Boston Consultancy Group (BCG Matrix) Essay Example

Cash cows have high market share but low growth, while stars have both high market share and high growth. Dogs refer to products with low market share in a low-growth market, which should be managed for value by harvesting as much money as possible without investing in them. Question marks or problem children have low market share but high market growth and need to improve their market share before the competition consumes the market growth. This technique can also be applied to a portfolio of companies.

The concept of BCG Matrix involves using circles to represent products or brands, where the size of each circle represents the sales value. A "question mark" product or brand has the potential to become a "star" in the future through development. It is advised for a company to maintain a balanced portfolio.

The BCG Matrix with Cash Flows demonstrates the importance of having a "cash cow" to generate revenue. This revenue can then be utilized for the development of "question mark" ventures. The process of utilizing a "cash cow" in this way is commonly referred to as "milking" it. The diagram below depicts this process using arrows to represent cash flow.

Bruce Henderson developed the growth-share matrix, also referred to as BCG analysis, while employed at Boston Consulting Group in the 1970s. The Wikipedia page for this concept can be accessed by clicking on the following link.

_Analysis can be discussed for merging into this article or section. The Boston Consulting Group created the growth-share matrix in 1970 as a chart to aid corporations in analyzing their product lines or business units, and determining how to allocate cash. Though it

was widely used for two decades, it remains an important analytical tool today. The chart recommends that funds from "cash cows" be allotted to "stars" and possibly "question marks." Contents [hide] • 1 The Chart • 2 Practical Use of the Boston Matrix [[1]] o 2.

The Chart describes the following elements: 1) Relative market share, 2) Market growth rate, 3) Risks and criticisms, which include alternatives, 4) Other uses of the growth-share matrix, and 5) See also. To effectively use the chart, analysts plot a scatter graph that ranks business units based on their relative market shares and growth rates within their respective industries. This categorizes businesses into four distinct types, including cash cows that have high market share within slow-growing industries.

These units are seen as unexciting and stable in a mature market, usually generating surplus cash beyond what is required to keep the business running. Every corporation would be elated to acquire as many of these units as possible and constantly exploit them for the maximum benefit. Due to the slow growth industry, it is not smart to invest too much in them, and they are considered to be "milked" continuously with little investment. Units with low market share in a slow-growing industry are known as dogs or pets, and they usually generate just enough cash to maintain the business's market share.

While owning a break-even unit can offer social benefits in terms of creating jobs and potential synergies for other business units, it is deemed worthless from an accounting standpoint, as it does not generate cash for the company. Additionally, such units can negatively impact a profitable company's return on assets ratio, which

is often used by investors to evaluate management effectiveness. As a result, "dogs" or low market share units in rapidly expanding industries are typically recommended to be divested.

For business units to increase their market share, they need a significant amount of financial resources. The objective for corporations should be to transform the business unit into a star, otherwise, it may fall into the dogs category when industry growth slows down. In other words, a star unit has a substantial market share in a fast-growing industry.

The aspiration is for stars to become profitable assets. It may be necessary to invest additional funds in order to maintain the business unit's dominant market position, but the benefits outweigh the costs. If stars can sustain their category leadership, they can transition from growth vehicles to cash cows. In a maturing industry with slower growth, all business units inevitably become either cash cows or dogs.

The main aim of the ranking was to aid corporate analysts in determining which business units to finance and to what extent, and which units to divest. This analysis was intended to give managers perspective so that they could confidently plan using funds generated by their cash cows to support their stars and potentially their question marks. According to the BCG in 1970, a diversified company with a well-balanced portfolio can effectively capitalize on growth opportunities. A balanced portfolio includes high share and high growth stars that ensure the future, cash cows that supply funds for future growth, and question marks that can be converted into stars with added funds. The Boston Matrix provides a practical way to map an organization's product strengths and weaknesses (based

on current profitability) and expected cashflows, with each product or service represented by the value of its sales.

The basis for this strategy was the management of cashflow, with the belief that market growth rate reflected cash usage and relative market share predicted potential cash generation. Relative market share played a crucial role in predicting cash flow since it commonly increased alongside earnings as economies of scale were key within the framework of Boston Matrix. When calculating a brand's ratio of relative market share to its main competitor's, this approach employs a 1:1 ratio if both have 20% market shares.

Using a logarithmic scale, the ratio of an organization's position can be determined based on their competitor's share. A 60% share would result in a weak ratio of 1:3, while a 5% share would indicate strength with a ratio of 4:1 and potential for profits and cashflow. There is some disagreement about what qualifies as a high relative share.

The Rule of 123 states that the most stable position for a brand leader in FMCG markets is to have a share double that of the second brand and treble that of the third brand. This position not only leads to stability but also profitability. Relative market share is a better measure of brand performance compared to just profits because it provides information on the brand's position against its competitors and predicts future outcomes. Effective marketing activities can also be identified from it. In rapidly growing markets, organizations aim for rapidly growing brands, but they usually require investment because they are net cash users.

Often, the reason for high growth being "bought" is due to the expectation that an increased

market share will eventually lead to profitable returns on investment. The matrix theory assumes that a higher growth rate corresponds with increased investment demands, with a cut-off point usually set at 10% per year. Accurately determining this cut-off point is crucial when utilizing this technique, as growth rates exceeding this rate are deemed significant and likely to require additional cash. However, applying the Boston Matrix may be problematic in certain product areas, especially when growth rates fall below 1% per year. Evidence from FMCG markets suggests that very low growth rates are most common, making the application of this analysis unfeasible in many markets.

Although the BCG growth-share matrix considers only market share and industry growth rate, it can still provide valuable insights into a brand's position beyond cashflow. By measuring the market growth rate, businesses can determine the strength and future potential of the market as well as its attractiveness to competitors. Ultimately, profitability should be every business's goal. It is worth noting that even a product considered a "dog" may still be profitable without requiring extra funding, making it wise to keep rather than sell.

