Monday, July 5, 2021

BOSTON CONSULTING GROUP (BCG) MATRIX

In the 1970s, BCG’s experience-curve work led to an insight that had a significant impact on business thinking. Problems faced by the organizations were:

● If rapid growth in market share was as important as the curve suggested, then the usual approach to resource allocation in which each business unit funded its own growth seemed a recipe for failure.
● Businesses with low market share, but high growth potential would never generate enough cash to win the race down the Experience Curve.
● Those with a high market share but few chances for growth would generate far more cash than they could use productively.

Need For Segregation

Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. The BCG model helped meet this challenge of allocating resources to different units or product lines. The model gave a way of showing the relationship of market growth and market share and the position of products within it.

About the Approach In brief

BCG developed a simple conceptual framework, named the Growth-Share Matrix, to help corporate managers determine when they should consider using profits from “cash cow” businesses to fund growth in other businesses.

For the greater part of two decades, it became the standard approach to capital allocation in multi-sector, multi-segment companies. ‘Stars’, ‘Dogs’, ‘Cash Cows’ and ‘Question Marks’ have become firmly embedded in the language of business. Even today, BCG’s Approach is used as a primer in the principles of portfolio management.

image for bcg matrix
simple and clear image for bcg matrix

The vertical axis represents the degree to which a marketplace for a product is growing.

The horizontal axis represents market share of a specific product in a
specific market.

Products can be categorized into one of the four boxes on the diagram. Thus, products with a high market share of a rapidly growing market would be placed in the upper left box. By contrast, products with a low market share of a slowly growing market would be placed in the lower right box. Products in each of the four boxes are described in terms of the picture in each box and decisions regarding their management are made accordingly.

Stars :

● Stars are products or Business Units
● They hold a high market share in a growing market.
● Such products tend to require high investment in product advertising and brand management.
● They are often new products and their management has to be quite intensive.
● Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead.
● If successful, a star will become a cash cow when its industry matures.

Cash Cows :

● Cash cows generate cash.
● They are products or business divisions with a high market share in a mature, slow-growing industry.
● They will normally be mature products and require limited advertising and management support. People tend to develop generic names for cash cow products, such as Xerox for copying machines or Cadbury for chocolates.

Question Marks :

● Question marks are products or units which have a low market share in high-growth markets.
● Strategic and hard decisions need to be made about such products. If there’s already an established leader in the market, it’s better not to invest in question mark products as the cost would be high. But, if there are a number of competitors but no dominant one, the investment may be worthwhile.
● Question marks will need a big investment in order to convert them into star products.

Dogs :

● Dogs are products or units with a low market share in a slow-growing or even declining market, with limited scope for growth.
● As dog products require less cash, because of their low market share, we can use this cash for our other products.
● Normally, it is advisable to liquidate/divest Dog products.
● However, sometimes the organizations keep these dog products in their portfolio, so as to have completeness of product range.

Criticism :

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. However, the approach has received some negative criticism for the following reasons:
● The link between market share and profitability is questionable since an increasing market share can be very expensive.
● The approach may overemphasize high growth since it ignores the potential of declining markets.
● The model considers the market growth rate to be a given. In practice, the firm may be able to grow the market.

Reference: Image1, Image 2, Information: SCDL,Pune, bcg.com

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