Page 170 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes 7. SPACE Matrix
8. Quantitative Strategic Planning Matrix (QSPM)

BCG Matrix

The BCG matrix was developed by the Boston Consultancy group in 1970s. It is also called the
“Growth share matrix”. This is the most popular and the simplest matrix to describe a corporation’s
portfolio of businesses or products. BCG matrix is based on the premise that majority of the
companies carry out multiple business activities in a number of different product-market
segments. Together, these different businesses form the business portfolio of the company,
which need to be balanced for overall profitability of the company.

To ensure long-term success, a company’s business portfolio should consist of both high-growth
products in need of cash inputs and low-growth products that generate excess cash.
The BCG matrix helps to determine priorities in a product portfolio. Its basic purpose is to invest
where there is growth from which the firm can benefit, and divest those businesses that have
low market share and low growth prospects.

Each of the products or business units is plotted on a two-dimensional matrix consisting of
1. Relative market share
2. Market growth rate.

Figure 9.4: The BCG Matrix

High market Stars Question Marks
growth rate

Low market
Cash Cows Dogs
growth rate
High relative Low relative

market share market share

Relative Market Share: Relative market share is defined as the ratio of the market share of the
concerned product or business unit in the industry divided by the share of the market leader. By
this calculation, a relative market share of 1.0 belongs to the market leader.

For example, if market share of 3 businesses A, B, C are
Business Market share
A - 10%
B - 20%

C - 60%
A’s relative market share=10/60=1/6
B’s relative market share=20 /60=1/3

C’s relative market share=60/20=3
The relative market share reflects the firm’s capacity to generate cash. It is assumed that if a
business unit enjoys high market share, its cash earnings would be correspondingly higher and
vice versa.

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