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Is BCG Matrix A Portfolio Planning Method On Decision Making?

 

Introduction

As its name suggests, the BCG matrix, also known as the Boston Growth-Share Matrix, was developed by Boston Consulting Group and has become a popular tool for evaluating a corporate portfolio from which to make strategic investment decisions. The BCG matrix is a growth-share business planning tool that can be used to represent a proprietary brand portfolio ( SBUs) in quadrants relative to market share (horizontal axis) and the speed of market growth (vertical axis or axis). Based on this assessment, the matrix helps inform the long-term strategic planning of the current product portfolio of a company by indicating whether a product should be invested, discontinued, or developed.

A deep understanding of the BCG Matrix

The BCG (Boston Consulting Group) Matrix, also known as Boston Growth-Share Matrix, was developed in the 1970s by Bruce Henderson of Boston Consulting Group (BCG) to determine the desired allocation of resources, including cash. The main task in analyzing the company's portfolio that uses the BCG matrix is to ensure that the company invests resources in products that are most likely to yield higher returns. 

The BCG matrix is a planning tool for assessing a company's current product portfolio and assisting in long-term strategic planning by helping companies evaluate growth opportunities, decide whether to invest and discontinue or develop a product. Portfolio planning takes an approach to analyze different companies in relation to each other. The BCG matrix measures the current state and value of business units and product lines, obtains a graphical representation of the company's products and services to help the company decide whether to keep, sell or invest. 

Due to the link between profitability and market share, the BCG matrix shows a beneficial approach to make business investment decisions. However, because it is subjective, managers can use their judgment and other planning strategies for the decision-making process. 

The objective is to create a balanced portfolio of capital-hungry and capital-generating businesses. The Boston Matrix operates on the principle that a corporate portfolio should contain high-growth products that require cash investment and low-growth products that yield surplus money. With the BCG matrix, the different products and market positions of independent business units can be analyzed, compared, and visualized to make a selection for prioritizing and aligning the diverse business segments. 

The four cells of the BCG Matrix

Resources are allocated to the business units according to their network situation. This matrix corresponds to a company's securities portfolio and can be interpreted as a series of investment decisions. Companies can be classified as stars, cash cows, question marks, and dogs. BCG looks at the various business units and product lines and how they are responsible for the company's success. The BCG matrix is divided into four quadrants based on analysis of market growth relative to market share as shown in the figure below. 

The vertical axis of the BCG matrix represents the growth rate of a product and its growth potential in a given market. Each quadrant is classified based on relative market share and market growth rates as low or high, based on the amount of sustainable growth a company can expect over the long term.

The market growth rate is not a precise measure of a company's market attractiveness. A high market share in an industry with slow growth is known as a cash cow. It is an industry with a bleak outlook, but the profits generated by this cash cow are not invested in the business and redirected to more promising companies.

Companies operating in a growth market with a low market share have the potential to win market share and become a star or market leader. A Star Business Unit has a high market share and is the market leader in a fast-growing industry.

On the contrary, there are question marks over those who cannot sustain market growth and make small profits. They are the problem children of companies operating in a low-growth market. 

Dogs are units with a small market share in a mature and slow-growing sector. These divisions generally "break-even," producing just enough income to keep the company's market share. Though having a break-even unit to provide jobs and potential synergies that help other business units, from an accounting standpoint, this quadrant is such a useless unit because it does not generate cash for the firm.

The BCG Matrix incorporation into the decision-making process

An intelligent corporate strategy distributes risk across a variety of business areas. Companies evaluate the situation and adjust their investment and product promotion tactics accordingly. This strategy is not to say that cash cows should not be carefully managed to ensure maximum total profits are not harvested, but that investment decisions should be based on different values for each cash cow.

A cut-off date means that the merged entity must have at least a similar market share to its biggest competitor to have a high relative market share. Stars are potential cash cows because they strengthen their competitive position. A competitive advantage is an attribute enabling a company to outperform its competitors. Products in the Star Quadrant of the market are often leading products that require significant investment to maintain their position, drive growth and maintain a competitive edge.

The market leader achieves a self-reinforcing cost advantage that competitors find difficult to replicate. This framework is especially true in fast-changing industries. While new technological advances are overtaking new innovative products, the star becomes a cash cow who becomes a dog.

Conclusion

The key takeaway is that Portfolio planning can be a powerful tool for analyzing a company's operations, but it has limitations. The BCG Matrix is a better tool to analyze your portfolio if you want to understand what will happen in the future. A company must apply a so-called portfolio planning approach to evaluate the potential of a brand portfolio and suggest additional investment strategies.
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