BCG Matrix
The BCG Matrix is a Growth-Share Matrix which separates a company’s units or major product
lines into four categories: Relative Market Share (High and Low) and Market Growth Rate (High
and Low). This helps a business to determine important areas of short and long-term
profitability.
The growth-share matrix analyzes different divisions within a corporation and compares their
growth rates and market shares with those of competitors.
The four segments of the BCG Matrix
Placing products in the BCG matrix provides 4 categories in a portfolio of a company:
• Stars (high growth, high market share)
• Stars are using large amounts of cash. Stars are leaders in the business.
Therefore they should also generate large amounts of cash.
• Stars are frequently roughly in balance on net cash flow. However if needed any
attempt should be made to hold your market share in Stars, because the rewards
will be Cash Cows if market share is kept.
• Cash Cows (low growth, high market share)
• Profits and cash generation should be high. Because of the low growth,
investments which are needed should be low.
• Cash Cows are often the stars of yesterday and they are the foundation of a
company.
• Dogs (low growth, low market share)
• Avoid and minimize the number of Dogs in a company.
• Watch out for expensive ‘rescue plans’.
• Dogs must deliver cash, otherwise they must be liquidated.
• Question Marks (high growth, low market share)
• Question Marks have the worst cash characteristics of all, because they have
high cash demands and generate low returns, because of their low market share.
• If the market share remains unchanged, Question Marks will simply absorb great
amounts of cash.
• Either invest heavily, or sell off, or invest nothing and generate any cash that you
can. Increase market share or deliver cash.
The BCG Matrix and one size fits all
strategies
The BCG Matrix method can help to
understand a frequently made strategy
mistake: having a one size fits all strategy
approach, such as a generic growth
target (9 percent per year) or a generic
return on capital of say 9,5% for an entire
corporation.
In such a scenario:
• Cash Cows Business Units will reach their profit target easily. Their management have
an easy job. The executives are often praised anyhow. Even worse, they are often
allowed to reinvest substantial cash amounts in their mature businesses.
• Dogs Business Units are fighting an impossible battle and, even worse, now and then
investments are made. These are hopeless attempts to "turn the business around".
• As a result all Question Marks and Stars receive only mediocre investment funds. In this
way they can never become Cash Cows. These inadequate invested sums of money are
a waste of money. Either these SBUs should receive enough investment funds to enable
them to achieve a real market dominance and become Cash Cows (or Stars), or
otherwise companies are advised to disinvest. They can then try to get any possible
cash from the Question Marks that were not selected.
Other uses and benefits of the BCG Matrix
• If a company is able to use the experience curve to its advantage, it should be able to
manufacture and sell new products at a price that is low enough to get early market
share leadership. Once it becomes a star, it is destined to be profitable.
• BCG model is helpful for managers to evaluate balance in the firm’s current portfolio of
Stars, Cash Cows, Question Marks and Dogs.
• BCG method is applicable to large companies that seek volume and experience effects.
• The model is simple and easy to understand.
• It provides a base for management to decide and prepare for future actions.
Limitations of the BCG Matrix
Some limitations of the Boston Consulting Group Matrix include:
• It neglects the effects of synergy between business units.
• High market share is not the only success factor.
• Market growth is not the only indicator for attractiveness of a market.
• Sometimes Dogs can earn even more cash as Cash Cows.
• The problems of getting data on the market share and market growth.
• There is no clear definition of what constitutes a "market".
• A high market share does not necessarily lead to profitability all the time.
• The model uses only two dimensions – market share and growth rate. This may tempt
management to emphasize a particular product, or to divest prematurely.
• A business with a low market share can be profitable too.
• The model neglects small competitors that have fast growing market shares.
Target Market
Definition: A specific group of consumers at which a company aims its products and services
Your target customers are those who are most likely to buy from you. Resist the temptation to be too general in
the hopes of getting a larger slice of the market. That's like firing 10 bullets in random directions instead of
aiming just one dead center of the mark--expensive and dangerous.
Try to describe them with as much detail as you can, based on your knowledge of your product or service.
Rope family and friends into visualization exercises ("Describe the typical person who'll hire me to paint the
kitchen floor to look like marble...") to get different perspectives-the more, the better.
Here are some questions to get you started:
• Are your target customers male or female?
• How old are they?
• Where do they live? Is geography a limiting factor for any reason?
• What do they do for a living?
• How much money do they make? This is most significant if you're selling relatively expensive or
luxury items. Most people can afford a carob bar. You can't say the same of custom murals.
• What other aspects of their lives matter? If you're launching a roof-tiling service, your target
customers probably own their homes.
Once upon a time, business owners thought it was enough to market their products or services to "18- to 49-
year olds." Those days are a thing of the past. Because the consumer marketplace has become so differentiated,
it's a misconception to talk about the marketplace in any kind of general way anymore. Now, you have to
decide whether to market to socioeconomic status or to gender or to region or to lifestyle or to technological
sophistication. There's no end to the number of different ways you can slice the pie.
