BCG Matrix

BCG matrix, developed in the early 1970’s by Boston Consulting Group, is known as growth-share matrix/ It is a strategic management method to recognize the internal strategic structure in a company so as to optimize its business portfolio. The method’ core is concentrated on how to adapt companies’ products and business portfolio to market’s demand. Only in this way can an enterprise’s production makes sense and brings profits.  More important, how to distribute a companies’ limited resources to each SBU( Strategic Business Unit)? This is the key point for a company to succeed in the competition. To be aware of what is going on in each SBU of a company, the BCG makes it visible through a four-cell matrix of two dimensions(growth-share) as seen below.

According to the BCG matrix, the four quadrants represent each a group of products or units that are in a similar development condition. As for the company, each SBU is situated in a grid which indicates whether it produces a potential profit ot not. And it is through analysis of market growth rate and relative market share that we come to define the following four categories of business units(star, cash cow, problem child, cash cow, dog). Star( higher growth rate in a higher market share)

1. SBUs situated in this quadrant have a higher rate with a larger market share. But it’s not certain whether they produce positive cash flow or not. Since the market is still in development, the company should continue its investment in this unit so that it can catch up with the changing market and beat back competitors. Star, seen as a leader in a developed market, evolves from problem child in which the company invest. And it is also probable to become a cash cow(higher market-share with a lower growth rate). Without stars in a company, there’s little hope. But too many stars will also confuse the eyes of management who may struggle in his decision-making.

2. cash cow(lower growth rate with a higher market-share)

Products in this quadrant produce a large quantity of cash but its growth perspectives are limited. They are leaders in the mature market with a great contribution to companies’ profits. Since the market is already in its maturity, the enterprises don’t need to increase investment to enlarge the economic scale. As leaders in the market, these units enjoy scale economy and a high marginal profit, as a result, they produce a large cash flow to companies.Generally, the other three units are supported bay cash caws in investment by a company. For cash cows, companies should better adopt steady strategies to remain their high market-share.

3. problem child（higher growth rate with a lower market-share)
Products in this quadrant is probably speculative with a big risk to companies.Despite a high profit rate, its market-share is so small. This kind of units are often companies’ new business. Attempting to develop problem units, companies should build factories, add equipments and employees, which means a great deal of investment. Problem describes exactly companies’ attitudes towards the business(to continue or to give up). If the business unit conforms to companies’ long-term strategic objective and contributes to companies’ competitive force, then it is worth investing. So we use the increasing strategy to deal with this business. For those who don’t manifest further perspectives, we adopt the reducing strategy. To make a sound decision, the below chart may help. Those which requires less and returns more are worthy of our investment and support.

4. Dog( both lower in growth rate and market-share)

This kind of units exists by reason of personal affection, for they don’t produce much profits and don’t need much investment either with sometimes a deficit. Dogs engender expenses of resources and management. So we treat them by means of the reducing strategy in order to sell or liquidate them.

China’s telecommunication has ever made use of BCG to evaluate its strategic business portfolio. As the BCG matrix shows, Fixed-line voice, PHS are the guaranties of the companies’ cash flow, for they are in a mature phase of development(cash cow). VoIP, mobile business , broadband have a good perspective leading the future trend. They belong to star business. IPTV, system integration and ICP are the so-called problem children. Companies should perform a deeper studying to work out how to reply. It's a market study method. With technique development and market’s changes, the business units will change their places into others’. Therefore, operators should grasp the developing law of the industry and make their new plannings.Through transformations among different units,  companies come to realize the optimization of the business structure.

BCG matrix combines strategic planning and budget planning, through which we can assess the complex companies’ actions. The matrix helps many enterprises to decide on where to put their investment and other resources so as to optimize the whole business structure. However, BCG is also limited to some extent. Firstly, it only considers internal financing, with external financing ignored. Secondly, in course of BCG analysis, the business units are treated in a separated way, however, these units are without surprise related and interactive. For instance, if stars and dogs are relatively complemented, then the abandonment of dogs will certainly affect stars. Moreover, sometimes selling dogs is not that easy, when the dogs’ industry bears a total deficit. Besides, growth-share’s relation is not constant.