To analyze the relevance of the company's products, based on their position in the market in relation to the growth of the market for these products and the market share occupied by the company selected for analysis.
This tool is theoretically justified. It is based on two concepts: the life cycle of a product and the economies of scale of production or the learning curve.
The axes of the matrix show market growth (vertical axis) and market share (horizontal axis). The combination of estimates of these two indicators makes it possible to classify the product, highlighting four possible roles of the product for the company that produces or sells it.
Classifications of types of strategic business units
"Stars"
High sales growth and high market share. Market share must be maintained and increased. "Stars" bring a very large income. But, despite the attractiveness of this product, its net cash flow is quite low, as it requires significant investment to ensure a high growth rate.
"Cash Cows" ("Money Bags")
High market share but low sales volume growth. "Cash cows" must be protected and controlled as much as possible. Their attractiveness is explained by the fact that they do not require additional investments and at the same time provide a good cash income. Proceeds from sales can be directed to the development of "Difficult Children" and to support the "Stars".
"Dogs" ("Lame Ducks", "Dead Weight")
The growth rate is low, the market share is low, the product usually has a low level of profitability and requires a lot of attention from the manager. Get rid of dogs.
"Difficult Children" ("Wild Cats", "Dark Horses", "Question Marks")
Low market share, but high growth rates. Difficult children need to be studied. In the future, they can become both stars and dogs. If there is a possibility of transfer to the stars, then you need to invest, otherwise, get rid of it.
Flaws
- Strong simplification of the situation;
- The model takes into account only two factors, but high relative market share is not the only success factor, and high growth rates are not the only indicator of market attractiveness;
- Lack of consideration of the financial aspect, the removal of dogs can lead to an increase in the cost of cows and stars, as well as negatively affect the loyalty of customers using this product;
- The assumption that market share corresponds to profit, this rule may be violated when a new product is introduced to the market with large investment costs;
- The assumption that the market decline is caused by the end of the product's life cycle. There are other situations in the market, for example, the end of the rush demand or the economic crisis.
Advantages
- theoretical study of the relationship between financial receipts and the analyzed parameters;
- objectivity of the analyzed parameters (relative market share and market growth rate);
- clarity of the results obtained and ease of construction;
- it allows you to combine portfolio analysis with a model life cycle goods;
- simple and easy to understand;
- it is easy to develop a strategy for business units and an investment policy.
Construction rules
The horizontal axis corresponds to the relative market share, coordinate space from 0 to 1 in the middle with a step of 0.1 and further from 1 to 10 with a step of 1. Market share estimation is the result of the analysis of sales of all industry participants. Relative market share is calculated as the ratio of own sales to sales of the strongest competitor or the top three competitors, depending on the degree of concentration in a particular market. 1 means that own sales are equal to sales of the strongest competitor.
The vertical axis corresponds to the growth rate of the market. The coordinate space is determined by the growth rates of all company products from maximum to minimum, the minimum value can be negative if the growth rate is negative.
For each product, the intersection of the vertical and horizontal axes is set and a circle is drawn, the area of \u200b\u200bwhich corresponds to the share of the product in the company's sales.
Links
- Practical methods for developing and analyzing the company's product strategy based on internal secondary information
Notes
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See what the "BCG Matrix" is in other dictionaries:
GROWTH-MARKET SHARE MATRIX, or BCG matrix- one of the most common, classic tools of marketing analysis, and in particular portfolio analysis of company strategies. The matrix gained fame and name thanks to the work of the Boston Consulting Group (BCG, or, in Russian, Boston ... ...
BCG MATRIX (BOSTON ADVISORY GROUP)- a two-dimensional matrix with which you can identify winners (market leaders) and establish the degree of balance between enterprises in the context of the four quadrants of the matrix: enterprises that have won large market shares in growing sectors ... ... Big Economic Dictionary
The BCG matrix (eng. Boston Consult Group, BCG) is a tool for strategic analysis and planning in marketing. Created by the founder of the Boston Consulting Group, Bruce D. Hendersen, to analyze the position of the company's products on the market ... ... Wikipedia
- (matrix product market) analytical tool strategic management, developed by the founder of this science, an American of Russian origin, Igor Ansoff, and designed to determine the product positioning strategy ... ... Wikipedia
PORTFOLIO ANALYSIS- [English] portfolio analysis] in marketing, the analysis of product types (activities or types of projects) using the classification of all commodity markets firms according to two independent measurement criteria: market attractiveness and ... ... Marketing. Big explanatory dictionary
Bruce D. Hendersen Bruce D. Henderson Occupation: Entrepreneur, author of the BCG Matrix, founder of the Boston Consulting Group Date of birth: 1915 (1915) ... Wikipedia
Hendersen, Bruce D Bruce D. Henderson Bruce D. Henderson Occupation: Entrepreneur, author of the BCG Matrix, founder of the Boston Consulting Group Date of birth: 1915 ... Wikipedia
It is probably difficult to give an example of a simpler, more visual and well-known analysis tool in marketing than the BCG matrix. This chart divided into 4 sectors and has memorable original names ("Dead Dogs", "Stars", "Cash Cows" and "Difficult Children"). Perhaps today it is known to any manager, marketer, student or teacher.