The limitations of the matrix do not account for all aspects of industry appeal or competitive benefits. To address these issues, a different matrix assessment system has been established-The G.E. multi-factor analysis (also referred to as the GE McKinsey Matrix).

Ranking business units using analytical tools involves some subjectivity and guesswork about future growth rates. Without rigorous and skeptical approaches, optimistic evaluations can lead to a dot com mentality where even dubious businesses are classified as "question marks" with good prospects. Enthusiastic managers may claim immediate investment is

necessary to turn these businesses into stars before growth rates slow down and it's too late. Poor market definition can lead to misclassifying dogs as cash cows. The Boston Consulting Group originally practiced the matrix, which proved useful for graphically illustrating cashflows in specific situations. If used with sophistication, the matrix remains a valid tool.

Despite its importance, the messages of the cashflow techniques have been over-simplified by later practitioners. This has been particularly evident in the use of names such as problem children, stars, cash cows and dogs, which often overshadow all other aspects and are remembered the most by students and practitioners. Unfortunately, this simplistic use presents two main problems. Firstly, it has a 'minority applicability' as the cashflow techniques can only be applied to a limited number of markets where growth is relatively high and a clear pattern of product life-cycles can be observed (e.g. ethical pharmaceuticals).

Using research into FMCG markets as a guide, it has been shown that in most cases, relying on established brands to fund new ones may lead to misleading results commonly known as 'milking cash cows'. This practice is arguably one of the most negative consequences of recent developments.

Protecting the position of the brand leader is crucial as they tend to outperform newly launched brands. Although these leaders generate high cash flows, taking advantage of this could harm their position. Additionally, the chances of other brands achieving the same level of leadership are slim, contrary to the perception implied by the Boston Matrix. The main danger lies in assuming that there should be product or service balance in all four quadrants. The message intended is to

fund future "stars" by diverting money from "cash cows," which inevitably decline and become "dogs." Overall, the process appears to be almost mesmeric.

The focus is on the "stars" and funding, while assuming that "cash cows" will become "dogs". However, it's the "cash cows" that are truly important and other elements are supporting actors. It's unwise to divert funds from a "cash cow" as it's needed to extend the product's life. Although one should recognize a "dog" when it appears, creating one to balance the picture would be foolish. A vendor with most products in the "cash cow" quadrant is fortunate and an excellent marketer. Creating a few stars could be an insurance policy against unexpected developments and add extra growth.

[edit] There are various alternative marketing techniques that compete with the Boston Matrix. The Boston Matrix is considered to be the most commonly used or taught method. However, the next most popular approach is the three-cell by three-cell matrix developed by McKinsey and General Electric. This technique focuses on "industry attractiveness" and "business strengths" to address similar issues as the Boston Matrix but in a more complex manner. Hence, it is less widely used or taught. The Boston Consulting Group's Advantage Matrix is a practical approach and reportedly used by the consultancy itself but is not well-known among the wider population. [edit] Additionally, the growth-share matrix can be applied to evaluate not just business units but also product lines or any other entity that generates cash, provided there is enough historical data available for prediction. If a corporation has only a few products and calls them a product line, then this analysis may

not be meaningful due to high sample variance.

The term "cash cow" refers to a product or business unit that generates exceptionally high profit margins in a company, resulting in a significant portion of the company's operating profit. The metaphor references a dairy cow, which can be milked for ongoing profit with minimal expenses once acquired. While the excess profit generated by a cash cow can be used for other purposes, risks include complacency and resistance to change by management and clashes over resources between managers in charge of the cash cow and those advocating for other products. Nevertheless, every business hopes to have a cash cow product.

The Boston Consulting Group developed the BCG growth-share matrix, which is still commonly used by analysts in large companies. This matrix uses the term "cash cow" to refer to business units that have a high market share but low market growth. Below are several examples of cash cows in different markets. However, the neutrality of this section is disputed, and further discussion is available on the talk page.

• The Super Mario game franchise can be considered a Cash Cow due to the continuous re-releases of older titles.
• The Walt Disney Company's Winnie the Pooh franchise is generating significant profits through merchandising. They are constantly introducing new variations of Pooh merchandise, including character redesigns in different art styles and various costumes.
B. C.

There is a suggestion to merge this article or section with Growth-share matrix (Discuss) G. analysis B. C.

G. analysis is a method utilized in strategic management, brand marketing, and product management. Its purpose is to support a business in determining which products to incorporate into

its product portfolio. The technique involves assessing products based on their market growth rate and relative market share, and then plotting them on a two-dimensional map.

When it comes to product categorization based on market share and growth, there are four main groups. Products that exhibit high market share paired with low growth are known as "cash cows". "Stars" are products that boast both high market share and growth. On the other hand, "dogs" are products with low market share in a slow-moving market, which usually require management for value optimization - essentially harvesting as much monetary benefit possible with limited investment. Lastly, products with low market share but high growth are dubbed "question marks" or "problem children".

Enhancing market share for products or brands is incredibly important, particularly before competitors consume market growth. This approach may also be extended to a portfolio of companies through the BCG Matrix. Product or brand value is denoted by the size of each circle in the matrix.

A potential "star" in the future is a "question mark" that has been developed. It is important for a business to have a balanced portfolio, which involves having a "cash cow" that generates revenue to fund the development of one or more "question mark" opportunities. This process, referred to as "milking your cash cow," is illustrated in the following BCG Matrix diagram with its corresponding cash flow arrows:

B.

C.G. Analysis originated in the early 1970s from the work of Bruce Henderson during his time at the Boston Consulting Group.