BCG Matrix
The Boston Consulting Group (BCG) Matrix is a four-cell matrix that was established by BCG, in the United States. It is a 2 by 2 matrix. It is often considered to be the best tool for analysing business portfolios. It offers a graphical depiction for an organisation to assess the many businesses in its portfolio on the basis of their respective market share and industry growth rates, and it does so by providing a chart.
A two-dimensional examination of the management of SBU’s is presented here (Strategic Business Units). In other words, it is a comparative review of the potential for business as well as an evaluation of the surrounding environment.
Businesses could be placed in either the high or low category of this matrix based on the rate of growth of their respective industries as well as their proportional market share.
In order to complete the analysis, each SBU will need to have both measures calculated for them. The relative market share metric will be used to quantify the competitive advantage that is suggested by market domination as a dimension of business strength. The existence of an experience curve is the fundamental notion that underpins this, along with the idea that market share is attained through total cost leadership.
The BCG matrix is comprised of four cells, the horizontal axis of which represents relative market share and the vertical axis of which denotes market growth rate. The value 1.0 represents the middle ground of relative market share. If all of the SBUs belong to the same industry, the average growth rate of that industry is the one that is used. However, if all of the SBUs are distributed over a variety of sectors, then the growth rate of the economy should be used as the point of reference for the median.
The locations of the business units on the grid are taken into consideration when allocating resources to those units. The names given to the four cells that make up this matrix are stars, cash cows, question marks, and dogs respectively. These individual cells each denote a distinct category of commercial enterprise.
Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures.
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Cash Cows
Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued.
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Question Marks
Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted.
If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars.
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Dogs
Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitor’s/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.
The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as-
- BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected.
- Market is not clearly defined in this model.
- High market share does not always leads to high profits. There are high costs also involved with high market share.
- Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability.
- At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes.
- This four-celled approach is considered as to be too simplistic.