With The Help Of Bcg Matrix Marketing Essay

With The Help Of Bcg Matrix Marketing Essay In the late 1960s a consultant for the Boston Consulting Group presented his ideas about cash deficient and growth deficient businesses and the need for a balance between cash generators and cash users. In 1968, BCG created the growth-share matrix, a simple chart to assist large corporations in deciding how to allocate cash among their business units. The corporation would categorize its business units as Stars, Cash Cows, Question Marks, and Dogs (originally Pets), and then allocate cash accordingly, moving money from cash cows toward stars and question marks that had higher market growth rates, and hence higher upside potential. The growth-share matrix was intended to analyze a portfolio from a corporate perspective because it is only at that level that cash balance is meaningful. A business may, however, be segmented further using this diagnostic tool to understand the positions of its various product lines or market segments. This portfolio can therefore be made up of products in a multi-product company, divisions in a multidivisional company and companies in a conglomerate. The BCG Growth-Share Matrix is based on the observation that a companys business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name growth-share. Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in its portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBUs (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment. For each product or service, the area of the circle represents the value of its sales. The BCG Matrix thus offers a map of the organizations product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cash flows. The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate. Derivatives can also be used to create a product portfolio analysis of services. So Information System services can be treated accordingly. Relative market share This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of economies of scale (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster the higher the share. The exact measure is the brands share relative to its largest competitor. Thus, if the brand had a share of 20 percent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 percent; however, the ratio would be 1:3, implying that the organizations brand was in a relatively weak position. If the largest competitor only had a share of 5 percent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows. If this technique is used in practice, this scale is logarithmic, not linear. On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is that the most stable position (at least in Fast Moving Consumer Goods  FMCG  markets) is for the brand leader to have a share double that of the second brand, and triple that of the third. Brand leaders in this position tend to be very stable-and profitable. The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective. Relative Market Share  = SBU Sales this year leading competitors sales this year. Market growth rate Rapidly growing in rapidly growing markets, are what organizations strive for; but, as we have seen, the penalty is that they are usually net cash users they require investment. The reason for this is often because the growth is being bought by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits. The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment. The cut-off point is usually chosen as 10 per cent per annum. Determining this cut-off point, the rate above which the growth is deemed to be significant (and likely to lead to extra demands on cash) is a critical requirement of the technique; and again makes the use of the BCG Matrix problematical in some product areas. What is more, the evidence,  from FMCG markets at least, is that the most typical pattern is of very low growth, less than 1 per cent per annum. This is outsid e the range normally considered in BCG Matrix work, which may make application of this form of analysis unworkable in many markets. Where it can be applied, however, the market growth rate says more about the brand position than just its cash flow. It is a good indicator of that markets strength, of its future potential (of its maturity in terms of the market life-cycle), and also of its attractiveness to future competitors. It can also be used in growth analysis. Market Growth Rate  = Industry sales this year Industry Sales last year. 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 SBUs are in same industry, the average growth rate of the industry is used. While, if all the SBUs 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. growth_share_matrix.gif 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. SBUs 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. 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 SBUs are the corporations 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 lose their appeal and move towards deterioration, then a retrenchment policy may be pursued. 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, they may have potential of becoming stars. 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 competitors/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. fwk-tanner-fig02_017.jpg 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- 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. Market is not clearly defined in this model. High market share does not always leads to high profits. There are high costs also involved with high market share. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. This four-celled approach is considered as to be too simplistic. BCG Matrix of Nestle According to Nestle, the relative market share and market growth rates of different products are given below:- Name Relative Market Share Market Growth Rate Cerelac 31.2% 45% Nestle Milk 21% 39% Kit Kat 19% 34% Maggi Noodles 18.76% 64% Nestle Dahi 3% 12% Market Growth Star Ceralec Nestle Milk Kit Kat Cash Cowcartoon_cows.gif Maggi Noddles DogNEWFOUNDLAND-DOG-LEO.jpg Nestle Dahi Relative Market Share Conclusions: Cerelac: Cerelac is one of the leading baby food products. It has witnesses quite a long hold on market share and it s a major contributor for Nestle. Nestle Milk and Kit Kat: Relative market share of Nestle milk and Kit Kat is low as compared with its growth thats why they are lying under head Question mark. Maggi Noodles: Growth rate of Maggi Noodles is low as compared with its Relative market share thats why they are lying under head Question mark. Nestle Dahi: Its both relative market share and growth rate are low as compared with other products thats why it is lying under head Dog.