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Introduction To BCG Analysis

The BCG matrix can be defined as a conceptual model which can be very important tool for assessing the business of a company and is used by the management at a large scale. It allows a company to evaluate the products and brands floated by it on the basis of the competition available in the market. The products are plotted into matrixes to have an idea about the invest ability of the product by the company and what product should the company discontinue. The developer of the BCG matrix was the Boston Consulting Group over forty years ago and is today used as one of the most efficient and important tool for strategic planning. The BCG matric assumes that the market share of the product reflects the ability of the product to generate cash for the company. If a product has a higher market share compared to the competitors, it would be able to generate a higher return in terms of cash and guarantees success in the future as well. The growth rate of the market is an indicator of the cash outflows that the company will be experiencing the future. A market with a high growth rate ensures that the product is earning well but comes with a disadvantage that includes that a huge infusion of cash is required to earn the future expected growth.

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Advantages Of BCG Analysis

The primary advantage that is associated with the BCG analysis includes the easy interpretation of the model as we do not need to hire professionals and experts to perform analysis which is complex and analytical in nature. If we plot products into a matrix which is visible to everyone with ease and easily interpretable, it would become very easy to understand the products which are a cash cow and which products are stars. Another advantage that is associated with the BCG analysis includes that it helps to get rid of the weak areas of the business by identifying the weaker product and channelizing the capital and the towards opportunities which are high value and available to you. The decision to choose cash cows and stars solely depends upon the ability of the company to bear risks and the amount of cash reserves that is available with them. The products that are termed as question marks and dogs can be removed with the help of BCG analysis and would help the company to free up ample amount of cash and the products that have huge growth potential would be left for the company.

Limitations Of BCG Analysis

As we know that the BCG analysis is easy to comprehend and do not involve any expert participation, the BCG analysis, however is not for everyone. The companies which are in early stage and are small in size usually have a large number of products which can be used to fill up each quadrant which takes away the liberty from those companies to choose between products which they can continue investing into and dispose the products that are a burden to the company. The BCG analysis is ignorant of middle path as it ignores the companies that exhibit a moderate growth and have a middle section market growth. The BCG's purposeful omission of other success-related elements is perhaps its largest drawback. Market share and cash flow are important, but they are not the only factors that affect a company's ability to turn a profit. In the world that we currently live in, the success of the company cannot be determined by the market share enjoyed and there are multiple new drivers of growth that comes up.

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Creation Of A BCG Matrix

The creation of the BCG matrix depends upon the examination of sales of the company over a year or a quarter against the revenue generated by the market as a whole. There are multiple matrix templates available online which can be used by someone who tries to create a BCG matrix. The chart that is created can be split into four parts which are Cash cows, stars, dogs and question marks.

Cash cows – These are the products that are market leaders of your company and they sit at the quadrant that lies in the bottom of the matrix. The selling of the products creates more revenues than the amount of capital that is spent in creation of the products.

Stars – The products that are at the upper quadrant in the right side are the products that have the best market share and are responsible for bringing the most amount of cash into the business. The products that are first-to-markets often fall into this category and the only disadvantage that lies with these products is that they need a lot of amount as investment for creating such products.

Question marks - Question marks have the potential to expand quickly if you spend a lot of money in them since they have a low relative market share and a high growth rate.

Dogs - The fourth group consists of your pets, who have a modest market share and growth rate. These products don't generate or use a lot of money; while they occasionally may experience a loss, they often turn a profit.

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Role Of Cash Flows Into BCG Analysis

The understanding related to the cash flows are the most important aspects of the BCG analysis. The following four rules should guide the approach to product cash flow strategies:

• Margins and cash generated are a function of the market share enjoyed by the product. It is believed that high market shares is associated with higher margins earned by the products.
• The growth of the company depends upon the investments into the assets of the company. The cash that is required to hold shares can be considered as a function of the rate of growth.
• The market share of the products should be earned or should be bought which requires additional investments.
• It is an established fact that the product market can grow indefinitely.