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
?
Copyright © 2008 - 2012

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.
Copyright © 2008 - 2012

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.
Copyright © 2008 - 2012

The BCG Matrix . . .
High Low
Relative position
(Market Share)
Low
High
Businessgrowthrate
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capacity and outdated product designs, as well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
Copyright © 2008 - 2012

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’
High
share
Low
Share
Low
growth
High
growth
Stars Question marks
Cash Cow Dog
Copyright © 2008 - 2012

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.
Copyright © 2008 - 2012

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.
Copyright © 2008 - 2012

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
Copyright © 2008 - 2012

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
Copyright © 2008 - 2012

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.
Copyright © 2008 - 2012

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
High Low
Relative position
(Market Share)
Low
High
Businessgrowthrate
Copyright © 2008 - 2012

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’
High Low
Relative position
(Market Share)
Low
High
Businessgrowthrate
Copyright © 2008 - 2012

High Low
Relative position (Market Share)
Low
High
Businessgrowthrate
Invest if needed to
create cash cow
Select a
few
Divest the
others
Liquidate
Copyright © 2008 - 2012

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
Copyright © 2008 - 2012

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.
1
2
3
Copyright © 2008 - 2012

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.
.
4
5
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
Copyright © 2008 - 2012

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'.
Copyright © 2008 - 2012

• 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
Copyright © 2008 - 2012

Limitations
Limitations of BCG Matrix
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
Copyright © 2008 - 2012

Bcg matrix

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