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BCG Matrix – Four Quadrants of BCG Matrix Explained in Detail | Strategic Management

Boston Consulting Group (BCG) Matrix

➥ Boston Consulting Group Matrix, also known as BCG Matrix, is a two by two matrix that was developed by the Boston Consulting Group, USA. 

It is the most renowned tool for analyzing corporate portfolios.

Based on the related market share and industry growth rates of different businesses in the portfolio, it provides a graphic representation for an organization to analyze.

The study examines the management of SBUs (Strategic Business Units) from a two-dimensional perspective.

The process consists of comparing business potentials and considering the environment.

In order to assess the strategic position of the business brand portfolio and its potential, Boston Consulting Group created the BCG matrix.

Business portfolios are sorted into four categories based on industry attractiveness (growth rate of the sector) and competitive position (relative market share).

Based on the cash needed to support and generate that unit, these two dimensions indicate the likely profitability of a business portfolio.

To help the firm identify which brands it should invest in or divest, the analysis generally identifies which ones must be divested.

Using the BCG matrix, businesses are categorized by their industry growth rate and relative market share.

Relative Market Share

Relative Market Share

The relative market share is one of the dimensions used to evaluate business portfolios. Companies with higher market shares earn more cash.

A company with a higher production volume normally has a higher economy of scale and experience curve, resulting in higher profits.

While some may experience the same benefits of lower output and market share with lower production, it is worth noting that some firms may experience the same benefits with lower production.

Relative Market Share = SBU Sales this year leading competitors sales this year.

Market Growth Rate

Market Growth rate

An increased market growth rate leads to higher earnings, sometimes profits, but it also uses up a lot of cash that would otherwise be invested in further growth.

Due to this, units within rapidly growing industries are cash consumers and should only be invested in if they are expected to grow or maintain market share in the future.

Market Growth Rate = Industry sales this year – Industry Sales last year.

For each SBU, both measures must be calculated. The relative market share dimension of business strength will measure competitive advantage based on market dominance.

A key theory behind this is that market share is obtained by cost leadership and that there is an experience curve.

Four Quadrants of BCG Matrix

Four Quadrants of BCG Matrix

BCG matrix has four cells: vertical axis represents market growth rate, horizontal axis represents relative market share.

Business units are allocated resources in accordance with their grid positions. These four cells of the matrix have been referred to as stars, cash cows, question marks, and dogs.

There are four different types of businesses represented in each cell.

Four Quadrants of BCG Matrix

They are grouped into four quadrants:

1) Stars (High Growth, High Market Share)

Stars

Stars indicate high-market share businesses in a fast-growing industry.

Even though stars generate cash, they need a large investment to maintain their lead due to the rapidly growing market.

Their net income is usually modest. These business units are highly competitive in their industry and located in a robust industry. As the industry matures, stars become cash cows.

Key Points

➨ Market share is high in these business units in a growing market.

➨ They are the best brands in the business.

➨ Both the product and the market are strong.

➨ They are likely to become the next cash cow.

➨ There is a lot of marketing spending on this product, and it generates and uses a lot of cash.

Strategic choices

  • Vertical integration,
  • Horizontal integration,
  • Market penetration,
  • Market development,
  • Product development

2) Cash Cows ( Low Growth, High Market Share)

Cash Cows

A Cash Cow is a business unit that has a strong market share in a mature, slow growing industry.

The investment requirement for cash cows is low, and they produce cash for other business units to invest in.

As a company’s main cash source, these SBUs are specifically the core business.

They provide the foundation of a company. Stability strategies are usually followed by these businesses.

Whenever cash cows lose appeal and begin to deteriorate, retrenchment may be pursued.

Key Points

➨ Their market share is low in a fast-growing market.

➨ The company has potential, but its future is uncertain.

➨ They are heavy cash users with low returns.

➨ Its questions today may become its stars tomorrow. They can even be dogs.

Strategic choices

  • Product development,
  • Diversification,
  • Divestiture,
  • Retrenchment

3) Question Marks (High Growth, Low Market Share)

Question Marks

A question mark represents a business unit with a low relative market share in an industry with a high growth rate.

