An SBU is considered as a cash cow when it has low market growth and high market share. Assess the unique opportunity and threats the organization faces in each industry. Once it has classified its SBUs, the company must determine what role each will play in the future. The matrix plots a company’s offerings in a four-square matrix, with the y-axis representing the rate of market growth and the x-axis representing market share. To construct a visual depiction of its various businesses, the organization uses the Portfolio matrices. The portfolio has to be balanced in terms of those businesses that generate revenue and are likely to generate revenue versus their resource consumption. It may offer-opportunities for long-term profit. A strategic business unit (SBU) is a relatively autonomous unit of a firm. In a diversified company, all the business-units constitute its business portfolio. Cash cows are often vulnerable to newer competitors, and marketing programs need to promote new versions and applications to maintain customer interest. However, such a unit is considered to have a future. "What Is the Growth Share Matrix." Accessed Sept. 26, 2020. Many other relevant factors, such as product differentiation^niche market possibility, etc. Some teams even include customers and suppliers in their strategic-planning processes. Strategic choices are concerned with resource allocation among businesses so that the ones with potential are nurtured and the ones without are divested. These two dimensions reveal likely profitability of the business portfolio in terms of cash needed to support that unit and ca… What is the fit between the parent’s capability and that of the unit’s? There are only indicative recommendations. "BCG Classics Revisited: The Growth Share Matrix." Like a product, SBUs have a life cycle starting with question marks, becoming stars, turning to cash cows, and end up as dogs. This approach focuses on extracting cash from a project at the expense of the business’s long-run survival. The company can invest more in the business unit to build its share. For example, PNG has 21 business units for the production of textile products, ceramics, pharmaceutical products, etc. It was introduced by the Boston Consulting Group in 1970., The BCG growth-share matrix breaks down products into four categories, known heuristically as "dogs," "cash cows," "stars," and “question marks.” Each category quadrant has its own set of unique characteristics., If a company’s product has a low market share and is at a low rate of growth, it is considered a “dog” and should be sold, liquidated, or repositioned. A strategy of divestment attempts to sell or liquidate businesses to generate cash so it can be better used in other areas. An ideal business portfolio developed using the GE nine-cell matrix with industry attractiveness and business strengths as the two measures. Question marks lie in the high business growth rate segment with a weak competitive position. Any business that is to the left of the dark violet is dominant in the market. Investopedia uses cookies to provide you with a great user experience. If a star can remain a market leader, it eventually becomes a cash cow when the market's overall growth rate declines., Questionable opportunities are those in high growth rate markets but in which the company does not maintain a large market share. That is why companies should examine the businesses’ future positions side by side with the current position analysis. The process of strategic choice also entails the commitment of financial and other resources through portfolio analysis and access to the corporate parent’s cumulative knowledge and learning through corporate parenting. Fortunately, it has two good-sized cash cows whose income helps finance the company’s question marks, stars, and dogs. You will notice that it is recommended to avoid being in those quadrants where the business strength and industry attractiveness are low. The BCG growth-share matrix is a tool used internally by management to assess the current state of value of a firm's units or product lines. They can be difficult, time-consuming, and costly to implement. When an SBU’s relative market share is greater than you can assume that it has a significant cost advantage over its competitors. This may alter the competitive position assessment. Assess the gaps and make decisions to either change some businesses’ competitive strategies or remove some businesses from the portfolio or add some businesses to the portfolio or reduce the performance targets. BCG matrix is criticized as a very simplistic model. The BCG growth-share matrix is a tool used internally by management to assess the current state of value of a firm's units or product lines. You should appreciate that SBUs change their positions in the growth-share matrix with the elapse of time. Prune/strengthen/consolidate businesses as required. If there are too many dogs or question marks or too few cash cows and starts, the company’s portfolio can be called an imbalanced one. The growth-share matrix aids the company in deciding which products or units to either keep, sell, or invest more in. Boston Consulting Group. The surplus cash can be used to nurture those businesses that are in the star quadrant or the question mark quadrant. Dogs, found in the lower right quadrant of the grid, don't generate much cash for the company since they have low market share and little to no growth. Recently, strategic planning has made a strong comeback. Like a product, SBUs have a life cycle starting with