BCG matrix

?Relevance. Widely used in the practice of strategic choice has received a two-dimensional matrix , developed by the Boston Consulting Group. Therefore, this matrix is ?? a matrix known as ” Boston Consulting Group ” or BCG matrix . This matrix allows the company to classify the products in its market share relative to its main competitors and the rate of annual growth in the industry. Matrix enables us to determine which products company occupies a leading position compared to competitors , what is the dynamics of its markets , allows to make the preliminary allocation of financial resources between strategic products.

The matrix is based on the well-known premise – the greater the share of goods in the market ( the larger the volume of production ) , the lower the unit costs per unit of output and higher profits as a result of the relative economies of production volumes. The object of the work is the BCG matrix . BCG matrix is made on the entire portfolio , and for each product shall bear the following information: • The volume of sales in value terms , it appears on the matrix area of ??

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a circle ; • share of the product in the market with respect to the largest competitor, which determines the horizontal position of the circle in the matrix ; • the growth rate of the market in which the company operates with its products , determines the vertical component of the circle in the matrix. Purpose – from BCG matrix if they perform for different periods of time , you can build a kind of time series , which will give a clear idea about the laws of motion of each product on the market , about the scope and pace of moving goods to market.

Distinguish the objectives of the study : 1. Goals and milestones of portfolio analysis 2 . Boston Consulting Group Matrix 3 . Modified BCG matrix In constructing the matrix BCG growth in sales of goods are divided into “high” and “low” arbitrary line at 10% . Relative market share is also divided into “high” and “low” , the boundary between them is 1. 0 . Factor of 1. 0 indicates that the company is close to the leadership.

The basis of the interpretation of the BCG matrix based on the following provisions: • First , gross profit and total revenues increased in proportion to the growth enterprise market share of the enterprise; • Second, if the company wants to maintain its market share , the need for additional increases in proportion to the growth rate of the market; • Third , since the growth of each market eventually reduced as soon as the product approaches in its life cycle to the stage of maturity , so you do not lose the conquered formerly marketed products , the profits should be sent or distributed among the products that have a tendency growth.

Chapter 1 Portfolio analysis 1. 1 Objectives and milestones portfolio analysis Scholars and practitioners have developed a number of analytical methods and models that can be useful in making strategic decisions. The most famous among them Ansoff matrix , approaches to the analysis of competition M. Porter , portfolio analysis matrix Boston Consulting Group ( BCG ) , consulting firms and Arthur D. McKincey Little. In addition, the project should be highlighted PIMS (ProfitImpactofMarketStrategies).

Currently one of the most frequently used tools western corporations strategic management is portfolio analysis . Portfolio companies or corporate portfolio – a collection of relatively independent business units ( strategic business units ) , belonging to the same owner. Portfolio analysis – a tool by which the company’s management identifies, evaluates its business activities with a view to investing in the most profitable and promising directions and its reduction / cessation of investment in inefficient projects .

When this is evaluated relative attractiveness of markets and competitiveness in each of these markets. It is assumed that the portfolio should be balanced , ie, must be provided the right combination of units or products experiencing the need for capital for growth , with business units , has some excess capital. Purpose methods of portfolio analysis is to help managers understand the business , to create a clear picture of the formation of costs and benefits in a diversified company.

This, in turn, requires a careful analysis of the opportunities and threats for each economic unit ( business unit ) . Portfolio analysis provides managers a tool of analysis and planning portfolio strategies for determining a reasonable diversification of diversified firms . It also helps in the introduction of a common terminology and management structure in order to facilitate communication within the firm. One of the most important use of the results of the portfolio analysis is a decision to restructure the company to take advantage of the opportunities within the company and outside it.

Approximately 75 % of the Fortune 500 and Fortune- many smaller companies with a wide range of products and services using one or another form of portfolio analysis when formulating their strategies . U. S. study showed that firms applying portfolio analysis had generally more pronounced focus on long-term goals [2, p . 328 ] . Methods of portfolio analysis of the enterprise (by analogy with the placement of capital in the financial sector ) were developed in the 1960s to meet the challenges of strategic management at the corporate level and are one of the few specialized methods of strategic management.