The matrix, which was developed by the Boston Consulting Group, was an instant hit. This happened due to the visibility and simplicity of the analysis of goods, companies or divisions, based on 2 objective factors: the rate of market growth and market share. And at the present moment, any economist should know how to build a BCG matrix.
essence
The BCG Matrix was created by Bruce Henderson, founder of a consulting group in Boston. This is a great tool for strategic planning in marketing. It is needed to analyze the timeliness of the company's products, based on their current position in the market in accordance with the growth in sales of these products, as well as the market share taken by this company for analysis.
This tool for planning and strategic analysis is theoretically fully justified.
The BCG matrix (an example of construction and analysis is given in the article below) displays the market share (horizontal) and market growth (vertical) along the axes. The combination of estimates of these indicators makes it possible to classify the product, while highlighting 4 roles of the product for the company selling or producing it.
If we consider an example of constructing and analyzing the BCG matrix, it becomes clear that its purpose is to identify the relevance of the company's products depending on the increase in the market for these products, as well as the share it occupies. It's called Growth-Share Market.
On the BCG matrix, the relative market share of the company's products is displayed on one of the coordinate axes, while the second is used to measure the growth rate of the market for this product.
BCG Matrix are 2x2 matrices. It shows business areas as circles whose centers are at the intersection of coordinates, which are formed by the values of the approximate share of the company in the relevant market and growth rates.
Matrix quadrants
Using the example of constructing and analyzing the BCG matrix, it will also be interesting to consider that each of the quadrants in it is given certain names: "Stars", "Difficult children", "Dogs", "Cash cows". Let's consider each of them.
Difficult children
These business areas in growing industries compete, while occupying a small market share. This combination of circumstances leads to the need to increase investments in order to protect one's own market share, in addition, to guarantee its survival. The rapid growth of the market needs a lot of cash in order to match this growth. But such business areas generate income for the organization with great difficulty due to their small market share. These areas are mainly consumers of financial cash, not its generators, and they remain so until their market share changes.
Stars
These typically include new business lines that occupy a large share of a rapidly growing market in which operations bring high profits. Such business areas can be safely called industry leaders. Organizations they bring a very high income. But the main challenge lies in finding the right balance between investment in given area and income in order to guarantee the return of the latter in the future. They are leaders in a rapidly growing market. "Stars" give a good profit, although they need investments to maintain such positions. Interestingly, if the market stabilizes, they can easily turn out to be Cash Cows.
cash cows
"Cash cows" in the BCG matrix are business areas that have received a fairly large market share in the past. But the growth of the relevant industry slowed down noticeably over time. Basically, "Cash Cows" in the past were "Stars" that provide organizations with enough profit in the present to maintain their own competitive position in the market. In these positions, the cash flow is well balanced, since very little is required to invest in such a business area.
Dogs
These are areas in slowly growing industries with a fairly small market share. At this point, the financial cash flow is mostly very small, even more often negative. In this case, every step of the organization, aimed at obtaining a larger share of the market, is immediately counterattacked by competitors that dominate the industry.
Matrix construction
The intersection of the axes in which the horizontal is equal to the market share, this is the BCG matrix. The construction and analysis example shown below demonstrates that it calculates the ratio of its sales to the sales of the strongest competitor or 3 competitors, which depends on the level of market concentration.
The vertical axis tells about the growth rate. The BCG matrix therefore forms 4 quadrants. Moreover, each of them has different products.
The matrix is based on a product life cycle model, which is based on 2 assumptions:
- Participation in a growing market indicates an increased need for material means for their own development, namely, expansion and renewal of production, advertising, etc. If the growth rate is low, then the product does not need significant financing.
- A business that has a significant market share gains a competitive cost advantage as a result of experience.
Using the BCG Matrix
When analyzing the position of certain goods or product groups on the market, it should be taken into account that under certain conditions “difficult children” may turn out to be “stars”, while “stars” will turn into “cash cows” with the advent of maturity, and then into “dogs”. ". Thus, based on this data, you can choose the main options for the company's strategies:
- increase and growth of the market share - the transformation into a "star" of the "question mark";
- Maintaining market share is a strategy that suits cash cows whose revenues are important to financial innovation and growing product types.
- “harvesting”, in other words, making quick profits in possible sizes, including by reducing market share, is a strategy for “cash cows” who have no future, as well as unfortunate “dogs” and “question marks”;
- liquidation of a business is a strategy for question marks and dogs that do not have the opportunity to invest in order to improve their own positions.
The matrix can be applied:
Advantages
The advantages of the BCG matrix in terms of its use as a tool for analyzing the internal environment of a company include:
- allows you to visualize and analyze the results of applying the adopted marketing strategies of the company, the position in the market, in addition, the contribution of each specific type of activity (product) to the results of the company's activities;
- focuses on the consumer, as well as on the key results of the company's work - the enterprise's product basket (product), production volumes, profitability and sales, starting from which it is possible to analyze the steps taken within the organization for this;
- gives a generalized picture of the competitiveness and demand for the company's products;
- shows the priorities in the selection of options for financial, production and marketing solutions on several types of activity, creation of a business portfolio of the company, competition strategies;
- is an easy to use and understand, simple approach to the analysis of the company's product basket;
- helps to justify options for various marketing strategies.
