When reviewing the products of an organization, an entrepreneur has to decide the products on which she should invest. While one of the products has good financial outcome, another product hardly brings any profit. It is important for the entrepreneur to decide if she wants to keep the products in the market or remove it. To make such decisions, she needs to identify the way in which the products might perform in the near future. In this article, we will discuss about Boston Matrix. We will learn about strategy tools and strategic opportunities that examine the financial performance of a product.
Origin of Boston Matrix
Bruce Henderson, management consultant, at the Boston Consulting Group developed the BCG Growth-Share Matrix as a portfolio planning model, in the 1970s.
An Idea of Boston Matrix
Also called product portfolio, the Boston Matrix helps a company to gather resources and use as a devise in product management, brand marketing, portfolio analysis and strategic management. It is also known as BCG (Boston Consulting Group Analysis).
Depending on the combination of market share relative to the largest competitor and market growth, the matrix is developed on the idea that the business units of a company can be divided into four categories. While relative market share acts as a proxy for competitive advantage, market growth acts as a proxy for the attractiveness of the industry.
The Four Categories of Boston Matrix
Dogs have low growth rate and low market share. Therefore, neither do they consume nor do they generate much cash. Dogs are however cash traps as they tie up money in a business with little potential.
# Question marks
Question marks are on the rise. They consume a lot of cash, but they have low market shares and thus, do not generate much cash. As a result, the net consumption of cash is quite large. The question mark is also called a ‘problem child. ’ It has the ability to accomplish market shares and become a cash cow in course of time, especially with the slowing down of the market. However, if the question mark cannot convert itself into a cash cow, it will transform itself into a dog after years of cash consumption. This negative transformation occurs when the growth of the market declines. Question marks need to be carefully examined, so that it can be determined whether they deserve the investment needed to grow market share.
# Cash cows
Cash cows are leaders in a mature market. They display a return on assets which is greater than the growth rate of market. This way, they generate more cash than they consume. These business units should be used to bring out the profit and invest as less cash as possible. Cash cows help in getting hold of the cash needed to cover company administrative costs, convert question marks into market leaders, service corporate debt, finance research and development, etc. Given the fact that cash cows ensure stable flow of cash, the value of cash cows can be determined with exactness. This value determination is done by calculating the current value of its cash stream by taking the help of cash flow analysis.
Stars have the potential to deliver a lot of cash. This is due to the strong relative market share they posses. They also consume a lot of cash. This is due to the fact that they grow at a high rate. If a star can keep the large market share it has, it can become a cash cow with the decline in the market growth rate. The portfolio of a company that has diversified into many fields should possess stars that can ensure cash cows and deliver cash in future.
Limitations of the Boston Matrix
The Boston Matrix was in good use at one point of time, but the introduction of more comprehensive models has reduced its popularity. Listed below are some of its weaknesses.
- The matrix takes under consideration the fact that the business units are not dependent on each other. There have been cases where a business unit, which is a dog, may have helped other business units achieve competitive market.
- The framework largely depends on the definition of the market. A business unit may be dominating in its small area, but its market share in the overall industry can be really low. Under such circumstances, the market definition can make the difference between a cash cow and a dog.
- In industry attractiveness, rate of market growth is only one factor. On the other hand, relative market share is only a factor in competitive advantage. The Boston matrix or the growth-share matrix loses sight of many other factors in these two determinants.
Utilizing the Boston Matrix
In the natural course, a business generally begins as a question mark, which eventually becomes a star. Later, with the maturity of industry and the slow motion of the growth rate, it becomes a cash cow or dog. The main purpose of using this matrix is to assist companies in deciding which units they should keep and which units they should remove from the market. This can be done with the aid of the following 4 strategies.
- Keep the same status
- Create market share
- Get rid of dogs and invest in units like, stars and question marks.
- Reduce investment, enhance flow of cash and increase profits
To Sum Up
From this article, it can be deduced that companies have a vivid view of the way in which they should screen opportunities and understand which business unit needs to be removed and which needs to be invested on. The four categories of the framework are used to realize the performance of the business units in the future. The framework is thus, not just about the present performance of the business unit, but how it can help in cash generation, in years to come. If the business unit consumes cash it is dog and if it generates cash, it is a cash cow.