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
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.
Business growth rate The BCG Matrix... 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 High 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 Low However, when inevitable market downturns occured or innovative products were introduced, the flaws of this approach became apparent High Low Relative position (Market Share) Companies found themselves with excess capacity and outdated product designs, as well as reduced capacity for innovations given their previous focus on cost-cutting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 High growth Stars Question marks 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 Low growth Cash Cow High share Dog Low Share
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
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 twodimensional 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.
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
Components of BCG Matrix 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 Stars Question marks? 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 Cash cows Dogs 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
Relative Market Share Relative market share indicates the cash generation. 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.
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
Business growth rate BCG Matrix application High Low 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 High Relative position (Market Share) Low 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
Business growth rate BCG Matrix application BCG Matrix application High 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 Low 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 High Relative position (Market Share) Low The company should have a balanced portfolio of stars, cash cows, and question marks
Business growth rate BCG Matrix application High Invest if needed to create cash cow Select a few Divest the others Low Liquidate High Low Relative position (Market Share)
BCG Matrix application Companies that followed these recommendations blindly made important strategic errors Even Cash cows may require substantial investment to keep competitive Example The Motor Vehicle industry is indeed lowgrowth 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 Example 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 freestranding entities, and this ignore any potential or actual synergies between them
Application of BCG Matrix in Corporate portfolio Second, the expertise and analytical resources in the corporate office provide guidance in determining what firms may be attractive acquisitions. 1 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 ) 2 3 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
Application of BCG Matrix in Corporate portfolio Fifth, portfolio analysis provides a basis for developing strategic goals and reward/evaluation system for business managers.. 4 5 Fourth, the corporate office can provide high-quality review and coaching for the individual businesses 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
Critical evaluation of BCG Matrix 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. 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'.
Business growth rate BCG Matrix with cash flow Stars Question marks High Cash flow Cash flow Low Cash flows Dogs High Low Relative position (Market Share)
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
Advantages of BCG Matrix 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
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
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