Bcg Matriz

John Mashego and two colleagues started Endless Vacations when they bought a run-down hotel in the Hazyview area in 1989. They slowly converted it and within three years they were awarded a three star status and an increase in occupancy. In the early nineties, with the dramatic growth of the travel industry, there were many competitive resorts that were established in the surrounding area which put significant pressure on Endless Vacation's financial performance. In an effort to combat lost market share, Endless Vacations increased their advertising spend and they hired overseas agents to market their hotel. This strategy has not been as effective as they expected and they are struggling to make any profits. In an effort to regain the financial security they once had, they are considering two potential ventures. The first venture is to establish a tour business for overseas visitors and the second venture is to develop an information website on SA tours and holiday resorts.

In 1989, when John Mashego and his two colleagues purchased the run-down hotel they recognized that there was a need for hotels in the Hazyview area. They took the time and money to convert it into a more luxurious hotel and by doing so they were rewarded with a three star status. This rating caused their occupancy to double almost immediately. At more or less the same time they started to see an increase in resorts being established in the area. They responded to this increase by substantially increasing their advertising spend and by hiring agents from overseas to market their hotel. The travel industry in South Africa was transforming rapidly.

In the early nineties, the economic climate in South Africa had changed significantly providing great prospects for those in the industry to grow and the ability for opportunity seekers to enter into the market. South Africa essentially opened its borders and became a sort-after destination for international travellers. This was partly due to its natural beauty but also because the rand was not strong against other international currencies allowing international visitors to travel cheaply to and in South Africa. The travel industry essentially transformed from one with mainly local tourists to one with international visitors. Businesses were being established at a rapid rate because of this escalating demand and consequently competition was increasing exponentially. The current companies had to continually reinvent themselves just so that they could maintain the customers they had, never mind to increase their customer base. These companies had to drastically increase their expenditure so that they could sustain the market share they once had.

To better understand how these changes affected Endless Vacations we can refer to the Boston Consulting Group (BCG) matrix. The BCG matrix (see exhibit A below) is a tool that allows a user to plot a business's products, allowing the user to better understand where the product is so that they can determine where the product needs to be. The BCG matrix plots a product on two dimensions, the first dimension (vertical axis) is the industry/market growth rate and the second dimension (horizontal axis) is the products relative market share.

A user will need to identify the grow rate of the market that the product is in. The growth rate of any market or industry is the relative increase or decrease in overall size from a previous period. The BCG matrix uses the premise that the higher the growth rate, the more attractive the industry becomes and therefore there will be more customers entering than leaving the market. In the case of Endless Vacations, the travel industry was growing rapidly in the early nineties and there was a large influx of businesses entering the market to try capture the growing number of customers.

The second dimension on the BCG matrix is the relative market share. The relative market share is a product or single business unit's market share as compared to the largest competitor in the same market. The BCG matrix is based on the premise that a product that has a high market share generates high profit margins. It also infers that the higher the market's growth rate the more additional cash needed to hold or increase the market share due to the increase in competition.

The BCG matrix requires the user to plot a product based on the above mentioned dimensions. Depending on whether the product has a high or low relative market share and whether the market growth rate is high or low, the product will fall into one of four quadrants.

* The first quadrant, starting from the top left hand quadrant, is the 'star' which is a product that is in a high growth industry and that has a relatively large market share.

* The second quadrant is the 'cash cow' which is a product that has a large share of a market that has a relatively low growth rate.

* The third quadrant is the 'dog' (also known as the 'pet') which is a product that is in a low growth market and that has a relatively small market share.

* The fourth quadrant is the 'question mark'. The 'question mark' (also know as 'problem children' or 'wildcats') is a product that has a relatively small share of the market in a market that is growing quickly.

Applying the BCG matrix, a product that has a relatively high market share in an industry with a high growth rate will be categorised as a 'star'. If we refer back to Endless Vacations in the late eighties there were few significant competitors in the hotel market in Hazyview. John Mashego and his colleagues recognised the need to invest in the hotel in order to provide a higher level of service and thus to increase their occupancy. It can be generalized that a high growth market is a relatively new market and due to this the customers are less knowledgeable about price and thus less price sensitive. Endless Vacations took advantage of this and were able to be successful with their services and prices in order to earn the cash to reinvest in the business and to upgrade it to a three star business. Endless Vacations was thus a 'star' product because they had a higher market share in the quickly growing hotel market.

In the early nineties, Endless Vacations started to experience increased competition with the rapid increase of resorts being opened in the surrounding area. The BCG matrix states that a 'star' product that may be in jeopardy of losing market share should increase their investment so as to keep their market share. The theory is that if the product keeps their market share they will eventually become a 'cash cow'.