BCG Matrix &
The Boston Consulting group’s product portfolio
matrix (BCG matrix) is designed to help with long-term strategic planning, to
help a business consider growth opportunities by reviewing its portfolio of
products to decide where to invest, to discontinue or develop products. It's
also known as the Growth/Share
Matrix
It is is a corporate planning
tool, which is used to portray firm’s brand portfolio or SBUs on a quadrant
along relative market share axis (horizontal axis) and speed of market growth
(vertical axis) axis.
The role of cash flow
in the BCG matrix
•
Margins and cash generated are a function of market share.
High margins and high market share go together.
•
To grow, you need to invest in your assets. The added cash
required to hold share is a function of growth rates.
•
High market share must be earned or bought. Buying market
share requires an additional increment or investment.
•
No product market can grow indefinitely. You need to get
your payoff from growth when the growth slows; you lose your opportunity if you
hesitate. The payoff is cash that cannot be reinvested in that product.
In this four-quadrant BCG matrix template, market share is
shown on the horizontal line (low left, high right) and growth rate is found
along the vertical line (low bottom, high top). The four quadrants are
designated Stars (upper left), Question Marks (upper right), Cash Cows (lower
left) and Dogs (lower right).
BCG matrix is a framework created by Boston Consulting
Group to evaluate the strategic position of the business brand portfolio and
its potential. It classifies business portfolio into four categories based
on industry attractiveness (growth rate of that industry) and competitive position (relative market share).
These two dimensions reveal likely profitability of the business portfolio in
terms of cash needed to support that unit and cash generated by it. The general
purpose of the analysis is to help understand, which brands the firm should
invest in and which ones should be divested.
Relative
market share.
One of the dimensions used to evaluate business portfolio
is relative market share. Higher corporate’s market share results in higher
cash returns. This is because a firm that produces more, benefits from higher
economies of scale and experience curve, which results in higher profits.
Nonetheless, it is worth to note that some firms may experience the same
benefits with lower production outputs and lower market share.
Market growth rate.
High market growth rate means higher earnings and sometimes profits
but it also consumes lots of cash, which is used as investment to stimulate
further growth. Therefore, business units that operate in rapid growth
industries are cash users and are worth investing in only when they are
expected to grow or maintain market share in the future
The Matrix is divided into 4 quadrants
based on an analysis of market growth and relative market share, as shown
in the diagram below
Dogs.
Dogs hold low market share compared to competitors
and operate in a slowly growing market. In general, they are not worth
investing in because they generate low or negative cash returns. But this is
not always the truth. Some dogs may be profitable for long period of time, they
may provide synergies for other brands or SBUs or simple act as a defense to counter
competitors moves. Therefore, it is always important to perform deeper analysis
of each brand or SBU to make sure they are not worth investing in or have to be
divested.
Strategic choices: Retrenchment, divestiture, liquidation
Cash cows.
Cash cows are the most profitable brands and
should be “milked” to provide as much cash as possible. The cash gained from
“cows” should be invested into stars to support their further growth. According
to growth-share matrix, corporates should not invest into cash cows to induce
growth but only to support them so they can maintain their current market
share. Again, this is not always the truth. Cash cows are usually large
corporations or SBUs that are capable of innovating new products or processes,
which may become new stars. If there would be no support for cash cows, they
would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture,
retrenchment
Stars.
Stars operate in high growth industries and
maintain high market share. Stars are both cash generators and cash users. They
are the primary units in which the company should invest its money, because
stars are expected to become cash cows and generate positive cash flows. Yet,
not all stars become cash flows. This is especially true in rapidly changing
industries, where new innovative products can soon be outcompeted by new
technological advancements, so a star instead of becoming a cash cow, becomes a
dog.
Strategic choices: Vertical integration, horizontal integration, market
penetration, market development, product development
Question marks.
Question marks are the brands that require
much closer consideration. They hold low market share in fast growing markets
consuming large amount of cash and incurring losses. It has potential to gain
market share and become a star, which would later become cash cow. Question
marks do not always succeed and even after large amount of investments they
struggle to gain market share and eventually become dogs. Therefore, they
require very close consideration to decide if they are worth investing in or
not.
Strategic choices: Market penetration, market development, product development,
divestiture
The BCG matrix is an excellent tool for analyzing the
products or services of a company. However, you can also use the model to
determine the priority for other matters within a company. For example, you can analyze your customer portfolio using the BCG
matrix. How does this work? List all your customers, and determine the margin
and (potential) growth per customer. It will soon become clear which customers
are making real money. The customers with whom a lot of money is earned and
where much growth can be expected are your stars. Customers who do have a high turnover, but whose margins or
growth are lower, can be qualified as cash
cows. Customers who can potentially generate a lot of revenue (for example
because it is a large company), but where relatively little is earned can be
qualified as question marks.
