience e.g. a visit the Disney World). The term was coined by Neil H. Borden in his article The Concept of the Marketing Mix in 1965.
Price
There are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations.
Place
Another element of Neil H.Borden's Marketing Mix is Place. Place is also known as channel, distribution, or intermediary. It is the mechanism through which goods and/or services are moved from the manufacturer/ service provider to the user or consumer.
Product
For many a product is simply the tangible, phsysical entity that they may be buying or selling. You buy a new car and that's the product - simple! Or maybe not. When you buy a car, is the product more complex than you first thought? The Three Levels of a Product
The Product Life Cycle (PLC) is based upon the biological life cycle. For example, a seed is planted (introduction); it begins to sprout (growth); it shoots out leaves and puts down roots as it becomes an adult (maturity); after a long period as an adult the plant begins to shrink and die out (decline).
The Customer Life Cycle (CLC) has obvious similarities with the Product Life Cycle (PLC). However, CLC focuses upon the creation of and delivery of lifetime value to the customer i.e. looks at the products or services that customers NEED throughout their lives.
Promotion
Another one of the 4P's is promotion. This includes all of the tools available to the marketer for 'marketing communication'. As with Neil H.Borden's marketing mix, marketing communications has its own 'promotions mix.' Think of it like a cake mix, the basic ingredients are always the same. However if you vary the amounts of one of the ingredients, the final outcome is different.
Physical Evidence
Physical Evidence is the material part of a service. Strictly speaking there are no physical attributes to a service, so a consumer tends to rely on material cues. There are many examples of physical evidence, including some of the following:
People
People are the most important element of any service or experience. Services tend to be produced and consumed at the same moment, and aspects of the customer experience are altered to meet the 'individual needs' of the person consuming it.
Process
Process is another element of the extended marketing mix, or 7P's.There are a number of perceptions of the concept of process within the business and marketing literature. Some see processes as a means to achieve an outcome, for example - to achieve a 30% market share a company implements a marketing planning process.
The concept is simple. Think about another common mix - a cake mix. All cakes contain eggs, milk, flour, and sugar. However, you can alter the final cake by altering the amounts of mix elements contained in it. So for a sweet cake add more sugar!
It is the same with the marketing mix. The offer you make to you customer can be altered by varying the mix elements. So for a high profile brand, increase the focus on promotion and desensitize the weight given to price. Another way to think about the marketing mix is to use the image of an artist's palette. The marketer mixes the prime colours (mix elements) in different quantities to deliver a particular final colour. Every hand painted picture is original in some way, as is every marketing mix.
Some commentators will increase the marketing mix to the Five P's, to include people. Others will increase the mix to Seven P's, to include physical evidence(such as uniforms, facilities, or livery) and process (i.e. the whole customer experience e.g. a visit the Disney World). The term was coined by Neil H. Borden in his article The Concept of the Marketing Mix in 1965.
Price
There are many ways to price a product. Let's have a look at some of them and try to understand the best policy/strategy in various situations.
Place
Another element of Neil H.Borden's Marketing Mix is Place. Place is also known as channel, distribution, or intermediary. It is the mechanism through which goods and/or services are moved from the manufacturer/ service provider to the user or consumer.
Product
For many a product is simply the tangible, phsysical entity that they may be buying or selling. You buy a new car and that's the product - simple! Or maybe not. When you buy a car, is the product more complex than you first thought? The Three Levels of a Product
The Product Life Cycle (PLC) is based upon the biological life cycle. For example, a seed is planted (introduction); it begins to sprout (growth); it shoots out leaves and puts down roots as it becomes an adult (maturity); after a long period as an adult the plant begins to shrink and die out (decline).
The Customer Life Cycle (CLC) has obvious similarities with the Product Life Cycle (PLC). However, CLC focuses upon the creation of and delivery of lifetime value to the customer i.e. looks at the products or services that customers NEED throughout their lives.
Promotion
Another one of the 4P's is promotion. This includes all of the tools available to the marketer for 'marketing communication'. As with Neil H.Borden's marketing mix, marketing communications has its own 'promotions mix.' Think of it like a cake mix, the basic ingredients are always the same. However if you vary the amounts of one of the ingredients, the final outcome is different.
Physical Evidence
Physical Evidence is the material part of a service. Strictly speaking there are no physical attributes to a service, so a consumer tends to rely on material cues. There are many examples of physical evidence, including some of the following:
People
People are the most important element of any service or experience. Services tend to be produced and consumed at the same moment, and aspects of the customer experience are altered to meet the 'individual needs' of the person consuming it.
Process
Process is another element of the extended marketing mix, or 7P's.There are a number of perceptions of the concept of process within the business and marketing literature. Some see processes as a means to achieve an outcome, for example - to achieve a 30% market share a company implements a marketing planning process.
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