Marketing : Static and Dynamic understanding of BCG Matrix

BCG matrix is a growth - share matrix depicting the position of a corporation's portfolio of business units with comparison to each other on a single plot. It was developed by Bruce Henderson of Boston Consulting Group in 1970s.
                                 

BCG Growth - Share Matrix

           
This matrix considers two factors important for the growth and success of a firm one is market growth rate and another is relative market share. The matrix is plotted along these two factors. Market growth rate is the overall industry's growth rate, as much high it is that much attractive it is to be in that business. An increased market growth rate leads to consumption of cash. Relative market share is the firm's market share in comparison to the market leader in that sector. An increased market share leads to the generation of cash and it is generally a good position for a business unit to have a high market share as it is able to capitalise on its experience curve and employ cost advantages.

There are four segments on the basis of different combinations of these factors:

1. Cash Cows : This is a situation for a business unit when the market growth of its industry is low but relative market share of the firm is high. This may be a result on the product life cycle when the business had really gained a significant market share during the growth days of market and it is still able to maintain that when the market growth rate had slowed down.

It means business is consuming less funds as market growth is slow but it is generating more funds as it has dominance in the market share because of its experience in the market. And due to this the business has been able to cut its cost and being more productive in less funds.

It does not need funds for investment in fixed assets, research or mass marketing but only for operations and to target the target customers.

These kind of businesses are good as long they can survive or should be retained even if small investments needed to run it as it can fund the corporation's growing units with least attention and investment. Just giving the fruits of corporation's hard work in its old years.

2. Stars : A business unit comes under stars when both its market growth rate and relative market share are high. It means the business unit needs more funds to satisfy its need for expansion and up-gradation, fixed investments, research, marketing,etc. At the same time when its market share is increasing it is able to generate more funds from volume sales, new customer acquisition, etc. Its net profit may be even out with its funds consumption. The business is in growth stage of product life cycle.

This is the right time to invest in it by pouring in funds from the corporations' other business units which may be from cash cows or by divesting loss making units.

3. Question Marks : Some business units become question mark when they have low relative market share in highly growing market. They tend to consume more funds but lack in funds generation. These are also in the growth stage of product life cycle.

There may be some problem with the way of carrying business because if the market is growing it means the industry's other competitors are growing and they are hitting the nail at the right place. We can take the example of Nokia, it was the king of mobile handset market in India but with the inception of low price handset companies like Micromax and smart phones from Samsung it started loosing its market share even when the market growth rate was very high.

These units need more and more funds for carrying out business but even on this they do not turn out to be profitable and make losses and thus there is a question mark on them they are also called problem child.

 If the corporation's philosophy allows it may be better to chalk out the actual problem and try to solve it, it may be regarding not getting sufficient funds or some procurement, production, finance,marketing or sales related problem or sell it as Nokia sold its handset business to Microsoft.

4. Dogs : Businesses which have relatively low market share in the slowly growing market are called dogs. They neither consume much funds nor generate enough funds. This stage generally comes in the late maturity time of product life cycle when the market growth rate has slowed down.

It may not be wrong to say that we are in the wrong business as even being for a long time in the same business since its growth the business has not been able to gain sufficient market share and still struggling with profits.

Retrenchment may be the best option for these units.

Shortcomings of B.C.G matrix:

BCG matrix is not much relevant in today's scenario. As it considers only two factors market growth rate and relative market share important for taking decisions in business. There are many other factors which play important role in a business's success like no.of competitors, size of the market, sector of the business, etc.

A business unit may have very small market share in comparison to competitors but it may have complete hold on the niche it is playing in.

A corporation's all the business units need not necessarily be dependent on each other.

According to matrix when a business seems to be a dog it may in actual be a cash cow for the corporation.

Its not necessary that particular strategy is applicable to all the situations, many things also depend on corporation's philosophy and situations that whether it want to stay in the market at any cost or its objective is to make money only or to keep its presence in the market or philanthropy.

Although BCG matrix may not be so relevant in today's world but it still provides a basic tool for the understanding of business and business decision making.