What is The BCG Growth-Share Matrix? What are the main aspects of The BCG Growth-Share Matrix? How to develop Good BCG Growth-Share Matrix of a company? Where to find information for The BCG Growth-Share Matrix?
INTRODUCTION
No strategic direction or marketing text appears to be complete without the inclusion of the Boston Consulting Group (BCG) growth-share animate affair substance. When used effectively, this model provides guidance for imagination allocation. And despite its inherent weaknesses, is probably one of the most wide used direction instrument as far as portfolio direction is concern. For instant, each SBU (strategic business unit) of large companies such as General Electric, Siemens, and Centrica require different strategies to contend effectively and efficiently. It is not a question of one scheme fits all SBUs since the likelihood for each of them experiencing the same market growth rate, industry-threats and leverage is very slim. This is where the BCG model comes into play as a direction analytical tool. The succeeding examines the underpinnings of the model, for what it is used, how to use it and why it is used.
WHAT IS THE BCG GROWTH-SHARE MATRIX?
To begin with, BCG is the acronym for Boston Consulting Group-a general direction consulting company extremely respected in business scheme consulting. BCG Growth-Share Matrix (see figure 1) happens to get one of many of BCG's strategic concepts the organisation developed in the late 1970s, and is being taught at leading business schools and executive education programmes around the world.
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It is a direction tool that serves four distinct purposes (McDonald 2003; Kotler 2003; Cipher 2006): it can be accustomed classify product portfolio in four business types supported four graphic labels including Stars, Cash Cows, Question Marks and Dogs; it can be accustomed determine what priorities should lean in the product portfolio of a company; to classify an organisation's product portfolio according to their cash usage and generation; and offers direction available strategies to tackle various business lines. Consider companies like Apple Computer, General Electric, Unilever, Siemens, Centrica and many more, piquant in wide-ranging business lines. The BCG model therefore becomes an valuable analytical tool to evaluate an organisation's wide-ranging business lines as later seen in the succeeding sections.
WHAT ARE THE MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX?
The BCG Growth-Share Matrix is supported two dimensional variables: relative market share and market growth. They often are pointers to good health of a business (Kotler 2003; McDonald 2003). In other words, products with greater market share or inside a fast growing market are expected to wield comparatively greater profit margins. The reverse is also true. Let's look at the following components of the model:
Fig. 1: Source: 12manage.com 2006
Relative Market Share
According to the proponents of the BCG (Herndemson 1972), It captures the relative market share of a business unit or product. But that is not all! It allows the analysed business unit be alveolate against its competitions. As earlier accented above, this is due to the old correlation between relative market share and the product's cash generation. This phenomenon is often likened to the experience curve paradigm that when an organisation enjoys lower costs, improved efficiency from conducting business operations overtime. The basic dogma of this postulation is that the more an organisation performs a task often; it tends to develop new ways in acting those tasks better which results in lower operative cost (Cipher 2006). What that suggests is that the experience curve effect requires that market share is accumulated to be able to drive down costs in the end and at the same time a company with a dominant market share will inevitably have a cost advantage over competition companies because they have the greater share of the market. Hence, market share is related with experience.
A precedent is Apple Computer's flagship product called the iPod, which occupies a dominant 73% share the portable music player market (Cantrell 2006). Analysts believe it is the impetus for Apple's commercial enterprise rebirth 40% of Apple's gross revenue is attributed to the iPod business line (Cantrell 2006). Similarly, Dell's PC line shares the same market dominance hypothesis as the iPod. The PC manufacture giant occupies a worldwide market share of 18.1%, which is proportionate to its large market revenue above its competitions (see figure 2).
Figure 2: Source: Reuters 2006
Market Growth
Market growth axis, correlates with the product life cycle paradigm, and predicates the cash requirement a product inevitably relative to the growth of that market. A fast growing market is generally considered attractive, and pulls much of organisation's imaginations in an effort to increase gains. A precedent is the technological market wide consider by experts as a fast growing market, and tends to attract much of competition. Therefore, a product life cycle and its associated market play a key role in decision-making.
Cash Cows
These products are said to have high profitability, and require low investment for the fact that they are market drawing cardship in a low-growth market. This viewpoint is captured by the founders themselves thus:
The money-spinners fund their own growth. They pay the corporate dividend. They pay the corporate overhead. They pay the corporate interest charges. They supply the monetary system system imagination for R&D. They supply the investment imagination for other products. They justify the debt capacity for the whole company. Protect them (Henderson 1976).
