BCG matrix was devised in 1968 by a consulting group in Boston, US, the is a famous tool used to map an organization’s products/services in terms of profitability, market share and hence, determine the future course of action for them.
Put in simple terms, BCG matrix helps the firm in allocation of its limited resources effectively by mapping its product/services in four-quadrants based in profitability and relative market share.
Design of the Matrix
Design of the BCG chart is amazingly analogous to the “four matrix” of time management which is again a very simple tool to prioritization of tasks.
The chart has two aspects on which it is worked out; blocks and x&y axis. Chart is divided into four blocks which has two degrees called High and Low, however x-axis denotes Cash Generation also called “Relative Market Share” whereas, on the contrary y-axis denotes Market Growth Rate. Thereby, segmenting it into four degrees that are poles apart, resulting it to be called as ‘Matrix’
First block – High & High (high growth & high cash)
Second block – High & Low (high growth & low cash)
Third block – Low & High (low growth & high cash)
Fourth block – Low & Low (low growth & low cash)
Based on their growth rate and cash generation each block is assigned with a name. For as the STARS, CASH COWS, QUESTION MARKS and DOGS.
Before we move on to the interpretation and detailed understanding of the BCG Matrix, we must get on to the bottom line of understanding Relative Market Share / Market Share and Market Growth Rate.
“Relative Market Share” (RMS) is the one hundredth or percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. Control over the market is directly proportional to market share means the higher your market share, the higher proportion of the market you control.
Computation of Relative Market Share
RMS =Business unit sales this year / Leading rival sales this year
“Market Growth Rate” (MGR) is used as a measure of the attractiveness of the market. Markets with a high growth rate are expanding and provide immense potential to all the players present.
Computation of Market Growth Rate
MGR= Individual sales this yr.-individual sales last yr. /Individual sales last yr
Understanding BCG Matrix
STARS: High relative market share and High market growth rate.
Leaders in the industry.
Require major chunk of investment for maintaining their competitiveness.
Usually, the flag-ship brands of the company.
Companies should focus on maintaining a steady growth in market share as the industry growth rate is high and competition is stiff.
CASH COWS: High relative market share but low market growth rate.
Stars of the past
Cash-rich brands of the company.
Form the foundation for the company and the cash generated is used in growth, reinvestment purposes.
The industry in which they operate is at its mature or declining stage so no more scope for growth.
Hence, profits need to be extracted and resource allocation for these brands is very less.
QUESTION MARKS: High market growth rate and low relative market share.
These are potential Stars of the company because the industry is growing at a rapid pace and there is immense potential for capturing market share.
Maximum amount of resources need to be allocated to these brands because they are the future flagship brands of the company.
However, the reasons for their low market share must be analysed and market / product development strategies put in operation to improve their present state.
DOGS : Low growth rate and low relative market share
The market is in its declining stage and they have low market share.
Dogs don’t have potential to bring in much cash.
Are the almost a liability for the company and should be divested.
Number of such brands should be minimized.
On the whole the goal of this positioning was to aid commercial analysts make a decision as which of their business units needs to be funded, and how much; and which units to be sold out. Managers were supposed to gain perspective from this analysis that approved them to chalk out with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks.
Steps to BCG Matrix
Identification and division on the basis of Strategic Business Unit.
Assessment of the Strategic Business Unit based on Market Growth Rate and Relative Market Share.
Classification of Strategic Business Unit in accordance to the BCG Matrix.
Development of the strategies and objectives.
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