Question

Richard Scott, CEO of XYZ Enterprises, is considering a merger with Empire Inc., which is led by CEO Mickey Thompson. The merger of their two firms will enable the creation of a very large diversified conglomerate, with businesses ranging from office supplies to sporting goods, industrial paints, consumer electronics, video games, and marine engines. Consultants from Boston Consulting Group have advised Scott and Thompson that the merger could create a great deal of value, because the new combined entity can use several lucrative yet mature "cash cows" within Empire Inc. to fund the growth of several promising, but not yet highly profitable, young businesses. Scott and Thompson have decided to seek a second opinion from your consulting firm, International Associates.

Please respond to the following questions posed to you by these two CEOs:

• Could you please explain the BCG matrix to us? What is the logic of this model? What are the model’s limitations and weaknesses?
• Should we be employing the matrix to evaluate this merger? Could we create value in the manner that BCG has described?

Answer 1

The BCG matrix developed by the Boston Consulting Group (BCG) is a tool used to analyze business units and product lines within a company. It is helpful for managers to evaluate balance of the company’s current portfolio. The matrix is a measure of market growth rate and relative market share that is comprised of four components (Business-to-you, 2018):

Stars: Stars represent business units having large market share in a fast growing industry. While they do generate cash, they also require a higher investments to maintain their lead in the market.

Cash Cows: Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. The idea is that the company should “milk” the cash cows as much as possible to keep a steady stream of cash flow for the business.

Question Marks: Question marks represent business units having low relative market share and located in a high growth industry. They require significant investments and ideally become stars as the market develops.

Dogs: Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require a significant investment. Units in this area typically break-even and are often ultimately removed from the business.

Even though the BCG matrix is simple to use, it does contain several limitations. The most significant limitation is that growth rate and market share are not the only indicators of profitability. This model ignores other indicators. (Management Study Guide, n.d.). A business with low market share can still be profitable, despite the matrix portraying otherwise.

The BCG matrix can be used to help evaluate the merger. Even though this model is simplistic, it is a good starting point to help sort the combined business units to see what products belong where and what cash cows can be fully utilized to fund other projects as well as what dogs may need to be divested from the combined company. Value can be created once they identify what product lines belong where and further analysis will be required to confirm where each product truly belongs.

References:

Business-to-you. (2018, June 17). BCG Matrix EXPLAINED with EXAMPLES | B2U.

Management Study Guide. (n.d.). BCG Matrix.

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