bcg matrix

BCG Matrix

Contents

Emergence of BCG Matrix

Approaches of BCG Matrix

Components of BCG Matrix

Applications of BCG Matrix

Advantages of BCG Matrix

Limitations of BCG Matrix

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Emergence of Portfolio Matrices

During the 1979’s and early 1980’s, several leading consulting firms developed the concept of portfolio matrices to achieve a better understanding of the competitive position of an overall portfolio of businesses, to suggest alternatives for each of the businesses, and to identify priorities for the allocation of resources.


Purpose of Portfolio Matrices

The key purpose of portfolio models was to assist a firm in achieving a balanced portfolio of business.

This consisted of businesses whose profitability, growth and cash flow characteristics would complement each other.

Imbalance, for example, could be caused either by excessive cash generation with too few growth opportunities or by insufficient cash generation to fund the growth requirements.


The BCG Matrix . . .

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Relative position (Market Share)

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The Boston Consulting Group (BCG), founded in 1963, was a pioneering consulting that introduced influential concepts such as the ‘experience curve’ and the ‘growth-share matrix’

The experience curve concept held that total costs would decline by a certain percentage everytime cumulative production is doubled. This idea spurred corporations to expand aggressively their capacity, focus on cost minimization, and seek higher demand, often by keen price competition

However, when inevitable market downturns occured or innovative products were introduced, the flaws of this approach became apparent

Companies found themselves with excess capacity and outdated product designs, as well as reduced capacity for innovations given their previous focus on cost-cutting


Emergence of Growth Share Matrix

The growth-share matrix viewed companies as a portfolio of businesses and was intended to help senior managers identify the cash-flow requirements of different businesses and take resource allocation decisions about them

When using the growth-share matrix, businesses are grouped in Strategic Business Units (SBUs) and are mapped on a matrix along two dimensions: industry growth rate abd relative market share. The SBUs are then divided into ‘Stars’, ‘Question Marks’, ‘Cash Cows’ and ‘Dogs’

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Low growth

High growth

Stars Question marks

Cash Cow Dog


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BCG Matrix

• Boston Consulting Group (BCG) Matrix is a four

celled matrix developed by BCG, USA.

• The Boston Consulting Group (BCG) growth/share

matrix in among the best known of these

approaches.

• In the BCG approach, each of the firm’s Strategic

Business Units (SBUs) in plotted on a two-

dimensional grid in which the axes are relative

market share and industry growth rate.

• The grid is broken into two quadrants. It is a most

renowned corporate portfolio analysis tool.


BCG Matrix

According to the BCG Matrix, business could be divided into high or low depending

upon their industry growth and relative market share.

Relative Market Share = SBU Sales this year leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.

The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership.


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Each of the four quadrants of the grid has different implication for the SBUs that fall into the category

Stars are SBUs competing in the high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding

Question marks are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions

These are SBUs with high market shares in low-growth industries. These units have limited long-run potential but represent a source of current cash flows to fund investments in “stars” and “question marks”

Dogs are SBUs with weak market shares in low-growth industries. Because they have weak position and limited potential, most analysts recommend that they be divested

Stars

?Question

marks

Cash cows Dogs


Relative Market Share

Relative market share indicates the cash genera-tion. Higher the market share, the cash generated will be more. According to the BCG Matrix, it is assumed that these earnings will grow faster the higher the share.

The question of what is a ‘high market share’ is a debate. The best evidence is that the most stable position is for the brand leader to have a share double that of the second brand, and triple that of the third.

By choosing the relative market share, it shows where the brand is positioned against its competitors and indicates about the future of the product/brand as well


Market Growth Rate

Organizations strive for rapid growth in the competitive market.

They require huge investment for this. The theory behind the matrix

assumes, therefore, that a higher growth rate is indicative of

accompanying demands on investment. The cut-off point is chosen

as 10% per annum and the growth beyond this point is considered

as significant. It is a critical requirement for this technique.


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BCG Matrix application


The BCG Matrix method can help to understand a frequently made strategy mistake: having a one size fits all strategy approach, such as a generic growth target or a generic return on capital for an entire corporation.