question marks, becoming stars, turning to cash cows, and end up as dogs. Limitations of BCG Matrix. As a result, many companies that diversified too broadly in the past now are narrowing their focus and getting back to the basics of serving one or a few industries that they know best. The matrix is a decision-making tool, and it does not necessarily take into account all the factors that a business ultimately must face. Developing a corporate parenting strategy involves three analytical steps. A holding strategy, on the other hand, is a defensive strategy designed to preserve market positions. Can the parent contribute? Watch a video with an explanation about the BCG Matrix below. They have the potential to be the cash cows only if they can consolidate their competitive position. Assess the relative attractiveness of industries that determines the long-run performance of the business. Because of this, dogs can turn out to be cash traps, tying up company funds for long periods of time. These include white papers, government data, original reporting, and interviews with industry experts. A business portfolio approach is commonly followed in a diversified company for corporate strategic analysis. BCG recommends several things based on the grid; The portfolio matrix gives the company an idea about the health of its businesses. Each of these units is treated as an SBU. If an SBU is a market leader in its industry, it will have a relative market share greater than 1.0. The areas of the circles are proportional to the SBU’s dollar sales. The market share/growth matrix implies a preference for high market growth and the need to maintain a firm’s cash balance. affect the business operations of the SBU BCG matrix and do not take into account all these factors. To sustain these business resources, the organization has to be committed to developing them in the select areas. Therefore, corporate parenting requires restraint, the exercise of mature leadership, and discretion retrenchment and combination. Building strategies are most appropriate when a firm wants to move question marks into the star category. A corporate strategy for each SBU is set in such a way that it becomes consistent with the resource capabilities of the overall company. In such situations, the organization has to balance its portfolio. A cash cow is one of the four BCG matrix categories that represents a product or business with high market share and low market growth. Incorporate parenting, and the corporate headquarters tries to achieve synergy among business units by allocating resources, transferring critical skills and capabilities among various units, and coordinating shared units’ activities to attain economies of scope. It classifies business portfolio into four categories based on industry attractiveness (growth rate of that industry) and competitive position (relative market share). Since this Strategic Business Unit (SBU) has a lack of opportunity for future expansion, more cash should not be injected. Neither the theoretical nor the empirical work exists to support such a preference conclusively. Further, the organization can develop a functional strategy to support its options and sub-options. Cash cow SBUs are supposed to generate substantial cash Sows because of their high market share. The BCG and other formal methods revolutionized strategic planning. When examining market growth, you need to objectively compare yourself to your largest competitor and think in terms of growth over the next three years. On the other hand, relative market share is ‘the ratio of an SBU’s market share to the market, the share held by the largest rival company in its industry. If your market is extremely fragmented, however, you can use absolute market share instead, according to the Strategic Thinker blog.Next, you can either draw a matrix or find a BCG … However, unlike former strategic-planning efforts, which rested mostly in senior managers’ hands, today’s strategic planning has been decentralized. That is why companies should examine the businesses’ future positions side by side with the current position analysis. It has a weak competitive position in a low-growth industry. Despite such problems, and although many companies have dropped formal matrix methods in favor of more customized approaches that are better suited to their situations, most companies remain firmly committed to strategic planning. They typically grow fast but consume large amounts of company resources. Stars are in the high growth rate and, therefore, highly competitive markets. A problem child is one of the four categories in the growth-market share matrix describing a business with a small market share in a rapidly growing industry. Such analysis is no cure-all for finding the best strategy. BCG stands for Boston Consulting Group; also called ‘Growth/Share Matrix/ BCG Matrix’; developed by Boston Consulting Group, a world-renowned management consulting firm located in the USA. The SBU strategic manager can make or implement a strategic decision relatively independent of other SBUs. Markets growing faster than these are considered high growth; markets going slower than these are considered slow growth. The BCG growth-share matrix contains four distinct categories: "dogs," "cash cows," "stars," and “question marks.”