Theoretical basis of portfolio analysis is the concept of product life cycle , and experimental curve database PIMS. In this portfolio analysis recommends that the strategy for the development of each product , its business units have been treated independently , allowing you to compare them with competitors. The basic method of portfolio analysis is the construction of two-dimensional matrices , by which business units or products can be compared with each other based on criteria such as sales growth , relative competitive position , the stage of the life cycle , market share, industry attractiveness , etc.

The implemented principles of market segmentation (highlight the most important criteria based on the analysis of the external environment ), and analysis of the enterprise and agreement ( pairwise comparison of criteria) . It should be noted that although in the matrices of different consulting firms use different sets of variables , but it is still two-dimensional matrix , in which one axis fixed values ?? of the internal factors, and on the other – external . Portfolio analysis is designed to address the following issues : • coordination of business strategies or strategies of economic departments.

It aims to provide a balance between business units and quick-impact areas , to prepare the future ; • the allocation of human and financial resources between business units ; • analysis of the portfolio balance; • Establishing executive tasks; • Restructuring the company ( merger, acquisition , liquidation or other actions to change the management structure of the company , business expansion or contraction ) . 1. 2 Advantages and disadvantages of portfolio analysis

The main advantages are the possibility of portfolio analysis of the logical structure and visual reflection of the strategic problems of the enterprise , the relative simplicity of presentation of the results , focus on the qualitative aspects of the analysis. Some authors believe that the portfolio analysis compels managers, mostly engaged in current affairs , pay attention to the future of the company [4, p . 23]. In all matrices portfolio analysis on one axis defined assessment of the prospects of the market, on the other – economic competitiveness assessment departments. usually portfolio analysis process is the same pattern . 1.

All activities of the company ( product range ) are divided into strategic business units . Problem identification or isolation of the business units is quite complex , especially for large corporations. It is believed that the business unit must : • serve the market , and not work on other parts of the enterprise. Empirical studies of Western experts , in particular project data PIMS, indicate that if more than 60% of the production unit is used within the company another production unit , it is advisable to consider these two entities as a single entity for the purposes of strategic analysis 1 ; • have their customers and competitors;

• Management business unit must control the key factors that determine success in the market. Guided by the specified criteria , large enterprises designed to address, what a business unit : individual firm , a division of the enterprise, product line or a separate product ? The answer depends on the current management structure of the company . In organizations with a functional management structure as a business entity is a product range , while at the divisional structure of the basic unit of analysis is the economic unit .

2 . Determined by the relative competitiveness of these business units and development prospects of the relevant markets . Thus different consulting firms offer a variety of criteria for evaluating the prospects of development of the market and business activities of the units in these markets. 3 . A strategy for each business unit ( business strategy ) and business units with similar strategies are combined into homogeneous groups . The process of developing business strategies discussed in detail in the next chapter. 4 .

Management assesses the business strategy across the enterprise in terms of their compliance with the corporate strategy , commensurate income and resources , the needs of each unit . On the basis of a comparative analysis of possible decisions on adjusting business strategies. This is the most difficult stage of strategic management where great influence subjective experience of managers, their ability to predict and anticipate events of the external environment , a kind of ” market intuition ” and other non-formalizable moments.

Portfolio matrix allows us to generalize the results of development strategies and present them in a visual form . The apparent simplicity of these methods is deceptive , since they require complete and reliable information about the market , about the strengths and weaknesses of the company and its major competitors. Building a portfolio matrix involves a lot of work on market segmentation , to collect information that may not exist explicitly. The main drawback of portfolio analysis is to use data on the current state of the business , which can not always be extrapolated into the future.

Differences portfolio analysis methods consist in approaches to assessing the competitive position of strategic business units and market attractiveness . The most well known approaches proposed Boston Consulting Group ( BCG portfolio matrix ) and consulting firm McKincey (« screen business”) . However, in any portfolio matrix different kinds of business are only evaluated according to two criteria , while a host of other factors ( product quality , investments , etc. ) remain unaddressed . Chapter 2 Matrix Boston Consulting Group

At the heart of the Boston matrix or matrices growth / market share model is the product life cycle , in accordance with which the product is in its development goes through four stages : entry into the market ( commodity “problem” ) , growth ( goods – “star” ) , maturity ( commodity ” cash cow “) and fall (commodity – “dog” ) . While cash flow and profit of the company also changed : it is replaced by a negative earnings growth and then a gradual decrease . Boston Matrix focuses on the positive and negative cash flows associated with various business units of the company or its products [2, p .

