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The Boston Consulting Group (BCG) matrix is a tool that used to evaluate strategic business
units. It is organizes business by two dimension, the business growth rate and market share.
The growth rate is use to show how rapidly the entire industry is increasing and the market
share is whether a business unit has a larger or smaller share than its competitors. The
combination of market share and business growth rate have provides four categories to
determine the SBUs within a corporate portfolio. The four categories of BCG are stars,
question marks, cash cows and dogs. STARS. The stars have a large market share in the
rapidly growing industry and it is important because it has an additional growth potential and
profits should be reinvested for future growth and profits. It will produce a positive cash flow
as industry matures and market growth slows. Star need to use large amount of fund and are
the leaders in the business so they should also generate large amount of fund. Star may
generate fund but because the market is grow rapidly, the star require investment to maintain
the lead. If successful, a star will become a cash cow when its industry matures. The stars in
Public Bank are personal loan and saving account.
The BCG matrix (aka B-Box, BC.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston
Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce
Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their
business units or product lines. This helps the company allocate resources and is used as an
analytical tool in brand marketing, product management, strategic management, and portfolio
analysis. Analysis of market performance by firms using its principles has called its usefulness
into question, and it has been removed from some major marketing textbooks.
All this is done to make sure that the company is performing at a level of fulfilling the set goals
and standards (http://www. referenceforbusiness. com/management/Sc-Str/Strategic-PlanningTools. html). For the case of stars most companies’ uses prices skimming to penetrate the
market. The prices are normally high and this can lead to low sales. In most cases price
skimming can only take very short periods of time which later affects demand of those
products hence this products ends up entering in another level of the cycle like “Questions
marks” which denies the company from enjoying its benefit (www.
Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by
BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic
representation for an organization to examine different businesses in it's portfolio on the basis of
their related market share and industry growth rates.
Being a consumer goods producer, it has observed global values in terms of cultural diversities
and other related issues in their marketing to ensure that they are not faced out of market.
Although the model is not used as it was used in the past, BCG growth/share matrix it has one
advantage in that it has an ability of providing a comprehensive snapshot of the positions of a
company’s various business concerns. It also draws attention to the cash flow investment
characteristics and needs of organization to know how to manage and also help the
organization to know how to manage and maintain a balanced portfolio.
It is a two dimensional analysis on management of SBU's (Strategic Business Units). In other
words, it is a comparative analysis of business potential and the evaluation of environment.
According to this matrix, business could be classified as high or low according to their industry
growth rate and relative market share.
For each product or service, the 'area' of the circle represents the value of its sales.
The BCG Matrix thus offers a 'map' of the organization's product (or service) strengths and
weaknesses, at least in terms of current profitability, as well as the likely cashflows.
The company has the biggest market share in the ice cream industry with an annual turn of €5
billion (http://fmcg-marketing. blogspot. com/2008/02/unilever-growth-to-sputter-as-p-takes.
html) According to Boston Consulting Group, development of matrix requires the assessment
of a business portfolio, which includes an organization’s autonomous divisions in terms of
their profit or activities. Unilever company has advanced its strategic management plans to
ensure that their products are competitive in the market.
The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that
one of the main indicators of cash generation was relative market share, and one which pointed
to cash usage was that of market growth rate.
Henderson reasoned that the cash required by rapidly growing business units could be obtained
from the firm's other business units that were at a more mature stage and generating significant
cash. By investing to become the market share leader in a rapidly growing market, the business
unit could move along the experience curve and develop a cost advantage. From this
reasoning, the BCG Growth-Share Matrix was born.
Derivatives can also be used to create a 'product portfolio' analysis of services. So Information
System services can be treated accordingly.
Relative Market Share = SBU Sales this year leading competitors sales this year.
This indicates likely cash generation, because the higher the share the more cash will be
generated.
As a result of 'economies of scale' (a basic assumption of the BCG Matrix), it is assumed that
these earnings will grow faster the higher the share.
Question marks are the third class in product portfolio. They are units with high growth rate
but low market share and thus they consume a lot of cash though they generate very little of it
and this results to high rate of cash consumption in the business. These units have a potential
of accelerating to a star level but when the market growth slows, they turn to be cash cows. If
the market growth declines completely leading to low consumption, then question marks
becomes Dogs.
