In case of English we all have read letters BCD and in case of management, all management students read the letters BCG. BCG matrix is the term used in the context of management. Full form of BCG matrix is Boston Consulting Group Matrix. BCG matrix has four types of scenarios with respect to the market share of the company, cash flow generation and growth rate of the industry in which the company is operating. The four quadrants or scenarios of BCG matrix are called stars, cash cows, question marks, and dogs.
BCG Matrix 4 Quadrants
Stars is the first quadrant which represents those business units which have higher market share in a rapidly growing industry which results in higher cash inflow for the company, while cash cows is the second quadrant which represents those business units which have higher market share in stable industry resulting in higher cash inflow for the company without much of investment. Question marks is the third quadrant which represents those business units which are having lower market share in a rapidly growing market and it requires substantial investment on the part of the company, while the last quadrant is called dogs which represent those business units which have low market share and industry too is on the declining trend which leaves no scope for company to have good cash flows. In order to have a clear understanding of this concept, one should look at the advantages and disadvantages of BCG Matrix –
BCG Matrix Advantages
Easy to Understand
The biggest advantage of the BCG matrix is that it very easy to understand and one does not need to have a master’s degree or qualification to understand this concept. Hence anyone who is seeing this matrix can deduce easily that cash cow and stars are the two quadrants which are ideal for the company and question marks and dog are the two quadrants which a company should try to avoid due to the risks involved in both the scenarios.
Identification of Opportunities
Another advantage of this matrix is that it helps the company in identification of opportunities because once dog and question marks quadrants are removed company is left with only cash cows and stars quadrants and depending on company cash position and risk appetite it can either go for stars business units which have a high scope of growth but at the same time requires substantial investment on the part of the company or it can go for cash cows business units which provide good cash inflow with minimal investment, however, their growth is not at the same level as stars business units.
Helpful in Removing the Weak area of Business
It is helpful in removing the weak business units because once the company has identified dogs and question mark business units than it can save a lot of money by not investing further money into dogs business units rather company can sell such business units and invest that money elsewhere profitably. As far as question marks business units are concerned if the company has excess cash than it can invest that money into question marks units because such units have potential to gain but they require patience as well money from the company.
BCG Matrix Disadvantages
Ignores other Factors of Business
The biggest problem with this approach is that it takes into account market share and cash flows only into account and ignores other factors of business which are equally important for success. Hence if the company has selected cash cows or stars business units but if the top management is not good or employees are not dedicated or some natural calamity happens than also the company will be making a loss. Hence choosing stars and cash cows do not guarantee that the company will make profits only.
Simplistic Approach for a Complex situation
Another problem with this matrix is that it offers simplistic approach for handling complex situation of selecting business units as business units are complex structures and by paying attention to only three factors that is cash flows, growth rate, and market share and ignoring the rest of the factors this matrix may not provide ideal solution for every situation.
No Middle Path
Another limitation of this approach is that it does not have a middle path that is it is not necessary that business is high growth or low growth as some business can also be of moderate growth and for such business this matrix offers no solution. Besides some business units are of strategic importance to the company and company cannot shut or sell it just because it falls under question marks or dogs category.
As one can see from the above that BCG matrix has pros as well as cons and any company thinking of adopting this strategy should carefully read above points and then decide whether to select or sell business unit based on the analysis done through BCG matrix.