In order to maintain or increase market share, huge amounts of cash are required. The venture should be evaluated to determine whether it is viable.

New goods and services with good commercial prospects are generally question marks. The best strategy is difficult to determine.

When the firm believes it has a dominant market share, it can adopt an expansion strategy, otherwise it can retrench.

When a company takes on a high growth market, which already has a large market share, it is usually a question mark.

In the absence of investment, question marks will most likely become dogs, while in the presence of big investments, they can become stars.

Key Points

➨ Previous stars often become question marks.

➨ Their market share is high in a low growth market.

➨ They are probably the foundation of your company and without them you would not exist.

➨ It is usually a relatively low investment.

➨ In the product lifecycle, cash cows are mostly in the mature stage. This means they have little growth potential.

➨ There are many brands with large, positive cash inflows, so they are cash-rich brands.

➨ These products can generate large sums of cash that can be used to develop products with better prospects, such as question marks and stars.

Strategic choices

  • Market penetration,
  • Market development,
  • Product development,
  • Divestiture

4) Dogs (Low Growth, Low Market Share)

Dogs

A dog represents a business with weak market share in a low-growth market. Dogs do not produce cash or require enormous amounts.

Due to their low market share, these businesses face cost disadvantages. The reason for retrenchment is that these firms can only gain market share at the expense of their competitors/rivals.

Due to high costs, low quality, insufficient marketing, etc., these firms have weak market shares.

If the prospect of gaining market share is low, a dog should be liquidated unless it has some other strategic goal. The number of dogs within an organization should be kept to a minimum.

Key Points

➨ Dogs are products in a low-growth market with a low share.

➨ Businesses in low-growth markets are weak.

➨ Products in decline phases of their lifecycles.

➨ There is no cash generated or consumed.

➨ Minimizing this should be avoided.

Strategic choices

  • Retrenchment,
  • Divestiture,
  • Liquidation

Advantages of BCG Matrix

➨ The BCG Matrix is simple and easy to use.

➨ This tool helps you sort through the opportunities available to you quickly and simply, and helps you realize how to make the most of them.

➨ In order to maximize a company’s future growth and profitability, it helps identify how to use corporate cash resources.

➨ By using the BCG Matrix, it is possible to allocate resources between different products and compare the product portfolio at a glance.

Limitations of BCG Matrix

➨ The BCG matrix classifies companies as low and high, but in general businesses can also be medium. As a result, it may not reflect businesses as they actually are.

➨ A clear market definition is lacking in this model.

➨ Profitability does not always follow high market share. High market share is also associated with high costs.

➨ Profitability is not solely determined by growth rate and market share. The model overlooks and ignores other indicators of profitability.A high market share is not the only indicator of success.

➨ A business can be profitable even with a low market share. Having a high market share doesn’t guarantee profitability.

➨ Only strong growth in markets can indicate the attractiveness of a market. Steady markets could be profitable.

➨ Some businesses may gain competitive advantage by using dogs. Sometimes they are more profitable than cash cows. It ignores the effect of synergy between business units.

➨ A dog can be as important to businesses as a cash cow if it helps to achieve competitive advantage for the rest of the company.

➨ Many consider this approach to be too simplistic.

➨ There are several dimensions to a business, and these aren’t the only ones. Using the General Electric matrix will give a more accurate measurement of the unit’s location since it uses more dimensions and criteria.

Conclusion

As a general rule, the BCG Matrix presents facts in a simplified manner. This does not necessarily indicate an inadequacy.

In Portfolio Analysis, the BCG Matrix is the most well-known model due to its simplicity. The model is simple and easy to comprehend.

Consequently, it offers everyone a way to make informed decisions based on facts that can be analyzed. This makes it an excellent model despite the criticism.

References

  • Hayes, A. (2023, December 21). Understanding the BCG growth share matrix and how to use it. Investopedia. https://www.investopedia.com/terms/b/bcg.asp

  • Banik, S. (n.d.). Limitations of BCG matrix. Scribd. https://www.scribd.com/document/101130888/Limitations-of-BCG-Matrix

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