The exact measure is the brand's share relative to its largest competitor. Thus, if the brand had a
share of 20 percent, and the largest competitor had the same, the ratio would be 1:1. If the largest
competitor had a share of 60 per cent, however, the ratio would be 1:3, implying that the
organization's brand was in a relatively weak position.
The BCG Growth-Share Matrix is a portfolio planning model that was developed by Bruce
Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation
that organisations business units can be classified into four categories based on combinations
of market growth and market share relative to the largest competitor. Market growth serves as
a proxy for industry attractiveness, and relative market share serves as a proxy for competitive
advantage. The growth-share matrix thus maps the business unit positions within these two
important determinants of profitability.
If the largest competitor only had a share of 5 per cent, the ratio would be 4:1, implying that the
brand owned was in a relatively strong position, which might be reflected in profits and cash
flows. If this technique is used in practice, this scale is logarithmic, not linear.
Wensley, Robin, 1994. Making better decisions: The challenge of marketing strategy
techniques. International Journal of Research in Marketing, [Online]. 11/1, pp85-90. Available
at: http://www.sciencedirect.com.libproxy.ncl.ac.uk/science/article/pii/0167811694900361
[Accessed 04 November 2012].
The reason for choosing relative market share, rather than just profits, is that it carries more
information than just cash flows. It shows where the brand is positioned against its main
competitors, and indicates where it might be likely to go in the future.
BCG matrix has been widely used in Unilever especially in house hold goods whereby tastes
and preferences change every time where applied BCG matrix helps not only in market growth
but also position of cash flow in the organization. BCG matrix has acted as good indication of
Unilever markets strength and future potentials and attractiveness to future competitors. Now
that BCG matrix ranks only market share and industry growth rate it implies the actual
profitably and purpose of any business unit in relation to the 4 graphic cycles in product
portfolio.
It can also show what type of marketing activities might be expected to be effective.
Relative Market Share = Sales This Year / Leading Rival's Sales This Year
Market Growth Rate = Industry sales this year - Industry Sales last year.
BCG is an acronym which stands for Boston Consulting Group Growth -share matrix. This is a
mode which is recommended for all companies to use in the event of marketing and resource
allocation. The information collected by experts in business environment indicates that there is
no strategic management which appears to be successful without using the BCG growth model.
Market share is the percentage of the total market that is being serviced by a company under
consideration, measured either in revenue terms or unit volume terms. Higher the market share,
the higher the proportion of the market one controls.
Therefore question marks should be carefully scrutinized to see whether they are worth
investing in and corrective control measures to be taken. Stars are leader units in the market
industry. They are units with high market share in a fast growing industry (http://fmcgmarketing. blogspot. com/2007/11/bcg-matrix. html). To maintain Stars in a business requires
a lot of cash and therefore cash cows becomes the support of Stars. This is possible only if the
business is worth to be leader in the market industry. If not well maintained Stars, can fall from
being leader in the market and become cash cows.
The Boston Matrix assumes that if the company under consideration is enjoying a high market
share then it will be making more money. (This assumption is based on the idea that company
has been in the market for long enough to have learned how to be profitable, and will be
enjoying scale economies that gives an advantage). Market growth is used as a measure of a
market's attractiveness.
This is because an invaluable analytical tool in their diversified product lines as it has been
witnessed. According to FMCG and Retail marketing Blog article in February 2008, Unilever
Company grew to sputter as P &G and it has taken market share in India. The Unilever
Company sells household foods and other consumer related goods. According to the article
released on February2008, the speculation of the company seems to notice a global revenue
growth slow in the year 2010 as Procter and Gamble Company (http://universityessays. tripod.
com/bcg_growth_share_matrix_boston_consulting_group.
Markets experiencing high growth are ones where the total market is expanding, meaning that it's
relatively easy for businesses to grow their profits, even if their market share remains stable.
While, competition in low growth markets is often bitter, and while you might have high market
share now, it may be hard to retain that market share without aggressive discounting.