According to experts (Drummond & Ensor 2004; Kotler 2003; McDonald 2003), surplus cash from money-spinner products should be channelled into Stars and Questions in order to create the future Cash Cows.
Stars
Stars are drawing cardship in high growth markets. They tend to/should generate large amounts of cash but also use much of cash because of growth market conditions. For example, Apple Computer has a large share in the quickly growing market for portable digital music players (Cantrell 2006).
Question Marks
Question Marks have not achieved a dominant market position, and thu do not generate much cash. They tend to use much of cash because of growth market conditions. Consider Hewlett-Packard's small share of the digital camera market, behind industry drawing card Canon's 21% (Canon 2006). However, this is a quickly growing market.
Dogs
Dogs often have little future and are big cash drainers on the company as they generate very little cash by virtue of their low market share in a extremely low growth market.
Consider Pfizer's Inspra (Gibson 2006):
"Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child, despite anaemic gross revenue of roughly $40 million in the $2.7 billion heart-failure market dominated by Toprol-XL (metoprolol). It was thought to gain market share and become a star, and eventually a money-spinner when the market growth slowed. But, according to industry's experts, Inspra is likely to remain a dog, despite any amount of promotion, given its perceived safety issues and a cheaper, more effective Aldactone in the same Pfizer portfolio. Because Pfizer blessed with heavily in promotion early with Inspra, the drug's earnings potential and positive cash flow is elusive at best. A portfolio analysis of Pfizer's vessel franchise would suggest redeploying promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin) or torcetrapib to ensure those drugs reach their gross revenue potential."
HOW TO DEVELOP GOOD BCG GROWTH-SHARE MATRIX OF A COMPANY?
SBUs or products are delineate on the model by circles and fall into one of the four cells of the animate affair substance already delineate above. Mathematically, the mid-point of the axis on the scale of Low-High is delineate by 1.0 (Drummond & Ensor 2004; Kotler 2003). At this point, the SBU's or product's market share equals that of its largest competition's market share (Drummond & Ensor 2004; Kotler 2003). Next, calculate the relative market share and market growth for each SBU and product. Figure 3 depicts the formulas to calculate the relative market share and market growth.
Fig 3
Oftentimes, if you are versed with a particular industry and companies operative in it, you could draw up a BCG animate affair substance for any company without necessarily computing figures for the relative market share and market growth. Figure 4 depicts a fairly accurate BCG growth-share animate affair substance for Apple Computer developed in the spring of 2005 without the author scheming the relative market share and market growth.
Fig. 4 Source: Asong (2005)
Once the products or SBUs have been plotted, the contriver then has to decide on the objective, scheme and budget for the business lines. Basically, at this juncture the organisations should strive to maintain a balanced portfolio. Cash generated from Cash Cows should flow into Stars and Question Marks in an effort to create future Cash Cows. Moreover, there are 4 major strategies that can be chased at this stage as delineate in the succeeding section.
AVAILABLE STRATEGIES TO PURSUE
Build
The product or SBU's market share inevitably to be accumulated to strengthen its position. Short-term earnings and profits are deliberately forfeit because it is hoped that the long-term gains will be higher than this. This scheme is suited to Question Marks if they are to become stars.
Hold
The objective is to maintain the current share position and this scheme is often used for Cash Cows so that they continue to generate large amounts of cash.
Harvest
Here direction tries to increase short-term cash flows as far as possible (e.g. price increase, cutting costs) even at the expense of the products or SBU's longer-term future. It is a scheme suited to weak Cash Cows or Cash Cows that are in a market with a limited future. Harvesting is also used for Question Marks where there is no possibility of turning them into Stars, and for Dogs.
Divest
The objective of this scheme is to rid the organisation of the products or SBUs that are a drain on profits and to employ these imaginations elsewhere in the business where they will be of greater benefit. This scheme is typically used for Question Marks that will not become Stars and for Dogs.
WHERE TO FIND INFORMATION FOR THE BCG GROWTH-SHARE MATRIX?
