BCG Matrix

BCG Matrix

BCG Matrix is based on the company's business units that divided in to four categories based on combinations of market growth and market share. This model developed by Bruce Henderson of the Boston Consulting Group in 1970's.

In this metrix consider two factors important for the growth and success of firm one is market growth rate and another is relative market share.

Market Growth Rate is the overall industry's growth rate, as much high it is that much attractive it is to be in that business and leads to consumption of cash.

Relative Market Share is the firm's market share in comparison to the market leader in that sector and lead to the generation of cash.

There are divided into four segments on the basis of different combinations.

Question Mark: When high market growth rate and low relative market share that time business under question mark. Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market share they do not generate much cash. Question mark also know as problem child.

If potential to gain market share and become star and eventually a cash cow.  when the question mark does not succeed it, market growth decline, it will degenerate into a dog.

Question Marks must be analyzed carefully in order to determine whether they worth the investment required to grow market share.

Star: A business unit comes under stars when both its market growth rate and relative market share are high. Stars generate large amount of cash, if a star can maintain its large market share, it will become a cash cow when the market growth rate declines.

the portfolio of a diversified company always should have star that will become the next cash cow and ensure future cash generation.

Cash Cow: As leader in a market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume.

Business consume less funds as market growth is slow but it is generating more funds as it ahs dominance in the market share because of its experience in market.

Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted ach flow analysis.

Dog: Business which have low relative market share and slow market growth. Thus neither generate nor consume large amount of cash.

Dogs are cash traps because of the money tied up in a business that has little potential. such business are candidates for divestiture.

Limitation

BCG Matrix is not much relevant as per today's market. There are other factor also affected rather than market growth rate and market share. like number of competitor, market size, sector of the business etc.

BCG Matrix shows that each business unit is independent of the others. In some case, business unit that may be helping other business units gain a competitive advantage.

Matrix depends on breadth of definition of market. a business unit may dominate its samll niche, but have very low market share in the overall industry.