Boston Consulting Group’s BCG Matrix is a business analysis tool to evaluate the strategic position of the business in terms of its brand portfolio and its prospects. The matrix classifies business portfolio into four categories based on two dimensions; industry attractiveness (growth rate of that industry) and relative market share. These two dimensions reveal likely prosperity of a strategic business unit (SBU) in terms of cash needed to support that unit and cash generated by it. The general purpose of the analysis is to help understand in which brands the firm should invest in and which ones should be divested. BCG Matrix is a four celled matrix (a 2 X 2 matrix) developed by Bruce Henderson for the Boston Consulting Group in 1970 in USA.
BCG matrix helps in doing a comparative analysis of business potential and the evaluation of environment. Relative market share shows SBU Sales this year leading competitor’s sales this year and market growth share shows industry sales this year minus industry Sales last year. The analysis requires that both measures be calculated for each SBU. The dimension of business based on strength and relative market share will measure comparative advantage indicated by market dominance. The key theory underlying this fact is existence of an experience curve and that market share is achieved due to overall cost leadership.
BCG matrix has four cells, with the relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0, if all the SBU’s are in same sector, the average growth rate of the industry is used. For example Nestle India’s all SBU exist in food industry. But, if all the SBU’s are located in different sectors of industries, then the mid-point is set at the growth rate of the economy, for example the Tata group’s SBUs exist in a variety of sectors.
The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular pattern of business. To clarify each cell of the matrix, we will be discussing examples of Amul’s products. Gujarat Cooperative Milk Marketing Federation Ltd. (GCMMF) is India’s largest food product marketing organization with annual turnover (2013-14) US$ 3.0 billion. The word amul is derived from the Sanskrit word amulya meaning rare, valuable. The co-operative was initially referred to as Anand Milk Federation Union limited hence the name AMUL. It has the largest distribution network compared to any FMCG company. It has nearly 50 sales offices spread all over the country, more than 5000 wholesale dealers and more than 700000 retailers. In order to maintain costs at lower levels, Amul India has never spent more than 1% of its budget on advertising. However it has still been successful in creating the same impact. It’s simple yet appealing ad campaigns with its lucky mascot a cute and chubby girl usually dressed in polka dots has not changed so far.
Stars
Stars represent business units having large market share in a fast growing industry. They usually generate cash because of fast growing market. Stars require huge investments to maintain their flourishing status. The net cash flows of ‘Star’ SBU are usually modest. Please understand that SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. When the industry matures, a successful star will become a cash cow. Amul pure ghee, cheese spread, ice creams, dairy whiteners and flavored bottled milk are examples of ‘star’ in Amul’s product portfolio.
Cash Cows
Cash Cows represent business units having a large market share in a mature yet slow growing industry. Cash cows require little investment but they generate steady cash that can be utilized for investment in other business units. It’s not the stars but cash cow SBU’s which are the key source of cash, and are in particular the core business of a corporation. They are the supporters of an organization. These businesses usually follow stability strategies. When cash cows lose their appeal and move towards descent, then a divestment policy may be followed. Amul butter, fresh milk range, mozzarella cheese are examples of cash cows in their portfolio.
Question Marks
These SBUs represent business units having relatively low market share in a high growth industry. They require huge amount of cash for maintenance and to gain market share. They require consideration to determine if the venture of the SBU is feasible. Question marks generally possess new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. The fact is that most businesses start as question marks as the company tries to enter a high growth market in which there are already existing businesses. If ignored and not rectified in time, then question marks turn into dogs. But, if huge investment is made, then they have potential of becoming stars. Masti dahi, lassi, mithai, tetra packed milk are examples of question marks.
Dogs
Dogs represent businesses having weak market shares and they operate in low-growth markets. They are cash traps. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these SBUs can gain market share only if they don’t face competition. That means other firms are weaker firms. An SBU can turn into dog because of high costs, poor quality, ineffective marketing, poor strategies etc. A dog is dragged on usually when a firm has strategic reasons to do so. If the SBU has fewer prospects for it to gain market share, it is better to divest the SBU. The thumb rule is number of dogs should be avoided and minimized in an organization. Amul chocolate, energy drink, infant milk range and pizza are examples of dog.
The BCG Matrix is not free from limitations. The limitations are defined hereby.
- BCG matrix classifies businesses as low and high, but generally businesses run on medium scales too. Thus, the true scale/degree of business needs to be reflected.
- High market share does not always lead to higher profits. The fact is that there are high costs also involved with high market share.
- Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability.
- Many times, dogs may help other businesses in gaining competitive advantage. The competitive advantage earned by other SBUs because of the dogs is more than cash cows sometimes.
Strategies based on BCG Matrix are as follows:
Build
By increasing investment, the product is given a thrust such that the product increases its market share. For example an organization can push a Question mark into a Star and finally a cash cow.
Hold
A company when cannot invest because it has other investment commitments due to which it holds a product or products in the same quadrant. For example is Amul decides to hold its question mark products in the same quadrant as higher investment to move a question mark into star need to put on hold.
Harvest
This is very well observed in the Cash cow scenario, wherein the company reduces the amount of investment and tries to take out maximum cash flow from the said product which increases the overall profitability. For example, Amul butter has retained its market share for decades. It’s indeed a leader as Amul owns 88 percent share in butter market.
Divest
It is observed in case of Dog quadrant products which are generally divested to release the amount of money already stuck in the business.
This is how the BCG matrix is the best way for a business portfolio analysis. The strategies recommended after BCG analysis help the firm decide on the right line of action and help them implement the same.
