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BCG Matrix Portfolio Analysis Definition: Portfolio Analysis Is An Examination of The Components Included in A Mix of Products With The

1. The BCG matrix is a portfolio analysis tool that classifies business units based on their relative market share and market growth rate. It sorts units into four categories: stars, cash cows, question marks, and dogs. 2. Stars have high relative market share in fast-growing industries and require significant investment. Cash cows have high relative market share in slow-growing industries and generate cash. Question marks have low relative market share in fast-growing industries and require investment to solidify their position. Dogs have low relative market share in slow-growing industries. 3. The GE 9-cell matrix expands on the BCG matrix by plotting competitive strength against industry attractiveness, dividing each category into three levels

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172 views6 pages

BCG Matrix Portfolio Analysis Definition: Portfolio Analysis Is An Examination of The Components Included in A Mix of Products With The

1. The BCG matrix is a portfolio analysis tool that classifies business units based on their relative market share and market growth rate. It sorts units into four categories: stars, cash cows, question marks, and dogs. 2. Stars have high relative market share in fast-growing industries and require significant investment. Cash cows have high relative market share in slow-growing industries and generate cash. Question marks have low relative market share in fast-growing industries and require investment to solidify their position. Dogs have low relative market share in slow-growing industries. 3. The GE 9-cell matrix expands on the BCG matrix by plotting competitive strength against industry attractiveness, dividing each category into three levels

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BCG Matrix

PORTFOLIO ANALYSIS
Definition: Portfolio analysis is an examination of the components included in a mix of products with the
purpose of making decisions that are expected to improve overall return. The term applies to the process that
allows a manager to recognize better ways to allocate resources with the goal of increasing profits. It might
also refer to an investment portfolio composed by securities.
The analysis requires that both measures be calculated for each SBU. The dimension of
business strength, relative market share, will measure comparative advantage indicated by
market dominance. The key theory underlying this is existence of an experience curve and
that market share is achieved due to overall cost leadership.
BCG matrix has four cells, with the horizontal axis representing relative market share and the
vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0.
if all the SBU’s are in same industry, the average growth rate of the industry is used. While,
if all the SBU’s are located in different industries, then the mid-point is set at the growth rate
for the economy.
Resources are allocated to the business units according to their situation on the grid. The four
cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of
these cells represents a particular type of business.

                10 x                                  1 x                                  0.1 x

Figure: BCG Matrix

1. Stars- Stars represent business units having large market share in a fast growing
industry. They may generate cash but because of fast growing market, stars require
huge investments to maintain their lead. Net cash flow is usually modest. SBU’s
located in this cell are attractive as they are located in a robust industry and these
business units are highly competitive in the industry. If successful, a star will become
a cash cow when the industry matures.
2. Cash Cows- Cash Cows represents business units having a large market share in a
mature, slow growing industry. Cash cows require little investment and generate cash
that can be utilized for investment in other business units. These SBU’s are the
corporation’s key source of cash, and are specifically the core business. They are the
base of an organization. These businesses usually follow stability strategies. When
cash cows loose their appeal and move towards deterioration, then a retrenchment
policy may be pursued.
3. Question Marks- Question marks represent business units having low relative market
share and located in a high growth industry. They require huge amount of cash to
maintain or gain market share. They require attention to determine if the venture can
be viable. Question marks are generally new goods and services which have a good
commercial prospective. There is no specific strategy which can be adopted. If the
firm thinks it has dominant market share, then it can adopt expansion strategy, else
retrenchment strategy can be adopted. Most businesses start as question marks as the
company tries to enter a high growth market in which there is already a market-share.
If ignored, then question marks may become dogs, while if huge investment is made,
then they have potential of becoming stars.
4. Dogs- Dogs represent businesses having weak market shares in low-growth markets.
They neither generate cash nor require huge amount of cash. Due to low market share,
these business units face cost disadvantages. Generally retrenchment strategies are
adopted because these firms can gain market share only at the expense of
competitor’s/rival firms. These business firms have weak market share because of
high costs, poor quality, ineffective marketing, etc. Unless a dog has some other
strategic aim, it should be liquidated if there is fewer prospects for it to gain market
share. Number of dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix


The BCG Matrix produces a framework for allocating resources among different business
units and makes it possible to compare many business units at a glance. But BCG Matrix is
not free from limitations, such as-
1. BCG matrix classifies businesses as low and high, but generally businesses can be
medium also. Thus, the true nature of business may not be reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are high costs also
involved with high market share.
4. Growth rate and relative market share are not the only indicators of profitability. This
model ignores and overlooks other indicators of profitability.
5. At times, dogs may help other businesses in gaining competitive advantage. They can
earn even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.
GE 9 Cell Matrix

In consulting engagements with General Electric in the 1970's, McKinsey & Company
developed a nine-cell portfolio matrix as a tool for screening GE's large portfolio of strategic
business units (SBU). This business screen became known as theGE/McKinsey Matrix and
is shown below:

Industry Attractiveness

Industry attractiveness indicates how hard or easy it will be for a company to compete in the
market and earn profits. The more profitable the industry is the more attractive it becomes.
When evaluating the industry attractiveness, analysts should look how an industry will
change in the long run rather than in the near future, because the investments needed for the
product usually require long lasting commitment.
Industry attractiveness consists of many factors that collectively determine the competition
level in it. There’s no definite list of which factors should be included to determine industry
attractiveness, but the following are the most common: [1]

 Long run growth rate


 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat
of substitutes and available complements (use Porter’s Five Forces analysis to
determine this)
 Industry structure (use Structure-Conduct-Performance framework to determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation

Competitive strength of a business unit or a product

Along the X axis, the matrix measures how strong, in terms of competition, a particular
business unit is against its rivals. In other words, managers try to determine whether a
business unit has a sustainable competitive advantage (or at least temporary competitive
advantage) or not. If the company has a sustainable competitive advantage, the next question
is: “For how long it will be sustained?”

The following factors determine the competitive strength of a business unit:

 Total market share


 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine this)
 Your business unit strength in meeting industry’s critical success factors
(use Competitive Profile Matrix to determine this)
 Strength of a value chain (use Value Chain Analysis and Benchmarking to determine
this)
 Level of product differentiation
 Production flexibility

Advantages

 Helps to prioritize the limited resources in order to achieve the best returns.
 Managers become more aware of how their products or business units perform.
 It’s more sophisticated business portfolio framework than the BCG matrix.
 Identifies the strategic steps the company needs to make to improve the performance
of its business portfolio.

Disadvantages

 Requires a consultant or a highly experienced person to determine industry’s


attractiveness and business unit strength as accurately as possible.
 It is costly to conduct.
 It doesn’t take into account the synergies that could exist between two or more
business units.

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