BCG Matrix

BCG matrix has been a tool for Malaysian brands to classify and evaluate the products and services of a business. It is a decision making tool in order to balance the activities of a company among those which make profits, those who ensure growth, those which constitute the future of the firm or those who are its heritage. With this tool one is able to define the development policy of the company. The matrix will position the products/services in two ways which are the rate of growth of the market and the market share of a product/service offered facing the competitors. According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relative market share. There are four type of categories which explains the BCG matrix:

Question marks are products that grow rapidly and as a result consume large amounts of cash, but because they have low market shares they don’t generate much cash. The result is a large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If it doesn’t become a market leader it will become a dog when market growth declines. Question marks need to be analyzed carefully to determine if they are worth the investment required to grow market share.

Dogs have a low market share and a low growth rate and neither generates nor consumes a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture. Stars generate large sums of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate. So the cash being spent and brought in approximately nets out. If a star can maintain its large market share it will become a cash cow when the market growth rate declines.

As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate. They generate more cash than they consume. These units should be ‘milked’ extracting the profits and investing as little as possible. They provide the cash required to turn question marks into market leaders.

The relationship to the product life cycle to BCG matrix is simple and easy to understand. It helps to quickly and simply screen the opportunities open and make the most out of it. Besides that, it is used to identify how corporate cash resources can best be used to maximize a company’s future growth and profitability. Product life cycle shows the stages that products go through from development to withdrawal from the market .The BCG model is a well-known portfolio management tool used in product life cycle theory. Product portfolio is the range of products a company has in development or available for consumers at any one time. Managing product portfolio is important for cash flow evaluation. BCG matrix is often used to prioritize which products within company product mix get more funding and attention.

At the beginning of a product’s life, it may have a little to no competition in the market place until competitors start to emulate it when it shows signs of success. As the product becomes more successful, it will face increasing numbers of competitors and may lose market share. Each product has its product life cycle, and each stage in product’s life-cycle represents a different profile of risk and return. In general, a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products.

A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future. A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The milking cow shows that it brings in the constant flow of cash.

In a nutshell, in however the situation it would be, BCG matrix reaches further behind product mix, knowing it helps managers to make decisions about what priorities to assign to not only products but also company departments and business units in the product life cycle.