BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic position of the business brand portfolio and its potential. It classifies business portfolio into four categories based on industry attractiveness (growth rate of that industry) and competitive position (relative market share). These two dimensions reveal likely profitability of the business portfolio in terms of cash needed to support that unit and cash generated by it. The general purpose of the analysis is to help understand, which brands the firm should invest in and which ones should be divested. “BCG matrix (or growth-share matrix) is a corporate planning tool, which is used to portray firm’s brand portfolio or SBUs on a quadrant along relative market share axis (horizontal axis) and speed of market growth (vertical axis) axis.”
“Growth-share matrix is a business tool, which uses relative market share and industry growth rate factors to evaluate the potential of business brand portfolio and suggest further investment strategies.
Relative market share: One of the dimensions used to evaluate business portfolio is relative market share. Higher corporate market share results in higher cash returns. This is because a firm that produces more, benefits from higher economies of scale and experience curve, which results in higher profits. Nonetheless, it is worth to note that some firms may experience the same benefits with lower production outputs and lower market share. Market growth rate: High market growth rate means higher earnings and sometimes profits but it also consumes lots of cash, which is used as investment to stimulate further growth. Therefore, business units that operate in rapid growth industries are cash users and are worth investing in only when they are expected to grow or maintain market share in the future. There are four quadrants into which firms brands are classified: Dogs: Dogs hold low market share compared to competitors and operate in a slowly growing market. In general, they are not worth investing in because they generate low or negative cash returns. But this is not always the truth. Some dogs may be profitable for long period of time, they may provide synergies for other brands or SBUs or simple act as a defense to counter competitors moves. Therefore, it is always important to perform deeper analysis of each brand or SBU to make sure they are not worth investing in or have to be divested. Strategic choices: Retrenchment, divestiture, liquidation
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Cash cows: Cash cows are the most profitable brands and should be “milked” to provide as much cash as possible. The cash gained from “cows” should be invested into stars to support their further growth. According to growth-share matrix, corporaters should not invest into cash cows to induce growth but only to support them so they can maintain their current market share. Again, this is not always the truth. Cash cows are usually large corporations or SBUs that are capable of innovating new products or processes, which may become new stars. If there would be no support for cash cows, they would not be capable of such innovations. Strategic choices: Product development, diversification, divestiture, retrenchment Stars: Stars operate in high growth industries and maintain high market share. Stars are both cash generators and cash users. They are the primary units in which the company should invest its money, because stars are expected to become cash cows and generate positive cash flows. Yet, not all stars become cash flows.
This is especially true in rapidly changing industries, where new innovative products can soon be outcompeted by new technological advancements, so a star instead of becoming a cash cow, becomes a dog. Strategic choices: Vertical integration, horizontal integration, market penetration, market development, product development Question marks: Question marks are the brands that require much closer consideration. They hold low market share in fast growing markets consuming large amount of cash and incurring losses. It has potential to gain market share and become a star, which would later become cash cow. Question marks do not always succeed and even after large amount of investments they struggle to gain market share and eventually become dogs. Therefore, they require very close consideration to decide if they are worth investing in or not. Strategic choices: Market penetration, market development, product development, divestiture BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly. They can help as general investment guidelines but should not change strategic thinking. Business should rely on management judgment, business unit strengths and weaknesses and external environment factors to make more reasonable investment decisions. Advantages and disadvantages: Helps to understand the strategic positions of business portfolio; It’s a good starting point for further more thorough analysis. Growth-share analysis has been heavily criticized for its oversimplification and lack of useful application. Following are the main limitations of the analysis: Business can only be classified to four quadrants. It can be confusing to classify an SBU that falls right in the middle. It does not define what ‘market’ is. Businesses can be classified as cash cows, while they are actually dogs, or vice versa. Does not include other external factors that may change the situation completely. Market share and industry growth are not the only factors of profitability. Besides, high market share does not necessarily mean high profits. It denies that synergies between different units exist. Dogs can be as important as cash cows to businesses if it helps to achieve competitive advantage for the rest of the company.
Relative Market Share Star: Ceralac
It has become one of the leading baby food products. It has witnesses quite a long hold in its market share with its sales increasing on a continuous basis for almost more than one and a half decade. Cash Cow: Maggi Noodles
The first preference of Indian children in terms of instant food, is only a cash cow and not a star. The reason essentially is that the market growth rate of Noodle consumption is not very high. Question Mark: Kit Kat Owing to crispiness and superior quality, Kit Kat has an upper edge over its competitors. However, on account of the rise of competitors, especially Perk, Kit Kat seems to have loosened up its grip in the market and has lost some of the prominent recognition which it commanded earlier.
Much market in this regard has been taken over by the local manufactures for example, Mother Dairy in Delhi, Saras in Rajasthan etc. Amul is one such competitor which gives competition to Nestle on a national scale. However, Nestle Milk has not really find a place in the market that it can be said to be known at least to the typical Indian consumer, if not unanimously chosen by him.
Dogs: Nestle Dahi
Majority of the consumers are unaware that Nestle offers a Dahi also. The launch of Nestle Dahi has been in select cities. The concept of packaged Dahi is not being accepted by the consumer who prefers to play it safe with the local manufacturer wherefrom he can keep a check on the qualitative content of the product as well before consuming it. GE Portfolio:
The GE Portfolio approach evaluates a business on the basis of two composite dimensions: industry attractiveness and business strength. These dimensions, in turn, consist of a series of weighted factors. Both the factor weights and the factors themselves may vary from one application to another; for example, industry attractiveness includes measures of market size, growth rate, competitive intensity, and the like, whereas business strength normally includes such measures as market share, share growth, and product quality. Analysts assign each business a rating for each factor and a weight to each factor.
Multiplying the factor ratings by the weights produces a position for each business on the strength/attractiveness matrix. While designed to assist in the GE/McKinsey approach to portfolio management, this model can be used for any situation where a certain number of items are ranked on two sets of weighted factors. Optionally, multiple sets of weights can be used. The GE Portfolio approach helps firms answer such questions as: On which products, offerings, or divisions should we focus our efforts? What method can we use to assess and understand the weights that various members of the management team assign to different dimensions? How can we reconcile different points of view?
The aim of the exercise was not to highlight on the BCG matrix as such but to use BCG matrix as a tool towards analysis of Nestle India as an organization with all its products in particular as well as on a whole. Thus, the suggestion generated are all brand specific and pertain to the factors behind each brand which contribute to its growth or lead to its fall. Also, one important fact has been witnessed by this study. It is not that organization name which is all for a product. This is to say that though Nestle is the leader is food products in the world and has dominating brands in India as well yet, its name is not sufficient to make all brands a success even though they may be related to the food business and thus within the core competency of Nestle. It is essentially only account of the fact that the present day consumers are changing. The colonial concept of a big name hides all has changed and unless the brand in particular comes up to the expectation in the subjective satisfaction of the consumer, it will not succeed, not matter how big the name of the organization is.
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