THE BCG MATRIX

THE BCG MATRIX

The Boston Consulting Group (BCG) created the Growth-Share Matrix as a framework to evaluate the strategic position and potential of the business brand portfolio. The BCG is a business planning tool, which uses the firm’s “relative market share and industry growth rate factors to evaluate the potential of business brand portfolio and suggest further investment strategies”. The BCG Growth-share Matrix divides the business portfolio into four quadrants based on relative market share and market growth rate. The Dogs category hold low market share and operate in a slowly growing market, which generally are not worth investing in due to their low or negative cash returns. However, some Dogs may provide synergies with other brands or counter competitors’ actions.

Unlike the Dogs, Cash Cows are the most profitable brands and they should be “milked” to gain cash. The cash generated should be invested to maintain current market share and to support further growth by innovating new products and processes that have potential to become new Stars. The Stars provide high growth market and market share.

Stars are a company’s primary investment units because they are cash generators, which are expected to become Cash Cows and generate positive cash flows. However, not all Stars become cash flows, especially in rapidly changing markets where it faces competition of new technological advancements. The last quadrant is the Question Marks, which has low market share in fast growing markets that require large amounts of cash and incur losses. Although the Question Mark has potential to become a Star or Cash Cow, it requires very close consideration to determine if they are worth the investment. The author of this article cautions that “BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly” for investment decisions”.

Boston Consulting Group (BCG) MATRIX is developed by Bruce Henderson of theBCGin the early 1970’S.According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relativemarket share. Market share is the percentage of the total market that is being serviced by your company,measured either in revenue terms or unit volume terms? The higher your market share, the higher proportion of the market you control.

Market growth is used as a measure of a market’s attractiveness. Marketsexperiencing high growth are ones where the total market share available isexpanding, and there’s plenty of opportunity for everyone to make money.It is a portfolio planning model which is based on the observation that acompany’s business units can be classified in to four categories which are Stars, Question marks, Cash cows and Dogs. It is based on the combination of market growth and market share relative to thenext best competitor.

There are some benefits in BCG MATRIX. It is simple and easy to understand.It helps you to quickly and simply screen the opportunities open to you, andhelps you think about how you can make the most of them.It is used to identify how corporate cash resources can best be used tomaximize a company’s future growth and profitability.

On the Other hand, there are some limitations in BCG MATRIX uses only two dimensions, Relative market share and marketgrowth rate.Problems of getting data on market share and market growth.High market share does not mean profits all the time.Business with low market share can be profitable too.

STARS:

High growth business competing in market where they are relatively strong compared with the competition. They have a high point shares and are the ideal businesses. Stars are leaders in business.They also require heavy investment, to maintain its large market share.It leads to large amount of cash consumption and cash generation.Attempts should be made to hold the market share otherwise the star will become a cash cow. Example: Box-Pak (Malaysia) Bhd., Kian Joo Packaging Sdn. Bhd. and Kian JooCanpackSdn. Bhd.

CASH COW:

The low-growth business with a relatively high point market shares. These businesses were stars but now have lost their attractiveness. They are foundation of the company and often the stars of yesterday.They generate more cash than required. They extract the profits by investing as little cash as possible. They are located in an industry that is mature, not growing or declining. Eg. Federal Metal Printing Factory, Sdn. Berhad and Metal-Pak (Malaysia) Sdn. Bhd.

QUESTION MARK:

Businesses with low point share but which may have a high growth rate. Thissuggests that they have potential but may require huge ever, a competing forceextraordinary effort in order to grow point share.Most businesses start of as question marks.They will absorb great amounts of cash if the market share remainsunchanged, (low)Question marks have potential to become star and eventually cash cow but can also become a dog.Investments should be high for question marks. Example: KJM Aluminium Can Sdn. Bhd and Kian Joo Cans Distribution Sdn. Bhd.

DOGS:

Businesses that have low relative share and low expected growth rate. Dogs maygenerate enough points to sustain but they are rarely, if ever, a competing forceDogs are the cash traps.Dogs do not have potential to bring in much cash. Number of dogs in the company should be minimized. Business is situated at a declining stage. Example: Kian Joo-VisypakSdn. Bhd.

