It is a four celled matrix developed by Boston Consulting Group, USA. BCG Matrix is a 2×2 matrix that is used to analyze the marketing strategy of an organization or firm. It gives a comprehensive graphical representation to an organization to assess its business according to its market growth and share. It is based on two-dimensional analyses of strategic business unit management. In short, it gives a complete analysis of environment evaluation and business potential. According to BCG matrix, a business could be ordered as low or high according to its market cap and industry growth,
- Relative Market Share
- Market Growth Rate
In BCG Matrix, there are four cells that represent categories such as stars, question marks, cash cows, and dogs. A company can analyze its product line on the bases of these four factors and categorize them accordingly. The Star category represents the most profitable products and the question mark shows those products that are not making any profit for the company. The cash cow category represents those products that are making decent profits. Here is the detailed explanation of these four factors,
Products or offerings with a large market share fall in the star category of BCG Matrix. This kind of product contains the largest market cap or best-selling status in the competitive market. Moreover, star category products need huge investments to retain the lead. In this scenario, net cash flow is slightly between slow to moderate. Strategic business units located in this category are very compelling because of their prominent place in the competitive industry. The products in star cell can be converted into cash cows on the basis of their growth and market share.
2- Cash Cows:
Products or services with a large market share in the mature business environment mostly fall in the cash cows cell. These companies mostly follow stable business strategies. They need small investments to enhance business performance. In short, this factor is the base of any company or organization for its bright future. You can exploit retrenchment policy if the products in the cash cows cell lose their demand or worth.
3- Question Marks:
Products or product lines that have low market cap and demand usually fall under the question marks cell. These products typically operate in high-growth markets. They need huge cash to maintain their position. They need continuous attention and planning. In question marks cell, mostly new products are located in this category. They require expansion strategies and try to venture into other markets. With huge investments, you can shift question marks products to cash cows or star cells.
Businesses that have feeble market cap and growth usually fall in this cell. They don’t generate any profit for the company but require constant investment. They create a negative impact on the profitability and growth of the company. Only a retrenchment policy can make dog cell products profitable. These products have a low market cap due to several reasons such as poor quality, high costs, inappropriate marketing, etc. It is crucial for businesses to minimize the number of dogs’ products.
Limitations of BCG Matrix:
Here are some limitations of BCG Matrix,
- This business analyzing tool only classifies products as high and low, but products can be medium in profitability and market share. It is a major limitation of BCG Matrix.
- This model does not define the market clearly.
- If the company has a high market share, it does not mean that they are generating higher profits. High costs are always associated with high market share.
- BCG Matrix only classifies businesses on the basis of their profitability and market share, but they are not the only signs of growth. However, this model does not pay attention on other indicators of profitability.
- People consider it the simplest method, which is a weakness.
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