It is a useful tool for analyzing a diversified company’s business portfolio. A holding strategy, on the other hand, is a defensive strategy designed to preserve market positions. BCG matrix is criticized as a very simplistic model. The corporate management should consider making the company an organization of a balanced portfolio with enough number of stars, question marks, and cash cows. For example, a business with its share of 1.01 may be the leader, but it is scarcely in a commanding position compared to the next largest competitor. For example, if SBU Y has a market share of 40 percent and its largest rival has a market share of 10 percent, then SBU Y’s relative market shareis40/l0 or 4 0. Two pieces of information are required to plot and SBU in the matrix. Mergers & Acquisitions: Meaning, Process, Example, Advantages, Disadvantages, Evaluating Strategies of Diversified Companies in 8 Steps, 10 Commandments for Formulating Winning Business Strategies, Strategic Options for Different Industries and Company Situations, Competitive Strategy: Four Types of Competitive Strategy, Corporate Strategies of Diversified Companies, Strategic Management: Explanation of Strategic Management Process, Strategic Planning Process: 9 Steps of Setting Proper Strategic Plan, 4 Levels of Strategy: Types of Strategic Alternatives, Diversification: Definition, Levels, Strategy, Risks, Examples, Corporate Strategy: Implementation Process of Corporate Strategy, Facility Planning: Steps, Process, Objectives, Importance, Departmentalization: Definition, Types (How Departmentalization Works), ← Marketing Mix: Definition, Elements, Examples, Diagram, Marketing Environment: Macro and Micro Marketing Environment →, Dividing the business-organization. Dogs, found in the lower right quadrant of the grid, don't generate much cash for the company since they have low market share and little to no growth. The use of the BCG Matrix lies in estimating which businesses are the net cash generators and which are the net cash consumers. Neither the theoretical nor the empirical work exists to support such a preference conclusively. If more cash is poured down into this SBU and properly nurtured, it may become a star Strategic Business Unit (SBU). They require a lot of cash to hold their share, let alone increase it. The matrix plots a company’s offerings in a four-square matrix, with the y-axis representing the rate of market growth and the x-axis representing market share. Many other relevant factors, such as product differentiation^niche market possibility, etc. These SBUs form the ‘business portfolio’ of the company. They generate far more cash than they consume. The parent’s role is not to interfere but to develop. If your market is extremely fragmented, however, you can use absolute market share instead, according to the Strategic Thinker blog.Next, you can either draw a matrix or find a BCG … In such situations, the organization has to balance its portfolio. A problem child is one of the four categories in the growth-market share matrix describing a business with a small market share in a rapidly growing industry. According to Hofer and Schendel (1977), the portfolio analysis should yield a statement of the firm’s current portfolio position as well as a forecast of its future position under the existing strategy. A building approach can also be used to convert small stars into bigger stars. On the other hand, relative market share is ‘the ratio of an SBU’s market share to the market, the share held by the largest rival company in its industry. For example, PNG has 21 business units for the production of textile products, ceramics, pharmaceutical products, etc. These established and successful Strategic Business Units (SBUs) need less investment to hold its market share. They have the potential to be the cash cows only if they can consolidate their competitive position. The picture would be worse if the company had no stars, if it had too many dogs, or if it had only one weak cash cow.8. Because of these flaws, it should be used cautiously. Management has to think hard about which question marks it should try to build into stars and which should be phased out. In a diversified company, each business unit is an SBU. Recently, strategic planning has made a strong comeback. Assess the relative attractiveness of industries that determines the long-run performance of the business. In reality, an organization may have a portfolio where there are too many profit producers, which means no cash users (young businesses that in the future will be profit earners), or too many losers (low possibility of growth/profits), or too many developers (demand too much cash leading to unstable growth). Strategic choices are concerned with resource allocation among businesses so that the ones with potential are nurtured and the ones without are divested. Dogs are in the low attractiveness, low competitiveness (low relative market share) quadrant. These include white papers, government data, original reporting, and interviews with industry experts. An SBU is considered as a cash cow when it has low market growth and high market share. They often need heavy investments to finance their rapid growth. Building strategies are most appropriate when a firm wants to move question marks into the star category. From the matrix, it is clear that these businesses operate in the industries which are in the maturity stage and hold a very strong competitive position in their respective industry. A corporate strategy for each SBU