94]. The range of products now analyzed on the basis of this matrix , ie, it is determined by the position of said matrix which include every kind of enterprise . For this business unit enterprises are classified in terms of relative market share ( SDT ) and the growth of industry market . SDT index is defined as the share of the business market – units , divided by the market share of the largest competitor. It is clear that the rate of SDT market leader will be more units , including SDT = 2 means that the market share of the market leader is twice that of its nearest competitor .

On the other hand , SDT < 1 corresponds to a situation where the market share of the business unit is less than the market leader . High market share is considered as an indicator of business that generates positive cash flow as an indicator of the expected revenue stream . This provision is based on the experimental curve . The second variable – the growth rate of the industrial market (TPP ) – based on sales forecasts and industry associated with the life cycle analysis of the industry. Of course, the actual curve of the industry life cycle can be built only in retrospect .

However, the company’s management can expertly assess the stage of the life cycle of the industry in which it operates , to determine ( predict ) the need to finance. In industries with a high rate of growth required a substantial investment in research and development of new products , in advertising to try to achieve a dominant position in the market and positive cash flows , respectively . To construct the matrix BCG fix the horizontal axis the relative market share, on the vertical axis – market growth . Further, this dividing the plane into four parts , we obtain the required matrix (Fig. 1) .

SDT variable value equal to one , separate products – market leaders – from followers. With regard to the second variable , it is usually the industry growth rate of 10 % or more are considered as high . Can be recommended to use as a baseline separating markets with high and low growth rates , the growth rate of gross domestic product in real terms, or a weighted average rate of growth of various segments of industry market in which the company operates. It is believed that each of the quadrants of the matrix describes substantially different situations that require special treatment in terms of financing and marketing.

At the heart of the BCG matrix is based on two hypotheses: • The first hypothesis is based on the effect of experience and suggests that a substantial share of the market means that there is a competitive advantage that is associated with the level of production costs. This hypothesis implies that the biggest competitor has the largest margin in the sale at market prices and financial flows for him maximized. • The second hypothesis is based on the model of the product life cycle and suggests that the presence in the growing market means increased need for funding for the renovation and expansion of production , intensive advertising and etc.

If the market growth rate is small (mature or internship market ), then product needs considerable funding. In the case where both hypotheses are satisfied ( and this does not always happen ) , we can distinguish four groups of markets with different strategic goals and financial needs . 3 «Звезда» 1 2 ? «Проблема» «Дойная корова» «Собака» 4 Each business unit of the company or its products fall into one of the quadrants of the matrix in accordance with the growth rate of the industry in which the company operates , and relative market share.

In this method, it is important to clearly define the industry in which the company operates. If the industry is defined too narrowly , the company can become a leader with broad industry definition firm will look weak. Graphically position product or business units are usually displayed circle whose area reflects the relative importance of this structure for the company or product , measured by the use of assets or profits generated . Such an analysis is recommended in the dynamics , tracing the development of each business over time.

Matrix growth / market share has a lot to do with the product life cycle curve . However, its advantage or difference from the simple model of product life cycle ( industry ) consists of a comprehensive review of a specific set of products that can be at different stages of the life cycle , and to make recommendations regarding the redistribution of financial flows between the products. New products often appear in growing industries and have the status of goods , the “problem” . Such products can be very promising , but they require substantial financial support from the center .

While these products are associated with large negative cash flows , there is a danger that they will not become commodities , “stars . ” The main strategic issues of a certain complexity – when to stop funding these products and remove them from the corporate portfolio ? If you do it too early, you may lose a potential commodity ” star. ” In the category of goods – “stars” may fall as new products and new production company trademarks . Risk investments in this group is greatest . Goods- “stars” – these are market leaders who are usually at the peak of its product cycle.

They bring enough money to maintain a high share of the rapidly growing market . But despite the strategically attractive position of the product , its net cash income is low enough , because it requires significant INVESTMENTS for high growth to take advantage of the experimental curve . The manager there is the temptation to reduce the investment in order to increase current earnings, new products popping up in growing industries and have the status of goods , the “problem” . Such products can be very promising , but they require substantial financial support from the center .