You can qualify dogs that
cost a lot of work, where there is little revenue, and where there is little
potential to earn. Maybe you should say goodbye to these customers and use your
sales and marketing power to get more out of the question marks and the stars.
Also make sure that your cash cows are not forgotten. Start thinking about how
you can optimize the profit of these customers.
Also don't forget to repeat this analysis
once in a while. Clients that you first qualified as a question mark and still
fall into this segment after a year, you may have to qualify as dogs. Focus on
customers that are making a profit or that can achieve growth!
ii. Porter’s Five Forces Model
Porter's Five
Forces is a simple but powerful tool for understanding the competitiveness of
your business environment, and for identifying your strategy's potential
profitability.
This is useful,
because, when you understand the forces in your environment or industry that
can affect your profitability, you'll be able to adjust your strategy
accordingly. For example, you could take fair advantage of a strong position or
improve a weak one, and avoid taking wrong steps in future.
Threat of new entrants:
•
Potential entrant is
the major source of competition in the industry. The product range, quality,
capacity, etc. brought by them, increases competition. The size of the new
entrant plays a major role here, i.e. the bigger the entrant, the more intense
is the competition. Moreover, the prices are slashed, and the overall
profitability of existing players is also affected, by the new entry.
It analyses the ease of entry to the new market, i.e. if
the entry is easy, then the level of competition in the industry is severe.
•
Bargaining
power of suppliers:
•
Suppliers, also exert substantial bargaining power over the
firms, by threatening to increase prices or degrade quality. They are likely to
exercise power if:
•
The number of suppliers in the industry is limited in
number.
•
They offer the specialised product.
•
The supplier’s product is an important input, to the
buyer’s product.
•
The product has a few substitutes.
Thus, the factor analyses bargaining power of industry
suppliers, which directly affects the profitability, i.e. the higher the cost,
the lesser is the profitability.
•
Bargaining
power of customers:
•
The market of
outputs, i.e. the customers have the ability to compete with the supplying
industry and put the companies under pressure, by forming groups or cartels.
This force not only affects the prices but also influences the producer’s cost
and investments in certain circumstances, as the powerful buyers’ influence
producers to offer better quality which involves cost and investment.
Buyer groups are likely to exercise power if, they are
concentrated, products are homogeneous, the switching cost is low, and full
information is available.
•
Threat from
substitutes:
•
It is the quiescent source of competition, present in the
industry. They are the key cause of competition in many industries. Substitute
products are offered at reasonable prices along with high quality, to the
customers can radically change the competitive scenario of industry,
especially, when the introduction is sudden.
•
Rivalry
among current players:
•
Last but not the
least, is the rivalry among current players, which is all that is known as
competition. It can be shown in a number of ways such as:
•
Price competition
•
Advertising battles
•
New introductions
•
Improving quality
•
Increasing consumer warranties.
As an example, stock analysis
firm Trefis looked at how Under Armour
fits into the athletic footwear and apparel industry
•
Competitive
rivalry: Under Armour faces intense
competition from Nike, Adidas and newer players. Nike and Adidas, which have
considerably larger resources at their disposal, are making a play within the
performance apparel market to gain market share in this up-and-coming product
category. Under Armour does not hold any fabric or process patents, hence its
product portfolio could be copied in the future.
•
Bargaining
power of suppliers: A diverse supplier base limits
supplier bargaining power. Under Armour's products are produced by dozens of
manufacturers based in multiple countries. This provides an advantage to Under
Armour by diminishing suppliers' leverage.
•
Bargaining
power of customers: Under Armour's customers include
wholesale customers and end-user customers. Wholesale customers, like Dick's
Sporting Goods, hold a certain degree of bargaining leverage, as they could
substitute Under Armour's products with those of Under Armour's competitors to
gain higher margins. The bargaining power of end-user customers is lower as
Under Armour enjoys strong brand recognition.
•
Threat of
new entrants: Large capital costs are required
for branding, advertising and creating product demand, which limits the entry
of newer players in the sports apparel market. However, existing companies in
the sports apparel industry could enter the performance apparel market in the
future.
•
Threat of
substitute products: The demand for performance apparel,
sports footwear and accessories is expected to continue to grow. Therefore,
this force does not threaten Under Armour in the foreseeable future.
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