Further complicating matters, age no longer means what it used to. Fifty-year-old baby boomers prefer rock 'n'
roll to Geritol; 30-year-olds may still be living with their parents. People now repeat stages and recycle their
lives. You can have two men who are 64 years old, and one is retired and driving around in a Winnebago, and
the other is just remarried with a toddler in his house.
Generational marketing, which defines consumers not just by age, but also by social, economic, demographic
and psychological factors, has been used since the early 80s to give a more accurate picture of the target
consumer.
A newer twist is cohort marketing, which studies groups of people who underwent the same experiences
during their formative years. This leads them to form a bond and behave differently from people in different
cohorts, even when they're similar in age. For instance, people who were young adults in the 50s behave
differently from people who came of age during the tumultuous 60s, even though they're close in age.
To get an even narrower reading, some entrepreneurs combine cohort or generational marketing with life
stages, or what people are doing at a certain time in life (getting married, having children, retiring) and
physiographics, or physical conditions related to age (nearsightedness, arthritis, menopause).
Today's consumers are more marketing-savvy than ever before and don't like to be "lumped" with others--so be
sure you understand your target market. While pinpointing your market so narrowly takes a little extra effort,
entrepreneurs who aim at a small target are far more likely to make a direct hit.
Strategic Business Unit or SBU is understood as a business unit within the overall corporate
identity which is distinguishable from other business because it serves a defined external market
where management can conduct strategic planning in relation to products and markets. The
unique small business unit benefits that a firm aggressively promotes in a consistent manner.
When companies become really large, they are best thought of as being composed of a number
of businesses (or SBUs).
In the broader domain of strategic management, the phrase "Strategic Business Unit" came into
use in the 1960s, largely as a result of General Electric's many units.
These organizational entities are large enough and homogeneous enough to exercise control over
most strategic factors affecting their performance. They are managed as self contained planning
units for which discrete business strategies can be developed. A Strategic Business Unit can
encompass an entire company, or can simply be a smaller part of a company set up to perform a
specific task. The SBU has its own business strategy, objectives and competitors and these will
often be different from those of the parent company. Research conducted in this include the BCG
Matrix.
This approach entails the creation of business units to address each market in which the company
is operating. The organization of the business unit is determined by the needs of the market.
An SBU is an operating unit or planning focus that groups a distinct set of products or services,
which are sold to a uniform set of customers, facing a well-defined set of competitors. The
external (market) dimension of a business is the relevant perspective for the proper identification
of an SBU. (See Industry information and Porter five forces analysis.) Therefore, an SBU should
have a set of external customers and not just an internal supplier.[1]
Companies today often use the word “Segment” or “Division” when referring to SBU’s, or an
aggregation of SBU’s that share such commonalities.
marketing
Definition
Management process through which goods and services move from concept to the customer. As a
philosophy, it is based on thinking about the business in terms of customer needs and their
satisfaction. As a practice, it consists in coordination of four elements called 4P's: (1) identification,
selection, and development of a product, (2) determination of its price, (3) selection of a distribution
channel to reach the customer's place, and (4) development and implementation of a promotional
strategy. Marketing differs from selling because (in the words of Harvard Business School's emeritus
professor of marketing Theodore C. Levitt) "Selling concerns itself with the tricks and techniques of
getting people to exchange their cash for your product. It is not concerned with the values that the
exchange is all about. And it does not, as marketing invariably does, view the entire business process
as consisting of a tightly integrated effort to discover, create, arouse, and satisfy customer needs."
What is Business Portfolio Analysis?
Business portfolio analysis is an enterprise strategy development tool based primarily on the
market share of your business and the growth of market in which your business exists.
Why is Business Portfolio Analysis?
Business portfolio analysis as an organizational strategy formulation technique is based on the
philosophy that organizations should develop strategy much as they handle investment
portfolios. Just as sound financial investments should be supported and unsound ones
discarded, sound organizational activities should be emphasized and unsound ones
deemphasized.2
Most Popular Business Portfolio Tools
Three most popular business portfolio tools are the BCG Growth-Share Matrix, the GE
Multifactor Portfolio Matrix, Matsushita Strategy Matrix, and road-mapping. The GE
Multifactor Portfolio Matrix was deliberately designed by General Electric Company (GE) and
McKinsey and Company to be more complete that the BCG Growth-Share Matrix.
segmentation
Definitions (3)
1. Business: Subdivision of a corporation into units along (1) organizational lines (braches,
department, subsidiaries), (2) areas of economic activity (industry, market, product line), or (3)
geographic regions.
2. Finance: Subdivision of a pool of assets into segments with similar characteristics, such as interest
or yield rate.
3. Marketing: Subdivision of a population into segments with similar characteristics, such as age,
education, income.
Customer Value
Difference between what a customer gets from a product, and what he or she has to
give in order to get it.
