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

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 . . .

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’

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 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.

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 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

Relative Market Share

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

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. Business growth rate 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 High 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 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 High Low Relative position (Market Share)

BCG Matrix application BCG assumed that competitors with larger market shares would have the lowest costs and higher profits Business growth rate 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 High 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’ Low The weakest ‘question marks’ should be divested or liquidated, the company should exit from the ‘Dog’ industries High Low The company should have a balanced portfolio of ‘stars’, ‘cash cows’, and ‘question marks’ Relative position (Market Share)

BCG Matrix application Business growth rate Invest if needed to create cash cow Select a few Divest the others High Liquidate Low 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

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 3 2 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”)

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. 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'. 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.

BCG Matrix with cash flow Business growth rate 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

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 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