By: Mohamed Sanih, Gn. Fuvamulah, Maldives
The BCG Matrix is a famous model developed by the Boston
Consulting Group which shows the various stages in a product life cycle in a
simple and understandable manner.
The BCG Matrix can be either used to measure a single product or more commonly a group of products in an portfolio which will be in the various stages of the product life cycle. e.g. some maybe a cash cow, while others maybe a problem child or question mark?
The company should decide which products needs to be abandoned, and which ones to pursue depending on various factors such as market penetration, product success, saturation of the market, low growth, cash generating, high expenditure products, research and development etc.
The BCG Matrix has four categories and they are:
The BCG Matrix has four categories and they are:
- Question Mark or Problem Child
- Stars
- Cash Cows
- Dogs
- Question Mark or Problem Child
This is normally a product which has a small market share in a fast growing industry. A problem child or question mark (product) will consume a lot of cash & resources in a company (e.g. for market penetration, product awareness, etc.) than it generates.
Products within this quadrant in the BCG matrix may remain uncertain for a number of years, during which time it may evolve into a Star (high market share / fast growing industry) or Dog (small market share / mature industry).
Most products or businesses start off as problem child and represents the biggest challenges to management. As management need to decide whether to put into the resources and huge cash reserves to make this product a success (Star) or when to put the stop limit or abandon the product before it becomes a Dog.
The product which we think of when thinking about Stars are telecom products. If we look at any best 5 telecom companies, share of market is high but the company growth rate is much higher. Since, these two factors, there is always high competition and juggle to invest and harvest between telecom companies i.e. invest the money into new products or taking out cash from time to time.
Stars can always be taken over by another company due to high competition which capitalize on the high market growth rate. With a successful strategy a star can become a cash cow in the long term.
Star Strategies can be as follows:
- Marketing and Sales Promos
- Advertising
- And Various other marketing activity
Cash cow will normally already have these strategies due to which it has resulted in the formation of the cash cow. Stars on other hand, due to high competition and high market share, the marketing strategy will of high expense with a lot of marketing activities to maintain market share, so as to gain and retain the respective market share.
They’re the market leaders and exhibit a return which is greater than market growth rate. Thus generating more cash than need to be expensed. The cash from such products should be harvested, extracting the profits and investing little cash as possible.
Cash from cash cows will be used to turn “problem child or question marks” into Stars, to cover admin costs, marketing costs, fund R&D development, debts and pay returns to shareholders.
Cash cows generate stable cash flow and their value is accurately determined by calculating present value of its cash stream using a discounted cash flow analysis.
Even though of the fact barely getting back original investment money or making a loss it gives the social advantage of giving employments and conceivable cooperative energies that help different specialty units.
From a bookkeeping perspective such a unit is useless, not producing money for the organization. They reduce the company’s return on assets ratio, utilized by numerous financial specialists to judge how well an organization is being overseen.
Dogs, it is thought, ought to be sold off or generally discontinued in the long term.
- Star in the BCG Matrix
The product which we think of when thinking about Stars are telecom products. If we look at any best 5 telecom companies, share of market is high but the company growth rate is much higher. Since, these two factors, there is always high competition and juggle to invest and harvest between telecom companies i.e. invest the money into new products or taking out cash from time to time.
Stars can always be taken over by another company due to high competition which capitalize on the high market growth rate. With a successful strategy a star can become a cash cow in the long term.
Star Strategies can be as follows:
- Marketing and Sales Promos
- Advertising
- And Various other marketing activity
Cash cow will normally already have these strategies due to which it has resulted in the formation of the cash cow. Stars on other hand, due to high competition and high market share, the marketing strategy will of high expense with a lot of marketing activities to maintain market share, so as to gain and retain the respective market share.
- Cash Cow in the BCG Matrix
They’re the market leaders and exhibit a return which is greater than market growth rate. Thus generating more cash than need to be expensed. The cash from such products should be harvested, extracting the profits and investing little cash as possible.
Cash from cash cows will be used to turn “problem child or question marks” into Stars, to cover admin costs, marketing costs, fund R&D development, debts and pay returns to shareholders.
Cash cows generate stable cash flow and their value is accurately determined by calculating present value of its cash stream using a discounted cash flow analysis.
- Dogs in the BCG Matrix
Even though of the fact barely getting back original investment money or making a loss it gives the social advantage of giving employments and conceivable cooperative energies that help different specialty units.
From a bookkeeping perspective such a unit is useless, not producing money for the organization. They reduce the company’s return on assets ratio, utilized by numerous financial specialists to judge how well an organization is being overseen.
Dogs, it is thought, ought to be sold off or generally discontinued in the long term.
The BCG Matrix has two axis one for Market Growth and another for Market Share, as can be seen from the below diagram:
Example of an BCG Matrix slide can be seen below for Nestle:
Example of an BCG Matrix slide can be seen below for Nestle:
http://www.valuebasedmanagement.net/methods_bcgmatrix.html
Excellent Video on BCG Matrix:
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