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Boston Consulting Group Essay

1.0 INTRODUCTION
The growth share matrix or Boston Consulting Group ( BCG Model) is a chart that had been created for the Boston Consulting Group for in 1970 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management and portfolio analysis. It is relatively easy to plot, use catches name for its quadrants, which make easy to remember and allow the decision maker to compare all the strategic business units (SBU) under the company’s umbrella on criteria that are taken to represent cash generation and resources needs. Briefly, the different parts of the model are as follows:

1.1 The market / industry growth rate indicates the annual growth of the industry or market each SBU operates in. 1.2 The relative market share (RMS) is the market share of each SBU compared to the market share of the largest or next largest competitor in the market the SBU operates in.

According to Bruce Henderson, to be successful a company should have a portfolio of products with different growth rates and different market shares. The portfolio composition is a function of the balance between

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cash flows. High growth products require cash inputs to grow. Low growth products should generate excess cash. Both kinds are needed simultaneously.

For each product or service, the ‘area’ of the circle represents the value of its sales. The growth-share matrix thus offers a ‘map’ of the organization’s
product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cash flows. The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate.

2.0 BCG MATRIX: THE QUADRANTS

The quadrants indicate the combined characteristics of each SBU and a general strategy direction for each SBU: 2.1 Star are units with high market share in a fast growing industry. They are successful question marks and become a market leader in high growth sector. The hope is that stars become next cash cows. Stars requires high funding to fight competitions and maintain a growth rate. When growth slows, if they have been able to maintain their category leadership stars become cash cows, else they become dogs due to low relative market share. 2.2 Question marks (also known as problem children) are business operating in a high market growth, but having a low market share. They are a starting point for most businesses. Question marks have a potential to gain market share and become stars, and eventually cash cows when market growth slows. If question marks do not succeed in becoming a market leader, then after perhaps years of cash consumption, they will degenerate into dogs when market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. 2.3 Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a “mature” market, and every corporation would be thrilled to own as many as possible. They are to be “milked” continuously with as little investment as possible, since such investment would be wasted in an industry with low growth. 2.4 Dogs more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically “break even”, generating barely enough cash to maintain the business’s market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is
worthless, not generating cash for the company. They depress a profitable company’s return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.

3.0 BCG MATRIX: THE AXIS

3.1 MARKET/INDUSTRY GROWTH RATE
The vertical axis refers to the level of growth in the industry or market of each SBU. The growth rate of any market or industry is the relative increase or decrease in overall size from the previous period (usually one year). The BCG model uses the premise that, the higher growth rate is, the more attractive the industry or market becomes because the overall size is larger, and therefore are more customers entering than leaving.

The growth rate can be roughly equated to the position in the product (category) life cycle.

Product life cycle shows the growth rate scale as high, medium and low. It is more common and much useful, to show the growth rate as percentage figure. As growth rates tend to be linked to other national and international economic activity, the specific figures used when assembling a BCG matrix will be whatever is relevant given the economic climate at the time. Additionally, some industries may grow more strongly in some countries than in others.

3.2RELATIVE MARKET SHARE
The horizontal axis refers to relative market share. Higher corporate’s 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.

Formula:
RMS = (Market share of X / Market share of the largest competitor)

4.0 HOW TO PERFORM BCG MATRIX ANALYSIS
Although BCG analysis has lost its importance due to many limitations, it can still be a useful tool if performed by following these steps: Step 1. Choose the unit
Step 2. Define the market
Step 3. Calculate relative market share
Step 4. Find out market growth rate
Step 5. Draw the circles on a matrix

Step 1: Choose the unit. BCG matrix can be used to analyze SBUs, separate brands, products or a firm as a unit itself. Which unit will be chosen will have an impact on the whole analysis. Therefore, it is essential to define the unit for which you’ll do the analysis. Step 2: Define the market. Defining the market is one of the most important things to do in this analysis. This is because incorrectly defined market may lead to poor classification. For example, if we would do the analysis for the Daimler’s Mercedes-Benz car brand in the passenger vehicle market it would end up as a dog (it holds less than 20% relative market share), but it would be a cash cow in the luxury car market. It is important to clearly define the market to better understand firm’s portfolio position. Step 3: Calculate relative market share. Relative market share can be calculated in terms of revenues or market share. It is calculated by dividing your own brand’s market share (revenues) by the market share (or revenues) of your largest competitor in that industry. For example, if your competitor’s market share in refrigerator’s industry was 25% and your firm’s brand market share was 10% in the same year, your relative market share would be only 0.4. Relative market share is given on x-axis. It’s top left corner is set at 1, midpoint at 0.5 and top right corner at 0 (see the example below for this).