Flaws
The main disadvantages of the matrix include:
- focused more on companies - striving for leadership or leaders;
- is based on a statement and analysis of what has been achieved and without new research cannot give a similar picture for the future, while taking into account the impact of changes in the internal and external environment of the company;
- does not give an accurate answer about the potential, efficiency of the use of enterprise resources and its capabilities (this most important area of analysis remains beyond the capabilities of the matrix);
- in case of multi-product production, it loses such dignity as visibility, in addition, it requires separate consideration of commodity groups;
- when preparing it, it may be difficult to find the necessary information on competitors' products, for example, their cost, which is not included in statistical reporting, as well as in annual reports and balance sheets of enterprises;
- does not give an understanding of what will happen to the “difficult children”: whether they will become losers or leaders, how long the “stars” will burn, and the “cows” will give high milk yields;
- does not take into account the nature of the market, the number of competitors and other market factors, which may lead to incorrect strategic actions;
- the matrix is fully focused on the company's product strategies and financial flows, while strategies in other areas are no less important for it: in technology, production, management, personnel, investments, etc.
Restrictions
The practice of using this matrix has its minuses, pluses, as well as certain boundaries of its use. Significant limitations include the following:
- A high market share that has been achieved is not the only indicator of success, and a high level of profitability is not necessary.
- The strategic outlook for each of the company's portfolios must be equated with growth rates. It should be borne in mind that for this it is necessary that at the same time the relevant products in the strategic perspective under consideration stay in stable phases of the product life cycle.
- Periodically, "Dogs" can give even more net profit than "Cash Cows". Therefore, the quadrant of the matrix gives the relative truthfulness.
- To determine the future position of the organization in the market and the development of competition, it is enough to understand the significance of the relative market share according to the BCG methodology.
- Under difficult conditions of competition, other analysis tools are required, in other words, a different way of building a company's strategy.
When applying the BCG matrix, it is necessary to correctly measure the relative share of the organization and the rate of market growth.
Example
Consider an example of building an enterprise matrix:
- We make a list of elements that need to be analyzed. For example, assortment groups, products, enterprises or branches of companies. For each of them, it is necessary to indicate the amount of profit (sales), similar data for a number of competitors (key competitor). The data is entered into the table below.
- Now you need to calculate how much the sales volumes decreased / increased in accordance with the previous period.
- Market share calculation. It is necessary to calculate for each of the products the relative market share in relation to the same product from a competitor. This can be done by dividing the sales of a particular company product by the sales of the same competitor's product.
We build the BCG matrix
Best of all in Excel for such purposes is a bubble chart.
It shows relative market share on the horizontal axis. The rate of market growth is vertical. The diagram area is divided into 4 equal quadrants.
For the growth rate, the central value is 90%. For market share - 1.00. Given the data, product categories should be distributed.
- "Stars" - 2 and 3 goods. The company has such categories - and this is a virtue. At this stage, only support is needed.
- "Problems", "Difficult children" - 1 and 4 goods. Investments are required for the development of these names. Scheme of possible development: creation of advantage - support - distribution.
- "Dead Weight" ("Dogs") - no.
- "Cash cows" - 5 products. Brings a good profit, which can be used to finance other products.
We have analyzed the BCG matrix with an example.
The BCG Matrix is a tool for strategic portfolio analysis of the market position of goods, companies and divisions based on their market growth and market share. Such a tool as the BCG matrix is currently widely used in management, marketing, and other areas of the economy (and not only). The BCG matrix was developed by the Boston Consulting Group, a management consulting group, in the late 1960s under the direction of Bruce Henderson. It is to this company that the matrix owes its name. Matrix Boston Consulting Group became one of the first portfolio analysis tools.
Why do you need a BCG matrix for a company? Being a simple but effective tool, it allows you to identify the most promising and, on the contrary, the “weakest” products or divisions of the enterprise. Having built a BCG matrix, a manager or marketer gets a clear picture, on the basis of which he can decide which goods (divisions, assortment groups) should be developed and protected, and which should be eliminated.
Construction of the BCG matrix
Graphically, the BCG matrix represents two axes and four square sectors enclosed between them. Consider the phased construction of the BCG matrix:
1. Collection of initial data
The first step is to make a list of those products, divisions or companies that will be analyzed using the BCG matrix. Then for them you need to collect data on sales and / or profits for a certain period (say, for the past year). In addition, you will need similar sales data for a key competitor (or a set of major competitors). For convenience, it is desirable to present the data in the form of a table. This will make them easier to handle.
The first step is to collect all the initial data and group them in the form of a table.
2. Calculation of the market growth rate for the year
At this stage, you need to calculate the annual increase in sales (revenues) or profits. Alternatively, you can calculate both the increase in revenue and the increase in profit for the year, and then calculate the average. In general, our task here is to calculate the growth rate of the market. For example, if 100 units were conditionally sold last year. goods, and this year - 110 units, then the market growth rate will be 110%.
Then, for each analyzed product (division), the market growth rate is calculated.