Cash Cows Business Units will reach their profit target easily. Their management have an easy job. Even worse, they are often allowed to reinvest substantial cash amounts in their mature businesses

Dogs Business Units are fighting an impossible battle and, even worse, now and then investments are made. These are hopeless attempts to "turn the business around"

As a result all Question Marks and Stars receive only mediocre investment funds. In this way they can never become Cash Cows. Inadequate invested sums of money are a waste of money

Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become Cash Cows (or Stars), or otherwise companies are advised to disinvest. They can then try to get any possible cash from the Question Marks that were not selected

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BCG assumed that competitors with larger market shares would have the lowest costs and higher profits

In growing markets, a company should try to capture most of the growth by growing faster than its competitors, so that when growth slowed down, it would emerge as the highest-share competitor

Based on these assumptions, the strategic implications of the BCG matrix were that cash from ‘cash cows’ should be used to support selected ‘question marks’ and to strengthen ‘emerging stars’

The weakest ‘question marks’ should be divested or liquidated, the company should exit from the ‘Dog’ industries

The company should have a balanced portfolio of ‘stars’, ‘cash cows’, and ‘question marks’

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Invest if needed to create cash cow Select a

fewDivest the others

Liquidate



Companies that followed these recommendations blindly made important strategic errors

Even ‘Cash cows’ may require substantial investment to keep competitive

Example

Example

The Motor Vehicle industry is indeed low-growth and relatively consolidated, but it is also characterized by cut-throat competition. If the leading competitors reduce their investment in new vehicle designs, and product or process innovations in general, they are likely to be quickly overtaken by more capable competitors. Lastly, portfolio planning techniques tend to view businesses as free-stranding entities, and this ignore any potential or actual synergies between them


Application of BCG Matrix in Corporate portfolio

Third, the corporate office is able to provide financial resources to the business units on favorable terms that reflect the corporation’s overall ability to raise funds

First, the portfolio analysis provides a snapshot of the business in a corporation’s portfolio. Therefore the corporations is in a better position to allocate resources among the business units according to prescribed criteria (e.g., use cash flows from the “cash cows” to fund promising “stars”)

Second, the expertise and analytical resources in the corporate office provide guidance in determining what firms may be attractive acquisitions.

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Application of BCG Matrix in Corporate portfolio

Fourth, the corporate office can provide high-quality review and coaching for the individual businesses

Fifth, portfolio analysis provides a basis for developing strategic goals and reward/evaluation system for business managers.

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For example, managers of “cash cows” would have lower targets for revenue growth than managers of “stars”, but the former would have higher threshold levels of profit targets on proposed projects than the managers of “star” businesses. “Cash cows” understandably would be rewarded more on the basis of cash that their businesses generate than would managers of “star” businesses


Even though, this BCG Matrix is widely used and theoretically useful, several academic studies have questioned about the success of various business units which has used this method. A study was conducted and analyzed that the firms which followed portfolio planning like BCG Matrix model had lower shareholder returns.

Critical evaluation of BCG Matrix

The matrix emphasizes only on market share and industry growth rate and overlooks other elements of the industry. The BCG Matrix was useful tool in some areas where cash flows were graphically depicted.

Perhaps the most important danger is, however, that the apparent implication of its four-quadrant form is that there should be balance of products or services across all four quadrants; and that is, indeed, the main message that it is intended to convey.

Thus, money must be diverted from `cash cows' to fund the `stars' of the future, since `cash cows' will inevitably decline to become `dogs'. There is an almost mesmeric inevitability about the whole process. It focuses attention, and funding, on to the `stars'. It presumes, and almost demands, that `cash cows' will turn into `dogs'.


BCG Matrix with cash flow

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Stars Question marks

Cash flows Dogs

Cash flow

Cash flow


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• BCG Matrix is simple and easy to understand

• It helps you to quickly and simply screen the opportunities open to you, and helps you think about how you can make the most out of them

• It is used to identify how corporate cash resources can best be used to maximize a company’s future growth and profitability

• If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price that is low enough to get early market share leadership. Once it becomes a star, it is destined to be profitable

• BCG method is applicable to large companies that seek volume and experience effects

• It provides a base for management to decide and prepare for future actions


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Limitations of BCG Matrix ?


Limitations


Limitations • BCG matrix uses only two dimensions: Relative Market Share and Market Growth Rate

• Problems arise while getting data for market share and market growth

• High market share does not mean profits all the time

• Business with low market share can be profitable too

• It neglects the effects of synergy between business units

• Market growth is not the only indicator for attractiveness of a market

• There is no clear definition of what constitutes a “market”

• The model neglects small competitors that have fast growing market shares


bcg matrix

Economy & Finance

celled matrix

bcg approach

market growth rate

highgrowth industries

high market shares

growth requirements

lowgrowth industries

growth opportunities