The BCG matrix (or Growth-Share Matrix), is a planning tool used to evaluate the Strategic position of a business brand portfolio and its potential. It classifies business brand portfolio into four categories on the basis of industry attractiveness (growth rate of that industry) and competitive position (relative market share).
The BCG analysis helps the company in deciding which entities in the business portfolio are actually profitable and which are not. This helps businesses identify what it should concentrate on and what gives it a competitive advantage over others.
Relative market share: Represented by the horizontal axis. Higher market share results in higher cash returns. The mid-point is generally set at 1.0.
Market growth rate: Represented by the vertical axis. Higher market growth rate might lead to higher returns in future, but this requires investment to stimulate further growth. So, this would lead to higher cash usage.
4 Categories of the BCG Matrix
Stars: High Market share High Growth
• The business units or products that have the best market share and generate the most cash are considered stars.
• Monopolies and first-to-market products are frequently termed stars.
• However, because of their high growth rate, stars also consume large amounts of cash. This generally results in the same amount of money coming in that is going out.
• Stars can eventually become cash cows if they sustain their success until a time when the market growth rate declines.
• Companies are advised to invest in stars
Question Marks: Low Market Share High Growth
• Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption.
• They have the potential to gain market share and become a star, and eventually a cash cow when the market growth slows.
• If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines
Cash Cows: High Market share Low Growth
• Cash cows are the leaders in the marketplace and generate more cash than they consume.
• They provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders.
• Companies are advised to invest in cash cows to maintain the current level of productivity, or to "milk" the gains passively.
Dogs: Low Market Share Low Growth
• Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash.
• They are cash traps because of the money tied up in a business that has little potential. • Such businesses are candidates for divestiture.
Strategies for Dogs:
• The company can either divest the product altogether.
• Product can be revamped through rebranding / innovation / adding features etc.
Disadvantages of BCG Matrix:
• The model uses only two dimensions (i.e. growth and share) to assess competitive position, others are ignored.
• More emphasis on cost leadership rather than differentiation as a source of competitive advantage.
• A high market share does not necessarily lead to profitability at all times.
• Assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage.
BCG Matrix of AMUL
Amul has diversified their offerings, entering into different milk and milk product markets, let us understand BCG Matrix of Amul.
The 3 products mentioned in the figure (milk, butter, cheese) generate steady, high revenue. They are the “flagship” products of the brand.
Amul invests a lot of cash coming from cash cow into star-product promotions. Amul Ice Creams have targeted & appealing ads in order to improve awareness.
Amul Lassi falls under this category. Considering the increasing demand for healthy products, this category shows a huge potential to grow.
Due to the heavy competition & limited innovation in these products, it’s difficult for Amul to gain market share & generate huge revenue.
BCG Matrix of Amazon