What is it? What purpose does it serve? THE BCG MATRIX What is it? What purpose does it serve?

Introduction The BCG Matrix is a business model or portfolio planning tool that was developed by Bruce Henderson of the Boston Consulting Group in the 1970’s. It is based on the observation that an organization’s product portfolio or business units can be classified into four categories basing on combinations of market growth and market share.

The matrix helps companies to analyse their strategic business units (SBUs) or product lines and enable them to allocate resources. The BCG Matrix thus offers a very useful 'map' of the organization's product (or service) strengths and weaknesses, in terms of current profitability, as well as the likely cash flows.

The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate.

The BCG Model

Cash Cows These are business units or product lines with high market share in a slow-growing industry. They typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as settled and boring, in a "mature" market, and every firm would be proud to own as many as possible.

As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. They are to be "milked", extracting the profits and continuously investing as little cash as possible, since such investment would be wasted in an industry with low growth. Since cash cows require little investment and generate cash, the cash can be used to invest in other business units.

Cash cows provide the cash required: To turn question marks into market leaders, To cover the administrative costs of the company, To fund research and development, To service the corporate debt, and To pay dividends to shareholders.

Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis.

Dogs Dogs are the units/products with low market share in a mature, slow-growing industry. Such products or SBUs typically "break even” and generate barely enough cash to maintain the business's market share.

Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere.

They depress a profitable company's return on assets ratio, which is used by many investors to judge how well a firm is being managed. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

Question marks (also known as problem child) Are SBUs or products which are growing rapidly and they consume large amounts of cash, but because they have low market shares they do not generate much cash. Have worst cash characteristics of all, because of high demands and low returns due to low market share, hence they result in large net cash consumption.

Such units or products have the potential to gain market share and become a stars. They can eventually become cash cows when the market growth slows. If nothing is done to change the market share situation, then question marks will simply continue to absorb great amounts of cash and later degenerate into a dog when the market growth declines.

Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. The best course of action is to try and increase market share or get it to deliver cash.

Stars Are units/products with a high market share in a fast-growing industry. They generate large amounts of cash due to their strong relative market share, but also consume large amounts of cash because of their high growth rate. This scenario makes the cash in each direction approximately net out.

If market share is maintained, the hope is that stars become the next cash cows when the market growth rate declines. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader.

Stars are required in any portfolio of a diversified company since they have a potential to become the next cash cows and ensure future cash generation. If relative market share is allowed to fall then it becomes very easy for the units or products move from brief stardom to “dogdom”.

Since stars are in the scenario where there is the optimum situation of high growth and high share, they require an increased investment due to the continuous growth. As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, and then turn into stars.

Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog. The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and by how much; and which units to sell.

Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG stated in 1970, only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities.

The balanced portfolio has: stars whose high share and high growth assure the future; cash cows that supply funds for that future growth; and question marks to be converted into stars with the added funds.

Limitations of BCG Matrix It only works with market share and growth rate but these are not the only measures of success. Also there are many situations in business where the Dogs can out earn the Cash Cows. The BCG grid may provide the basis for a business development strategy for large business but what about the small business?

It is possible to have a high market share and not have increased profits, or have a low market share and still be profitable. The BCG Matrix is a great stepping stone for market research and has great possibilities, but for today's companies it may need to be tweaked just a little.

This business model is a pretty decent model which if used in the right situation it can help a business to increase and monitor its market share and growth

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