In the early 1970’s, BCG Matrix was submitted by Bruce Henderson of the Boston Consulting Group (BCG). Using the Product Portfolio Matrix, a firm classifies all its Products/Markets or SBUs through the Growth-Share Matrix. Consequently, it is best illustrated as Portfolio planning model. This Matrix is divided in four Quadrants which are: Question Mark, Star, Cash Cow and Dog.
Relative Market Share and Market Growth Rate play an important role in BCG Matrix. Relative Market Share is measured by competitive advantage and Growth Rate is the calculated by industry attractiveness. For that reason, these two are most significant factors to regard as firms profitability and strategic plan. The partition is based on Growth Rate and Market Share. A concise debate comes as follow:
Question Mark: Products with low market share but in a growth market are classified as Question Mark. Due to growth, these SBUs need plenty of cash to grasp their market share. If no measures are taken to increase the market share, it will soak up huge sum of cash in the short run and afterward, as growth slow down, turn into a dog.
Star: Products having high market share of growth market are known as star. These Products/markets or SBUs are net consumer of cash because they always need huge investment to sustain market share and sponsorship rapid growth. When the product approaches to maturity phase, then the growth become low and it is converted into cash cow.
Cash Cow: Cash Cows have high market share but low growth products or businesses. Their elevated earnings, attached with their decline, signify superior cash inflows and they require very small amount of reinvestment. Therefore, they are the good source of cash to support the other products or SBUs. Extra cash inflows are used for R&D for the introduction of innovative and competitive products.
Dog: Dog has low market share and low growth product or SBU. It may produce sufficient cash to preserve themselves, but do not assure to be a big source of cash. Although dog does not require huge amount of cash but it holds considerable amount of cash which could be utilized somewhere else. Every organization must avoid and minimize the number of dogs.
The construction of BCG Matrix requires a lot of information (actual facts and figures) therefore an example of hypothetical Company is given below:
Calculation of RMS and Industry Growth Rate
RMS = Revenue of the Hypothetical Company / Total Revenue of the market leader in the industry
RMS = 200000 / 100000 = 2
On the other hand industry growth rate is measured in terms of total sales. Each SBU has different industry growth rate due to difference in the industries.
Construction of BCG Matrix