While these products are associated with large negative cash flows , there is a danger that they will not become commodities , “stars . ” The main strategic issues of a certain complexity – when to stop funding these products and remove them from the corporate portfolio ? If you do it too early, you may lose a potential commodity ” star. ” In the category of goods – “stars” may fall as new products and new production company trademarks . Risk investments in this group is greatest . Goods- “stars” – these are market leaders who are usually at the peak of its product cycle.

They bring enough money to maintain a high share of the rapidly growing market . But despite the strategically attractive position of the product , its net cash income is low enough , because it requires significant INVESTMENTS for high growth to take advantage of the experimental curve . The manager there is the temptation to reduce the investment in order to increase current earnings, however, this may be short-sighted , as in the long term this product may become a commodity ” cash cow . ” In this sense, important future revenue – product “star” and not current . When the market growth rate is slowing , goods – “stars” become ” cash cows .

” These are products or business units , occupying a leading position in the market with low growth rate . Their appeal because they do not require large investments and provide significant positive cash flows , based on the experimental curve . These business units are not only pay for themselves , but also provide funds for investment in new projects , on which depends the future growth of the company . To the phenomenon of goods – ” cash cows” fully utilized in the investment policy of the company , you need competent management products , especially in the field of marketing.

Competing in stagnant industries is very tough . Therefore , continued efforts aimed at maintaining market share and find new market niches . Goods- ” dog ” – are products that have a low market share and do not have opportunities for growth , as are unattractive industries (in particular , the industry may be unattractive because of the high level of competition ) . Net cash flows from such business units zero or negative . If there are special circumstances (for example, the product is complementary to the goods – “cash cow” or ” Star “), then these business units should be disposed of .

Sometimes, however, the corporation retain their nomenclature in such products if they are “mature” industry . Capacity markets “mature” industries to some extent protected from sharp fluctuations in demand and major innovations that radically changing consumer preferences , allowing you to maintain the competitiveness of the product , even in a low market share (for example, market razor blades ) Thus, the desired sequence in the development of products as follows: “The problem” -> “Star” -> “Cash Cow” [and if inevitably] -> “Dog” Implementation of such a sequence depends on the efforts aimed at achieving a

balanced portfolio , which involves including a decisive rejection of unpromising products. Ideally, a balanced portfolio of businesses nomenclature should include 2-3 Item – ” cow” , 1-2 “star” a few “problems” as a reserve for the future , and perhaps a small number of products , ” dogs . ” Typical unbalanced portfolio is usually one commodity ” cow ” many ” dogs “, a few “problems” , but does not have the goods , “stars” that can take the place of ” dogs . ” Excess aging products (” dogs “) points out the danger of recession , even if the current business results are relatively good .

Glut of new products can lead to financial difficulties. In a dynamic corporate portfolio may be, for example , such a trajectory: • « trajectory innovator . ” Investing in R & D funds received from the sale of goods , ” cash cows” , the company enters the market with a fundamentally new product that takes place “star” ; • « trajectory follower . ” Funds from the sale of goods , ” cash cows” are invested in commodity “problem” , which dominates the market leader . In this situation, the firm chooses an aggressive strategy to expand its market share and commodity “problem” into a ” star” ; • « trajectory of failure .

” Due to insufficient investment goods – “star” loses its leading position in the market and becomes a commodity , a “problem” ; • « permanent path of mediocrity . ” Product – “problem” can not increase its market share , and it comes in the next step (commodity – “dog” ) . Matrix Boston Consulting Group is a corporation in the form of a number of units , almost independently of each other in terms of production and sales ( business units ) , which are positioned in the market , depending on the values ?? of the two criteria.

