Boston consultancy group growth share Matrix commonly known as BCG Matrix is a famous portfolio analysis technique developed by Boston consultancy group in the 1970`s. It was developed for managing portfolio of different business units. The BCG Matrix shows a relationship between products that are generating cash and products that are eating cash.
Large companies who want to be organized in Single Business Units(SBU) face a challenge of allocation resources among these units . The BCG Matrix shows various business units on a graph of market growth v/s market share relative to competitors. Resources are allocated to business units according to where they are situated on the graph.
Four Cells of a BCG Matrix
(A) Cash cows – It is a business unit with large market share in a mature and slow growing industry. Cash cow require little investment and generate cash that can be used to invest in other business units. These a generally large and mature business units reaping the benefits of experience and customer loyalty.
(B) Star – It is a business unit that has a large market share in a fast growing industry. It may generate cash but due to rapid growing market it requires investment to maintain its needs. It is a high growth – high market share business unit. These business units are generally in the growth stage of its product life cycle and not self sufficient in terms of its financial needs.
(C) Question mark? – It is also called the problem child. It is a business unit which has a small market share in a high growth market. Such a business unit requires huge investment to grow market share but whether it will be a star or not is unknown.
(D) Dogs – These are business units with a small market share in a mature industry .A dog may not require substantial cash but it ties up capital that could be invested elsewhere. Such a business unit must be liquidated unless it has some special strategic purpose or prospects to gain market share in the future.
The BCG matrix provides a framework for allocating resources among different business units and allow one to compare many business units at a glance.
Criticism of the BCG Matirx
♦ It is criticised that it does not reflect the true nature of the business. The BCG Matrix considers only two dimensions High and Low for measurement and while a business may enjoy a high, medium or low market share/growth rate.
♦ It assumes that high market share always leads to high profits which is not be true. High Costs are involved in business units with large market share which may lead to normal profits.
♦ There are many parameters to measure profitability other than growth rate and market share. The BCG Matrix ignores all other indicators of profitability.
♦ The model does not clearly define the markets.
♦ Long term profitability of a business depends upon a variety of factors which may not be related to market share or growth. A business with low market share can also earn high profits without needing large amount of investment.