The management consulting organization Boston consulting group matrix (BCG) is an analytical tool which is founded in 1963 by Harvard Business School alum Bruce Henderson.
Boston consulting group matrix (BCG) created a chart named growth-share matrix with the help of which the organizations can make an analysis of their different product lines or business units in order to ascertain the allocation of cash to potential business units or product lines. It has been very popular since its origin.
When an organization decides to apply the Boston consulting group matrix (BCG) to ascertain the potential requirements of cash in different business units, its corporate analysts make a scatter graph that look like chart which indicates the growth rates & relative market shares of different business units. By doing so, there emerges a chart that contains four categories of different kinds of businesses.
Boston Consulting Group Business Categories
- Cash Cow:
Those business units that have a high market share but the growth of the industry is slow is categorized as cash cows. Such business units have the capacity to generate a large portion of cash which is excessive of the required one to maintain that business unit.
Every organization desired to possess many cash cows because they are considered as staid & boring in a mature market. A little portion of the investment is suitable for such kind of business units because more investment go waste as there is little growth in the industry.
- Dog:
Those business units that have a low market share, as well as the slow growth in the industry, are regarded as dogs. Mostly such kinds of business units do not generate enough cash to maintain its operations. These break-even business units are worthless for the organization because these are not in a position to maintain the operations by themselves.
The organization does not receive any cash from dogs and they can be beneficial in social terms by providing jobs or allowing the synergies with other business units of the organization. The return on asset ratio of the business organization is badly affected by dog units and this ratio is considered as a potential measure of the performance of management of the organization by many investors. It is quite feasible for the business organization to selling its dog units.
- Question Mark
Those business units which have low market share but have high growth in the industry are regarded as question marks. Question mark units need a heavy amount of cash in order to enhance their relative market share. The organization should concentrate their efforts to grow the question mark unit so that it can be converted into a star otherwise with the decline in the growth rate it will convert into wasteful dog category.
- Star
Those business units that have high market share as well as high market growth rate are regarded as stars. It is the expectation of the management that the stars can be converted into cash cows. In order to sustain as a leader in the market, heavy investment is required by the star. When the market growth declines, the stars are converted into cash cows.
In short, when the growth of any particular industry declines, all business units of that industry either become dogs or cash cows. The main purpose of the ranking of business units by corporate analyst is to find out which business unit require further investment and also in how much portion. Moreover it is also ascertained which unit is ineffective & need to be sold out by the organization.
These conclusions assist the managers of the organization in investing the excess cash from the cash from cash cows to the star units & then to the question marks. The diversified organization that contains balanced portfolio has the capability to capitalize the growth opportunities through its strength. Following are included in the balanced portfolio
- Stars which have larger market share & high industry growth rate highlighting the future
- Cash cows that provide reasonable funds to control future growth
- Question marks which can be converted into stars with additional investment
Practical Application of Boston Consulting Group Matrix:
The value of sales of every product or services is represented by the area of its circle. The BCG matrix is a useful tool that specifies the strengths & weaknesses of the products as well as the expected cash flows. The management of the cash flows is the main idea that provides the basis for the formation of this analytical tool. Relative market share is regarded as the indicators of cash generation while the industry growth rate is considered as an indicator of cash usage.
Limitations:
Following are some of the limitations of the Boston consulting group matrix (BCG Matrix).
It is overly simplistic to view every organization as a star, cash cow, dog or question mark.
There are certain businesses that lie at the centre of the BCG matrix and therefore it is not possible to ascertain their exact position.
The growth of various division & industries over time is not reflected by the BCG matrix.
There are certainly other important variables that can better help in making strategic decisions about different divisions besides the two variables of relative market share & industry growth rate.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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