3. Computing Relative Market Share
Having calculated the market growth rate for the analyzed products (divisions), it is necessary to calculate the relative market share for them. There are several ways to do this. The classic option is to take the sales volume of the analyzed product of the company and divide it by the sales volume of a similar product of the main (key, strongest) competitor. For example, the sales volume of our product is 5 million rubles, and the strongest competitor selling a similar product is 20 million rubles. Then the relative market share of our product will be - 0.25 (5 million rubles divided by 20 million rubles).
The next step is to calculate the relative market share (relative to the main competitor).
4. Construction of the BCG matrix
At the fourth last stage, the actual construction of the matrix of the Boston Consulting Group is carried out. From the origin we draw two axes: vertical (market growth rate) and horizontal (relative market share). Each axis is divided in half, into two parts. One piece match low values indicators (low market growth rate, low relative market share), the other - high (high market growth rate, high relative market share). An important question to be solved here is what values of the market growth rate and relative market share should be taken as central values dividing the axes of the BCG matrix in half? The standard values are as follows: for the market growth rate - 110%, for the relative market share - 100%. But in your case, these values \u200b\u200bmay be different, you need to look at the conditions of a particular situation.
And the final action is the construction of the BCG matrix itself, followed by its analysis.
Thus, each axis is divided in half. As a result, four square sectors are formed, each of which has its own name and meaning. We will talk about their analysis later, but for now it is necessary to put the analyzed goods (divisions) on the field of the BCG matrix. To do this, sequentially mark the market growth rate and the relative market share of each product on the axes, and draw a circle at the intersection of these values. Ideally, the diameter of each such circle should be proportional to the profit or revenue corresponding to this product. So you can make the BCG matrix even more informative.
Analysis of the BCG matrix
Having built the BCG matrix, you will see that your products (divisions, brands) ended up in different squares. Each of these squares has its own meaning and a special name. Let's consider them.
The field of the BCG matrix is divided into 4 zones, each of which has its own type of product/division,
development features, market strategy, etc.
STARS. They have the highest market growth rates and hold the largest market share. They are popular, attractive, promising, rapidly developing, but at the same time require significant investment in themselves. That's why they are "Stars". Sooner or later, the growth of “Stars” begins to slow down and then they turn into “Cash Cows”.
CAIRY COWS(aka “Money Bags”). They are characterized by a large market share, with a low rate of its growth. Cash Cows do not require expensive investments, while bringing a stable and high income. The company uses this income to fund other products. Hence the name, these products literally "milk". WILD CATS (also known as "Dark Horses", "Problem Children", "Problems" or "Question Marks"). They have it the other way around. The relative market share is small, but the sales growth rate is high. It takes a lot of effort and expense to increase their market share. Therefore, the company must conduct a thorough analysis of the BCG matrix and assess whether the “Dark Horses” are capable of becoming “Stars”, whether it is worth investing in them. In general, the picture in their cases is very unclear, and the stakes are high, which is why they are “Dark Horses”.
DEAD DOGS(or "Lame ducks", "Dead weight"). They are all bad. Low relative market share, low market growth. Their income and profitability are low. They usually pay for themselves, but nothing more. There are no prospects. Dead Dogs should be disposed of, or at least their funding stopped if they can be dispensed with (there may be a situation where they are needed for the Stars, for example).
BCG Matrix Strategies
Based on the analysis of goods according to the matrix of the Boston Consulting Group, the following main strategies of the BCG matrix can be proposed.
INCREASE MARKET SHARE. Applied to "Dark Horses" in order to turn them into "Stars" - a popular and well-selling item.
KEEPING MARKET SHARE. Suitable for "Cash Cows", as they bring a good stable income and it is desirable to maintain this state of affairs as much as possible.
REDUCING MARKET SHARE. Perhaps in relation to “Dogs”, unpromising “Difficult Children” and weak “Cash Cows”.
LIQUIDATION. Sometimes the liquidation of this line of business is the only reasonable option for "Dogs" and "Difficult Children", which, most likely, are not destined to become "Stars".
Conclusions on the BCG matrix
Having built and analyzed the matrix of the Boston Consulting Group, a number of conclusions can be drawn from it.
Advantages and disadvantages of the BCG matrix
The BCG matrix, as a portfolio analysis tool, has its pros and cons.
Let's list some of them.
Advantages of the BCG matrix:
- thoughtful theoretical background(the vertical axis corresponds to the life cycle of the product, the horizontal axis corresponds to the effect of scale of production);
- objectivity of the estimated parameters (market growth rate, relative market share);
- ease of construction;
- clarity and clarity;
- great attention is paid to cash flows;
Disadvantages of the BCG matrix:
- it is difficult to clearly define the market share;
- only two factors are evaluated, while other equally important ones are overlooked;
- not all situations can be described within the 4 studied groups;
- does not work when analyzing industries with low level competition;
- the dynamics of indicators, trends are almost not taken into account;
- the BCG matrix allows you to develop strategic decisions, but says nothing about tactical moments in the implementation of these strategies.
This tool is theoretically justified. It is based on two concepts: and the economies of scale of production or the learning curve.
The axes of the matrix show market growth (vertical axis) and market share (horizontal axis). The combination of estimates of these two indicators makes it possible to classify the product, highlighting four possible roles of the product for the company that produces or sells it.
