BCG model of Product

This model, called Boston Consulting Group (BCG), categorized products into four groups – Question marks, Stars, Cash cows and Dogs based on their market share relative to competition and the market growth rate. An important assumption made by BCG is that products can be treated as strategic business units (SBU), provided they fulfilled the following conditions.

1. The product(s) / SBU must have a clear well-defined and identifiable competitor, which is trying to outsmart the firm.
2. The product(s) / SBU can be planned separately from the rest of the firm.
3. It has an independent manager responsible for its sales, profits and strategic planning.

Further, the BCG model assumes a market growth rate of 10% as the cut-off point. SBU growing at a rate higher than 10% are in the high growth segment and those growing at a rate lower than this were perceived to be in the low growth segment. Assuming a graph is plotted with market growth rate represented on the vertical axis and the horizontal axis represents SBU’s market share relative to its largest competitor.

The market share is expressed in log scale and 1.0 is taken as a cut-off point. Based on these factors, a firm’s product items or product lines can be categorized as:

1. Problem child or question mark: This is a product which is in a market growing at a rate of more than 10% and hence is in the high-growth market. Its relative market share is low (lower than 1.0) and the firm has to decide either to:

a. build or
b. with draw

The strategy to build question mark or problem child is based on competitive forecasts, market trends and corporate objectives. Many a time, a firm may decide to build a product not because it is getting good profits but purely for image reasons. These products / SBU require huge cash resources since the firm has to keep acquiring plant and machinery and personnel to keep pace with the high growth market. Further, these are generally new products and consequently the firm’s learning cost is high compared to the sales revenue generated by these pro-ducts. At times, some of the existing products of a firm may also be in this segment.

2. Star: Star is an SBU which is a market leader in a high growth market. Mostly question marks succeed to become a star. Just because it is a market leader does not mean that star generates surplus or profits. On the contrary, star requires cash to maintain its leader status. These resources are ploughed in an on-going process of market development and fighting off competition. The strategist will have to examine which of the SBUs are stars. Star requires a strategy of maintenance or hold.

3. Cash cows: The irony of market place is that after some time it stops growing at rates higher than 10%. This happens when the market reaches a saturation point. Since a star has been the market leader and has deployed strategies to build customer loyalties, a star generally becomes a cash cow. A cash cow is an SBU that generates cash surplus. Stronger the cash cow, higher the cash generation. The strategy here is to harvest or milk these cash cows, particularly those that are soon going to be dogs, i.e. lose their relevance. Strong cash cows may be maintained but the strategist must but forget the fact that these SBU are fast getting obsolete, customer preferences are changing to newer or more efficient products, hence in the long-term they may be unviable.

4. Dogs: Dogs are the SBU or products that have lost their leader position and are in the low growth markets. These are also weaker cash cows. These products need to be killed or divested. Otherwise they will consume management time and scarce resources which otherwise could be more effectively utilized elsewhere.

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