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Analysis of the portfolio of Red Bull based on the BCG matrix

Hausarbeit 2014 19 Seiten

BWL - Sonstiges

Leseprobe

Table of Contents

List of Abbreviations

List of Figures

List of Tables

1 Introduction
1.1 Problem definition
1.2 Objective and expectation
1.3 Structure and methods

2 The BCG Matrix
2.1 History
2.2 Objective and application
2.3 Strategic business units
2.4 Description of the BCG Matrix
2.5 Benefits and limitation

3 Case study: Red Bull Company
3.1 Procedure
3.2 Identification of the SBUs
3.3 Calculation of the dimensions
3.4 The BCG Matrix for the Red Bull Company
3.5 Analysis and derivation of strategies

4 Conclusion

References

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: The BCG Matrix under influence of experience curve and life-cycle curve

Figure 2: Calculation of market growth

Figure 3: Calculation of relative market share

Figure 4: The implication for the four quadrants of the BCG-Matrix. (own graphic)

Figure 5: Procedure to create a BCG Matrix (own graphic)

Figure 6: The BCG Matrix for the Red Bull Company (own graphic)

List of Tables

Table 1: Data collection for BCG Matrix Red Bull

1 Introduction

On the October 14th, 2012 an extreme athlete named Felix Baumgartner broke the speed of sound reaching an estimated speed of 1,342.8 km/h. Therefore he ascended to 128,100 feet in a stratospheric balloon and made a freefall jump rushing toward earth at supersonic speeds before parachuting to the ground. The mission of this project was it to beak five world records. Today Felix Baumgartner holds five world records. The entire project with the name Red Bull Stratos was sponsored by the Austrian beverage company Red Bull which has created the global market for energy drinks. Energy drinks fall into the category of functional beverages, which also encompasses sports and nutraceutical drinks. Globally, energy drinks hold 47.3% of the functional beverage’s overall. Energy drinks in particular have experienced impressive growth while the beverage market in general is stagnating or just slightly increasing.

In 2013 the Red Bull GmbH generated in 166 countries with around 9.700 employees 5.040 billion euros. This is equivalent to around 5.387 billion cans of Red Bull and means a plus of 3.1% compared to 2012.[1] According to "Brand Finance" Red Bull is ranked on #3 of beverage brand with a brand value of $6.2 billion dollar behind Coca-Cola ($33.7 billion) and Pepsi ($19.4 billion).[2]

From the beginning Red Bull has leaved it by third parties to produce and bottle its products so the company could concentrate on the marketing. The key elements for Red Bull’s marketing strategy are event and sports sponsorship.

Red Bull operates many other businesses aside from energy drinks. The company owns and manages football and ice hockey clubs, TV broadcasting, a faction label; a formula one team and recently the company bought a weather service. Additional media products include print magazines about football, motor racing, celebrity gossip and lifestyle. The company has even ventured into the mobile phone service business in Austria, Hungary, Switzerland and South Africa.

1.1 Problem definition

While Red Bull is the world leader in energy drinks, it is facing growing competition from other players. The Coca-Cola Company (TCCC) in particular, with the brand Monster in the United States and the brand Burn in Brazil is gaining more and more market share. One reason therefore is that all the competitors offering quite the same product but to a cheaper price. Another reason is that Red Bull’s portfolio is limited compared to the rising numbers of rivals. In terms of facing the constantly changing environment and future challenges the company always needs to analyze their portfolio and create new strategies. This is the only way the company can defend their market share in a highly competitive non-alcoholic beverage segment against strong competitors like Monster Beverage Co. (Monster), TCCC (Full Throttle), Rockstar Inc. (Rockstar), PepsiCo Inc. (Amp) etc.

1.2 Objective and expectation

The objective of this work is it to introduce and apply one of the most renowned strategic instruments in the portfolio analysis for the company's management – the BCG Matrix. By applying the BCG Model to the Red Bull Company current strength and weaknesses of the portfolio will be uncovered and based on the analysis a decisions can be made about selection, prioritization and alignment of SBU´s to create a balance between risk and performance. Even Red Bull has already started to diversify into other businesses, rather than limiting itself to energy drinks the diversification strategy has not yet success so far, hence it can be expected an unbalanced and therefore risky portfolio.

1.3 Structure and methods

In the first part of this work the fundaments or theory behind the BCG Matrix will be explained. To the beginning you will find the objectives and the application field followed by the development of the BCG Matrix over a description of the various dimensions, the four quadrants and different standard strategies. The first part ends with the benefits and limitation of the Boston Box.

The second section shows the case study. Here the BCG-Model will be applied to the Red Bull Company in order to uncover the strength and weaknesses of the portfolio. It starts with the identification of the strategic business units followed by the creation and the analysis of the BCG Matrix over some recommendation for action. In the last part a conclusion will be drawn before finalizing with an outlook based on the thoughts about the future of the Red Bull Company.