The purpose of this matrix is to analyze the relevance of the company's products depending on the growth of the market for these products and their share. The BGK matrix has another name - “Growth-market share”.
The BCG matrix is a kind of mapping of the position of a particular type of business in a strategic space defined by two coordinate axes, one of which is used to measure the growth rate of the market for the corresponding product, and the other to measure the relative share of the organization's products in the market of the product in question.
The BCG model is a 2x2 matrix in which business areas are represented by circles centered at the intersection of coordinates formed by the corresponding market growth rates and the relative share of the organization in the corresponding market (see figure).
Each circle plotted on the matrix characterizes only one business area characteristic of the organization under study. The size of the circle is proportional to the total size of the entire market (in other words, it takes into account not only the size of the business of this particular organization, but in general its size as an industry on the scale of the entire economy). Most often, this size is determined by a simple addition of the organization's business and the corresponding business of its competitors. Sometimes, each circle (business area) has a segment that characterizes the relative share of the organization's business area in a given market, although this is not necessary to draw strategic conclusions in this model. Market sizes, like business areas, are most often measured in terms of , and sometimes in terms of asset values. It should be especially noted that the division of the axes into 2 parts was not done by chance. At the top of the matrix are business areas related to industries with above-average growth rates, at the bottom, respectively, with lower ones. In the original version of the BCG model, it is assumed that the boundary between high and low growth rates is a 10% increase in output per year.
The abscissa axis, as already noted, is logarithmic. Therefore, a typical coefficient characterizing the relative market share occupied by a business area varies from 0.1 to 10. Displaying competitive position (which is understood here as the ratio of an organization's sales in the corresponding business area to the total sales of its competitors) on a logarithmic scale is a fundamental detail of the BCG model. The fact is that the main idea of this model assumes the existence of such a functional relationship between the volume of production and the unit cost of production, which looks like a straight line on a logarithmic scale.
The breakdown of the matrix along the abscissa into two parts allows us to distinguish two areas, one of which includes business areas with weak competitive positions, and the second - with strong ones. The border of the two regions passes at the level of the coefficient 1.0.
BCG matrix quadrants
Each of these quadrants in the BCG matrix is given figurative names:Difficult children
These business areas compete in growing industries but hold a relatively small market share. This combination of circumstances leads to the need to increase investment in order to protect its market share and ensure survival in it. The high growth rate of the market requires significant cash flow to match this growth. However, these business areas have a hard time generating revenue for the organization due to their small market share. These areas are most often net cash consumers, not cash generators, and remain so until their market share changes. These business areas have the greatest degree of uncertainty: either they will become profitable for the organization in the future, or not. One thing is clear, that without significant additional investment, these business areas are more likely to slide into "dog" positions. This is a weak position that requires large investments and does not provide tangible profits. In this situation, you need to either make serious investments in the business, or sell it, or invest nothing and get a possible residual profit. But you need to remember that under certain conditions and competent investments, the goods of this group can become "Stars".
These tend to be new business areas that account for a relatively large share of a rapidly growing market, operations in which bring high profits. These business areas can be called leaders in their industries. They bring organizations a very high income. However, the main problem is related to finding the right balance between income and investment in this area in order to guarantee the return of the latter in the future. These are leaders in a rapidly growing market. They give high profits, but they need investments to maintain their leading positions. When the market stabilizes, they can move into the category of "Cash Cows".
cash cows
These are business areas that have gained relatively large market share in the past. However, over time, the growth of the relevant industry slowed down noticeably. As usual, "cash cows" are "stars" in the past, which currently provide the organization with enough profit to maintain its competitive position in the market. The cash flow in these positions is well balanced, since investment in such a business area requires the bare minimum. Such a business area can generate very large revenues for the organization. This product is also called "Money bags". As a rule, these are yesterday's "Stars", which constitute the main asset of the company. Products are distinguished by high market share in the markets and low rates of development. The profit from Cash Cows is greater than the investment. It is expedient to allocate proceeds from the sales of "Cash Cows" to the development of "Difficult Children" and to support the "Stars".
These are business areas with relatively small market share in slow growing industries. Cash flow in these areas of business is usually very small, and often even negative. Any move by an organization towards gaining a large market share is uniquely immediately counterattacked by the industry's dominant competitors. Only the skill of a manager can help an organization maintain such positions in the business area. This product is also called "Lame ducks", "Dead weight". The product is characterized by a low growth rate and a small market share. Usually goods are unprofitable and need additional investments to maintain their positions. "Dogs" are supported by large firms if they are related to their direct activities. If there is no such need, then it is better to get rid of them or minimize their presence in the company's assortment policy.
Construction of the BCG matrix
It represents the intersection of the axes, where the horizontal axis corresponds to relative market share. It is calculated as the ratio of own sales to sales of the strongest competitor or the three strongest competitors, depending on the degree of concentration in a particular market.The vertical axis corresponds to the growth rate of the market.
Thus, four quadrants are obtained in the BCG matrix, each of which contains different goods.
The Boston Matrix is based on a product life cycle model. It is based on two assumptions.
