Page 171 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 9: Strategic Analysis and Choice

Market Growth Rate: It is the percentage of market growth, that is, the percentage by which Notes
sales of a particular product or business unit have increased.
A high growth rate enables the company to expand its operations. It makes it easier for the
company to increase its market share and provide the opportunities of profitable investment.
The company may plough back its earnings into the business and further increase the rate of
return on the investment. Additional cash will necessarily be required to avail of the investment
opportunities for growth. On the other hand, low market growth rate indicates stagnation with
little scope for expansion and profitable investments may be risky to undertake. Increase in
market share in such a situation can be possible only by cutting into the competitor’s market
price.

Building the BCG Matrix

The stepwise procedure for building the BCG matrix is given below:
1. The various activities of the company are classified into different business units or SBUs
2. The growth rate of the market is determined and plotted on the Y-axis.
3. The assets employed by the company in each of the business units are compiled to determine
the relative size of the business unit in relation to the company.
4. The relative market share for different business units is estimated and plotted on the X-
axis
5. The position of each business unit or product is plotted on a matrix of market growth rate
and relative market share. The size of the business is represented by a circle with a diameter
corresponding to the assets invested in the business. The radius of the circle is given by

r = p .R 2
where R represents total sales, P represents sales of the business unit as a percentage of the
total sales of the company.
6. Depending on its location in the 2 × 2 matrix, a separate strategy has to be developed for
each of the units.
It is important not to change the criteria around in order to shift pet projects and products into
more favourable groups, thereby defeating the very purpose of the exercise.

Analysis of BCG Matrix

The BCG matrix reflects the contribution of the products or business units to its cash flow. Based
on this analysis, the products or business units are classified as:
1. Stars

2. Cash cows
3. Question marks
4. Dogs

Stars (High Growth, High Market Share)

Stars are products that enjoy a relatively high market share in a strongly growing market. They
are (potentially) profitable and may grow further to become an important product or category

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