For that work no primary data was gathered, the entire work is based on secondary data as the scope of this assignment does not allow for any explorative approaches, interviews or surveys. The necessary information for the work that were previously scattered published or accessible will be arranged, analyzed and interpreted. The sources of secondary data are gathered form books, annual reports and sources in the world-wide-web.

2 The BCG Matrix

The basic question in corporate management and strategy is “What business are we in and in what business we should be in?” Hence, corporate strategy is concerned with the composition and balance of a company’s portfolio of business. In an ongoing strategic responsibility of corporate management, the management has to make key decisions related to extensions, deletions and changes in the balance of the portfolio through the allocation and reallocation of capital and other resources. Therefore portfolio analyzing and planning models are useful techniques to get an idea about the firm’s overall business.[3]

2.1 History

The portfolio analysis is based on the model of financial portfolio theory which was developed in 1952 by the Nobel Prize winner Markowitz. The goal is an optimal set of securities in terms of return and risk.[4] In the 60 years this idea was transferred by Bruce Henderson of the Boston Consulting Group (BCG) from the financial model to the strategic management. Analogous to the securities portfolio, the company is interpreted as a set of investment decisions. Instead of securities paper the BCG considers the various business units or product lines as these are responsible for the company's success.[5]

2.2 Objective and application

The portfolio approach is perhaps the most widely used method in strategic management and the growth-share portfolio analysis better known as the BCG matrix (aka B.C.G. analysis, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram), represents the most known embodiment. The core task of the BCG matrix is to support the strategic management to control diversified businesses. Using the Boston Box the different product-market positions of the independent business units can be analyzed, compared and visualized in order to make a selection, prioritization and alignment of the various business segments. Goal is always to generate a balanced portfolio of capital needy and capital-generating business lines. Therefore, the BCG matrix is not only an analysis tool but also a tool for strategic planning and the formulation of strategies of individual business units.[6]

2.3 Strategic business units

In order to make an investment decision and develop separate strategies for the diverse markets it is necessary to divide the company into strategic business units (SBUs). An SBU is independent of activity of a company and therefore somehow a “micro-enterprise” within the company. It is identified as a product-market combination or product line which has an independent market mission and own set of competitors and costumers. At the same time it has its own management responsible for strategic planning and profit performance. The strategic business units can be quite active in several business areas but must be clearly delineated from each other. Once a company has defined its SBUs, management has to decide how the budget needs to be allocated. Each SBU must therefore be assessed according to its value, which is based on potential growth opportunities.[7]

2.4 Description of the BCG Matrix

The starting point for the Boston box is the simplification of the market key success factors to a from the company impressionable factor (relative market share – internal factor) and to a from the market given not essential controllable factor (market growth – external factor). The basic idea is that the individual business segments are always evaluated from these two dimensions. These strategic success factors which are based on strategic planning models are matched together in the form of a two-dimensional 4-field matrix.[8] Figure 1: ”The BCG Matrix under influence of experience curve and life-cycle curve.” visualized the relationship.

illustration not visible in this excerpt

Figure 1: The BCG Matrix under influence of experience curve and life-cycle curve.[9]

The environmental axis (y-axis) represents the external not essential controllable factors over the market growth. All environmental-relevant success factors are shown in this single dimension. The market growth is based on the strategic planning model of the Business-Life-Cycle, which demonstrates the sales performance of an industry or a product in a time period. The market growth is expressed in percentage as market growth rate in which operates a specific strategic business unit. It is calculated by the market volume of the current year and the previous year. The simple formula is shown in figure 2: “Calculation of market growth”. The market growth is used as indicator for the market attractiveness, as it is easier to gain market share in a growing market as in a shrinking market.[10]

illustration not visible in this excerpt

Figure 2: Calculation of market growth

Beside the calculation of the market growth rate it is necessary to define an adequate separation line to categorize low and high growing SBUs. This is quite easy as long all SBUs are operating in the same industry. In such a case it makes sense to simply use the median of the industry. In the other case of highly diversified companies an individual scheme must be found. In practice the dividing line is presented by e.g. the defined overall enterprise growth rate or to cross industry average rate.[11]

The internal situation of a company is compacted in the single dimension relative market share and is often shown on the x-axis (company-axis). This is the controllable factor which serves as a scale for the internal strength or weakness of a business unit. Background of the dimension relative market share is the strategic planning model of the experience curve or also known as economic of scale effect. This model says that an increasing cumulative production and sales volume tends to lower the costs per unit of a company. A rule of thumb says that the unit costs fall by 20-30% with each doubling of the cumulative volume. Thus, a company can build up cost advantages when its cumulative volume increases faster than its competitors - so it gains market share. The company that has in its industry the largest market share has compared to the company with less market share and less experience an advantage in the competition. The relative market share (based on the strongest competitors) has established itself as a dimension because the absolute market share would not allow sufficient comparability.[12] The relative market share is calculated by the sales of the SBU dividing by the sales of the strongest competitors (alternatively, the three strongest competitors), as shown in figure 3 “Calculation of relative market share”.