1. A business with a significant market share acquires a competitive advantage in relation to , as a result of the experience effect. It follows that the largest competitor has the highest price when selling at market prices, and for him the financial flows are maximum.
2. Presence in a growing market means an increased need for financial resources for its development, i.e. renewal and expansion of production, intensive advertising, etc. If the market growth rate is low, such as a mature market, then the product does not need significant financing.
Application of the BCG matrix
When strategically analyzing the position of individual product groups or products on the market, it should be taken into account that “difficult children” under certain conditions can become “stars”, and “stars” with the advent of maturity will turn first into “cash cows” and then into “dogs”. Based on the data of the BCG matrix, you can choose the following main options for the enterprise:Growth and increase in market share - the transformation of the "question mark" into a "star";
retaining market share is a strategy for cash cows whose revenues are important for growing product types and financial innovation;
“harvesting”, that is, obtaining short-term profits as much as possible, even at the expense of reducing market share, is a strategy for weak “cash cows” deprived of a future, unfortunate “question marks” and “dogs”;
liquidating or abandoning a business and using the resulting funds in other industries is a strategy for "dogs" and "question marks" who do not have more opportunities to invest to improve their positions.
The BCG matrix can be used:
To determine the prospects for certain types of products or services, activities or divisions of the enterprise and make strategic decisions on them;
for the formation of the business portfolio of the enterprise and its optimization;
to substantiate strategic decisions on the distribution or redistribution of enterprise resources directed to various types of activities;
for negotiations between the top managers of the enterprise and heads of departments and making decisions on the amount of investment in a particular area of activity.
Benefits of the BCG Matrix
The advantages of the BCG matrix in terms of using it as a tool for strategic analysis of the internal environment of an enterprise include the following:Focuses on the consumer, key end results the work of the enterprise - the product (the product basket of the enterprise), the volume of its production and sales and its profitability, starting from which it is possible to analyze all the steps taken for this within the organization;
makes it possible to visualize and analyze in detail the results of using the adopted marketing strategies of the enterprise, the position in the market and the contribution of each product (type of activity) to overall results enterprise activities;
shows possible priorities when choosing options for marketing, production and financial decisions for various types activities, strategies, formation of the business portfolio of the enterprise;
gives a certain general picture of the demand and competitiveness of the company's products;
helps to justify various options for marketing strategies;
is a simple, easy to understand and use approach to the strategic analysis of the company's product basket.
Disadvantages of the BCG matrix
The main disadvantages of the BCG matrix include:It is based on the analysis and statement of what has been achieved and cannot, without additional research, give a similar picture for the future, take into account the impact of changes in the external and internal environment of the enterprise;
more focused on enterprises - leaders or striving for leadership;
with multi-product production, it loses such an advantage as visibility or requires separate consideration of individual product groups;
does not give an answer about the strategic potential, the capabilities of the enterprise and the efficiency of the use of its resources. Such an important direction of strategic analysis as the analysis of enterprise resources remains outside the framework of the matrix;
does not answer the questions of what will happen to “difficult children”: will they grow into leaders or losers, how long will the “stars” burn and the “cows” give high milk yields;
when preparing the matrix, it may be difficult to find relevant information on competitors' products, for example, their cost, which is not included in statistical reporting, as well as in the balance sheets and annual reports of enterprises, which can be found in the business register. For successful application, the matrix requires a good knowledge of competitors, the market, and sufficiently accurate enterprise products on it, but does not provide analysis tools suitable for this;
the matrix focuses on the financial flows and product strategies of the enterprise, while strategies in other areas of activity are no less important for it: in production, technology, personnel, management, investments, etc.;
does not take into account the nature of the market, the number of competitors and other market factors, which without additional analysis may lead to the adoption of incorrect or less beneficial strategies of action.
Limitations of the BCG Matrix
The practice of using the BCG matrix has its pros, cons, as well as clear boundaries of its application.Significant limitations of the BCG matrix include the following:
1) The strategic outlook for all of the organization's portfolios must be commensurate with growth rates. This requires that the relevant products in the considered strategic perspective remain in stable phases of their life cycle.
2) The high market share that has been achieved is not the only factor, and not necessarily a high level of profitability.
3) To develop competition and determine the future market position of the organization, it is enough to know the value of the relative market share according to the methodology of the BCG model.
4) Sometimes "Dogs" can bring even more profit than "Cash Cows". This means that the quadrant of the matrix is information with relative truthfulness.
5) Under difficult competitive conditions, other strategic analysis tools are needed, i.e. another model for building an organization's strategy.
When using the BCG matrix, it is very important to correctly measure the growth rate of the market and the relative share of the organization in this market. It is proposed to measure the market growth rate based on industry data for the last 2-3 years, but no more. An organization's relative market share is the logarithm of the ratio of an organization's sales in a given business area to that of the leading organization in that business. If the organization itself is a leader, then its relation to the first organization following it is considered. If the obtained coefficient exceeds one, then this confirms the leadership of the organization in the market. Otherwise, this will mean that some organizations have a large competitive advantage compared to this one in this business area.
