35344125-BCG-Matrix

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BCG Matrix

Riyas K. Basheer

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Introduction

• most well-known portfolio managementtool

• based on product life cycle theory

• developed in the early 1970s by BruceHenderson at the Boston ConsultingGroup

• can be used to determine what prioritiesshould be given in the product portfolio of a business unit

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Introduction

• a company should have a portfolio of

products that contains

– high-growth products in need of cash inputs and

– low-growth products that generate a lot of cash

• The Boston Consulting Group Matrix has two

dimensions

– market share and – market growth

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BCG Matrix

• There are four segments of the BCG

Matrix

– Question Marks (high growth, low market

share)

– Stars (high growth, high market share)

– Cash Cows (low growth, high market share)

– Dogs (low growth, low market share)

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BCG Matrix

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Question Marks

• Question Marks have the worst cashcharacteristics of all the four, because theyhave high cash demands and generate lowreturns, because of their low market share.

• If the market share remains unchanged,Question Marks will simply absorb greatamounts of cash.

• These products are in growing markets buthave low market share.

• Question marks are essentially new productswhere buyers have yet to discover them.

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Question Marks

• The marketing strategy is to get markets toadopt these products so as to convert themto Stars for the company.

• Question Marks have high demands and lowreturns due to low market share.

• These products need to increase their marketshare quickly or they become dogs.

• The best way to handle Question Marks is toeither invest heavily in them to gain marketshare or to sell them.

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Question Marks

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Stars

• Stars are defined by having high market share in agrowing market.

• Stars are using large amounts of cash. Stars areleaders in the business. Therefore they shouldalso generate large amounts of cash.

• Stars are frequently roughly in balance on netcash flow.

• Stars are the leaders in the business but still needa lot of support for promotion and placement.

• If market share is kept, Stars are likely to grow intocash cows.

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Stars

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Cash Cows

• Cash cows are in a position of high market share in amature market.

• If competitive advantage has been achieved, cashcows have high profit margins and generate a lot of

cash flow.• Because of the low growth, promotion and placementinvestments are low.

• Investments into supporting infrastructure can improveefficiency and increase cash flow more.

• Cash cows are the products that businesses strive for.• Cash Cows are often the stars of yesterday and they

are the foundation of a company.

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Dogs

• Dogs are in low growth markets and have

low market share.

• Dogs should be avoided and minimized.

• Expensive turn-around plans usually do

not help.

• Dogs must deliver cash, otherwise theymust be liquidated.

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Dogs

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BCG Matrix

• The BCG Matrix method can help to

understand a frequently made strategy

mistake

• having a one size that fits all strategy

approach, such as a generic growth target

(‘x’ percent per year) or a generic return

on capital of ‘y’ percent for an entirecorporation

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BCG Matrix

• In such a scenario:

– Cash Cows Business Units will reach their

profit target easily.

• Their management has an easy job

• The executives are often praised anyhow

• Even worse, they are often allowed to reinvest

substantial cash amounts in their mature

businesses.

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BCG Matrix

• Dogs Business Units are fighting an impossible battleand, 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 onlymediocre investment funds – In this way they can never become Cash Cows – These inadequate invested sums of money are a waste of

money. – Either these SBUs (Small Business Units) should receive

enough investment funds to enable them to achieve a realmarket dominance and become Cash Cows (or Stars)

– Otherwise companies are advised to disinvest.

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BCG Matrix and PLC

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Other uses - BCG Matrix

• BCG matrix helps a company to use the

experience curve to its advantage

• BCG matrix enables the company 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.

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• BCG model is helpful for managers toevaluate balance in the firm’s current portfolioof Stars, Cash Cows, Question Marks and

Dogs.• BCG method is applicable to largecompanies that seek volume and experienceeffects.

• The model is simple and easy to understand.• It provides a base for management to decide

and prepare for future actions.

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1Cash flow

frommilkingcows

2Consolidate

ExistingStars

Starsbecome

future CashCows

3Finance

promisingQuestion

Marks

QuestionMarks with

lowprospects

abandoned

4Dogs

QuestionMarks

becomeStars

Revitalizewith focusstrategy

Divest, orcannibalizeto extractcash, or

exit

Starsbecome

future CashCows

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BCG Analysis

• BCG Analysis is a technique used in brandmarketing, product management, and strategicmanagement to help a company decide whatproducts to add to its product portfolio.

• It involves rating products according to their relative market share and market growth rate.• The products are then plotted on a two

dimensional map.•

Products with high market share but low growthare referred to as "cash cows"• Products with high market share and high growth

are referred to as "stars"

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BCG Analysis

• Products with low market share in a low growthmarket are referred to as "dogs" Products with lowmarket share but high market growth are referredto as "question marks" or "problem children".

• A "question mark" has the potential to become a"star" in the future if it is developed.

• A company should have a balanced portfolio

•This implies having at least one "cash cow" whichcan generate revenue that can be used to developone or more “question mark" - referred to as"milking your cash cow”

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Limitations

• It neglects the effects of synergy betweenbusiness units.

• Market growth is not the only indicator for attractiveness of a market.

• Sometimes Dogs can earn more cash thanCash Cows.

• The problems of getting data on the marketshare and market growth.

• There is no clear definition of whatconstitutes a "market“.

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Limitations

• A high market share does not necessarilylead to profitability all the time.

• The model uses only two dimensions –

market share and growth rate. This maytempt management to emphasize a particular product, or to divest prematurely.

• A business with a low market share can be

profitable too.• The model neglects small competitors that

have fast growing market shares.

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Conclusion

• BCG Matrix is useful for a company toachieve balance between the four categoriesof products a company produces

• As a particular industry matures and itsgrowth slows, all business units becomeeither cash cows or dogs.

• The overall goal of this ranking is to help

corporate analysts decide which of their business units to fund, and how much; andwhich units to sell

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BCG Matrix – Coca Cola

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BCG Matrix – Nestle

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Thank you..

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