The Boston Consulting Group (BCG) Matrix is an uncomplicated tool to evaluate a company’s position in terms of its product range. It facilitates a company think about its products and services and makes decisions about which it should keep, which it should let go and which it should invest in further. Also called the BCG Matrix, it provides a useful way of screening the opportunities open to the company and helps to think about where one can best allocate resources to maximize profit in the future. At the end of the 1960s, Bruce Henderson, creator of the Boston Consulting Group, BCG, developed portfolio matrix. The BCG Growth-Share Matrix is a fourcell (2 by 2) matrix used to execute business portfolio analysis as a footstep in the strategic planning process. BCG matrix is often used to prioritize which products within company product mix get more funding and attention BCG matrix takes into account two strategic parameter into consideration namely, market share and market growth. To understand the Boston Matrix, one must understand how market share and market growth are interrelated. 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. 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. 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. This makes low growth markets less attractive. Understanding the Matrix: Question Marks / Problem Child (Low Market Share / High Market Growth) Question marks are the products that grow rapidly and as a result consume large amounts of cash, but because they have low market shares they don’t generate much cash. The result is large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If it doesn’t become a market leader it will become a dog when market growth declines.
Question marks need to be examined carefully to determine if they are worth the investment required to grow market share. Dogs (Low Market Share / Low Market Growth) Dogs have a low market share and a low growth rate and neither generates nor consumes a large amount of cash. However, dogs are a cash trap because of the money is being tied up in a business that has little potential. Such businesses are candidate for divestiture. Stars (High Market Share / High Market Growth) A Star is being able to generate huge sum of cash because of their strong relative market share, but simultaneously it also consumes large amounts of cash because of their high growth rate. So the cash being spent and brought in approximately nets out. If a star can maintain its large market share it will become a cash cow when the market growth rate declines. Cash Cows (High Market Share / Low Market Growth) As leaders in a mature market, a cash cow demonstrates a return on assets that is greater than the market growth rate – so they generate more cash than they consume. These units should be ‘milked’ extracting the profits and investing as modest as possible. After plotting the company one among the four matrix depending on its respective...