is set in such a way that it becomes consistent with the resource capabilities of the overall company. A question mark business-unit is risky due to the inherent uncertainty in a high-growth market and weak market share position. The growth-share matrix aids the company in deciding which products or units to either keep, sell, or invest more in. Such analysis is no cure-all for finding the best strategy. The company has two stars, two cash cows, three question marks, and three dogs. Further, the organization can develop a functional strategy to support its options and sub-options. Cash cows, seen in the lower left quadrant, are typically leading products in markets that are mature., Generally, these products generate returns that are higher than the market's growth rate and sustain itself from a cash flow perspective. The BCG matrix, also known as the Boston growth-share matrix, is a tool to assess a company’s current product portfolio.Based on this assessment, the Boston matrix helps in the long-term strategic planning of the company’s portfolio, as it indicates where … If a star can remain a market leader, it eventually becomes a cash cow when the market's overall growth rate declines., Questionable opportunities are those in high growth rate markets but in which the company does not maintain a large market share. Question marks lie in the high business growth rate segment with a weak competitive position. Overall, as is the case with other strategic management aspects, a strategic choice is an analytical process backed by managerial foresight, commitment, and vision. With regards to this, it can pursue one of the following strategies: The building strategy is designed to improve market positions in spite of possible short-run damage to profitability. Plot the organization’s current portfolio. The offers that appear in this table are from partnerships from which Investopedia receives compensation. BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of the business brand portfolio and its potential. Cash cow SBUs are supposed to generate substantial cash Sows because of their high market share. It wants to invest in the more promising question marks to make them stars and maintain the stars to become cash cows as their markets mature. BCG Classics Revisited: The Growth Share Matrix. Assess the unique opportunity and threats the organization faces in each industry. Cash cows are low-growth, high-share businesses or products. However, unlike former strategic-planning efforts, which rested mostly in senior managers’ hands, today’s strategic planning has been decentralized. Notice that businesses are concentrated in the upper left-hand quadrant of the Figure. Diversified companies having several SBUs (Strategic Business Units) use the BCG Matrix. The matrix is not a predictive tool; it takes into account neither new, disruptive products entering the market nor rapid shifts in consumer demand. It is a highly profitable firm and generates a substantial amount of cash. As a result, many companies that diversified too broadly in the past now are narrowing their focus and getting back to the basics of serving one or a few industries that they know best. If SBU X has a market share of 10 percent and its largest rival has a market share of 30 percent, SBU X’s relative market share is 10/30 or 0.3. On the vertical axis, the market growth rate provides a measure of market attractiveness. Like a product, SBUs have a life cycle starting with question marks, becoming stars, turning to cash cows, and end up as dogs. Harvesting is a ruthless strategy that is best suited to weakening cash cows, dogs, and some question marks. an estimate of the future rate of growth in the market and. The BCG Matrix is one of the most popular portfolio analysis methods. The market share/growth matrix implies a preference for high market growth and the need to maintain a firm’s cash balance. One dimension of the chart (vertical dimension or Y-axis) represents future market growth (growth rate of SBU’s industry), and the other dimension (horizontal dimension or X-axis) represents an SBU’s relative market share. An SBU with high market growth and a high relative market share is considered as a star business-unit. BCG stands for Boston Consulting Group; also called ‘Growth/Share Matrix/ BCG Matrix’; developed by Boston Consulting Group, a world-renowned management consulting firm located in the USA. Stars are in the high growth rate and, therefore, highly competitive markets. A cash cow is one of the four BCG matrix categories that represents a product or business with high market share and low market growth. Holding is most commonly used to keep cash cows productive. A business portfolio approach is commonly followed in a diversified company for corporate strategic analysis. As remarked by Hili and Jones, the portfolio approach is a visual way of identifying and evaluating alternative strategies for the generation and allocation of corporate resources. Assess the unique resources of the organization to match the opportunities/threat. Some teams even include customers and suppliers in their strategic-planning processes. Many companies plunged into unrelated and new high-growth businesses using these approaches that they did not know how to manage—with very bad results. The process of strategic choice also entails the commitment of financial and other resources through portfolio analysis and access to the corporate parent’s cumulative knowledge and learning through corporate parenting. That is