Cash cows produce substantial profits for their companies because they require little
investment to maintain their high share of the market. Managers should divert profits from
cash cows to help defend market share of star products, develop new products for emerging
markets, or turn struggling products around. While cash cows often provide the largest profit
margin in a company portfolio, firms interested in maintaining long-term profitability must
invest in defending and creating star products that will become cash cows` Low market-share
products that show low growth are referred to as dogs. Managers should minimize the number
of dogs in the product portfolio. While many managers seek the challenge of trying to turn a
dog product around, additional scrutiny should be given to any investment in dog products.
Firms should decide whether to find a niche in the product’s market to control or divest from
the product entirely to free up resources for more profitable ventures.
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.
This is a suggestion that the effect in experience curve requires that market share to be
increased to enable the company to lower the cost in the process of business operation. For
those companies with dominant market share then its clear that they will have a cost advantage
over competition companies because they have won a greater share of the market
(http://bankelele. blogspot. com/2007_07_01_archive. html). The Boston consulting group
(BCG) matrix is based on a products life cycle theory which states that a product has four main
stages in growth i. e.
BCG matrix has four cells, with the horizontal axis representing relative market share and the
vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if
all the SBU's are in same industry, the average growth rate of the industry is used. While, if all
the SBU's are located in different industries, then the mid-point is set at the growth rate for the
economy.
InvestmentPersonal loan is consider as star because it give loans to customers when they are
desire to pay child’s higher education fee or marriage related expenses or want to buy a house
and the interest rate is lower compare to the financial company. A saving account is a account
that maintain by retail financial institutions that pay interest but cannot be used directly as
money but can used by writing a cheque. The saving account lets the customer set aside a
portion of their liquid assets while earning a monetary return. The saving account is attracting
the customer and consider as a star because it have certain profit and low interest. QUESTION
MARKS. Also known as problem children. The question mark is new in a rapidly growing
industry but only has a small market share. Question mark have the worst cash characteristic of
all, because high demands and low return due to low market share. If nothing is done to change
the market share, question marks will generate great amount of cash but when the growth
stops, it will become a dogs. Question mark is risky and uncertain because it could become a
star or it could fail.
Resources are allocated to the business units according to their situation on the grid. The four
cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these
cells represents a particular type of business.
These units have got little or no cash generation which can be used to run or maintain the
affairs in a business market share. From accounting perspective these units can only be good in
a business in the matter of creating job opportunities to the jobless but in strategic market view
they are un worth to be maintained or included in a business product line. Such product units
should be removed from business operating system to avoid negative consequence in future.
This is because they depress a profitable company’s return on assets ratio used by many
investors to judge how well a company is being managed (http://fmcg-marketing.
BCG Matrix
10 x 1 x 0.1 x
Stars- 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.
This framework assumes that an increase in relative market share will result in an increase in
the generation of cash. This assumption often is true because of the experience curve;
increased relative market share implies that the firm is moving forward on the experience
curve relative to its competitors, thus developing a cost advantage. A second assumption is that
a growing market requires investment in assets to increase capacity and therefore results in the
consumption of cash. Thus the position of a business on the growth-share matrix provides an
indication of its cash generation and its cash consumption.
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.
Strategic marketing management involves the process of deciding the marketing strategy to
follow and to ensure it is followed correctly, in order to compete against its rivals successfully.
In an attempt to assist strategic marketing process, a number of different strategic marketing
planning tools have been created. Igor Ansoff, Michael Porter, and the Boston Consulting
Group have the best known models in the field of business. Strategies are developed according
to the objectives within an organization. The establishment of the objectives will normally
produce a difference between what had been achieved and what target needs to be met. The
uses of strategies are to illustrate how this gap is going to be solved, and objectives met.
"Strategic Management is a systematic approach to the major and increasingly important
responsibility of general management to position and relate the firm to its environment in a
way which will assure its continued success and make it secure from surprises"(Ansoff, 1990).
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.
All operating companies would like to own and maintain many of cash cow units to maintain
the operations in their industries. They are referred to as stand and boring now that investing to
this kind of unit might lead to low returns in a business companies normally invest low but
they gain a harvest a lot from them,. These units should be well maintained for growth of other
units in a business (http://fmcg-marketing. blogspot. com/2007/11/bcg-matrix. html) Dogs are
units with low market share in mature slow growing industry usually referred to as pets.
