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Application of BCG Matrix

Application of BCG Matrix

Small and Medium Enterprises (SME’s) in India face the challenge of implementing an effective product growth strategy. SME’s in India plan a product strategy only when the promoter of the Organization experience’s the potential in the product when there is either a sudden demand generated in the market or by competitor’s aggressive moves. So to summarize, plan to push the product (strategy) is reactive in most of the case’s. This reactive strategic push is generally based on intuition of promoter who can be blinded by various risk’s involved. To mitigate the risk BCG matrix can be used as a tool. It is a strategic planning tool developed by the American firm, Boston Consulting Group to aid businesses in implementing a product growth strategy. The matrix provides a sound basis for evaluating products and service lines thus helping an organization to ascertain current positioning of the product as well as future industry roadmap. It might be difficult to segment small businesses who have less products and in this case the matrix is used to evaluate current and future product lifecycle.The BCG matrix uses the market growth rate, and the product relative market shares to evaluate a products where four positions (Dog, Question Mark, Cash Cow and Question Mark) given symbolic names are identified.

To effectively apply the BCG matrix, SMEs should segment their businesses into specific revenue streams comprising of either products or service lines and analyze the resulting products or service line using the relative market share and the market growth rate.

  1. Growth rate: How is the overall product segment growing in the market ? (Y — Axis)
  2. Market share: What portion or size of the market has the product achieved relative to competition ? (X — Axis)

With above mentioned axes, you will be getting four quadrants. Each quadrant representing status of your product
and Service line with respect to its growth as well as its market share.

Each quadrant representing following product segmentation –

  1. Dogs

    • A ‘ dog’ is a product or service line operating in a low growth market as well as having low market share.
    • Promoters should minimize the number of dog products in the portfolio. While many promoters seek the challenge of trying to turn a dog product around, additional scrutiny should be given to any investment in dog products.
    • Promoters should decide whether to find a niche in the product’s market to control or divest from the product entirely to free up resources for more sustainable ventures.
    • Such products or service lines are a liability to a business, and they should be terminated as they predate on other products or service lines.
    • Dogs are generally considered cash traps because businesses have money tied up in them, even though they are bringing back basically nothing in return.
  2. Question Mark

    • A ‘question mark’ as the name suggests plunge pushes the promoter into uncertainties as it is hard to tell whether this product can be developed into stars.
    • Question marks are products or service line operating in a high growth rate market with a low relative market share.
    • In-Depth research is needed to point out what the firm should do right to grow question marks into stars.
    • These products, called question marks, require investments to develop. Even with substantial funding, a question mark product is at a disadvantage due to the fierce competition in high-growth markets.
    • Promoters should consider the likelihood and means of increasing market share, such as specializing in a niche market, before allocating additional resources to question marks.
    • They consume a lot of cash but bring little in return. However, since these business units are growing rapidly, they have the potential to turn into stars. Companies are advised to invest in question marks if the product has the potential for growth, or to sell if it does not.
    • Ultimate objective is to push the “Question Mark” product into “Star” Quadrant.
  3. Star

    • A star is a product or service line operating in a high growth market and one that has a Hlyh high relative market share.
    • It has a great potential to grow and requires an investment to increase its value to the business.
    • These products are market leaders and considerable attention should be devoted to them to ensure they maintain their lead.
    • Stars can eventually become cash cows if they sustain their success until a time when the market growth rate declines. Promoters are advised to invest in stars.
  4. Cash Cow

    • A cash cow has a high relative market share and operates in a low growth rate market.
    • These are products or service lines with high market shares but which are not expected to grow significantly.
    • Cash cows require to be maintained to preserve their cash generating ability.
    • Such products or service line are able to generate large profits that can be used by the organization to improve other sections of the business.
    • With cash cows, there is less competitive pressure due to the low growth rate of the market. The proceeds from these products may be used to support star products.
    • Cash cows provide the cash required to turn question marks into market leaders, cover the administrative costs of the company, fund research and development, service the corporate debt, and pay dividends to shareholders.
    • Promoters are advised to invest in cash cows to maintain the current level of productivity, or to “milk” the gains passively.

Lets understand BCG Matrix with an Industry example

Now, Since you have understood the concept; try mapping your products or Service line keeping in mind the current market scenario with help of market data. Doing this exercise with intuition will just get you to an estimate. Try this exercise by asking two set of questions: 1) What is the size of the market in terms of Value ? 2) What is your market share of product in terms of Value ?

After doing the exercise you can evaluate your product standings and accordingly plan for four potential strategies:

  1. Build: Increase investment in a product to increase its market share. For example, you can push a question mark into a star and sustain there as much as possible and, finally, a cash cow.
  2. Hold: If you can’t invest more into a product, hold it in the same quadrant and sustain the profitability and market share.
  3. Harvest: Reduce your investment and try to take out the maximum cash flow from the product, which increases its overall profitability (best for cash cows).
  4. Divest: Release the amount of money already stuck in the business (best for dogs). Other possibility is by innovating the Product offering or Service line.

As a promoter, you need products or service lines in every quadrant in order to keep a healthy cash flow and have products that can secure your future. Maintaining a healthy supply of question marks readies you to act on the next trend, while cash cows need to be milked efficiently because they may fall out of favor – and profitability – more quickly.

With a few tweaks, the matrix can be adapted to help promoters drive the strategic experimentation required for success, even in unpredictable markets. The BCG matrix needs to be applied with accelerated speed while balancing the investments between exploration in new segments and exploitation of established segments. In addition, the investments and divestments need to be managed rigorously while carefully measuring and monitoring the portfolio economics of business.

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