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At the heart of the Boston Matrix, or Growth/Market Share Matrix There is a model of the life cycle of a product, according to which a product goes through four stages in its development: entry into the market (product - "problem"), growth (product - "star"), maturity (product - "cash cow") and decline (product - "dog"). At the same time, the cash flows and profits of the enterprise also change: negative profit is replaced by its growth and then a gradual decrease. Boston Matrix focuses on the positive and negative cash flows that are associated with the various business units of an enterprise or its products.
The range of products manufactured by the enterprise is analyzed on the basis of this matrix, i.e., it is determined to which position of the specified matrix each type of enterprise product can be attributed. To do this, the business units of the enterprise are classified in terms of relative market share (ODR) and growth rates of the sectoral market. The ODR ratio is defined as the market share of the business unit divided by the market share of the largest competitor. It is clear that the ODR of the market leader will be greater than one, including ODR = 2 means that the market share of the market leader is twice that of the nearest competitor. On the other hand, ODR< 1 соответствует ситуации, когда доля рынка бизнес-единицы меньше, чем у рыночного лидера. Высокая доля рынка рассматривается как индикатор бизнеса, который генерирует положительные денежные потоки, как показатель ожидаемого потока доходов. Это положение основано на опытной кривой.
The second variable is the industry market growth rate (TRP) -- based on industry sales forecasts and linked to industry life cycle analysis. Of course, the actual life cycle curve of an industry can only be drawn retrospectively. However, the management of the enterprise can expertly assess the stage of the life cycle of the industry in which it operates in order to determine (predict) the need for finance. High-growth industries require significant investment in research and development new products, in advertising, to try to achieve a dominant position in the market and, accordingly, positive cash flows.
To construct the BCG matrix, we fix the values of the relative market share along the horizontal axis, and the market growth rates along the vertical axis. Further, dividing this plane into four parts, we obtain the desired matrix (Fig. 1). The value of the ODR variable, equal to one, separates products - market leaders - from followers.
As for the second variable, industry growth rates of 10% or more are generally regarded as high. It can be recommended to use as a baseline separating markets with high and low growth rates, the growth rate of gross national product in natural indicators or weighted average the growth rates of the various segments of the industry market in which the firm operates. It is believed that each of the quadrants of the matrix describes essentially various situations requiring special approach in terms of finance and marketing.
The BCG matrix is based on two hypotheses:
* The first hypothesis is based on the experience effect and assumes that a significant market share means the presence competitive advantage associated with the level of production costs. From this hypothesis it follows that the largest competitor has the highest profitability when selling at market prices and for him the financial flows are maximum.
* The second hypothesis is based on a product life cycle model and assumes that presence in a growing market means an increased need for financial resources for updating and expanding production, conducting intensive advertising, etc. If the market growth rate is low (mature or probationary market), then the product does not require significant financing.
In the case when both hypotheses are fulfilled (and this is not always the case), four groups of markets can be distinguished with different strategic goals and financial needs.
High Low
Comparative market share
Fig.1. Boston Consulting Group Growth/Market Share Matrix: 1-- innovator; 2-- follower; 3 - failure; 4 -- mediocrity
Each business unit of an enterprise or its product falls into one of the quadrants of the matrix in accordance with the growth rate of the industry in which the enterprise operates and relative market share. IN this method It is important to clearly define the industry in which the firm operates.
If the industry is defined too narrowly, then the firm can turn into a leader; if the industry is defined broadly, the firm will look weak. Graphically, the position of a product or business unit is usually displayed as a circle, the area of which reflects the relative importance of this structure or product for the enterprise, estimated by the value of the assets used or the profit generated. Such an analysis is recommended to be carried out in dynamics, tracing the development of each business over time.
The growth/market share matrix has a lot to do with the product life cycle curve. However, its advantage or difference from a simple product (industry) life cycle model lies in the comprehensive consideration of a certain set of products that may be on the market. different stages life cycle, and the development of recommendations regarding the redistribution of financial flows between products.
New products appear more often in growing industries and have the status of a “problem” product. Such products may turn out to be very promising, but they need significant financial support from the center. As long as these products are associated with large negative financial flows, the danger remains that they will fail to become star products. The main strategic question, which presents a certain difficulty, is when to stop financing these products and exclude them from the corporate portfolio?
If this is done too early, then you can lose a potential star product. Both new products and new trademarks of the company's products can fall into the category of "star" products.
The risk of financial investments in this group is the greatest. Star products are market leaders, usually at the peak of their product cycle. They themselves bring in enough funds to maintain a high share of a dynamically developing market. But despite the strategically attractive position of this product, its net cash income is quite low, as significant investments are required to ensure high growth rates in order to take advantage of the experience curve. There is a temptation for managers to reduce investment in order to increase current profits, but this can be short-sighted, as in the long run this product can turn into a cash cow commodity. In this sense, the future revenues of the star product are important, not the current ones.
When the growth rate of the market slows down, star products become cash cows. These are products, or business units, that have a leading position in a market with a low growth rate. They are attractive because they do not require large investments and provide significant positive cash flows based on the experience curve. Such business units not only pay for themselves, but also provide funds for investing in new projects on which the future growth of the enterprise depends.
In order for the phenomenon of goods - "cash cows" in fully used in the investment policy of the enterprise, competent product management is necessary, especially in the field of marketing. Competition in stagnant industries is very tough. Therefore, constant efforts are needed to maintain market share and search for new market niches.
