The BCG Matrix – Why understanding the difference between a Dog, Cow or a Star could save your Business.
The BCG Matrix and its Benefits to Business
A bit of background..
A quick and effective way to identify an appropriate business strategy for your product or service is through the BCG matrix. Developed in 1968, the matrix has been long used by the bastions of industry as a quick tool for identifying the most appropriate strategy. This article offers a critique explaining the theory behind the BCG matrix and evaluating its pros and cons.
The matrix was designed to assess a business’ products in terms of potential cash generation and cash expenditure. They are effectively categorised in terms of their rate of market growth and relative market share. Arguably the most important factor deciding factor for the success or failure of a business is whether management really understand the market in which their product or service is sold and the true potential of that market.
Market Growth Rates are assessable by the individual companies are dependent on the sector type, its degree of saturation and what stage of its life-cycle the market is at.
Market share is assessed as a ratio and is ultimately decided by comparison relative to the largest competitor within the market. Ultimately having a relative market share greater than 1 would indicate that the product is a market leader.
Companies have been known to spend millions trying to assess what level of market growth there is left within a certain industry or their relative market sharer for a particular product type. One only needs to look at the share price movements of Apple or Google when updated figures for their respective shares in the Smartphone market are released.
Applying the matrix and what it means...
I have attached a picture of the matrix here to demonstrate what it all means. First you need to identify where on the matrix your product/service sits...
Stars - These really are the long-term heroes for your business. Stars have high relative market share and high rates of market growth potential. In the short-term they may require a high degree of investment or capital expenditure most probably more than the cash they generate. However in the long-term these stars make well in excess of the investment required to keep them growing and the key point is this, you have a high market share and a high market growth.
Cash Cows- At some stage, all stars become cash cows. How long they stay there depends on the attrition rate within the market and how quickly competitor products are evolving. Cash cows require little capital expenditure and generate high levels of income. However, they are cash cows for a reason and that is because they are losing their star status.Therefore management have to decide whether this cash cow with high market share but low market growth is worth holding (in the hope that market share is maintained) or should it be harvested in order to reap maximum earnings at the expense of long-term development.
Strategy: HOLD or HARVEST
Question Marks: With high market growth and low market share this is arguably the toughest decision for management. Do you build and therefore spend money on investment in the hope of increasing market share or should the product or service be allowed to die as the product is squeezed out by competitors?
Strategy: BUILD or HARVEST
Dogs: Dogs have relative low market share and low rates of market growth. These can be ex-cash cows that are no longer doing what they did best i.e. earning serious money. Although they don’t necessarily cost the company a lot of cash, they can still be cash traps which tie up funds and provide a poor return on investment. There is some silver lining however. Sometimes companies hold on to dogs because they play a useful role such as completing a product range, acting as a gateway for customers to use other “star” or “cash-cow” products or services.
Strategy: DIVEST or HOLD
So, the theory makes sense but when it comes to practicalities does it work?
This is the proverbial million-dollar question. There have been a number of academic studies on the BCG matrix and some have called into question its practical usefulness. One such study identified entities which use models such as the BCG matrix as having lower shareholder returns.
Furthermore, assessing relative market share and rate of market growth is a highly subjective exercise. At any one time, market analysts, industry experts, academics and numerous CEO’s could have a range of differing opinions about both of these criterion. After all, one man’s star may be another man’s dog.
Finally it cannot be ignored that the matrix succeeds and fails due to its simplicity indicating that it is a useful initial tool in assessing markets, industries, products and services but ultimately requires a whole array of business strategy tools to define and implement the best strategy for a business.
Ultimately, this popular strategy analysis tool should never be used solely by itself. However, provided a company has a balance of products within its portfolio with cash cows providing finance for stars and question marks and a minimum of dogs, all indications are that it will be hugely successful. As they say after all, cash is king.
- Zachary Jonah has something to say....
Weekly Commentary discussing the key headlines in World politics,finance and economic news.
No comments yet.