The BCG Matrix
- Details
- Hits: 28144
Introduction
One of the challenges faced by large companies consisting of different strategic business units (SBUs) is the allocation of resources to the units. The Boston Consulting Group (BCG) formulated the BCG growth-share matrix to help in the management of a portfolio consisting of diverse business units. This matrix has been used by many companies and has been hailed as an effective way of resource allocation (BCG, 2014). The essay explores the theoretical concepts underpinning the matrix and looks at a real life example of a company that has utilized the matrix with relative success.
1. The BCG Matrix
In its simplest form, the BCG matrix is a method for allocating resources to a company’s strategic business units. In this matrix, business units are categorized as stars, cash cows, question marks, or dogs and this classification is based on their market growth rate.
1.1. Stars
Business units that have a large share of the market in an industry that has high growth rates are known as stars. Whereas stars can create wealth for the company, they are located in markets that have high growth rates and therefore need large investments in order to preserve and gain more market share. Successful stars eventually turn out to be cash cows upon maturation of the industry in which they operate (QuickMBA, 2014).
1.2. Cash Cows
Cash cows are business units that enjoy huge market share in an industry that has low growth rates and is mature. The investments that are required by cash cows are little and these units create wealth that can be channelled into other business units (QuickMBA, 2014).
1.3. Question Marks
Question marks are also referred to as problem children. The basic feature of such units is that their market share is small and operates in a market that has high growth rates. To expand their market share, they require resources. They may turn around and become stars or fail altogether (QuickMBA, 2014).
1.4. Dogs
Dogs resemble question marks in that they also have a small market share. Unlike question marks however, dogs operate in a mature industry. This implies that dogs do not necessarily need investments to boost their performance. Even though dogs may require little or no investment, they usually tie up capital that may be better utilized elsewhere. The rule of the thumb is to liquidate dogs if it can be shown that gaining of more market share will be a tall order. Nevertheless, dogs that exist to fulfil other strategic interests may still be retained by the company (QuickMBA, 2014).
2. Advantages of the BCG Matrix
a. The BCG matrix is useful since it provides a credible and plausible framework that can be used by companies to effectively share resources among the different SBUs (QuickMBA, 2014).
b. The BCG matrix allows the comparison of diverse SBUs at a glance (QuickMBA, 2014).
3. Criticisms of the BCG Matrix
The BCG matrix has been criticized on account of the following issues:
a. Increased market share does not necessarily translate into improved profitability as the matrix seems to imply because a lot of expenses can be used to increase the market share of a product and consequently eat into the product profitability (QuickMBA, 2014).
b. One of the key assumptions of the BCG matrix is that the market growth rate is given. However, there are many instances where a company can grow a particular market (QuickMBA, 2014).
c. The BCG matrix is also weak since it does not take into consideration the potential of markets that are on a decline. Consequently, the matrix tends to exaggerate high growth (QuickMBA, 2014).
3.1. Coca Cola Company and the BCG Matrix
Established by Dr. John Pemberton, Coca Cola is located in Georgia, Atlanta and begun its operations in 1886. With a market presence in more than 200 countries, well known leading brands, revenues in excess of $1.42 billion and consistently good outcomes, The Coca Cola Company is a market leader in the world’s soft drinks and non-carbonated beverages sector. Coca-Cola Company manufactures non-alcoholic beverages, bottled water, juices and juice drinks and has lately entered the tea market. Currently, the company boasts of over 450 global brands (Eeni, 2008; Fortune 500 News, 2005; Scanlon, 2008; Hoovers, 2008).
The global operation of Coca Cola is structured around five strategic business units or regional subsidiaries. These include Coca Cola North America (CCNA), Coca Cola Africa and Eurasia, Coca Cola Asia, Coca Cola Latin America, and Coca Cola Europe and Middle East. The African operation was recently merged with the Eurasia concern with the Adriatic and Balkans units being moved to the Europe division (Yahoo Finance, 2008).