Information for the BCG Growth-Share animate affair substance is generated from five-fold sources including company's annual reports, sec fillings and a host of specialised research organisations such as IDC, Hoover, Edgar, Forrester and many more. Armed with this information, developing a BCG growth-share animate affair substance should pose less of a problem.
Limitations
The BCG model is criticised for having a number of limitations (Kotler 2003; McDonald 2003):
o There are other reasons otherwise relative market share and market growth that could influence the allocation of imaginations to a product or SBU: reasons such as the need for strong brand and product positioning could compel imagination allocation to an SBU or product (Drummond & Ensor 2004).
o What is more, the model rests on net cash consumption or generation as the fundamental portfolio reconciliation criterion. That is appropriate only in a capital unnatural environment. In modern economies, with comparatively resistance capital flows, this is not the appropriate metric to apply - rather, risk-adjusted discounted cash flows should be used (ManyWorlds 2005).
o Also, the animate affair substance assumes products/business units are independent of each other, and independent of assets outside of the business. In other words, there is no provision for synergism among products/business units. This is rarely realistic.
o The relationship between cash flow and market share may be weak due to a number of factors including (Cipher 2006): competitions may have access to lower cost materials unrelated their relative share position; low market share producers may get on steeper experience curves due to superior production technology; and strategic factors otherwise relative market share may affect profit margins.
o In addition, the growth-share animate affair substance is supported the assumption that high rates of growth use large cash imaginations and that maturity of the life cycle brings about the expected profit returns. This may be wrong due to various reasons (Cipher 2006): capital intensity may be low and the business/product could be grownup without major cash outlay; high entry barriers may exist so margins may be property and big enough to produce a positive cash flow and a growth at the same time; and industry overcapacity and price competition may depress prices in maturity.
o Furthermore, market growth is not the only factor or necessarily the most important factor when assessing the attraction of a market. A fast growing market is not necessarily an attractive one. Growth markets attract new entrants and if capacity exceeds demand then the market may become a low margin one and therefore unattractive. A high growth market may lack size and stability.
Given the same weaknesses, the BCG Growth-Share animate affair substance must be used with care; nonetheless, it is a best-known business portfolio evaluation model (Kotler 2003).
If you found this clause useful delight have a look at the other clauses we have written: PEST analysis, Porter's 5 Forces analysis, Ansoff analysis, SWOT analysis, Porter's Generic Strategies, Scenario Planning, Value chain analysis.
REFERENCE
12Management (2006). BCG Matrix. www.12direction.com [Accessed: September 23, 2006]
Asong, B. (2005). Case Study: Apple Computer Market Assessment and Product Launch Strategy. CLC-PHW: London, pp. 17-40.
BCG (2006). The Growth-Share Matrix. www.bcg.com [Accessed: September 20, 2006]
Canon (2006). InfoSource research puts Canon No.1 in the UK & Ireland. [Accessed: September 28, 2006]
Cantrell, A. (2006). Apple's Remarkable Comeback Story. [Accessed: September 28, 2006]
Drummond, G. & Ensor, J. (2004). Strategic Marketing: Planning & Control. 2nd Ed. Butterworth-Heinemann: MA, pp. 96-100.
Henderson, B. (1976). Anatomy of the Cash Cow. Accessed: September 21, 2006]
Lane, S. (2006). Overall Mac OS usage market share declining? [Accessed: September 28, 2006] http://www.appleinsider.com/clause.php?id=2059
ManyWorlds (2005). Models and Concepts.[Accessed: September 24, 2006]
McDonald, M. (2003). Marketing Plans: How To Prepare Them, How To Use Them. MA: Butterworth-Heinemann, pp. 175-245.
MindTools (2006). The Boston Matrix. www.mindtools.com/pages/clause/newTED_97.htm [Accessed: September 28, 2006]
BIBLIOGRAPHY
Cooper, R. G., Edgett, S. J., & Kleinschmidt, E.J. (2006). Portfolio Management. Working Paper No 12: The Product Development Institute.
Lee, C. K. (2004). Asia Zirconium Limited Valuation report. Prudential Tower: Standard & Poor's.
Vriens, D (2004). The Role of Information and Communication Technology in Competitive Intelligence. Idea Group Inc: University of Nijmegen.
Zolkiewski, J. & Turnbull, P. (undated). Relationship Portfolios-Past, Present & Future.
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