Question

In a diversified company you must allocate your resources efficiently and effectively. Using the BCG matrix explain how you identify different planning units, how you classify them for resource allocation and what you plan to do with each unit based on where it is on the chart. Also give at least one error or limitation of this system (hint S, C, Q, D).

Answer 1

The BCG matrix is a 2*2 matrix which compares market growth and market share of various products offered by a diversified company. It is used to help efficient resource allocation to each strategic business unit. The following is a BCG matrix:

Here Relative Market share signifies the amount of sales of our product as compared to other competitors in market.

Market growth rate signifies the growth in the industry sales this year as compared to last year.

In the BCG matrix each of the four cells of this matrix represent a type of product as explained below:

1. Stars: The business units with high growth rate as well as high market share fall in this category. These business units generate high amount of cash as they have higher market share but such units also need high investments to maintain the high market share in the industry. These are generally attractive as they lie in a robust and competitive industry. They generally convert to cash caws as the industry matures.
2. Cash Cows: These are the business units which have a high market share in an industry which has matured and the growth of the industry is low. Such business units generate high cash flows and the require low investments as the industry is mature. These business units generate cash for other business units that may require higher investments. Such units generally represent the core business of the organization. In case the cash cows start to move towards deterioration then a retrenchment policy may be used to revive the unit.
3. Question Mark: There are the business units are currently having low market share but they are in a high growth industry. They require large amount of investments to maintain and gain market share. A constant attention is required to assess these units if they are going to be useful for future. Most of the new business units generally start as question marks. These units have a potential to become stars if a good strategy is adopted with high amount of investments. However, they become dogs if enough attention is not paid on them.
4. Dogs: These are the units that do not generate good cash flows and do not require high investments. Dogs are generally liquidated as there are fewer chances to gain market share. However, if the organization have a strategic aim these dogs can be revived to start generating cash flows. Dogs should be avoided and kept to a minimum number in any organization.

Limitations of this system are:

1. BCG matrix does not take into account the intermediate business units. It only considers the high and low as two factors.
2. This model is not clearly defined in terms of market share and growth. These may vary depending on organization and thus it is not a robust model.
3. It assumes that high market share is always related to high profits which might not be the case in many cases.
4. It only considers two indicators of profitability whereas there are many other factors that may influence profitability