CH - 19 (The BCG Matrix)

Part- III : Strategy Formulation and Choice
Ch-19: The BCG Matrix
Chapter
19 The BCG Matrix
Copyright © 2008, C Appa Rao, B Parathiswara Rao, K Sivaramakrishna
19– 1 C Appa Rao, B Parathiswara

Strategic Management and Business Policy Text and Cases Rao, K Sivaramakrishna
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Introduction
 The BCG matrix was developed by the Boston Consultancy group in 1970s.
It is also called the “Growth share matrix”. This is the most popular and the
simplest matrix to describe a corporation’s portfolio of businesses or
products.
 BCG matrix is based on the premise that majority of the companies carry
out multiple business activities in a number of different product-market
segments. Together, these different businesses form the business portfolio
of the company, which need to be balanced for overall profitability of the
company.
 To ensure long-term success, a company’s business portfolio should consist
of both high-growth products in need of cash inputs and low-growth
products that generate excess cash.

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The BCG Matrix

The BCG matrix helps to determine priorities in a product portfolio. Its basic
purpose is to invest where there is growth from which the firm can benefit, and
divest those businesses that have low market share and low growth prospects.
Each of the products or business units is plotted on a two-dimensional matrix
consisting of:
The BCG Matrix
a) Relative market share
b) Market growth rate. Question
Stars
High market Marks
growth rate
Low market Cash Cows

Dogs
growth rate
High relative Low relative

market share market share

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Building The BCG Matrix

The stepwise procedure for building the BCG matrix is given below.
1. The various activities of the company are classified into different business
units or SBUs
2. The growth rate of the market is determined and plotted on the Y-axis.
3. The assets employed by the company in each of the business units are
compiled to determine the relative size of the business unit in relation to the
company.
4. The relative market share for different business units is estimated and
plotted on the X-axis
5. The position of each business unit or product is plotted on a matrix of
market growth rate and relative market share. The size of the business is
represented by a circle with a diameter corresponding to the assets invested
in the business. The radius of the circle is given by
r = p .R2
where R represents total sales, P represents sales of the business unit as a
percentage of the total sales of the company.

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Analysis Of BCG Matrix
The BCG matrix reflects the contribution of the products or business units to its
cash flow. Based on this analysis, the products or business units are classified
as:
 Stars (high growth, high market share)
 Cash cows (low growth, high market share)
 Question Marks (High Growth, Low Market Share)
 Dogs (Low Growth, Low Market Share)

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Strategic Implications
 The BCG growth-share matrix links the industry growth characteristic with
the company's market share (i.e competitive strength), and develops a
visual display of the company's market involvement, thereby indirectly
indicating current resource deployment.
 In terms of BCG classification, the cash position of various types of
businesses can be visualized as shown exhibit .
Cash Position of Various Businesses
S.No. Business Type Cash Source Cash Use Net Cash Balance
1 Cow More Less Funds available, so milk and deploy
2 Star More More Build competitive position and grow
3 Dog Less Less Divest or redeploy proceeds
4 Question Mark Less More Funds needed to invest selectively
to improve competitive position

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Critical Assessment Of BCG Matrix

BCG matrix is a very well-known portfolio concept with many advantages
or merits:
1. It is easy to use
2. It is quantifiable
3. It draws attention to the cash flows
4. It draws attention to the investment needs
The BCG Matrix, however, has some serious limitations:
1. It is too simplistic.
2. Link between market share and profitability is not strong.
3. Growth rate is only one aspect of industry attractiveness.
4. It is not always clear how markets should be defined.
5. Market share is considered as the only aspect of overall competitive
position.
6. Many products or business units fall right in the middle of the matrix, and
cannot easily be classified. Copyright © 2008, C Appa Rao, B Parathiswara Rao, K Sivaramakrishna

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BCG Modifications
 It was in 1981 that the Boston Consulting Group realized the limitations of
equating ‘market share’ with the ‘competitive strength’ of the company. They
have admitted that the calculation of market share is strongly influenced by
the way the total market domain is defined.
 The Boston Consulting Group came up with a modified version of the BCG
matrix.
The New BCG Matrix
According to the New BCG matrix, the businesses are classified as
follows:
Fragmented businesses are small, confined to a region.
Specialized businesses are focused segment and are characterized by
steep learning curves.
Volume businesses are those where economies of scale and increasing
returns operate. Stalemated businesses are those where it is difficult to gain
advantage. Copyright © 2008, C Appa Rao, B Parathiswara Rao, K Sivaramakrishna

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Part- III : Strategy Formulation and Choice

Ch-19: The BCG Matrix

Copyright © 2008, C Appa Rao, B Parathiswara Rao, K Sivaramakrishna

19– 1 C Appa Rao, B Parathiswara

19– 2 C Appa Rao, B Parathiswara

The BCG Matrix

Low market Cash Cows

High relative Low relative

19– 3 C Appa Rao, B Parathiswara

Building The BCG Matrix

19– 4 C Appa Rao, B Parathiswara

Analysis Of BCG Matrix

 Stars (high growth, high market share)

 Cash cows (low growth, high market share)

 Question Marks (High Growth, Low Market Share)

 Dogs (Low Growth, Low Market Share)

Copyright © 2008, C Appa Rao, B Parathiswara Rao, K Sivaramakrishna

19– 5 C Appa Rao, B Parathiswara

19– 6 C Appa Rao, B Parathiswara

Critical Assessment Of BCG Matrix

19– 7 C Appa Rao, B Parathiswara

19– 8 C Appa Rao, B Parathiswara

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