There are 4 stagesin BCG product life style. It consists of Introduction stage, Growth stage, Maturity Stage and Decline stage. (Appendix 1)

Introduction stage:

KJM Aluminium Can Sdn. Bhd and Kian Joo Cans Distribution Sdn. Bhd.are in the introduction stage, as both are much new in the market as compared to Box-Pak (Malaysia) Bhd., Kian Joo Packaging Sdn. Bhd. and Kian JooCanpackSdn. Bhd.

Growth Stage:

Box-Pak (Malaysia) Bhd., Kian Joo Packaging Sdn. Bhd. and Kian JooCanpackSdn. Bhd. are in the growth stage, it is having high growth and high market share.

Maturity Stage:

Federal Metal Printing Factory, Sdn. Berhad and Metal-Pak (Malaysia) Sdn. Bhd. are in the maturity stage, it is having low growth but high market share.

Decline stage:

Kian Joo-VisypakSdn. Bhd.is currently in decline stage, it is having low growth and low market share.

Benefits of the BCG matrix

• It is very simple to use and explain, as there are only two dimensions and four quadrants
• It is a reputable and long-standing strategic model that has proved to be robust over time and significant changes in the competitive environment
• Usually the measurements required market growth and relative market share are available to the company.
• Clear guidance is provided for each quadrant in terms of the approach to investment and support of business units– perhaps with the exception of the question mark.
• It is an important model for allocating resources for firms pursuing market share goals and seeking experience curve benefits
• The firm has a basis for allocating resources across its business units, based upon competitive position and market opportunity making for a more strategic based decision
• Although the matrix is developed based upon historical/current position, the four quadrants of the BCG matrix provide some strategic guidance for the future
• The matrix is more beneficial for large-scale manufacturing operations where experience curve benefits can be realized that is, where they is a strong correlation between market share profitability
• For students, it provides a good understanding of the concept of aligning competitive strengths with market opportunities in the development of a suitable strategy for the organization.

Limitations of the BCG matrix

• The first concerned with the BCG matrix actually stems from its biggest advantage, which is its overall simplicity.
• It uses two measures for its dimensions namely relative market share (a measure of competitive strength) and market growth rate (a measure of market attractiveness) these two measures are too simplistic and narrow for the purpose of what they trying to measure and identify.
• In some cases, relative market share could be a reasonable measure of competitive strength probably in a low growth marketbut is probably going to be far less effective in the high-growth markets, where the competitive situation are far more dynamic.
• The original intention of the BCG matrix was to be able to plot a large firm’s business interests onto one simplified graph format and be able to compare on a side by side basis and then identify how the available resources of the overall organization should be allocated across the relative business units.For instance, a firm with a large product range plotting individual products onto the BCG matrix will probably identify that they have a mix of cash cows and a lot of dogs. Therefore, care needs to be taken when plotting individual brands or products onto the matrix.
• A limitation or concern area for the BCG matrix is the definition of the market. How the firm decides to define the actual market will change the outcomes, as the different portfolios could be plotted in two different quadrants.
• Limitation of the BCG matrix uses some of the terminology of the four quadrants might be considered misleading. For example, the term “dog”tends to suggest something undesirable that should be divested from the firm’s business portfolio.

The reality is a “dog” is still likely to be quite profitable to the organization and maybe a significant player in a niche position. However, it is classified as a dog because it has limited growth potential and usually make significantly less money than the firm’s major business portfolios. Likewise, the term “star” indicates a very highly profitable product or business portfolio. Again in reality, a star is a future cash cow only – that means, that in the future it will make a lot of money for the organization, but currently it needs significant investment support to maintain its position.

The final major limitation of the BCG matrix occurs when a brand or portfolio is plotted almostequally between two quadrants or towards the center of the BCG matrix itself. Although not a technical term, I refer to this as the black hole of the BCG matrix as highlighted in the diagram if a brand/portfolios falls into the black area it is difficult to determine the best approach

Therefore, for a brand that is half a cash cow and half a dog – or worse a combination of all four quadrants – the matrix has less value as its strategic clarity and guidance is reduced.

