BCG Matrix: Portfolio Analysis in Corporate Strategy
The BCG Matrix is a tool used in corporate strategy to analyze business units or product lines based on two variables: relative market share and the market growth rate. It is also referred to as the Boston Consulting Group analysis, the Growth-Share matrix, the Boston Box, or the Product Portfolio matrix. A firm can map its business divisions in accordance and decide where to devote additional (financial) resources, where to pay out, and where to divest by integrating these two variables into a matrix. Making corporate-level investment decisions is the core goal of the BCG Matrix. Each unit can be assigned one of four possible category labels, including Dogs, Question Marks, Cash Cows, or Stars, depending on how well the unit and the industry are performing. Each of these areas will be covered in this post along with instructions on how to utilize the BCG Matrix correctly.
BCG Matrix Example: Samsung’s Product Portfolio
Samsung is a corporation made up of several strategic business units (SBUs) that produce a wide range of goods. Samsung sells a variety of products, including phones, cameras, TVs, microwaves, refrigerators, washing machines, chemicals, and insurance. The risk is distributed throughout a wide range of company divisions, making this a wise corporate strategy. For instance, Samsung is still likely to have positive cash flows from other business divisions in other product categories in the event if something were to happen to the camera market. This aids Samsung in overcoming other financial setbacks. Corporate strategists will still need to decide how much money to allocate to and distribute across all of those business units, even in the case of a product portfolio that is well-balanced. Where do you invest the majority of your funds, and where might you perhaps divest? Relative Market Share and Market Growth Rate are used by the BCG Matrix to calculate that.
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Relative Market Share
This variable was utilized by the BCG Matrix’s inventor to quantify how competitive a business is. The share of the focus firm in relation to its biggest rival is the precise measurement for relative market share. Therefore, if Apple, its biggest rival, has 60 percent of the market for mobile phones and Samsung has 20 percent, the ratio would be 1:3, or 0.33, suggesting that Samsung is in a rather precarious situation. The ratio suggests that Samsung is in a reasonably strong position, which may be reflected in above average earnings and cash flows. If Apple only had a 10% market share, the ratio would be 2:1 (2.0). The cut-off point in this case is 1.0, indicating that in order for the focus firm to have a high relative market share, it must at least have a similar market share to that of its biggest rival. This framework makes the assumption that a rise in relative market share will lead to a rise in cash creation because the focal firm acquires a cost advantage over its rivals as a result of economies of scale.
Market Growth Rate
The market growth rate, which is used to gauge market attractiveness, is the second variable. Organizations often aim for rapidly expanding markets because they provide intriguing long-term returns on investments. The disadvantage is that businesses in expanding areas are probably going to require expenditures in order to enable expansion. For instance, the investments are required to finance marketing initiatives or to boost capacity. Industry to industry, growth rates might be high or low, but generally, the cut-off point is set at roughly 10% annually. This implies that if Samsung were to operate in a market that, on average, grew by 12 percent annually, the market growth rate would be regarded as high.
Start-ups and ventures typically begin as question marks. Businesses operating in a high-growth market with a low market share are known as Question Marks (or Problem Children). They could ultimately increase their market share and develop into Stars (market leaders). If properly handled, Question Marks will expand quickly and use up a lot of monetary investments. If Question Marks are unsuccessful in dominating the market, they could turn into Dogs when market expansion slows down after several years of cash consumption. Therefore, in order to decide if they are worth the expenditure necessary to increase market share, question marks must be thoroughly examined.
Stars are companies that have a significant market share and may even be market leaders in a rapidly expanding sector. Stars make a lot of money because they have a huge relative market share, but they also have to make a lot of capital to compete with rivals and keep up their growth pace. In order to guarantee long-term cash flows, well diversified organizations should always have some Stars in their portfolio. In addition to providing certainty for the future, stars are excellent for enhancing your company’s reputation.
After several years of operation in the sector, market growth may eventually slow and profits may plateau. Your Stars are probably turning into Cash Cows at this point. Profits and cash flows are anticipated to be strong since they still hold a significant relative market share in a (mature) industry that is stagnant. The reduced growth rate should result in fewer investments being required. Therefore, cash cows generally produce more money than is required to keep the firm running. The Cash Cow is expected to be “milked” for investments in other company divisions to generate this “extra cash” (Stars and Question Marks). Cash Cows are ultimately what provide a portfolio stability and balance.
Dogs are business units having a low relative market share in a market with moderate growth or decline. These units often earn just enough money to keep the company’s market share and break even (they neither produce nor use a significant quantity of cash). As a result, investors are less interested in these companies. Dogs are likely to be sold off or liquidated since there is still money tied to these company units that may be invested in ones with more promise.
BCG Matrix and the Product Life Cycle
The Product Life Cycle and the BCG matrix are closely related. Products or SBUs with a question mark are still in the introduction stage. At this time, brand-new goods are introduced to the market. SBUs or goods in the growth phase are referred to as stars. Sales are rising at their quickest rate at this time. When sales are almost at their peak but the rate of growth is decreasing due to market saturation, Cash Cows are in their mature period. Dogs are also in the decline phase, which is the point in the cycle when sales start to diminish.
BCG Matrix In Sum
When all of these elements are considered, a BCG Matrix route from start-up to market leader may be drawn. Cash Cow investments are designed to be used to pay for Question Marks and Stars. Additionally, Dogs must be sold or liquidated to free up money with no future value. To ensure future positive cash flows, you will ultimately require a balanced portfolio of Question Marks, Stars, and Cash Cows. You might want to read more about the Ansoff Matrix if you want to learn more about HOW to use these investments to expand a business unit. You might also want to have a look at alternative portfolio management models, such as the GE McKinsey Nine Box Matrix, in addition to the BCG Matrix.