. It is a highly profitable firm and generates a substantial amount of cash. Dogs are low-growth, lo,w-share businesses, and products. According to Pearce and Robinson, Strategic Business Units (SBUs) must have certain characteristics: An SBU is responsible for its products, services ‘and markets and, therefore, it is also responsible for developing its strategy. Question marks are in the upper right portion of the grid. During the 1970s, many companies embraced high-level corporate strategy planning as a kind of magical path to growth and profits. Separate high growth from low growth markets common cut point is GDP + 3%. These products should be taken advantage of for as long as possible. Many companies plunged into unrelated and new high-growth businesses using these approaches that they did not know how to manage—with very bad results. The growth rate of an SBUs industry may be faster or slower than the economy’s growth rate. In addition, these approaches focus on classifying current businesses but provide little advice for future planning. Each business unit or SBU is treated as a stand­alone profit center. On the vertical axis, the market growth rate provides a measure of market attractiveness. Generally, an SBU rs independent in business operations has its managerial resources and has all its assets under its control. In the BCG matrix, SBU(Strategic Business Unit) is a company that has a separate mission and objectives and can be planned independently from other company businesses. Or it can invest just enough to hold the SBU’s share at the current level. BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of the business brand portfolio and its potential. When used properly, strategic planning is just one important aspect of overall strategic management, a way of thinking about how to manage a business. 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An organization may not have an ideal portfolio. The picture would be worse if the company had no stars, if it had too many dogs, or if it had only one weak cash cow.8. This explains how different organizations can follow widely differing strategies leading to varying profitability in the same industry, other conditions being equal. A building approach can also be used to convert small stars into bigger stars. The company should take some decisive action concerning its dogs and its question marks. One of the four strategies can be pursued for each SBU. Eventually, their growth will slow down, and they will turn into cash cows. A star is a candlestick formation that happens when a small bodied-candle is positioned above the price range of the previous candle. Using the Boston Consulting Group (BCG) approach, a company classifies all its SBUs according to the growth-share matrix. By using Investopedia, you accept our, Investopedia requires writers to use primary sources to support their work. You can see the BCG Matrix diagram below to visualize the model. They generate far more cash than they consume. Can it derive benefits from the industry? Overall, as is the case with other strategic management aspects, a strategic choice is an analytical process backed by managerial foresight, commitment, and vision. Within each of these options are various sub-options. Many SBUs start as question marks and move into the star category if they succeed. The growth-share matrix defines 4 types of SBUs. Products that are in high growth markets and that make up a sizable portion of that market are considered “stars” and should be invested in more. They generate as well as consume revenue. By dividing the growth-share matrix as indicated, 4 types of SBUs of BCG Matrix are; Stars are high-growth, high-share businesses or products. They are not generating revenue, nor does it make sense to develop them as their competitive position would remain weak. In the Figure below, businesses B, C, F, G, and H. A, D, E, and I could be winners in large markets or have a very dominant position in smaller markets. an estimate of the future rate of growth in the market and. The chart below shows the ten circles in the growth-share matrix represent a company’s ten current SBUs. BCG matrix has certain flaws. We also reference original research from other reputable publishers where appropriate. In the BCG matrix, SBU(Strategic Business Unit) is a unit of the company that has a separate mission and objectives that can be planned independently from other company businesses. Management has to think hard about which question marks it should try to build into stars and which should be phased out. It classifies a firm’s product and/or services into a two-by-two matrix. Cash cows, seen in the lower left quadrant, are typically leading products in markets that are mature., Generally, these products generate returns that are higher than the market's growth rate and sustain itself from a cash flow perspective. Notice that businesses are concentrated in the upper left-hand quadrant of the Figure. The decisions to retain and divest are top management decisions. The corporate head office has to decide about its future. In reality, an organization may have a portfolio where there are too many profit producers, which means no cash users (young businesses that in the future will be profit earners), or too many losers (low possibility of growth/profits), or too many developers (demand too much cash leading to unstable growth). At the same time, these companies were often too quick to abandon, sell, or milk to death their healthy mature businesses. They later become cash cows as market growth falls, then finally die off or turn into dogs toward the end of their life cycle. Each SBU has a life cycle. The offers that appear in this table are from partnerships from which Investopedia receives compensation. In a multi-business, different businesses have