BCG -MATRIX

Dr. Rajesh

BCG growth-share matrix

doing. in 1968 a clever chap from Boston Consulting Group, Bruce Henderson, created this chart to help organisations with the task of analysing their product line or portfolio. The matrix assess products on two dimensions. The first dimension looks at the products general level of growth within its market. The second dimension then measures the products market share relative to the largest competitor in the industry. Analysing products in this way provides a useful insight into the likely opportunities and problems with a particular product BCG matrix (or growth-share matrix) is a corporate planning tool, which is used to portray firms brand portfolio or SBUs on a quadrant along relative market share axis (horizontal axis) and speed of market growth (vertical axis) axis. Growth-share matrix is a business tool, which uses relative market share and industry growth rate factors to evaluate the potential of business brand portfolio and suggest further investment strategies.

Understanding the tool

Consulting Group to evaluate the strategic position of the business brand portfolio and its potential. It classifies business portfolio into four categories based on industry attractiveness (growth rate of that industry) and competitive position (relative market share). These two dimensions reveal likely profitability of the business portfolio in terms of cash needed to support that unit and cash generated by it. The general purpose of the analysis is to help understand, which brands the firm should invest in and which ones should be divested

Relative market share. One of the dimensions used to evaluate business portfolio is relative market share. Higher corporates market share results in higher cash returns. This is because a firm that produces more, benefits from higher economies of scale and experience curve, which results in higher profits. Nonetheless, it is worth to note that some firms may experience the same benefits with lower production outputs and lower market share.

Market growth rate. High market growth rate means higher earnings and sometimes profits but it also consumes lots of cash, which is used as investment to stimulate further growth. Therefore, business units that operate in rapid growth industries are cash users and are worth

Products are classified into four distinct groups, Stars, Cash Cows, Problem Child and Dog

Stars (high share and high growth)

means that star products can be seen as market leading products. These products will need a lot of investment to retain their position, to support further growth as well as to maintain its lead over competing products. This being said, star products will also be generating a lot of income due to the strength they have in the market. The main problem for product portfolio managers it to judge whether the market is going to continue to grow or whether it will go down. Star product can become Cash Cows as the market growth starts to decline if they keep their high market share. Stars operate in high growth industries and maintain high market share. Stars are both cash generators and cash users. They are the primary units in which the company should invest its money, because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become cash flows. This is especially true in rapidly changing industries, where new innovative products can soon be outcompeted by new technological advancements, so a star instead of becoming a cash cow, becomes a dog. Strategic choices: Vertical integration, horizontal integration, market penetration, market development, product development

Cash Cows (high share, low growth)

is due to less competitive pressures with a low growth market and they usually enjoy a dominant position that has been generated from economies of scale. Cash cows are still generating a significant level of income but is not costing the organisation much to maintain. These products can be milked to fund Star products. Cash cows are the most profitable brands and should be milked to provide as much cash as possible. The cash gained from cows should be invested into stars to support their further growth. According to growth-share matrix, corporates should not invest into cash cows to induce growth but only to support them so they can maintain their current market share. Again, this is not always the truth. Cash cows are usually large corporations or SBUs that are capable of innovating new products or processes, which may become new stars. If there would be no support for cash cows, they would not be capable of such innovations.

Dogs (low share, low growth)

share in a low growth market. These products are very likely making a loss or a very low profit at best. These products can be a big drain on management time and resources. The question for managers are whether the investment currently being spent on keeping these products alive, could be spent on making something that would be more profitable. The answer to this question is usually yes. Dogs hold low market share compared to competitors and operate in a slowly growing market. In general, they are not worth investing in because they generate low or negative cash returns. But this is not always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other brands or SBUs or simple act as a defense to counter competitors moves. Therefore, it is always important to perform deeper

Problem Child -low share, high growth)

Also sometime referred to as Question Marks, these products

prove to be tricky ones for product managers. These products are in a high growth market but does not seem to have a high share of the market. The could be reason for this such as a very new product to the market. If this is not the case, then some questions need to be asked. What is the organisation doing wrong? What is competitors doing right? It could be that these products just need more investment behind them to become Stars. Question marks are the brands that require much closer consideration. They hold low market share in fast growing markets consuming large amount of cash and incurring losses. It has potential to gain market share and become a star, which would later become cash cow. Question marks do not always succeed and even after large amount of investments they struggle to gain market share and eventually become dogs.

Assumptions
A completed matrix can be used to assess the

strength of your organisation and its product portfolio. Organisations would ideally like to have a good mix of cash cows and stars. There are four assumptions that underpin the Boston Consulting Group Matrix: 1. If you want to gain market share you will need to invest in a competitive package, especially through the investment in marketing 2. Market share gains have the potential to generate a cash surplus due to the effect of economies of scale. 3. The maturity stage of the product life cycle is were any cash surplus is most likely to be generated 4. The best opportunities to build a strong market position usually occur during a markets growth period.

Application of BCG
BCG matrix quadrants are simplified versions of

the reality and cannot be applied blindly. They can help as general investment guidelines but should not change strategic thinking. Business should rely on management judgment, business unit strengths and weaknesses and external environment factors to make more reasonable investment decisions.

How to perform BCG matrix analysis?

Step 4. Find out market growth rate The industry growth rate can be found in industry reports, which are usually available online for free. It can also be calculated by looking at average revenue growth of the leading industry firms. Market growth rate is measured in percentage terms Step 5. Draw the circles on a matrix