Limitations / Problems Of The Bcg Matrix Essay, Research Paper
Limitations / problems of the BCG Matrix
1. The problems of getting data on the market share and market rate
2. There is no clear definition of what constitutes a ‘market’
3. A high market share need not necessarily lead to profitability all the time.
4. The model employs only two dimensions – market share and growth rate. This may tempt management to emphasis a particular product or divest prematurely.
5. Low share businesses can be profitable too.
6. It considers the product or SBU only in relation to one competitor: the market leader. It misses small competitors with fast growing market shares.
Critiques of BCG Matrix
1. In another word: by definition, only a single company can have a share greater than 1.0 in any given market. Thus, in the BCG matrix, there can be but one cash cow or one star per market.
2. The BCG model implies resource allocation rules regarding cash usage.
Assumptions of BCG
1. This matrix assumes that a larger market share in a growth market leads to profitability. An effort to obtain a large market share in a slowly growing market requires too much cash.
2. The higher the growth rate, the easier to gain market share
Uses / Application of BCG Matrix
1. If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price low enough to get early market share leadership. Once it becomes a star, it is destined to be profitable.
2. BCG model is helpful to management in evaluating the firm’s current balance among stars, cash cow, problem child and dogs.
3. BCG model is applicable to large companies that seek volume and experience effects.
4. The model is simple and easy to understand.
5. It provides a base for management to decide upon and prepare for contingent future courses of action.
BCG as a planning tool
1. The BCG growth share matrix is widely used as a strategic planning tool giving planners a sense of direction.
2. The matrix facilitates the strategic planning process and service as a rich source of ideas about possible strategic options.
3. In multi-product organizations, management can use this matrix as a guide to allocate limited resources.
BCG MATRIX
22%
10% market growth rate
0%
10x 1.5x 1x 0.1x
Relative market share
1. The BCG matrix is plots the business’s relative competitive position as expressed by the market share and the growth rate of its industry on the vertical axis. The company is represented by as a circle on the matrix. The diameter of the circle represents the size of the business (usually in terms of the sales) in relation to the sizes of other businesses in the portfolio.
2. Market growth rate: represent the annual growth rate of the market in which the business operates. 10% is considered high.
3. Relative market share: refers to the SBU’s market share relative to that of its largest competitor in the segment. It serves as a measure of the company’s strength in the relevant market segment. 0.1x means that the company’s sales volume is 10% of the leaders’ sales volume.
4. Question marks: – - business that operate in high-growth market but have low relative market shares. Most business start off as question marks. A question markets requires a lot of cash to spend on plant, equipment to keep up with the fast-growing market.
5. Stars: if the question marks are successful, it becomes a star. A star is the market leader in a high growth market. A star does not necessarily produce a positive cash flow for the company. The company must spend substantial funds to keep up the high market growth and fight off competitor’ attacks.
6. Cash cows: When a market’s annual growth rate falls to less than 10 percent, the star becomes a cash cow if it still has the largest relative market share. A cash cow produces a lot of cash for the company. The company does not have to finance capacity expansion because the market’s growth rate has slowed down. Because the business is the market leader, it enjoys economies of scale and higher profit margins. Cash cows can be used to support other businesses
7. Dogs: Dogs are businesses that have weak market shares in low growth markets. They typically generate low profits or losses.
8. Next task is to determine what objective, strategy and budget to assign to each SBU. 4 strategies can be pursued:
a. Build: increase market share, even forgoing shot term earning – question marks.
b. Hold: Preserve market share. Cash cows.
c. Harvest: Increase short-term cash flow. Weak cash cows, question marks, dogs
d. Divest: To sell or liquidate the business. Dogs and question marks.