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.
Boston Consulting Group is a model widely used by many multinational and domestic
companies as instrument in portfolio management in the event of employing a strong base to
face their competing companies in the industry they are operating.
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.
In business, there are times when an organization needs to expand or change the market or
field. There are tons of ideas about things one could do. However, it is hard to determine which
idea will be the best. Therefore, strategic marketing planning tools will be important and
beneficial, such as BCG matrix, Ansoff Matrix or Porter 5 forces and so forth, to help one
evaluate the options and decide on the one that suits the organization and situation best. As a
result, it gives the best return on the considerable investment that an organization will need to
make.
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.
If they don’t achieve real market dominance then it is advisable for the company to disinvest
and try to get whatever possible cash out of the question marks that were not selected
(http://www. referenceforbusiness. com/management/Sc-Str/Strategic-Planning-Tools. html0).
One of the limitations of Boston Consulting Group matrix is that high market share is not the
only indicator for success factor but there are some other underlying forces which needs also to
be considered. Also market growth is not only indicator for attractive ness of market.
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.
Due to correlation between relative market and products cash generation, BCG helps to capture
market share of a strategic business unit as well as analyzing how the units in an organization
can be well advanced to have a competitive advantage against those of the competitors. The
underlying assumption in BCG is that the more an organization is engaged in a particular
activity the more they save costs which could have been incurred during the time of trading
(http://fmcg-marketing. blogspot. com/2007/11/bcg-matrix. html).
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.
This firm was started in the 1970s as a business firm but today it has the leading level in terms
of business schools and executive education Programmes around the world (http://fmcgmarketing. blogspot. com/2007/11/bcg-matrix. html). Boston Consulting Group labels As a
management tool Boston Consulting Group-share matrix can be used to classify product
portfolio in four businesses types which are based on four graphic lebels. this include stars
cash cows question marks and dogs.
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.
Limitations of BCG Matrix
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 asBCG matrix classifies businesses as low and high, but generally businesses can be medium also.
According to an article by Hiram and Clyde on portfolio analysis, they added three categories
to the matrix, such as infants, war horses and dodos, to get a better coverage of the business
society during recession. War horses represent a cash cow in a declining market. The veteran
products in an organization are things which hold a strong market position. It is used to prevent
an organization from eliminating a veteran product during a recession as it is always just a
temporary phenomenon (Hiram & Clyde, 1982). Dodos represent products that have little
potential for growing and low shares in declining markets (Hiram & Clyde, 1982). It is added
into the matrix because it will enable the company to make an early decision in withdrawing or
removing such products so as to improve the chance of selling the assets of such business. The
authors categorized new innovative products to be infants (Hiram & Clyde, 1982). Most of the
time, infant products do not generate any profit to the company at the introduction period and
may even have a negative cash flow. Thus, it is important to point out the new innovative
products before they are treated as a dog or question mark.
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.
The comparison given by BCG matrix is between the product and strategic business unit
(SBU) only with a strong competitor in same level yet it disregard small competitor with fast
growing market share. Like in consumer goods the Unilever Company has market share. Like
in consumer goods the Unilever Company has targeted only the multinational companies
without knowing that there are other small companies growing in their industry which can
affect their sales in certain countries they have invested. This can lead to a company being put
out of place in the market industry.
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.
Their contribution to cash flow depends on their need for resources. In the growth stage, the
firm seeks to build brand preference and increase market share. Market share tends to stabilize.
(3) Cash cows businesses correspond to the maturity stage of the product life cycle. Cash cows
businesses in this generate large amounts of cash but their prospects for future growth are
limited In the maturity stage, the market reaches saturation. The primary objective is to defend
market share while maximizing profit. (4) Dogs businesses in this category do not producer
consumer much cash. However they hold no promise for improved performance. In decline
stage there is a downturn in the market as sales decline discontinue the product liquidating
remaining inventory or sell off.
They can earn even more than cash cows sometimes.
This four-celled approach is considered as to be too simplistic.
