The surplus cash can be used to nurture those businesses that are in the star quadrant or the question mark quadrant. For example, PNG has 21 business units for the production of textile products, ceramics, pharmaceutical products, etc. The vertical axis of the BCG Matrix represents the growth rate of a product and its potential to grow in a particular market. An example of a cash cow business is the domestic soft drink business in the U.S. for Coca-Cola, where the company maintains a 44% share of all revenue. While first created to manage product lines for manufacturing companies in the ‘60s and ‘70s, it’s equally relevant for tech startups that offer a variety of digital services.
MCQs on strategic management
A strategy of divestment attempts to sell or liquidate businesses to generate cash so it can be better used in other areas. Divestment is employed on question marks and dogs that the firm cannot finance into better growth positions. The four quadrants of the BCG Matrix are stars, dogs, cash cows, and question marks. But it can help management understand the company’s overall situation, see how each business or product contributes, assign resources to its businesses, and orient the company for future success. When used properly, strategic planning is just one important aspect of overall strategic management, a way of thinking about how to manage a business.
Without accurate data, your product portfolio decisions are going to be more luck than judgment. For example, realizing that its TV business was a dog, Phillips decided to sell off its TV business unit in 2012. The company was coming off record deficits in 2011 and decided to cut its losses.
A practical way to do this is to arrange a planning workshop with executives and key stakeholders involved with your entire portfolio. Before your company will get anything of value out of it, you need the big picture figured out. The market has long since matured and is growing at a fairly slow rate at about 5.1%, which is currently lower than the U.S. rate of inflation. While we’ve roughly covered them above, let’s explore each category a bit closer, using real product examples. It is one of the most iconic success stories of selling off and divesting from a “dog” product line in modern history. But in the 21st century, the first mover’s advantage is more crucial than ever.
For example, a company division, a product line within a division, or sometimes a single product or brand. The BCG Matrix doesn’t leave room to account for crucial external factors outside the market. For example, the Covid-19 pandemic decimated the tourism sector as a whole, with over one trillion dollars in lost revenue in 2020. Ideally, you’d do this in a live meeting with every key stakeholder on board.
Question marks are the most managerially intensive products and require extensive investment and resources to increase their market share. Investments in question marks are typically funded by cash flows from the cash cow quadrant. It divides a company’s business units into categories based on their respective market shares and market sizes. To help you roughly estimate the profitability of a business, the matrix uses the two metrics of relative market share and market growth rate. Even if you had never heard of the BCG matrix before, you have probably heard of the term ‘cash cows’.
Companies use the framework to decide which businesses or products to what does question mark symbolize in bcg matrix invest in to maximize growth potential and profitability. If a star continues its position as the market leader for an extended period of time, it will fall into the cash cow quadrant, as market growth begins to decline. An SBU with low market growth and low market share is treated like a dog.
- Get as specific as possible to use accurate numbers on the actual business area you want to compare.
- In the best-case scenario, a firm would ideally want to turn question marks into stars (as indicated by A).
- The BCG matrix is a growth-share matrix that refers to a planning tool that uses visual representations of a company’s goods and services to assist it in deciding what to maintain, sell, or spend more.
- In a diversified company, all the business-units constitute its business portfolio.
- It’s all about where the market is going and how your product’s doing within that market.
These are the products that have both a high growth rate and a high relative market share. Generally, the products in this quadrant provide a better return on investment as compared to those in other quadrants. What differentiates ‘stars’ from ‘cash cows’ is the attention and investment they require to maintain the ‘star’ status. The term “growth-share” refers to the fact that a firm’s units can be divided into four groups depending on mixes of growth and share compared to the main rival.
The Lean Startup Methodology Cycle: 4 Steps to Risk-Free Success
A Strategic Business Unit (SBU) is considered a question mark when it has high market growth and low market share. In a diversified company, all the business-units constitute its business portfolio. Each business unit or SBU is treated as a standalone profit center. BCG stands for Boston Consulting Group; also called ‘Growth/Share Matrix/ BCG Matrix’; developed by Boston Consulting Group, a world-renowned management consulting firm located in the USA. It is a useful tool for analyzing a diversified company’s business portfolio.
However, the iPod still remains a popular alternative to music listeners of a younger age group. Therefore, the product line continues to generate revenue for other areas of the business (with greater future potential) so shouldn’t be discontinued just yet… Cash cows represent products in their maturity phase when yields are at their highest but market share is starting to level off.
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As the market matures and the products remain successful, stars will migrate to become cash cows. Stars are a company’s prized possession and are top-of-mind in a firm’s product portfolio. Products in the star quadrant are in a market that is growing quickly and one where the product(s) have a high market share. Products in the stars quadrant are market-leading products and require significant investment to retain their market position, boost growth, and maintain a competitive advantage.
During the 1970s, many companies embraced high-level corporate strategy planning as a kind of magical path to growth and profits. In addition, these approaches focus on classifying current businesses but provide little advice for future planning. Management must still rely on its own judgment to set each SBU’s business objectives, determine what resources each will be given, and figure out which new businesses should be added. An SBU is considered as a cash cow when it has low market growth and high market share.
Phillips’ television business — which we covered earlier — is an example of a dog, where the company had a low market share in a mature marketplace. This type of market-leading product in an industry that’s virtually exploding is what we call a star. The fact is, not every product a company sells becomes popular and generates profit, and not every product that is not popular yet can be considered to have flopped. Both the BCG Matrix and Ansoff Growth Matrix help companies assess how to develop their product portfolio.
By identifying a business as a dog — something with limited growth potential — you can cut your losses by selling the business or even, if it’s not profitable, simply closing it down. The focus should be redirected towards experimentation increasingly in new products, markets, and business models – echoing the ideas of lean startup methodology. Finally, the Consumer Products segment of the Walt Disney Company can be placed in the dogs quadrant because of the low growth and market share.
Like a product, SBUs have a life cycle starting with question marks, becoming stars, turning to cash cows, and end up as dogs. That is why companies should examine the businesses’ future positions side by side with the current position analysis. If your objective is to focus on innovation, double down on stars and question mark businesses in rapidly growing markets, and move some of the marketing and R&D budgets away from stable cash cows. These are the products or services that have a low growth rate as well as a low relative market share.
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