Uses of BCG MATRIX

• The firm has a diverse product range or if they have multiple business units
• The firm has reasonable levels of market shares in some markets
• The firm likes to be analytical and take a strategic view of their planning
• The firm is a large manufacturer

What is the experience curve?

The experience curve is a concept used in large-scale manufacturing. It suggests that over time primarily through the firm’s growing experience in manufacturing and logistics that the firm will become more cost efficient with their production. Over time, the market leader who has the greatest amount of production experience will build a significant cost leadership advantage in the marketplace. This cost leadership position enables the market leader to more aggressively compete on price OR to achieve greater profitability through increased margins.

The experience curve differs in concept from economies of scale. Economies of scale are generated when the firm has an increasing sales volume, which means that fixed costs are allocated across more units. As you can see, both the experience curve (getting more efficient at production through experience) and economy of scale benefits (allocating fixed costs across more units) will result in much lower average unit costs.

Impact on the BCG matrix

The BCG matrix considers relative market share as the prime form of competitive advantage. This is because a high level of market share delivers the cost advantages from experience curve benefits and economies of scale. This is why cash cows are significant generators of surplus cash that is then available for reinvestment in the business. It also explains why cash cows are relatively stable, as they have a financial advantage in the marketplace that allows them to compete more aggressively and win back any lost market share if required.

The BCG matrix and Competitor Analysis

The BCG matrix can be utilized to help analyze competition. This makes a lot of sense, given that one of the key determinants of classifying a product into one of the four quadrants is relative market share therefore, the outcomes of the BCG matrix are based around this competitive position. As we know, the key goal of a star is to manage it effectively, support it, invest and develop it – in order to build a cash cow in the future.However, for the purposes of discussion, let’s go back to the year one scenario where both firms had stars, yet our competitor had a relative market share advantage. At this point of the competitive situation, a key goal for us would be to build market share and become the market leader. If we failed to do that, then we run the risk of our position eroding and deteriorating back to a question mark and then ultimately down to a dog.

Industry growth versus company growth

Another approach to analyzing competition is using a scatter chart/graph that is based upon the BCG matrix. In this particular chart – as shown here – growth rates of both the market/industry and the firm’s portfolio are shown together. On the left-hand side of the chart there is a significant concern as the market is outperforming the firm’s growth – this will mean that stars are likely to deteriorate towards question marks and cash cow are likely to head towards dogs.On the right-hand side of the chart is the preferred position – where the firm’s growth rate is exceeding the industry. In this case, the firm’s market shares will be increasing,

The BCG matrix and the product life-cycle (PLC)

The concept of the product life cycle is fundamental to understanding how product portfolios will evolve over time through the quadrants of the BCG matrix. Conceptually, the product life cycle, suggests that most product portfolios will categories will progress through different stages of rates of growth – from introduction to growth to maturity and then to eventual decline.

Introduction is very early growth, while a mature market should also have a small level of growth, usually almost in line with increases in GDP.

This second diagram highlights the typical product life-cycle pattern – however, there are variations of this pattern for fads (short-term products), style and fashion products as well as products that are essentially reinvented for the consumer and then go from maturity into another period of growth. However, for the purposes of understanding the BCG matrix, we will concentrate on the typical product life-cycle curve only.As you can see, stars and question marks only occur in theintroduction and growth stages. While cash cows and dogs exist during times of maturity and decline. Therefore, new product portfolios categories will start off as either a star or as a question mark and then in the longer term will progress downwards (to either a cash cow or a dog).

In today’s market, many new products and technology breakthroughs are being adopted by the market much faster than previously, which then indicates the period of time that a product portfolio will remain as a star or as a possible question mark is decreasing.

Using the BCG matrix for portfolio analysis

One of the prime uses of the BCG matrix is for portfolio analysis – that is, to ensure that the overall company has an appropriate mix of business units and/or product in its overall portfolio.

