Boston Consulting Group (BCG)

BCG growth-share matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970s. It is based on the observation that a companys business unit can be classified into four categories base on combination of market growth and market share relative to the largest competitor, hence the name growth-share. Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. BCG MATRIX is method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, company should have a portfolio of products that contains both high-growth products in need o f cash input and low-growth products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the market share a product has or faster the products market grows the better it is for the company. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability. This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption often is true because of the experience curve; increased relative market share implies that the firm in moving forward on the experience curve relative to its competitor, thus developing a cost advantage. A second assumption is that a growing market requires investment in asset to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indicator of its cash generation and its cash consumption. Henderson Use the BCG matrix model Each product has its product life cycle, and each stage in product's life-cycle represents a different profile of risk and return. In general, a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products. A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future. An example of this product would be an iPod. A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The is the milking cow that brings in the constant flow of cash. An example of this product would be a regular Colgate toothpaste.

Anjuman-I-Islams Allana Institute of Management Studies

Page 1

Boston Consulting Group (BCG)

But the question is, how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix? Should we promote one product more than the other one? The BCG matrix can help with this. The BCG matrix reaches further behind product mix. Knowing what we are selling helps managers to make decisions about what priorities to assign to not only products but also company departments and business units BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBUs are in same industry, the average growth rate of the industry is used. While, if all the SBUs are located in different industries, then the mid-point is set at the growth rate for the economy. Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

10 x

1x

0.1 x

Figure: BCG Matrix

1. Stars (high growth, high market share) - Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBUs located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures.

Anjuman-I-Islams Allana Institute of Management Studies

Page 2

Boston Consulting Group (BCG)

2. Cash Cows (low growth, high market share) - Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBUs are the corporations key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued.

3. Question Marks (high growth, low market share) - Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars.

4. Dogs (low growth, low market share) - Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitors/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. 2. Market is not clearly defined in this model. 3. High market share does not always leads to high profits. There are high costs also involved with high market share. Anjuman-I-Islams Allana Institute of Management Studies Page 3

Boston Consulting Group (BCG)

4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. 5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. 6. This four-celled approach is considered as to be too simplistic.

Anjuman-I-Islams Allana Institute of Management Studies

Page 4

Boston Consulting Group (BCG)

Anjuman-I-Islams Allana Institute of Management Studies

Page 5

Boston Consulting Group (BCG)

A PROJECT ON PARLE

Company background Established in 1929 1st brands- Parle Glucose and Parle

Anjuman-I-Islams Allana Institute of Management Studies

Page 6

Boston Consulting Group (BCG)

Monaco Market leader in many products 40% share of total biscuit market 15% share of total confectionery market 14 manufacturing units for biscuits and 5 for confectioneries and has largest manufacturing unit in India

Anjuman-I-Islams Allana Institute of Management Studies

Page 7

Boston Consulting Group (BCG)

Biscuits Parle-G Krackjack Krackjack crispy cream Monaco Hide and Seek Hide and Seek Milano Parle Marie Milk Shakti

Anjuman-I-Islams Allana Institute of Management Studies

Page 8

Boston Consulting Group (BCG)

Snacks Musst bites Sixer Monaco chessligs Hippo

Anjuman-I-Islams Allana Institute of Management Studies

Page 9

Boston Consulting Group (BCG)

Confectionary Melody Mango bite Kaccha Kismi

Anjuman-I-Islams Allana Institute of Management Studies

Page 10

Boston Consulting Group (BCG)

Beverages Frooti Appy fizz & grapo fizz LMN Parle Bisleri

Anjuman-I-Islams Allana Institute of Management Studies

Page 11

Boston Consulting Group (BCG)

Five force model

Anjuman-I-Islams Allana Institute of Management Studies

Page 12

Boston Consulting Group (BCG)

Cont

Anjuman-I-Islams Allana Institute of Management Studies

Page 13

Boston Consulting Group (BCG)

What has made them keep the price low??? Economies of scale for a product like PARLE-G Understood the consumer psyche of value for money
Anjuman-I-Islams Allana Institute of Management Studies Page 14

Boston Consulting Group (BCG)

Their reach made it possible for them to operate at low cost

BCG matrix

Anjuman-I-Islams Allana Institute of Management Studies

Page 15

Boston Consulting Group (BCG)

HIGH LOW HIGH LOW Anjuman-I-Islams Allana Institute of Management Studies Page 16

Boston Consulting Group (BCG)

PARLE G Frooti Hide and seek Musst bites MONACO MARKET SHARE MARKET GROW TH

Anjuman-I-Islams Allana Institute of Management Studies

Page 17

Boston Consulting Group (BCG)

Strategy of Parle with respective to competitors

Anjuman-I-Islams Allana Institute of Management Studies

Page 18

Boston Consulting Group (BCG)

Anjuman-I-Islams Allana Institute of Management Studies

Page 19

Boston Consulting Group (BCG)

Anjuman-I-Islams Allana Institute of Management Studies

Page 20

Boston Consulting Group (BCG)

Core competencies Unmatched reach Low cost leader Related diversified group

Anjuman-I-Islams Allana Institute of Management Studies

Page 21

Boston Consulting Group (BCG)

SWOT

Anjuman-I-Islams Allana Institute of Management Studies

Page 22

Boston Consulting Group (BCG)

Anjuman-I-Islams Allana Institute of Management Studies

Page 23