BCG Matrix

The Boston Consulting Group (BCG) Matrix is a simple tool to assess a company’s position in terms of its product range. It helps a company think about its products and services and make decisions about which it should keep, which it should let go and which it should invest in further.

 

That model was developed by Boston consulting group in 1970’s. That matrix also incorporates the product life cycle concept. That model can be used to access the position of strategic business units and very helpful for the organizations operating in number of different markets.

 

BCG MATRIX

 

 

Brands or items can be referred to as strategic business units (SBUs) because each is viewed as a separate entity with its own set of market conditions and competitors. BCG matrix shows various SBU on graph of Market growth Vs Market share. It has four cells and cells within the matrix are classified using the SBU’s ability to act as a source of funds (e.g., relative market share or competitive position) and its need for funds based on future growth potential (e.g., market growth rate or industry attractiveness). Placing products in the BCG matrix results in 4 categories in a portfolio of a company.  To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of their relative market share and growth rates.

 

The BCG matrix’s’ four cells based on two axes. The horizontal axis is labeled relative market share. Relative market share refers to a firm’s market share relative to its largest competitor. The vertical axis is labeled market growth. The market growth rate is usually based on average annual growth rate over the last few years, depending on the age of the industry or category.

 

Two other factors are important in evaluating SBUs: the size of the circle and the placement within the cell.

 

The size of the circle representing each SBU gives an indication as to the actual size of the unit measured in sales or volume. This is important because some SBUs may generate a good deal of revenue based on absolute volume but not look as attractive in terms of relative market share and market growth rate.   The SBU’s placement within the cell is also important because the axes represent a continuous scale even though there are only two labels. Two SBUs could be on opposite sides of the same cell and should be viewed differently.

 

 

The SBU’s placement within the cell is also important because the axes represent a continuous scale even though there are only two labels. Two SBUs could be on opposite sides of the same cell and should be viewed differently.

 

Four categories are as following

 

Stars	(high growth, high market share)
	These products generate high amounts of income as they are in high growth markets with a relatively high share of that market. However, they require large amounts of investment because of their high growth rate. These are normally known are raising star. When the market growth rate decree ses, a star will become a cash cow, if it maintains its large market share. A diversified company should have stars that have the potential to become the next cash cows in their portfolio to ensure future cash generation.
Basic Strategic Rule	·         Maintaining relative market share ·         Keeping sufficient funding available
Cash Cow	(low growth, high market share)
	These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth. Cash cows provide the cash required to turn the question marks into market leaders , to cover the administrative cost of the company, to fund research and development, to service the corporate debt and to pay dividends to share holders. Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis.
Basic Strategic Rule	Gaining relative market share Accepting losses ·         Profits and cash generation should be high , and because of the low  growth, investments needed should be low. Keep profits high ·         Foundation of a company
Question Mark	(high growth, low market share)
	These products have low market shares and do not generate much cash. However, these products are in a rapidly growing stage and thus consume large amounts of cash. A question mark (also known as a "problem child") A question mark has the capability to gain market share when the market growth slows, and can thus become a star and finally a cash cow. Before making the investment required to grow the market share. Question marks must be analyzed carefully in order to determine their potential.
Basic Strategic Rule	·         Maintaining relative market share ·         Exploiting cost-cutting potential ·         Releasing funds
Dog	(low growth, low market share)
	Dogs, or more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. The products that fall in this cell are the ones with a low share of a low growth market. These products do not generate revenues for the company. Firms should get rid of the products that fall in this cell as they tend to require huge investments from time to time.
Basic Strategic Rule	Abandoning hopeless products Minimizing losses ·         Avoid and minimize the number of dogs in a company. ·         Beware of expensive ‘turn around plans’. ·         Deliver cash, otherwise liquidate

 

 

Limitations of BCG Matrix

  

• High Market Share is not the only factor to measure competitive advantage. The matrix is just based on one factor each in industry attractiveness and competitive advantage. It tends to ignore a number of highly important factors as determinants of profitability. Similarly, Market growth rate is not the only factor to measure industry attractiveness. 
• The framework is based on the assumption that each business unit is independent of the others and their activities are mutually exclusive. Sometime a dog SBU used as synergy to other SBUs. However, in practicality, a business unit that is “dog” may be helping other business units gain a competitive advantage. Sometimes Dogs [of a huge market] can earn even more cash as Cash Cows.