Understanding the BCG Matrix: A Guide to Strategic Resource Allocation

hi um today i'd like to present you uh the topic which is called bcg matrix

basically what we did last year is i've just seen that many students has problems with

understanding not only what the bcg matrix is but why it is used by the companies or in basic

stages of the studies so uh before i'll present to you what is that

i would like to tell you why it was used and what for we can use it today bcg matrix coming from the name from the

boston consulting group was created for big companies that has more than one product or more than

one group of products and that should help them to make the decision uh how

to allocate the resources between them giving you the example if we had a company like uh

general electric which works on several different topics starting from nuclear power plants

uh through the dishwashers finishing on selling mortgages the question is what in which areas they should invest

their money most and it is the bcg matrix might help you if you take a look on what you have in

here um you can see that there is a vertical line and a horizontal line

on the vertical line you can find uh the market group so this is illustrating how fast

the market about what we're talking right now is growing if you take a look on the horizontal

line it presents you what the market share or the product that we're

talking about in here you can find four categories looking from the top uh left

you have question marks stars dogs and cash cuts each of these categories is representing

the type of product starting from the top left so you have the products with high

market growth and a low market share in there we have the products which are

called question marks this is describing the type of the products in which we know

that there is a huge potential of the market in there but our current market shares are pretty

limited if you take a look on the example of uh the tablet market

around five six years ago when the market was introduced there were several different players

that appeared on the market there was a uh sony there was a samsung with their tablets

there was uh a research in motion which is called blackberry right now there was hp all these companies they

were trying to appear on that market with their product in that time their market share was small

because most of the market was already taken by uh apple and ipod and what these companies

what they could do there were two possibilities there might invest

lots of money in that product hoping that their market share will be bigger or they might just decide that their

market shares are small the market is growing very fast so they should disappear from that market or

sell that product and that's exactly what was done by most of the companies only a few of them

stayed on that market we take a look on another company which is called stars stars these are

the products with high market share and high market group the category which seems like

the type of product that every company would like to have and in there basing on the same example

you can think about tablet market and ipod which appeared on the market and in there uh apple in the first years

they have the majority of the market which was growing super fast every year around few hundred

percent year to year uh sounds like a perfect position for the product well it is

but it doesn't mean automatically that the product is earning or giving high profits because

you have to invest lots of money in that product because the market is growing very fast

new countries on which you are appearing you have to invest in logistics appearing on that market marketing and

you have to also invest money to keep your high market shares in there so

that's a great future for the product every company would like to have that product

but still it require lots of investments in that type of product then if you take a look on the uh write down

position you have cash accounts cash cows these are the products which have high market shares

but this type of market in which they are currently uh does not have high market growth

practically saying the future of that product is limited if you would like to present it based on

the examples it might mean that we have a product which is well established on the market

gives you high profits but we know that the time perspective for that product is limited

based on the examples um if you take a look on the current um tobacco companies for example philip

morris with their brands of cigarettes they have high market shares they earn lots of money on that but they know that

the future of that product is pretty limited so these products they will give you

lots of cash in short-term perspective but then the question is what you will do with that money

and where you will invest that money and there is a final category which is called dogs

that sounds bad i mean not the dogs but in here you have low market shares and the future of that market is very

limited giving you the example if you take a look on the example of the current

coal mines for example in poland their cost of coal digging in the ground is getting higher and higher every year

the future of the coal as the fuel for which it might be used seems to be very limited and in here

there is a question what we are going to do with that product from the theoretical perspective in here

you should decide to leave that mark sell it close it that that's a theory always we

have of this practical perspective which presents why sometimes companies they still have it

for example from political reasons and that's why we still have most of the uh coal mines

these days are located in poland or in some other countries because of uh for example energy

security from the government perspective so in here

you have this four categories of the product but we all want only to do it in the way that

someone created four categories of the product and that's all in here there is a question how this bcg

matrix can help you with a decision-making process

and to illustrate that they were strategies created how identifying which types of products you already have

in your company how which types of strategies you might use

the first one and the most obvious one is that one that you have currently the product which is

the cash cup so you do it in the way that you take the money from the cash code

you invest that in the product which currently is the question mark hoping that next this product will

become a star and from that perspective in long-term perspective

you might feel secure that you will still have the products up to date on the market

generating the profit that's the one theoretically of course sounds the best but it requires having

the product which is already a cash cow and the product which has the possibility to become a

star if we don't have that perspective sometimes we might use

different secure different strategies uh second strategy is called just holding the market share

so you have a product which has the possibility to grow but you decide just to hold the

market share so you just do the required maintenance processes

limited process of investment just to keep your market share not generated higher

why well you do it mostly when you need money when the money is required in a short-term perspective

because of financial crisis for example then you can do the process of holding the market shares there is also

a different perspective or different strategy which is called harvesting a product that might sound

different or that might sound even strange because in that strategy

you decide to lower maxim i mean in maximum way to lower the cost that you generate i will give you the

example if you manage the company like railways the biggest costume there is just doing

the up-to-date checking of every type of train which is done every single time

perspective for example every half a year it has to be done verifying

checking how it works this process is very cost but if you manage that type of company

and in very short term perspective you would like to present with generate profit

you can start generating high profits by stopping all the process of checking verifying

the trains and in short-term perspective you will start generating high profits

of course after six months or one year you will realize that half of your trains cannot run anymore

but because of many reasons like you would like to appear on the stock exchange market and in short term

perspective you need to present very good results or another perspective you need to

generate high amount of money and invest it somewhere else you can use that strategy

of course you need a long-term perspective this strategy sounds like something

which is useless but as always in business sometimes just this short term

seems to be important so summing up bcg matrix something that should help you to manage

the company which has many different types of products and in there to make the decision

how to allocate the resources between these different products why it's so important because many times

the employees which are for example hired in one department i will give you the example

of the company which was ibm they decided to do it more than 20 years ago right now uh they

were mostly known from producing personal computers laptops personal computers

and that time they decided we are selling that department everyone was just asking

why it generates majority of your profits and majority of your income they decided to sell it and invest in

mostly software why they did it from current perspective it was great decision because the market of producing

the software producing the computers by itself these days is pretty limited we have

dell we have hp but the value of those companies is much lower than ibm because they have

many competitors mostly from asia preparing computers which are let's say cheap or

the profit that you can generate on that is limited so they took the money from that market because they sold it to

lenovo and they invested that money in completely different parts we can call

them question marks and right now ibm is still the leading company in for example

software which is supporting decision making processes and that's how the companies would like

to make that decision so what you can learn from that lecture is that

decision making process support you have four categories of the products and most important in here is just to

remember that there are several different strategies that you can use to allocate the resources between that

product thank you