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A BCG matrix with the ideal portfolio

The ideal BCG matrix portfolio

Ideally, a proportioned portfolio would have a diversity of offerings across the four quadrants, with a heavier weighting towards cash cows and stars, and a lower number of dogs and question marks as we know, the best quadrant for profitability today is the cash cow quadrant and the best quality quadrant for profitability in the future is the star quadrant – so portfolios that have higher proportions of cash cows and stars are preferred.This first diagram is a good example of the ideal BCG matrix portfolio – as you can see there are several cash cows and two well-placed stars to ensure profitability into the future. There are a couple of dogs and question marks, which indicates that the firm is relatively proactive in the marketplace and is trying to look for opportunities.

A conservative BCG matrix portfolio

A too-conservative BCG matrix portfolio

In this next BCG matrix example, the firm in question only has cash cows and dogs. This would represent the business portfolio of a very conservative organization. There is no doubt that his organization would be extremely profitable, as none of its portfolios would require any significant reinvestment – as they are all in mature and stable markets. However, the significant concern here is the lack of investment in the future. The firm has no portfolios placed into growth markets.

A poor BCG matrix portfolio

A poor BCG matrix portfolio

This next example of a BCG matrix portfolio is significant concern.This particular firm has no cash cows which means that they have no portfolios capable of generating sufficient income that can be reallocated to the stars and question marks as required. Of major concern here is the high proportion of question marks – which are all heavy users of cash. It could be possible for the stars to become self-supporting, but they will not have surplus income to assist the question marks. Therefore, this is probably an example of a start-up company that has invested into too many areas and would be burning a lot of cash. The logical recommendation for this firm would be to divest most of its question marks and try to manage the cash flow of its stars until one or two of them become cash cows.

A nice and balanced BCG portfolio

This final example is discussed in more detail in the example section for a retailer.

You will note that they have one significant cash cow, which would provide surplus income to be reinvested in other parts of the business. You should also note that they only have one question mark, with a couple stars coming through. And they would probably be looking to divest the department store dog or to simply run it as a cash dog for the foreseeable future.This would be considered to be a nicely balanced BCG matrix portfolio because they have only a few, but valuable, portfolios and there is a weighting towards cash cows and stars.

Tracking products portfolios over time with the BCG matrix

The BCG matrix is not designed to be a static model and it can be used to track portfolios over time. This is important because relative market share and market growth rates are dynamic. It also allows the tracking of the products portfolios against overall goals and against competitors over time.

A neglected star

Just as a question Mark can boldly into a star and then onto a cash cow, the reverse pattern can apply to the star, as illustrated in this BCG matrix example. In this example, the firm has failed to reinvest adequately in the portfolio or has been outspent by a major competitor

The BCG matrix and relative market share

Market growth rate

Market growth rate is designed to be a measure of market attractiveness and potential. Growth markets provide opportunities to a firm because they are getting much larger, but also because there are significant opportunities to improve the firm’s competitive position.

Relative market share

The second dimension of the BCG matrix is relative market share. This is the more important of the two dimensions. A high or low relative market share makes the difference between a cash cowa star.

Relative market share has been included in the matrix as a definable way of measuring the firm’s competitive strength in the marketplace. Relative market share was included because it was built upon the following assumptions:

• Firms with a high market share are successful due to a combination of marketing factors
• A higher market share means that production is greater
• The combination of high sales and a higher unit margin means that the firm has much greater profitability than any of its competitors
• Because of the structure of the definition of a cash cow in the traditional BCG matrix, they can only ever be one market leader and only one firm will own the cash cow in the whole industry

Is relative market share still relevant today?

As a standalone marketing metric, relative market share is still worth calculating and tracking of time. However, its value in the BCG matrix is becoming more questionable. However, much the economy is now service based, the role of other competitive advantages have become more important, and the speed of technology change has dramatically increased.As a result, it is no longer possible to view a cash cow as a product portfolio that requires a simple level of maintenance reinvestment.

Other factors to consider other than relative market share

The GE portfolio model recognizes that competitive strength is a combination of factors and it is too limited to look at market share alone. Therefore, as relative market share has faded of a suitable for competitive strength is important to consider other factors such as:

• Brand equity
• Retailer relationships
• Logistics and distribution
• Innovation skills
• R+D capability and patents
• Customer loyalty

Appendix 1