Boston Consulting Group (BCG) portfolio analysis – BGC matrix
The simplest, and quantitative analysis known product or strategy centers method is developed by the company Boston Consulting Group (BCG), in the late 60s and is embodied in the matrix of growth-share market.
This approach considers the cash flow (profit + depreciation) as the most important when making decisions about the composition of product portfolio strategy centers or a business variable, and how to allocate resources.
It is important that balance is achieved within the company, these surplus products, which are providing liquidity to the company must finance the deficit.
BCG’s approach from two premises:
- The liquidity obtained through the operations of the company depends on the unit cost, which in turn is a function of sales volume and experience, which ultimately depend on market share (scale effect, related to fixed costs ).
- The liquidity needed for investment in facilities, equipment and working capital is a function of the growth rate of the sector in which the company or strategic business segment is located.
Thus, the strategy associated with each ‘center strategy “will be determined by the two factors upon which the cash flow of the company, that is, when the cash flow a function of the relative market share and the rate growth of the company or sector, the differences in these two factors will indicate the strategy.
At the operational level and a practical adaptability, BCG can be used to analyze the range of the company, competition and even franchise networks. Once known variables that frames the growth matrix-share market, the next step is the construction of the matrix.
Figure: Matrix growth-share (BCG)
These concepts of growth rate and participation fee, properly combined, allowed the BCG make a classification of products, according to the positioning thereof, in order to analyze the portfolio, based on its ability to generate or use of income, and therefore, set different strategies. The graphical representation of these variants is done shape in the horizontal axis the market share gained, and the vertical axis the rate of output growth relative to its market. Thus an array or board divided into four quadrants. Each of these represents the position of a product, according to their capacity to generate flows ( cash flow ) and their monetary needs. So different categories of products or product groups are established. The graph matrix, the (X – X ‘) coordinates and (Y – Y’) indicate the industry average, both the share in the market and the growth rate.
Several authors maintain that the coordinate axis (X – X ‘) is equivalent to the critical mass, ie, that its growth rate is above or below 10%; in practice, this is not possible or useful and that stages of a sector slowdown, growth above 5% could place the company above the competition making its products star or children.
1. Question or Children Products
The questions or children products are those located in high growth markets with low relative market shares, implying a reduced benefits, and the need for large investments to maintain their market shares and, of course, increase them. The units in this area may be products that are introduced for the first time in an existing market, products introduced earlier but for some reason did not reach high market share, or products that came to have a high market share but they lost.
They are generally products with high market growth and small participation fees. They represent the future of the company, why require appropriate price management, promotion, distribution … which translates into a need for investment of resources. They are called to be “star products”.
2. Star Products
Those in markets with high growth and high market share are called stars. These are characterized by having a cash flow balance, as strong corporate profits are offset by the great needs money to finance growth and maintain its market share. Located in the growth phase, they are those who have better possibilities, both for investment and for profit.
In these products it is essential to maintain and consolidate its market share, for which it will sometimes be necessary to sacrifice margins and establish entry barriers to competition. The pricing policy can be an important strategy because it allows choose between getting a smaller cash flow in exchange for increasing market share. Some companies leave the product at this stage to maintain a leadership image.
3. Dairy Cow
Products placed in markets of low growth and high market share are called dairy cows. These are cash generators because it does not require large investments will be used to finance the growth of other units, research and development of new products, and remunerate own and outside capital.
These products are typically located in the maturity phase, with high market share and low or zero rate of growth. They are products with a great experience, lower cost competition and, therefore, higher incomes. Are essential to enable the fund ‘questions’ base products, research and development, and make the sacrifices required of income “star products”.
It should be remembered that the expectations of growth of these “dairy cows” are zero, which do not require additional funding and that sooner or later reach their decline stage. Therefore, investments should be geared exclusively to maintain the share achieved, while the replacement is achieved by “star products”.
Products with low market shares and low growth are called “dogs”. They are true liquidity traps, since due to its low market share, profitability is very small and is unlikely to become a major source of liquidity, so they are immobilizing company resources that could be invested more appropriately other centers. The units in this area may be:
- Products were unsuccessful in achieving a leading position in the growth stage.
- Recently introduced new brands on the market to compete with products “dairy cows.”
- Products that have gone from being “dairy cows” to be “dogs.”
They have a growth rate and small market share. The main characteristic of these products is that in most cases, are unlikely to be profitable. There are competitors with better costs, greater experience and share, and higher incomes.
They are difficult products to promote, reposition and unjustified absorb many hours of dedication, so it is not logical to invest in them. The best strategy for these products is to use them as cash generators or try to find a segment, a niche market, suitable for them, which, making a differentiation can be achieved high participation and defend . There are also companies that have products in this category for company image or brand, because otherwise they would not have a complete range of products.Except as set out here are all handcrafted products or mini SMEs whose income is positive, but the philosophy of development not allow them to mass production and therefore growth.
5. Ideal product portfolio
Considering classification by the BCG, companies have to maintain well-balanced portfolio, ie, should be introduced on the market with future prospects in categories of questions products and stars, besides the cows produce milk, which They provide income through which investments and research and marketing in the above will be made. They may also have dogs, provided they are well differentiated and possess a particular market cycle. The graphical representation of the portfolio is done by a cloud of points, placing these in place that corresponds to their market share and growth rate.
6. Different types of strategies proposed by Boston Consulting Group (BCG)
The focus of BCG proposes four types of strategies, all in terms of market share.
Determine the most appropriate depends, among other reasons, the current market for the product, its life cycle, the resources of the company, and possible reactions of competition.
In this regard, I remind that the term market share, while important, has left part of their role to share customer. These strategic actions, which transmit their objectives expressed in market share, are four:
- Increase market share. It can be an offensive or defensive action, depending on whether you are looking for increased profitability in the first case; or, second, if it seeks to obtain the critical market share to enable it to survive in the market.
- Retain market share. That is suitable for products that are in the mature stage and have large market shares relative, because at that stage buying habits tend to be more stable and difficult to change, and an attempt to increase the quota would be expense of other consumers. It is the strategy adopted, always considering what is the most cost effective way to maintain market share.
- Harvest. It is to maximize short – term profits and cash flow , letting the market share decline. To carry out this strategy is necessary to reduce costs to the maximum. It is the most appropriate strategy for the range of products that have a small market share in low – growth markets.
- Backing out. It consists of liquidating the product, since resources can be better used elsewhere. It shall be applied to products strategy with a market share below the critical market.