The BCG Matrix

The matrix measures a company’s relative market share on the horizontal axis and its growth rate on the vertical axis. Uses two scales Horizontal – Relative Market Share = Log scale Vertical – Market Growth Rate

BCG axes
Market growth rate on the vertical axis indicates the annual growth rate of the market in which the business operates. A market growth rate above 10 percent is considered high. Relative market share, refers to the SBU’s market share relative to that of its largest competitor in the segment. A RMS of 0.1 means that the company’s sales volume is only 10 percent of the leader’s; a RMS of 10 means that the company’s SBU is the leader and has 10 times the sales of the next-strongest competitor in the market.

Question Mark (Problem Child)
Businesses that operate in high-growth markets but have low relative market shares. A question mark requires a lot of cash because the company has to spend money on plant, equipment and personnel to keep up with the fast-growing market, and because it wants to overtake the market leader. The company has to decide whether to keep pouring money into the business or not.

STARS
The market leaders in the high growth market. A star does not necessarily produce a positive cash flow for the company. The company must spend substantial funds to keep up with the high market growth and to fight off competitors’ attacks

Cash Cows
Stars with a falling growth rate that still have the largest relative market share and produce a lot of cash for the company. The company does not have to finance expansion because the market’s growth rate has slowed. Because the business is the market leader, it enjoys economies of scale and higher profit margins. The company uses its cash cows to pay bills and support other businesses. If the cash cow starts losing relative market share, the company will have to pump money back into it to maintain market leadership.

DOGS
Businesses that have weak market share in low growth markets. A dog may not require substantial cash, but it ties up capital that could be better deployed elsewhere. The company should consider whether it is holding on to these businesses for good reasons or not.

HOW DOES IT HELP?
After plotting its various businesses in the growth-share matrix, a company must determine whether its portfolio is healthy. An unbalanced portfolio would have too many dogs or question marks and too few stars and cash cows

STRATEGIC BUSINESS UNITS STRATEGIES

STRATEGIC BUSINESS UNITS STRATEGIES
1) Build – this strategy is appropriate for question marks whose market shares must grow if they are to become stars. As they are in a growing market, an inflow of resources would work wonders for them. But if the company is doubtful about its growth even in a growing market then it divesting it would be a better decision. An early decision to divest is likely to produce fairly good bids if the business is in relatively good shape now. 2) Hold – this strategy is appropriate for stars. As they are the market leaders with highest relative market share and in a rapidly growing market, it is important for the firm to hold on to its current position for long.

In this stage the firm would be required to pump in resources in order to maintain its position as a star. In order to reap the benefits from this star the firm would be required to continuously support it with resources. 3) Harvest – this strategy is appropriate for cash cows. The objective of harvest strategy is to increase short term cash flow regardless of long term effect. In other words it involves ‘milking the business’. In this position the firm does not spend money on R&D activities, reduces advertising expenditure and undertakes other cost cutting measures for the concerned SBU. Harvesting can be also used for weak cows, question marks and dogs which show some promise for future potential. 4) Divest – the objective is to sell or liquidate the business because resources can be better used elsewhere. This strategy is appropriate for dogs and question marks that are acting as a drag on the company’s profits. In this strategy the firm does not plough resources into the business but just try to sell it off at a good price.

The General Electric Model
It holds that a company can appropriately rate its different businesses for the purpose of strategic planning on the basis of two main parameters – Market Attractiveness and Business Strength. The above two factors make excellent marketing sense for rating a business. Companies are successful to the extent that they enter attractive markets and possess the required business strengths to succeed in those markets. If one of these factors is missing, the business will not produce outstanding results. Neither a strong company operating in an unattractive market nor a weak company operating in an attractive market will do very well. FACTORS UNDERLYING GE PORTFOLIO MODEL 1. MARKET ATTRACTIVENESS Overall market size Annual market growth rate Historical profit margin Competitive intensity Technological requirements Inflationary vulnerability Energy requirements Environmental impact Social-political legal

2. BUSINESS STRENGTH WEIGHT Market share (FROM 1) Share growth Product quality Brand reputation Distribution network Promotional effectiveness Productive capacity Productive efficiency Unit costs Material supplies R & D performance Managerial personnel

RATING VALUE (1-5) WXR

The axes

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