different resource requirements. Diversified companies having several SBUs (Strategic Business Units) use the BCG Matrix. For example, a company division, a product line within a division, or sometimes a single product or brand. BCG matrix suggests a straight-forward Hnkage relative market Share’ and cost savings. A division of a company may also be treated as Strategic Business Units (SBUs). A question mark business-unit is risky due to the inherent uncertainty in a high-growth market and weak market share position. It is best to divest these businesses. This means that the organization has to develop some competencies to make the best use of high growth rates. It neither generates strong cash flow nor requires a big investment. Harvesting strategies are aimed at making as much money off a product as possible. You can learn more about the standards we follow in producing accurate, unbiased content in our. The value of cash cows can be easily calculated since their cash flow patterns are highly predictable. Thus, they produce a lot of the cash that the company uses to pay its bills and support other Strategic Business Units (SBUs) that need investment. For example, increasing market share may be more expensive than the additional revenue gain from new sales. First, you'll need data on the market share and growth rate of your products or services. It is a useful tool for analyzing a diversified company’s business portfolio. Finally, the company can divest the SBU by selling it or phasing it out and using the resources elsewhere.9. In reality, cost advantage may not accrue to an SBU simply due to high maShaS Depending on the industry, an SBU with low simple, low-cost technology. It has attractive long-term profit opportunities. Understanding the BCG Matrix. The company needs to add new products and units continuously so that some of them will become stars and, eventually, cash cows that will help finance other SBUs. It is relatively weak in competitive terms. In the upper left quadrant are stars, which generate high income but also consume large amounts of company cash. Harvesting is a ruthless strategy that is best suited to weakening cash cows, dogs, and some question marks. As time passes, SBUs change their positions in the growth-share matrix. One dimension of the chart (vertical dimension or Y-axis) represents future market growth (growth rate of SBU’s industry), and the other dimension (horizontal dimension or X-axis) represents an SBU’s relative market share. What should an ideal portfolio of business be like? After getting the portfolio’s picture, the company should then decide on each SBU’s objective, strategy, and budget. If more cash is poured down into this SBU and properly nurtured, it may become a star Strategic Business Unit (SBU). quadrant 2 shows the ‘question mark’ SBUs. They require a lot of cash to hold their share, let alone increase it. Any business to the right of the start point is nondominant. They may generate enough cash to maintain themselves but do not promise to be large sources of cash. The decision-maker must assess the resource requirement of the different businesses plotted on the matrix to allocate resources. In multi-business companies, corporate parenting enables the headquarters to focus on core competencies and tries to create value among various business units by establishing relationships and a good fit between needs and opportunities of units and resources and capabilities within the firm. Because product development may take years, businesses must plan for contingencies carefully. Formal planning approaches can also lead the company to place too much emphasis on market-share growth or growth through entry into attractive new markets. It represents what percentage of sales has turned into profits. The BCG Matrix is one of the most popular portfolio analysis methods. By the 1980s, however, such strategic planning took a backseat to cost and efficiency concerns, as companies struggled to become more competitive through improved quality, restructuring, downsizing, and reengineering. Assess the unique resources of the organization to match the opportunities/threat. In effect, low-growth, high-share cash cows should be milked for cash to reinvest in high-growth, high-share “stars” with high future potential.. The Boston Consulting Group (BCG) growth-share matrix is a planning tool that uses graphical representations of a company’s products and services in an effort to help the company decide what it should keep, sell, or invest more in. Sometimes divestment can work to the advantage of both the seller and the buyer. BCG Matrix is a 4 quadrant model where the x-axis is the market share or relative market share of your product, service or investment and the y-axis is the market growth rate. into several (at least two) SBUs, Determining the prospects of each SBU of the organization, Comparing each SBU against other SBUs with the help of a matrix (two-dimensional). However, such approaches have limitations. But it can help management understand the company’s overall situation, see how each business or product contributes, assign resources to its businesses, and orient the company for future success. Setting strategic objectives for each SBU. To use this matrix, the SBUs of the company are plotted on a two- dimensional chart. On the vertical axis, the market growth rate provides a measure of market attractiveness. If SBU X has a market share of 10 percent and its largest rival has a market share of 30 percent, SBU X’s relative market share is 10/30 or 0.3. The businesses