Dog products are products that have low market share and no growth opportunities because they are in unattractive industries (in particular, an industry may be unattractive due to high levels of competition). These business units have zero or negative net cash flows. Unless there are special circumstances (for example, this product is complementary to a cash cow or star product), then these business units should be disposed of. However, sometimes corporations retain such products in their nomenclature if they belong to "mature" industries. Large markets in mature industries are to some extent protected from sudden fluctuations in demand and major innovations that fundamentally change consumer preferences, which allows products to remain competitive even in a small market share (for example, the market for razor blades).
Thus, the desired sequence of product development is as follows:
"Problem"--> "Star"--> "Milch cow"
[and if unavoidable] --> "Dog"
The implementation of such a sequence depends on efforts aimed at achieving a balanced portfolio, which involves, among other things, a decisive rejection of unpromising products.
Ideally, a balanced nomenclature portfolio of an enterprise should include 2-3 “cow” products, 1-2 “stars”, a few “problems” as a reserve for the future, and, possibly, a small number of “dog” products. A typical unbalanced portfolio has, as a rule, one "cow" product, many "dogs", several "problems", but does not have "star" products that can take the place of "dogs". An excess of aging goods (“dogs”) indicates the danger of a downturn, even if the current performance of the enterprise is relatively good. An excess of new products can lead to financial hardship. In a dynamic corporate portfolio,
be, for example, such trajectories:
* "trajectory of the innovator". By investing in R&D funds received from the sale of goods - "cash cows", the company enters the market with a fundamentally new product, which takes the place of the "star";
* "trajectory of the follower". Funds from the sale of goods - "cash cows" are invested in the product - "problem", the market of which is dominated by the leader. In this situation, the company chooses an aggressive strategy of increasing its market share, and the “problem” product turns into a “star”;
* "trajectory of failure". Due to insufficient investment, the “star” product loses its leading position in the market and becomes a “problem” product;
* "trajectory of permanent mediocrity". The “problem” product fails to increase its market share and enters the next stage (the “dog” product).
The matrix of the Boston Consulting Group represents a corporation in the form of a number of subdivisions that are practically independent of each other in terms of production and sales (business units), which are positioned in the market depending on the values of two criteria.
The essence of portfolio analysis is to determine which departments to withdraw resources from (withdraw from the "cash cow") and to whom to transfer them (give them to the "star" or "problem"). The main recommendations of the Boston Consulting Group on the corporate portfolio are presented in Table 1. It should be emphasized that these strategies are justified only to the extent that the hypotheses on which they are based are realized.
|
Type of strategic business unit |
cash flows |
Possible Strategies |
|
|
"Problem" |
growing, unstable |
Negative |
Analysis: can business climb up to star level |
|
"Star" |
stable growing |
Approximately zero |
Investments for growth |
|
"Milch cow" |
stable |
Positive stable subdivisions |
maintenance profitability investment in other |
|
"Dog" |
unstable |
Approximately zero |
Liquidation departments/ "harvesting" |
Therefore, the analysis based on the BCG matrix leads to the following conclusions:
* define a possible strategy for business units or products;
* assess their funding needs and profitability potential;
* evaluate the balance of the corporate portfolio.
When conducting portfolio analysis in practice, the management of an enterprise may encounter many methodological problems. In particular, in multi-product companies it is difficult to identify business units, as well as to choose a limit separating fast and slow growing types of business, it is difficult to group business units in order to develop a unified development strategy, etc. Nevertheless, portfolio analysis is used in the formation corporate strategy due to its inherent merits. Portfolio analysis has a positive effect in the following areas:
* encourages top management to separately evaluate each type of business of the enterprise, set goals for it and redistribute resources;
* gives a simple and visual picture of the comparative "strength" of each business unit in the corporate portfolio;
* shows both the ability of each business unit to generate a stream of income, and its need for financing;
* stimulates the use of data on the external environment;
* raises the issue of matching financial flows to the needs of business expansion and growth.
The main criticism of the approach of the Boston Consulting Group boils down to the following:
* the matrix provides only two dimensions - market growth and relative market share, many other growth factors are not considered;
* the position of a strategic business unit significantly depends on the definition of the boundaries and scale of the market;
* In practice, it is not always clear how the growth of the market / market share affects the profitability of the business. The hypothesis of the relationship between relative market share and profitability potential is applicable only in the presence of an experimental curve, i.e., mainly in mass production industries;
* the interdependence of economic units is ignored;
* a certain cyclical development of commodity markets is ignored.
Portfolio matrices show that a separate division within an enterprise is obliged not only to keep records of its profits and not to share them with other divisions. The situation changes over time, and a unit that was, for example, a “star” becomes a “cash cow”, and that, in turn, sooner or later turns out to be a “dog”. We emphasize once again that within the framework of this approach, the existence of an experience curve in the industry is assumed and the development strategy of each individual business is reduced to a simplified alternative: expansion - maintenance - reduction of activity (movement through the stages of the product life cycle). Although in real life interrelations of factors and possible development strategies are much more complicated. However, the Boston Matrix can be used as a methodological approach in determining cash flows within an enterprise.
