BCG Matrix : Strategic Analysis and Choice

BCG Matrix is a business tool, which uses relative market share and industry growth rate factors to evaluate the potential of business brand portfolio and suggest further investment strategies.

Exclusively for Multi-business Scenario

BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of the business brand portfolio and its potential. It classifies business portfolio into four categories based on industry attractiveness (growth rate of that industry) and competitive position (relative market share). These two dimensions reveal likely profitability of the business portfolio in terms of cash needed to support that unit and cash generated by it. The general purpose of the analysis is to help understand, which brands the firm should invest in and which ones should be divested.

Relative market share. One of the dimensions used to evaluate business portfolio is relative market share. Higher corporate’s market share results in higher cash returns. This is because a firm that produces more, benefits from higher economies of scale and experience curve, which results in higher profits. Nonetheless, it is worth to note that some firms may experience the same benefits with lower production outputs and lower market share.

Market growth rate. High market growth rate means higher earnings and sometimes profits but it also consumes lots of cash, which is used as investment to stimulate further growth. Therefore, business units that operate in rapid growth industries are cash users and are worth investing in only when they are expected to grow or maintain market share in the future.

There are four quadrants into which firms brands are classified in BCG Matrix:

Stars. Stars operate in high growth industries and maintain high market share. Stars are both cash generators and cash users. They are the primary units in which the company should invest its money, because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become cash flows. They are money seekers, not providers. The purpose here is to mobilization and re-mobilization of all the available resources. The CEO/CFO faces difficulties because it is challenging to maintain the stardom.
Strategic choices: Vertical or horizontal integration, market penetration, market development, product development
Example: Wai Wai / Tuborg

Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as much cash as possible. The cash gained from “cows” should be invested into stars to support their further growth. According to growth-share matrix, corporates should not invest into cash cows to induce growth but only to support them so they can maintain their current market share. Invest only upto that level required to repair and maintenance. This is money provider.
Strategic choices: Product development, diversification, divesting, retrenchment
Example: Surya Nepal

Question marks. Question marks are the brands that require much closer consideration. They hold low market share in fast growing markets consuming large amount of cash and incurring losses. It has potential to gain market share and become a star, which would later become cash cow. Question marks do not always succeed and even after large amount of investments they struggle to gain market share and eventually become dogs. Therefore, they require very close consideration to decide if they are worth investing in or not. The problem is organizational weaknesses.
Strategic choices: Market penetration, market development, product development, divesting
Example: CG Nepal Ice

Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing market. In general, they are not worth investing in because they generate low or negative cash returns. But this is not always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other brands or SBUs or simple act as a defense to counter competitors moves. This is money provider,
Strategic choices: Retrenchment, divesting, liquidation
Example: Winston CG Cigarette
We can see example of Jay Nepal Cinema Hall which shifted back from Dog to Cash Cows at current.

Advantages and disadvantages

Benefits of the matrix:

  • Easy to perform;
  • Helps to understand the strategic positions of business portfolio;
  • It’s a good starting point for further more thorough analysis.

Following are the main limitations of the analysis:

  • Business can only be classified to four quadrants. It can be confusing to classify an SBUs that falls right in the middle.
  • It does not define what ‘market’ is. Businesses can be classified as cash cows, while they are actually dogs, or vice versa.
  • Does not include other external factors that may change the situation completely.
  • Market share and industry growth are not the only factors of profitability. Besides, high market share does not necessarily mean high profits.

Source: Respected Saroj Sir online Class on Strategic Management
Image Source: Google Free Images

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