The essence of portfolio analysis is to determine whether , in any units withdraw resources ( revoke the “cash cow” ) and to whom they pass ( give “star” or “problem” ) . The main recommendations of the Boston Consulting Group on corporate portfolio are presented in Table 1. It should be emphasized that these strategies only justified insofar as implemented hypotheses on which they are based. Table 1: Predictions and recommendations Boston Matrix Вид стратегической единицы бизнеса Прибыль Денежные потоки Возможные стратегии «Проблема» Низкая, растущая, нестабильная

Отрицательные Анализ: сможет ли бизнес подняться до уровня «звезды»” «Звезда» Высокая, стабильная, растущая Примерно нулевые Инвестиции для роста «Дойная корова» Высокая, стабильная Положительные стабильные подразделения Поддержание прибыльности инвестиций в другие «Собака» Низкая, нестабильная Примерно нулевые Ликвидация подразделения/ «сбор урожая» Consequently, the analysis based on the BCG matrix to the following conclusions : • identify the possible strategy of business units or products ; • assess their funding needs and potential profitability;

• to assess the balance of corporate portfolio. When conducting portfolio analysis in practice management company may be faced with many problems of methodological plan. In particular, multi-product companies are hard to identify business units , as well as choose a limit that separates the fast and slow-growing businesses , it is difficult to carry out the grouping of business units to develop a common strategy for development , etc. Nevertheless portfolio analysis used in the formation corporate strategy due to its inherent advantages .

Portfolio analysis has a positive effect in the following areas : • encourages senior management separately evaluate each kind of business enterprise , set goals for him and reallocate resources ; • provides a simple and clear picture of the relative “strength” of each business unit in the corporate portfolio ; • shows how the ability of each business unit to generate a revenue stream , and its need for funding ; • promote the use of data on the external environment ;

• raises the issue of compliance with financial flows needs to expand and grow the business. The main criticism of the Boston Consulting Group approach is the following: • in the matrix are only two dimensions – market growth and relative market share are not considered many other growth factors; • Position strategic business unit depends strongly on the definition of the boundaries and scope of the market; • it is not always clear how the market growth / market share affects the profitability of the business .

Hypothesis about the relationship between relative market share and profitability potential is applicable only if the experimental curve , ie, largely in the areas of mass production ; • ignores the interdependence of economic units ; • ignored certain cyclical development of commodity markets. Portfolio matrix indicate that a separate unit within the company is obliged to not only keep a record of their profits and not share it with other units .

The situation has changed over time , and the unit that was, for example , a “star” , it becomes a “cash cow” , and that, in turn, sooner or later is ” dog . ” We emphasize once again that this approach assumes the existence of the experimental curve in the industry and the development strategy of each individual business is reduced to a simplified alternative : the expansion – contraction – maintenance activities (movement through the stages of product life cycle ) .

Although in real life relationship factors and possible development strategy is much more difficult . However, the Boston Matrix can be used as a methodological approach in determining the cash flows within the enterprise. conclusion The main objective of the method is to help manage BCG in identifying the needs of various enterprises in the flow of funds ( for example, in a group) or activities (eg products ) within any single company. This method allows you to do this by figuring out where on the matrix is every activity .

The matrix has two changes : the rate of market growth and market share. At BCG matrix shows four types of products, which have received the name of ” Star “, ” cash cow “, ” question marks ” and ” dog . ” This type of analysis can be used for adding advanced options on the matrix, which may impose organization on a number of important conclusions concerning future strategies. In the evaluation of any newly proposed strategy must take into account how it will improve the portfolio of the company’s interests .

Would she allow him to develop the area of ?? growth of the organization , at the same time removing the ” dogs “, depriving it of funds ? Similarly, it is necessary to determine whether large enough ” cash cow” to provide investment required for the development of “stars. ” Matrix may provide justification for targeting long-term product development . What strategies stimulate movement from the ” question marks ” over the “star” and , ultimately , to the ” cash cow “?

The matrix may also help in understanding the acquisition strategy (ie, to help find a company to buy ) . What kind of information can be obtained on Strategies of Matica BCG? The principal conclusions may be obtained using a matrix BCG, are the following : • Funds generated by ” cash cows ” should be used to support the development of ” question marks ” and nurturing rising “stars. ” • From having the most weak and uncertain outlook ” question marks ” must withdraw investment. • The organization must withdraw from any activity which is defined as “dog” .

However, there are some situations in which ” dogs ” should be retained, since they provide the basis for the development of the “stars” or will hold ” cash cows” competitor threatened. • If your company lacks the large ” cash cows “, ” stars ” or ” question marks “, it should consider the possibility of acquisitions or divestments in order to get a more “healthy” portfolio . • There are many improvements to the original matrix BCG, including McKinsey matrix and life cycle analysis .

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