illustration not visible in this excerpt

Figure 3: Calculation of relative market share

The dividing line for the relative market share is a natural dividing line because according to the formula the market leader has a market share bigger one. Some authors define the dividing line at 1.5 with the justification that a significant competitive advantages arise only from a serious relative market share advantage of at least 50%.[13]

In addition to the two already mentioned dimensions of market growth and relative market share there is a third dimension, the revenue, which takes into account the performance of the individual business units and thus their contribution to the overall success of the company. The revenue is shown in the Boston Matrix on the different sized circles. The diameter of the circles - of which each represents a SBU - symbolizes the revenue of each SBU. With the help of different dimensions, the SBUs can be mapped into the four fields of the matrix. Out of the four quadrants, certain implications can be derived. Figure 4: “The implication for the four quadrants of the BCG-Matrix” shows a summary of all implications.

Question marks (low relative market share, high market growth):

SBUs this category have a low relative market share but operating in attractive markets with a high growth rate. This means in this sector the company has potentials that have not been used so far. A low cash flow due to the weak market position meets a high financial need to boost the SBU form a question mark to a star. In general it can be assumed for question marks a low to negative contribution margins, so losses can be expected. With question marks, it is unclear whether these develop to stars or Poor Dogs therefore the company should take every opportunity to make the concerned SBUs to develop into a star. However, if the market growth rate decreases significantly the company should try to sell or divest the business unit.[14]

Stars (high relative market share, high market growth):

Compared to the question marks Stars generate already a positive contribution margins and profit. The win is generally still below the required investment that is needed to save or to the further expansion of its own market position. The company can boast a strong competitive position in attractive markets. The here positioned SBUs are market leader in a high growth market. Therefore the company should try thru investments to keep the position. When the market growth slows down and the company manages to keep the market share, the star will developed into a Cash Cow, otherwise a poor dog.[15]

Cash Cows (high relative market share, low market growth):

The SBUs in this sector operating in markets those are already in the mature or saturation phase. That means the market growth is below the average. Due to their high market share these SBUs have regular high profit and cash flow. As the market grows only slightly there are none or even only small investments necessary. The strategy has to be hold the position and harvest the profit and cash flow to use it for stars.[16]

Poor Dogs (low relative market share, low market growth):

Poor Dogs are also in the saturation phase of a market. However, the company could not manage to generate significant market share. Therefore the SBU cannot benefit from economies of scale effects and makes little or no profit. It is recommended to clean out.[17]

illustration not visible in this excerpt

Figure 4: The implication for the four quadrants of the BCG-Matrix. (own graphic)[18]

2.5 Benefits and limitation

The specific advantages of the Boston box are in particular the simplicity of the model and the clear visualization as well as the resulting high communication potential and the uncomplicated data sourcing. A further advantage is the derivation of standard strategies and the fact that it is an established and well know strategic tool. To be considered critically is among other things the strong simplification of the success factors market growth and relative market share. Whether a market is attractive depends, besides the market growth of many other factors such as the market size and competitive intensity. Also, the competitive advantage lies not only in the relative market share, but also in other factors such as R&D and marketing skills. A further limitation is the lack of exact definition of the dividing lines and the fact that the standard strategies do not have a universal application.[19]

[...]


[1] Red Bull

[2] Salzburger Nachrichten 2014

[3] Grant 2008, page 420

[4] Markowitz 1952, page 77-91

[5] Kerth et al. 2011, page 85

[6] Kerth et al. 2011, page 85

[7] Matzler et al. 2013, page 14, 15

[8] Weber et al. 2008, page 388

[9] Grafic is translated and modified form Kerth et al. 2011, page 86

[10] Matzler et al. 2011, page 106

[11] Kerth et al. 2011, page 90

[12] Hungenberg 2012, page 461, 462

[13] Kerth et al. 2011, page 90

[14] Kerth et al. 2011, page 86, 87

[15] Weber et al. 2008, page 389

[16] Hungenberg 2012, page 463

[17] Hungenberg 2012, page 463, 464

[18] Grafic is translated and modified form Kerth et al. 2011, page 88

[19] Matzler et al. 2011, page 108, 109

Details

Seiten
19
Jahr
2014
ISBN (eBook)
9783668750920
ISBN (Buch)
9783668750937
Dateigröße
658 KB
Sprache
Englisch
Katalognummer
v432956
Institution / Hochschule
FOM Hochschule für Oekonomie & Management gemeinnützige GmbH, Nürnberg früher Fachhochschule
Note
Schlagworte
Strategic Corporate Management BCG Red Bull strategische Geschäftseinheit strategic business units

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Titel: Analysis of the portfolio of Red Bull based on the BCG matrix