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Classify SBU & products
◦Determine future cash contributions Positive cashflow (+ve)
◦Determine future cash requirements Negative cashflow (-ve)
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Assumptions of model (applies to SBU or product)
◦ Profitability increases as market share increases and/or the market grows.
◦ Efforts to increase market share will have short term costs/ -ve impact on cash flow.
◦ Quality issues affect market share and profit.
◦ Impact of differentiation and new products will be positive if the business has strong market position already. (success breeds success)
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◦BCG Growth-Share matrix model
Uses market share and market growth
◦Business Screen (General Electric)
Use indexes made up of a number of factors
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SBU / product can be classified by two factors: ◦ market share relative to competitors, ◦ growth rate of the market in which the SBU
operates. These factors are divided into high and
low categories. The resulting 2 x 2 grid has 4
categories of SBU / product.
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◦Assumes cash flow and profitability are closely related to sales volume
◦Products are classified on the basis of: relative market share market growth rate
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◦Relative market share Is the ratio of it’s market share to that of the
largest competitor.
◦Any value > 1 shows strong position Found by dividing product share by
market share of next largest competitor. Eg Coca-Cola = 37% / Pepsi = 22% Coca-Cola relative market share =37/22 = 1.68.
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◦Growth rate – Can be interpreted as reflecting the four stages of the Product Life Cycle (PLC). High growth reflects introduction (1) & growth (2) stages.
Low growth shakeout(3) & mature(4) stages.
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9
Stars
Cash Cows
Question Marks
Dogs
????
?? ????
Mar
ket
Gro
wth
Rat
e
Relative Market Share
High Low
Hig
hL
ow
10
High
Low
Stars
Dogs
Question marks
10 0.1Relative market share
Marketgrowthrate(inconstantdollars)
10%
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Source: Adapted from Barry Hedley, “Strategy and the Business Portfolio,” Long Range Planning 10 (February 1977).
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87Cash cows
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10 13
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3
11 12
STAR = high relative share in high growth market
◦ High sales & high cash flows◦ Attractive to competitors◦ Need high promotion to protect market share◦ High market growth means high investments in
production facilities & inventory are needed◦ Cash from a star needs to be reinvested in back into
the star
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Cash Cow= high relative share in low growth market
◦ High sales & high market share & high cash flow◦ Market leader product◦ High profits◦ Low growth markets◦ Cash investments are low◦ Primary source of cash to the firm
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Question marks / Problem Child = low relative share in high growth market
◦ Have great potential (as in a growth market) ◦ Need high investment to build market share◦ Large negative impact on cashflow
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Dog= low market share and low market growth
◦ Weak cash providers.◦ If there is a loyal core market, consistent profits are
possible.◦ Relatively small share of company resources are
invested.
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A balanced portfolio of SBUs with a mix of stars, cash cows, and questions marks, but hopefully no dogs is desirable.
Why not all cash cows?
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Far too simplistic◦Suggests market share and industry
growth are the best predictors of profitability
◦Strict reliance of these two dimensions may not be appropriate
Some products cannot be classified as high or low on one of the factors.
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Present market share does not show possibility of increasing/decreasing it in the future.
Some high growth markets may not be attractive because of their small size and/or long term stability
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Criticism of BCG Model …Continued