why companies should examine the businesses’ future positions side by side with the current position analysis. Are there any areas that need improvement? Can it derive benefits from the industry? Boston Consulting Group. These products should be taken advantage of for as long as possible. The idea is to cut promotion and production costs to the bone and mine the product for its cash flow. Watch a video with an explanation about the BCG Matrix below. The Figure indicates the direction in which the corporate strategies must be fashioned to shift the portfolio towards the left hand upper two quadrants. In the upper left quadrant are stars, which generate high income but also consume large amounts of company cash. The stars should be nurtured with the surplus cash flows from the cash cows. BCG matrix has certain flaws. They can be difficult, time-consuming, and costly to implement. We also reference original research from other reputable publishers where appropriate. This approach focuses on extracting cash from a project at the expense of the business’s long-run survival. You can learn more about the standards we follow in producing accurate, unbiased content in our. Those in a strong position and are growing need cash to be harvested from those in a weak industry position. When examining market growth, you need to objectively compare yourself to your largest competitor and think in terms of growth over the next three years. Their net contribution to the kitty of the organization is not very substantive. Setting strategic objectives for each SBU. In reality, cost advantage may not accrue to an SBU simply due to high maShaS Depending on the industry, an SBU with low simple, low-cost technology. To use this matrix, the SBUs of the company are plotted on a two- dimensional chart. The businesses that are the cash consumers must also exhibit the potential to be the leaders in their business with a highly competitive position so that they can contribute enough cash to nurture future businesses in the future. Separate high growth from low growth markets common cut point is GDP + 3%. On the vertical axis, the market growth rate provides a measure of market attractiveness. Assess the organization’s competitive position in each industry. Dogs are low-growth, lo,w-share businesses, and products. It may not always be in some businesses; the capital investments needed to remain competitive are so high that an SBU classified as a cash cow may find it very difficult to yield substantial cash flows. In a diversified company, all the business-units constitute its business portfolio. Moreover, the feasibility of a strategy is dependent on more factors than simply share and market growth. Cash cows are often vulnerable to newer competitors, and marketing programs need to promote new versions and applications to maintain customer interest. The company should seriously think about getting rid of dog SBUs. In multi-business companies, corporate parenting enables the headquarters to focus on core competencies and tries to create value among various business units by establishing relationships and a good fit between needs and opportunities of units and resources and capabilities within the firm. The surplus cash can be used to nurture those businesses that are in the star quadrant or the question mark quadrant. The portfolio matrix plots the different businesses on two axes: one that shows the attractiveness of the industry the business is into the strength of the business based on a chosen indicator such as relative market share (in case of the BCG matrix as shown above and Business Strengths in the nine-cell GE Matrix). You should appreciate that SBUs change their positions in the growth-share matrix with the elapse of time. Can the parent contribute? "What Is the Growth Share Matrix." In the Figure below, businesses B, C, F, G, and H. A, D, E, and I could be winners in large markets or have a very dominant position in smaller markets. Divestment is employed on question marks and dogs that the firm cannot finance into better growth positions. In the BCG matrix, SBU(Strategic Business Unit) is a unit of the company that has a separate mission and objectives that can be planned independently from other company businesses. For example, a company division, a product line within a division, or sometimes a single product or brand. A strategic business unit (SBU) is a relatively autonomous unit of a firm. The corporate head office has to decide about its future. Products in this quadrant should be analyzed frequently and closely to see if they are worth maintaining.. Share this article. Each unit is assessed as a separate entity after a portfolio approach is followed. The areas of the circles are proportional to the SBU’s dollar sales. But it can help management understand the company’s overall situation, see how each business or product contributes, assign resources to its businesses, and orient the company for future success. Some businesses are net resource generators, and some are resource consumers. Assess the critical success factors, which are the basis of the unit’s competitive advantage. The BCG growth-share matrix contains four distinct categories: "dogs," "cash cows," "stars," and “question marks.”. The Boston Consulting Group (BCG) growth-share matrix is a planning tool that uses graphical representations of a company’s products and services in an effort to help the company decide what it should keep, sell, or invest more in.
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