The Bcg Matrix Analysis Marketing Essay

The BCG matrix (aka B-Box, B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. Analysis of market performance by firms using its principles has called its usefulness into question, and it has been removed from some major marketing textbooks.

Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment.

According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share.

For each product or service, the ‘area’ of the circle represents the value of its sales. The BCG Matrix thus offers a ‘map’ of the organization’s product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cashflows.

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.

Derivatives can also be used to create a ‘product portfolio’ analysis of services. So Information System services can be treated accordingly.

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

This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of ‘economies of scale’ (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster the higher the share. The exact measure is the brand’s share relative to its largest competitor. Thus, if the brand had a share of 20 percent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 per cent, however, the ratio would be 1:3, implying that the organization’s brand was in a relatively weak position. If the largest competitor only had a share of 5 per cent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows. If this technique is used in practice, this scale is logarithmic, not linear.

The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flows. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective.

Relative Market Share = Sales This Year / Leading Rival’s Sales This Year

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

Market share is the percentage of the total market that is being serviced by a company under consideration, measured either in revenue terms or unit volume terms. Higher the market share, the higher the proportion of the market one controls. The Boston Matrix assumes that if the company under consideration is enjoying a high market share then it will be making more money. (This assumption is based on the idea that company has been in the market for long enough to have learned how to be profitable, and will be enjoying scale economies that gives an advantage). Market growth is used as a measure of a market’s attractiveness. Markets experiencing high growth are ones where the total market is expanding, meaning that it’s relatively easy for businesses to grow their profits, even if their market share remains stable. While, competition in low growth markets is often bitter, and while you might have high market share now, it may be hard to retain that market share without aggressive discounting.

The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership.

BCG matrix has four cells, with the horizontal axis representing 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 industry, the average growth rate of the industry is used. While, if all the SBU’s are located in different industries, then the mid-point is set at the growth rate for the economy.

Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

BCG Matrix

                10 x                                  1 x                                  0.1 x

Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. 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. If successful, a star will become a cash cow when the industry matures.

Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued.

Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally 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.

Dogs- Dogs represent businesses having weak market shares in low-growth markets. 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 firms can gain market share only at the expense of competitor’s/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as-

BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected.

Market is not clearly defined in this model.

High market share does not always leads to high profits. 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.

At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes.

This four-celled approach is considered as to be too simplistic.

Benefits of BCG

Organizations that are very large such that they require setting up business units usually face the test of the allocation of resources among those business units. The BCG matrix was developed by Boston Consulting Group for the management of various business units. Using the BCG opens an organization to several benefits such as the ones listed in the following article.

Simplifies management

The BCG is an effective management tool and it offers a good framework for resource allocation among various units. This enables the managers to compare several business units whenever they want. It simplifies many business factors through showing employees the market share as well as growth rate and how to use them to create new strategies.

Popular matrix

Even though BCG matrix may be among the oldest matrices ever formulated, it is also the most common and best known matrix taught all over the world. There are forums on the internet where individuals share their ideas on the best methods of using BCG matrix because of its popularity. This means that those looking to use it will never lack assistance and support. The BCG still remains a quick and beneficial guide for resource allocation and ensuring better profits.

.Better decision making

The BCG allows for the making of comparisons so as to measure the growth and development rate of a company against the average growth rate in that specific industry. In addition, this particular matrix is also enjoyable to use, encouraging better decision making.

BCG Matrix of TATA

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Tata Steel, Tata Power, Tata Motors and Indian Hotels emerge as clear Stars(high market growth, high market share). Hence, they should be retainedand the investment in these companies should be increased

Tata Chemicals and Tata Tea emerge as the Cash Cows (low market growth,high market share) and should be held on to for the time being

Some of the Question Marks (high market growth, low market share) are Tata Teleservices, Voltas and Tata Communications