Matrix Is Designed Precisely To Augment A Multidivisional Firm's Efforts To Formulate Such

The profit centers of an organization develop what is known as a business portfolio is a part of
their corporate parenting policy. Whenever a company's divisions compete in several industries,
distinctive strategies are often developed for each business. The Boston Consulting Group (BCG)
Matrix is designed precisely to augment a multidivisional firm's efforts to formulate such
strategies.
The BCG Matrix graphically depicts the differences among different divisions of a firm in terms
of their relative market share position and the industry growth rate. The relative market share is
defined as the ratio of a division's own market share in a particular industry to that of the largest
rival firm in that industry. The BCG matrix is a four quadrant 2x2 matrix with the X-axis
representing the relative market share and the Y-axis as Industry growth rate. Different product
lines can take their position in any of the four quadrants of this matrix. The product lines are shown
with circles of varying diameter where the diameter represents the percentage revenue from the
product. The description of different quadrants follows:
Quadrant 1 (Question Marks) – The first quadrant is known as question marks because the firm is
yet to find a suitable strategy for these products. For these products, the relative market share is
low and the market growth potential is high. The firms incur high cost as large cash is being taken
up by these products with little cash generation. The firms need to decide on whether they should
strengthen these product line to improve cash generation or to hive them off or stop producing
them form the main business on the basis of existing resources and capabilities. If resources and
capabilities exist, the question marks can be converted into stars. But before that, these products
are cash eaters. Most of the businesses start with new products as question marks. For example,
any smart phone manufacturer’s new product will be a question mark in the industry. The relative
market share will be very low initially and the growth potential is high.
Quadrant 2 (Stars) – Stars are the product lines having high relative market share and having high
market growth potential. Here, the investment needs to be high but at the same time, cash
generation will also be higher. Starts are considered leaders in the market. It is necessary to focused
continuously on these product divisions in order to keep their market share intact. To do so,
investment and re-investments are necessary. Otherwise, there is a chance that they become cash
cows. Backward, forward, and horizontal integration; market penetration; product development;
market development; and joint ventures are appropriate strategies to consider for these product
divisions. For example, if we consider Nestle, the Stars are the Nescafe and Ceralac.
Quadrant 3 (Cash Cows) – Cash Cows are the product divisions which have high market share but
low market growth potential. The appropriate strategy to adopt for cash cows are maintenance and
harvesting. They provide excess of cash outflow and often need less cash consumption. Many of
the today’s cash cows were yesterday’s stars. These divisions are to be leveraged upon to ‘extract
the milk’ as long as possible. Product development or concentric diversification should be the
attractive strategies for strong Cash Cows. However, as a Cash Cow division becomes weaker, a
divestiture strategy becomes more appropriate. For the same Nestle, Maggie noodles and KitKat
are the best examples of cash cows.
Quadrant 4 (Dogs) – This is the fourth and final quadrant which represents products that are having
low market share and lower market growth potential. They are the most unattractive segments
where infusing cash does not necessarily imply improvement in market share or cash generation.
They are often taken for divestiture and hiving off for improving the cash flow. They are often
observed at their decline stage of the product life cycle and are perceived as cash traps. Nestle
Milky Bar, Nestea are the examples of Dogs.

The main advantage of BCG matrix is that it is cash flow centric and can be referred by the firms
to understand the position of different products based on investment vs. cash generation
perspective. However, it has some serious drawbacks. For example, it never considers internal
factors. Dimensions of categorizing are industry growth rate and relative market share are all
external factors. It is oriented towards financial resource management and there is a little focus on
intangible resources and capabilities. No emphasis is given on synergy and co-operative
arrangements. It considers possibilities that the Dogs can be in niche areas generating high profit
margins. Another major fallacy is that a market share based analysis does not necessarily imply
profit. Finally, it does not consider the fit with parent capability.

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The profit centers of an organization develop what is known as a business portfolio is a part of

Matrix is designed precisely to augment a multidivisional firm's efforts to formulate such

product. The description of different quadrants follows:

are the best examples of cash cows.

Milky Bar, Nestea are the examples of Dogs.

intangible resources and capabilities. No emphasis is given on synergy and co-operative

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