that are the cash consumers must also exhibit the potential to be the leaders in their business with a highly competitive position so that they can contribute enough cash to nurture future businesses in the future. Management must still rely on its own judgment to set each SBU’s business objectives, determine what resources each will be given, and figure out which new businesses should be added. It can harvest the SBU, milking its short-term cash flow regardless of the long-term effect. Their net contribution to the kitty of the organization is not very substantive. They, however, work under the Tesla corporate management. Accessed Sept. 26, 2020. The growth rate is measured concerning the economy of the country. It may not always be in some businesses; the capital investments needed to remain competitive are so high that an SBU classified as a cash cow may find it very difficult to yield substantial cash flows. Companies use the BCG matrix is as a portfolio planning tool. Question marks are low-share business units in high-growth markets. According to Hofer and Schendel (1977), the portfolio analysis should yield a statement of the firm’s current portfolio position as well as a forecast of its future position under the existing strategy. It may be divested or liquidated or turned around if there are sufficient reasons for its revival. Divestment is employed on question marks and dogs that the firm cannot finance into better growth positions. Because of these flaws, it should be used cautiously. A dog is a business unit with a small market share in a mature industry. Candidates for divestment include businesses that have little room for cost savings and those that just break-even or operate at a loss. To ensure success, both of these building strategies require significant commitments of company resources. The use of the BCG Matrix lies in estimating which businesses are the net cash generators and which are the net cash consumers. From the matrix, it is clear that these businesses operate in the industries which are in the maturity stage and hold a very strong competitive position in their respective industry. Boston Consulting Group. An SBU with high market growth and a high relative market share is considered as a star business-unit. Two pieces of information are required to plot and SBU in the matrix. The long-term objective should be to consolidate the star SBU’s position. The question marks should be provided supports from the surplus of the cash cows. This company is in fair shape, although not in good shape. The international equity style box is a visual representation of the risk-return structures of foreign stocks and foreign funds created by Morningstar. Assess the critical success factors, which are the basis of the unit’s competitive advantage. On the horizontal axis, relative market share serves as a measure of company strength in the market. On the horizontal axis, relative market share serves as a measure of company strength in the market. An SBU with low market growth and low market share is treated like a dog. For example, if SBU Y has a market share of 40 percent and its largest rival has a market share of 10 percent, then SBU Y’s relative market shareis40/l0 or 4 0. The matrix is not a predictive tool; it takes into account neither new, disruptive products entering the market nor rapid shifts in consumer demand. The BCG matrix, also known as the Boston growth-share matrix, is a tool to assess a company’s current product portfolio.Based on this assessment, the Boston matrix helps in the long-term strategic planning of the company’s portfolio, as it indicates where … With regards to this, it can pursue one of the following strategies: The building strategy is designed to improve market positions in spite of possible short-run damage to profitability. An estimate of the relative market share of the business unit. Video with an explanation about the BCG Matrix. BCG Classics Revisited: The Growth Share Matrix. To develop a portfolio analysis, an organization may follow the following steps; Having allocated the resources, the organization must also ensure that the corporate parent removes any problems that may have been caused or are likely to be caused by inadequacy or shortfall in managerial skills, foresight, and capabilities by sharing of skills, the transference of learning and meditation. It is a profitable business. Those in a strong position and are growing need cash to be harvested from those in a weak industry position. The idea is to cut promotion and production costs to the bone and mine the product for its cash flow. Holding is most commonly used to keep cash cows productive. For this reason, they are prime candidates for divestiture., Products that are in low-growth areas but for which the company has a relatively large market share are considered “cash cows,” and the company should thus milk the cash cow for as long as it can. Each unit is assessed as a separate entity after a portfolio approach is followed. In the Figure, you will find that the market growth rate is placed on the left-hand side (Y-axis), and the relative market share is placed at the bottom (X-axis), below the horizontal line. To make a diversified company’s business- portfolio more attractive, the corporate head office should have an objective of turning the favored question mark SBUs into stars. There is no fixed manner in which an organization decides upon strategies. As postulated by BCG Matrix, a favorable competitive environment exists in an industry when the growth rate is faster in the industry.