Step 4: Find out market growth rate. The industry growth rate can be found in industry reports, which are usually available online for free. It can also be calculated by looking at average revenue growth of the leading industry firms. Market growth rate is measured in percentage terms. The midpoint of the y-axis is usually set at 10% growth rate, but this can vary. Some industries grow for years but at average rate of 1 or 2% per year. Therefore, when doing the analysis you should find out what growth rate is
seen as significant (midpoint) to separate cash cows from stars and question marks from dogs.

Step 5: Draw the circles on a matrix. After calculating all the measures, you should be able to map your brands on the matrix. You should do this by drawing a circle for each brand. The size of the circle should correspond to the proportion of business revenue generated by that brand.

5.0 STRATEGY OPTIONS
Subsequent to a completed BCG matrix, it can be used to to assess assess the strengths of the SBU or organisation and its product portfolio by using the strategies that suit each quadrants.

5.1 For cash cow, it is recommended to maintain strong position as long as possible and strategic options include: product development, concentric diversification, or retrenchment in condition or market contraction. 5.2 A SBU that under dogs quadrant must avoid to stay in the quadrant longer and strategic options would include retrenchment (if it believed that it could be revitalised), liquidation, or divestment. 5.3 A question marks must be analysed carefully in order to determine whether they are worth the investment required to grow market share. The strategic options for question marks include market penetration, market development, product development, or divestment. 5.4 Strategic choices for a stars include integration, market penetration, market development, product development, and joint ventures.

6.0 LIMITATION TO A BCG MODEL
There are some limitations of the BCG Matrix model include:
The first problem can be how can we define the market and how we get the data about the market share. A high market share does not necessarily lead to profitability all at the times. The model employs only two dimensions – market share and product/service growth rate. Low share or niche business can be profitable too. Dogs can be more profitability than Cash Cows. Market growth is not the only indicator for attractiveness of a market. there are probably even more aspects that need to be considered in a particular use of the BCG model.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation’s business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units.

7.0 CASE STUDY : BCG AirAsia

7.1 AirAsia Business Units

AirAsia profit centre would be the sales airlines fares, food, gifts and passenger luggage. But Air Asia contributions will be best measured according to the popular routes and it sales figures. The most popular routes from KL: KL-London

KL-Gold Coast
KL – Singapore
KL-Penang
KL- Johor Baharu (JB)

AisAsia BCG Matrix
No
Routes
Cost
Per seat (MYR)
No of Passenger
Average Sales
Per seat
Profits
(MYR)
Relative Market Share
Industry Growth Rate
1
KL – London
1,500.00
328,000
1,299.00
65,928,000.00
0.3
-3.00
2
KL – Gold Coast
500.00
220,000
700.00
44,000,000.00
0.40
2.0
3
KL – Singapore
60.00
164,200
150.00
14,778,000.00
0.60
1.50
4
KL – Penang
60.00
118,650
110.00
5,932,500.00
0.85
3.00
5
KL-JB
60.00
97,600
110.00
4,880,000.00
0.80
3.00

7.2 The BCG Matrix
7.2.1 DOGS ( Low Growth, Low Market Share)
KL-London routes is the lease profitable route for Air Asia is losing as much as MYR 20 million a year to sustain this route. Business travellers prefer full service airlines due to long houl flight. Casual travellers opted to MAS economy class as they can ride on excess baggage benefit and in flight meal and entertainment. MAS is strong in this route. AirAsia decided to cancel this route on January 2012.

7.2.2 QUESTION MARKS (High Growth, Low Market Share)
KL- Gold Coast is the most promising destination, it is a cheap solution to long haul flight to Europe. The airport is the lower in Coolanggata Airport, thus help AirAsia to reduce the price. MAS is landing in Brisbane, which caters for premium flight operation. AirAsia has added its flight frequencies once daily to thrice daily. AirAsia use the available resources and capital to increase the frequency of his route. It has huge potential to return higher profitability.

7.2.3 STARS (High Growth, High Market Share)
KL- Penang and KL JB are two most profitable domestics routes. Achieve 98% sold out routes and provide the highest profit margin of almost 90%. AirAsia must use the position to further strengthen its dominance. It can be done by providing additional service counter to serve this route. AirAsia can continue to offer excellence service and the best deal to all passengers flying this routes.

7.2.4 CASH COWS (Low Growth, High Market Share)
The growth is stagnant but the demand for KL-Singapore routes never ended. High tax and administrative cost. Profit margin is the narrowest compares to other routes. AirAsia just need to focus on it core services, to ensures there will be no flight delay or any mishap. Need not to invest for promotion as the sales will remain stagnant but strong.

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