Four key consulting concepts

Marta Szczerba explains the theory behind the work of this part of the business world
Introducing consulting

Consultants can be thought of as the academics of the business world: they observe, analyse their research findings in the context of theory, and draw conclusions. So here's our guide to four of the most famous theoretical concepts used in the industry today.

1. BCG Matrix

The BCG Matrix, a tool that helps companies allocate resources, was devised by the Boston Consulting Group during an assignment for a chemicals company in 1968, and was deemed by the Harvard Business Review to have changed the world of consulting.

To apply the matrix, a business's products are split into four categories that determines, according to the theory, how much money should be invested in them.

Cash cows, which have a high share of a low growth market, should be "milked" for profit as much as possible - investment would be wasted in a low-growth industry. Stars, which have a high share of a high growth market, should receive investment so that they can become the next cash cows.

Dogs, which have a low share of a low growth market, should be sold as they risk depressing the performance of the company. There might, however, be strategic reasons for keeping a dog - for example, as a tool to acquire new customers for other products. Question marks, which have a low share of a high growth market, have the potential to become either stars or dogs, so they need to be carefully analysed to determine if they're worth investing in.

Theory and the real world: the BCG Matrix and Tesco

Tesco's high street shops would be cash cows - although Tesco has a market share in this area of around a massive 30 per cent, the growth in the division has been very weak.

Tesco's online operations would be stars - Tesco is the largest UK online grocer in the high growth e-commerce market. So Tesco should invest money generated by its shops into improving its online offering.

Tesco's question marks include Blinkbox, its video on demand service, which is in a high growth market but has a low market share as it faces competition from the likes of Sky, iTunes and Netflix. Tesco will need to decide on the appropriate level of investment needed to turn this service into a star.

Finally, Tesco's US operation Fresh & Easy is a dog as it operates in a low growth market with a small market share. In spring this year, Tesco decided to pull out of the US.

2. The Experience Curve

The theory states that there is an inverse relationship between production and costs: each time production volume doubles, costs fall by a constant percentage. So different companies making the same product will have different costs depending on volume of production.

Why do costs decrease as production increases? The model explains that the key lies in learning over time - both in terms of individuals and whole organisations. For example, workers operate faster as they become more confident and spend less time hesitating, learning or making mistakes, while refinements to manufacturing processes over time lead to improvements in efficiency.

The model has limitations. It best fits a manufacturing or industrial company operating in a growing market, and is a poor basis for strategy in mature industries with already very efficient production methods. Also, the model's relentless drive for ever-lower costs can leave a business open to being blindsided by changes in taste or technology.

3. Porter's Five Forces

Developed by Harvard Business School Professor Michael Porter, Porter's Five Forces is a framework that determines how profitable an industry could be for its players and where and how within it a company might have room to compete. Note that Porter's Five Forces is only a starting point for analysis - consultants would need to evaluate the company itself to make substantiated claims about its competitiveness.

At the centre of Porter's Five Forces is rivalry between companies. The other forces help to determine the intensity of the competition. These are divided into two "vertical forces" from other levels of the business world - the bargaining power of suppliers and the bargaining power of buyers -and two horizontal forces from the same level of the business world - the threat of new entrants and the threat of substitute offerings. An industry where the five forces drive down overall profitability would be deemed "unattractive".

Porter also added a long list of factors that affect the strength of each force to be considered when applying the model. For example, when evaluating the likelihood of new entrants consultants should consider, among other factors, economics of scale, government policy, capital requirements and importance of brand identity.

Theory and the real world: Porter's Five Forces and the magazine industry

The magazine industry is very competitive - the UK's magazine industry declined by 6 per cent between 2008 and 2013. Using Porter's Five forces can help explain why.

There's a constant influx of new entrants as entry barriers are low - e-zines and print publications are very easy and cheap to set up and distribute.

There's also a high degree of substitution as generally no costs apply for switching between products, though consumers enrolled in subscriptions for niche content are less likely to switch.

The bargaining power of buyers is high. Attracting a print audience is a struggle unless your product provides unique content, while digital audiences lack loyalty and have an even lower inclination to pay for content.

By contrast, the bargaining power of suppliers is low, both in terms of publishing platforms and journalists. However, star journalists can still command a hefty price tag, meaning that significant resources are needed to publish a quality publication.

4. Core Competencies

Core Competencies is a concept devised by CK Prahalad and Gary Hamel from the University of Michigan. It's one of the most-used consulting concepts, but is also the most confusing given its non-quantitative approach and complexity of the definitions it uses.

The theory's key idea is that each business has a "core competency", a factor that's central to the way in which it or its employees work. It should fulfil three key criteria: not easy for competitors to imitate, can be reused widely for many products and markets, and contributes to the value of the product or service for customers.

A core competency can take various forms - for example, technical know-how, good market coverage, relationships with customers, or cultural factors, such as employee loyalty or good human resource management.

A core competency provides a business with a competitive advantage - and, says the theory, every business should develop and guard theirs. For example, Apple's core competency is its intuitive user interface design, which has been successfully implemented in a wide variety of products and markets. McDonald's core competency is the ability to uniformly replicate its hamburgers around the world.

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