Benefits of BCG
Organizations that are very large such that they require setting up business units usually face the
test of the allocation of resources among those business units.
This paper will focus on the BCG Matrix, which is one of the models like PESTLE, SWOT,
Ansoff matrix, Gap analysis, GE matrix and Porter 5 forces. It is often used to assess the
profits of business or resource allocation and divestment decisions by the marketers. The
content of this report will explain and analyse the application of BCG Matrix with some
examples. Some of the other analytic tools will also be mentioned in this work.
The BCG matrix was developed by Boston Consulting Group for the management of various
business units. Using the BCG opens an organization to several benefits such as the ones listed in
the following article.
The product life cycle has 4 very clearly defined stages, each with its own characteristics that
mean different things for business that are trying to manage the life cycle of their particular
products. Introduction Stage - This stage of the cycle could be the most expensive for a
company launching a new product. The size of the market for the product is small, which
means sales are low, although they will be increasing. On the other hand, the cost of things like
research and development, consumer testing, and the marketing needed to launch the product
can be very high, especially if it’s a competitive sector. Growth Stage - The growth stage is
typically characterized by a strong growth in sales and profits, and because the company can
start to benefit from economies of scale in production, the profit margins, as well as the overall
amount of profit, will increase.
Simplifies management
The BCG is an effective management tool and it offers a good framework for resource allocation
among various units. This enables the managers to compare several business units whenever they
want.
Unilever Company has dropped many products and developed new ones in the event of
satisfying the market demands. In Africa consumer goods from Unilever company has highly
excelled due to clear plan and matching with consumer interests. This has been possible
through use of BCG matrix which helps identify the position of product in the market and take
the possible measures for instance the cash cows business as units will gain their expected
profits very fast which give s the management team an easy jobs.
It simplifies many business factors through showing employees the market share as well as
growth rate and how to use them to create new strategies.
Popular matrix
Even though BCG matrix may be among the oldest matrices ever formulated, it is also the most
common and best known matrix taught all over the world.
The BCG matrix helps to play as analytical tool where a certain company is faced with
problems of constant market growth rate and lack of advancement in general (http://fmcgmarketing. blogspot. com/2007/11/bcg-matrix. html). Boston consulting group (BCG) growth
now comes in as a firm which gears its efforts in giving consultation services to other
companies in general organization management where need arises. This firm is highly
respected in the business industry due to their efficient and effective job.
There are forums on the internet where individuals share their ideas on the best methods of using
BCG matrix because of its popularity. This means that those looking to use it will never lack
assistance and support.
In some other instances a high market share does not lead consequently to a high profit margin
it is clear that low business share are profitable, this can blind font the management to run their
company at a loss without knowing if they insist on using more cash to such products. This is
instigated by the fact that the model insists on only two dimensions i. e. market share and
growth rate of which other factors are held constant in theory but not in real practice
(http://www. kmtalk. net/article. php? story=20070103041059823).
The BCG still remains a quick and beneficial guide for resource allocation and ensuring better
profits.
.Better decision making
The BCG allows for the making of comparisons so as to measure the growth and development
rate of a company against the average growth rate in that specific industry.
Company which needs to be a leader in terms of market share should produce new products
and charge them at a lower price to penetrate to the market. On the other hand BCG model is
helpful to management in evaluating the firm’s current balance among stars cash cows,
problem child and dogs. And it is also applicable to multinational companies to seek large
volume and experience effects because it is easy to understand. This model provides
management with basis for understanding and deciding upon how to prepare for the contingent
future causes of action.
In addition, this particular matrix is also enjoyable to use, encouraging better decision making.
BCG Matrix of TATA
http://htmlimg1.scribdassets.com/4alz7qvy9sjbnjv/images/1-9e01114206.jpg
Tata Steel, Tata Power, Tata Motors and Indian Hotels emerge as clear Stars(high market
growth, high market share). Hence, they should be retainedand the investment in these
companies should be increased
Tata Chemicals and Tata Tea emerge as the Cash Cows (low market growth,high market share)
and should be held on to for the time being
Some of the Question Marks (high market growth, low market share) are Tata Teleservices,
Voltas and Tata Communications
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