- Be familiar with the BCG Portfolio Model and each quadrant. What objectives might be pursued for SBU's in each quadrant?
The Boston Consulting Group’s (BCG) Portfolio Model is based on the assumption that profitability and cash flow will be closely related to sales volume. There are four special quadrants in this model: Stars, Cash Cows, Dogs and Question Marks.
Stars are Strategic Business Units (SBUs) with a high share of a high-growth market. Because high-growth markets attract competition, such SBUs are usually cash users because they are growing and because the firm needs to protect their market share position.
Cash cows are often market leaders, but the market they in is not growing rapidly. Because these SBUs have a high share of a low-growth market, they are cash generators for the firm. I like to imagine a fat cows, slowly grazing in a stagnant pasture to help me remember.
Dogs are SBUs that have a low share of a low-growth market. If the SBU has a very loyal group of customers, it may be a source of profits and cash. Usually, dogs are not large sources of cash.
Question marks are SBUs with a low share of a high-growth market. They have great potential but require great resources if the firm is to successfully build market share.
Portfolios often incorporate many of these to achieve diversification.
There are different objectives for the SBUs in certain quadrants.
1. Build share. This objective sacrifices immediate earnings to improve market share. It is appropriate for promising question marks whose share HAS to grow if they are ever to become stars.
2. Hold share. This objective seeks to preserve the SBUs market share. It is very appropriate for strong cash cows (large share in low growth market) to ensure that they continue to yield a strong cash flow.
3. Harvest. Here, the objective seeks to increase the product’s short-term cash flow without concern for the long-run impact. It allows market share to decline in order to maximize earnings and cash flow. It is an appropriate objective for weak cash cows, weak question marks, and dogs.
4. Divest. This objective involves selling or divesting the SBU because better investment opportunities exist elsewhere. It is very appropriate for dogs and those question marks the firm cannot afford to finance for growth.
- What are the criticisms of the BCG Model?
There are several major criticisms of the BCG Model, revolving around its focus on market share and market growth as the primary indicators of preference. First, the BCG model assumes market growth is uncontrollable. As a result, managers can be preoccupied with setting market share objectives instead of trying to grow the market. Second, assumptions regarding market share as a critical factor affecting firm performance may not hold true, especially in international markets. Third, the BCG model assumes that the major sources of SBU financing comes from internal means. Fourth, the BCG matrix does not take into account any interdependencies that may exist between SBUs, such as shared distribution (note: similar to cannibalization?) Fifth, the BCG matrix does not take into account any measure of profits and customer satisfaction (Note: you can have a small share of the market but be selling a premium product at a premium price, thus making enough money despite your relatively small share of the market). Sixth, and perhaps the most important, the thrust of the BCG matrix is based on the underlying assumption that corporate strategy begins with an analysis of competitive position. By its very nature, a strategy developed entirely on competitive analysis will always be a reaction one. While the above criticisms are certainly valid ones, managers (especially of large firms) across all industries continue to find the BCG matrix useful in assessing the strategic position of SBUs.
- Be familiar with the General Electric 9 Cell Portfolio Model.
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