BCG Matrix Application

Table of contents

BCG Matrix is devised by Boston Consulting Group. The underpinning philosophy for the development of this matrix was the portfolio analysis. The aim was to develop a methodology to determine what type of strategic decision needs to be taken, especially in terms of investment to the products within the portfolio of a company. He divided all the products into four categories, on the basis of two dimensions.

These categories were cash cow, dog, star and question mark. These four categories were based on two dimensions, market growth (high or low) and the market share of the concerned product. Purpose

The basic purpose of the BCG matrix was to establish a picture of the product portfolio for an organization which classifies the products into the categories based on market growth and market share. This classification, as they posed, was deemed to help in taking strategic decisions related to investment, divestiture etc. The Impact of BCG Matrix: The popularity of BCG Matrix in early days can be highlighted from the fact that in 1979, there was around 360 out of the fortune 1000 companies which were using this tool and considered it to have a positive effect on the management decisions. (Haspeslagh 1982)

Interpretation

Before moving on to the actual case, it is better to understand the interpretation of each category as it would help in gaining deeper insight of the case. Star: In this tool, those products are classified as star which has high market growth and the product itself has high market share. For such product, the main focus is to protect the market share. Cash Cow: ‘Cash Cow’ are those products which have low market growth, yet high market share of the product itself. The extra cash generated out of it is usually used to protect market share and distributed to other products (usually question marks) to support their share.

Question Mark: These are the products which are high in market growth, but the product itself does not have high market share. This situation demands either more investment in those products to increase the share or to divest them, if the competitor is very strong and increasing share does not seems to be a possibility. Dog: These are the products that have low market share and the market growth is also low. In this case, the best strategy is to liquidate or divest it for as much amount as possible. (Keller and Kotler, 2005)

Applying to the Case

The case states that the company has developed the BCG matrix for its divisions. The findings of the BCG matrix show that Electronics Division is on the upper right side of the matrix (which means question mark). However, the Appliances Division is on the lower left side of the matrix (Cash Cow). The Appliances Division: (Cash Cow) This means that the appliances developed by the company have low market growth and the appliances made by the company have high market share. As there is high market share, so the profit generation form these products is high and as the market growth is low, so the investment required is low.

This means that the additional cash can be used to grow other businesses / divisions or products. The Electronic Division: (Question Mark) These are the products where there is a significant market growth, but the company itself is not able to gain a significant market share. This is the worst of all other case, since the market is growing yet the firm is not able to capitalize the situation. If questions marks are kept going like this, they would absorb so much cash and ultimately become a dog when the market growth drops.

Thus, there is a need of significant investment into the electronic division to enable it to capitalize the growing market and become a ‘star’. Strategic Recommendation: Since the appliances division is in a position to generate more cash than the cost of running the division as well as the cost of investment required protecting the market share, the additional cash can either be used to support the question marks (such as electronics department where significant investment is required to make it star) and make them star or it can be used for Research and Development of those products which may prove to have high growth potential for future.

In case of electronic division, it is recommended that significant investments must be made with the aim of gaining some market share. If there is some untapped market, it is a bit easy, however, it the market is almost saturated and there is a need to grab share from competitors, it is a bit difficult. The investment can be made to add new features to the products to attract customers, launching aggressive marketing and sales campaigns etc. Reliability of BCG Matrix Nevertheless, it was used extensively by the companies in last quarter of the 20th century; however it has certain critiques as well, which harms its reliability.

One of the biggest critiques on the BCG matrix is on its assumption that higher market share means higher profit. It may not be the case. For example, there is a possibility that a company has lower market share (due to niche marketing or due to high prices) but its prices are too high, so it leads to a higher profit, despite lower share. In that case, the BCG matrix won’t provide a true picture. Moreover, the matrix ignores the market share growth rate. There may be some start-ups with low market share yet high market share growth rate.

Such firms which may prove to be a potential danger (especially in Information Technology industry) are totally neglected by the BCG matrix. These findings suggest that though apparently it looks like appliances division is having a good time in the market while the electronic division is in trouble, however this conclusion should not be drawn unless, all other factors ignored by the BCG matrix, such as market share growth rate, duration of entry into the market, competitor’s growth rate etc.

Are revisited and the same situation is apparent from other tools like, Mc Kinsey and General Electric Matrix (that uses factors like industry attractiveness and business strength), SWOT Analysis for each product, porter’s five force analysis (to understand the environment in which the product is there) and above all the use of data mining tools etc. , (Bendel et al, 2006) using different variables than the one used by BCG Matrix.

So BCG matrix can provide an idea, but final decision must be based on the conclusions from multiple tools, measurements, market situation, analysis and above all, management insight.

BIBLIOGRAPHY

Bendle, N. , Farris, P. , Pfeifer, P. , & Reibstein, D. (2006).

Marketing Metrics: 50+ Metrics Every Executive Should Master. Upper Saddle River, NJ: Wharton School Publishing. Haspeslagh, P. (1982).

Portfolio planning: Uses and limits. Harvard Business Review, 60(1), 58-73. Keller, K. , & Kotler, P. (2005).

Marketing Management (12th Edition) (Marketing Management). Alexandria, VA: Prentice Hall.

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