Coca Cola North America oversees the operations in the U.S., Canada, and Puerto Rico and is further divided into the still beverages, emerging brands, and sparkling beverages divisions. CCNA contributes close to a third of the total sales and distributes and markets Evian, Simply Orange, Minute Maid, Barq’s, Odwalla, Fresca Softwater, Dasani Mineral Water, Sprite, and the flagship brand, Coca Cola. However, CCNA has increasingly come under stiff challenges from key competitors such as the Dr. Pepper Snapple Group, Pepsi-Cola North America, and Tropicana. This competition coupled with an economy in recession and changing consumer preferences contributed to the division nil growth in the second quarter of 2008 (Hoovers, 2008).
In terms of the BCG matrix, CCNA exhibits all the characteristics of a cash cow and can thus be described as a cash cow because CCNA is a market leader in the industry, holding about a third of the market share. Additionally, the North American beverage market especially for sodas is mature and has low growth rates. The CCNA SBU also has very low growth.
Coca Cola Africa is becoming an important market for the corporation, with annual average sales of its first mover product, Coca Cola, standing at 36 billion bottles. This division reported a 7% increase in unit case volumes and future growth is projected to exceed 10% (Economist.com, 2008).Coca Cola Africa massive distribution network provides employment either directly or indirectly to more than a million people.
Based on the accounts above, Coca Cola Africa can be described as a star. It has a large market share in Africa which is quite an extensive market. Moreover, statistics show that the African beverages market is expanding rapidly. To maintain its lead, Coca Cola Africa requires investments and this is also typical of SBUs that are classified as stars. Such investments may convert Coca Cola Africa into a cash cow if utilized properly and once the African market matures. However, successful conversion into a cash cow is not a guarantee, taking into account the difficult operating environment in some parts of Africa. Still on Africa, different markets can be classified differently based on their profitability and market share. For instance, the Kenyan market can be classified as a star while the Eritrean market can be classified as a dog.
Coca Cola Asia is equally an important division of the corporation. China forms the fourth largest market for the company and impressive turnovers have been reported in the Philippines and India, with an 18% climb in the latter country. In China, Coca Cola commands close to 40% of the market and boasts of investments and sales of up to $1.1 trillion and $1.2 billion respectively (Weissert, 2001). 10 % of the corporation’s sales emanate from Latin America. The Middle East and European operation has been buoyed by the superior performances of the emerging markets of Russia, Ukraine, Bulgaria, and Romania which chalked up a 31% growth in 2007 (Merrett, 2008; Stanford, 2008).
With reference to the BCG matrix, Coca Cola Asia is also a star. The Asian SBU not only boasts of the highest growth rates. For instance, the growth rate in India has at one time exceeded 18% and the SBU controls nearly half of the Chinese market. Moreover, the Asian market is large and the industry here is yet to mature. The Asian industry is also growing very fast and this is a further manifestation of the star nature of the Coca Cola Asia SBU. Coca Cola Europe can also be categorized as a star.
In terms of the BCG matrix, Coca Cola’s strategy should be to use the cash generated by its cash cow, CCNA, to invest in its stars. This would entail using the wealth generated by CCNA to boost its investments in Africa and Asia where growth prospects are high and the industry is yet to mature. Comparatively fewer resources should be dedicated to the CCNA SBU especially as regards the soda business. More resources can however be channelled into other product lines of the CCNA such as the mineral water, juice, and tea product lines where the market is yet to mature and is still growing and prospects of faster growth are high and returns more promising. This will enable CCNA to boost its profitability and grow its market share of juices, tea, and mineral water.
Looked at differently, the Coca Cola SBUs can also be categorized based on the company’s product lines and not on the geographical considerations. In this respect, the soda products in CCNA would be considered as cash cows and other products such as Evian, Minute Maid, Simply Orange, Barq’s, Dasani Mineral Water, Fresca Softwater, and Odwalla stars. In Africa and Asia, Coca Cola, Sprite, and other brands of soda would be cash cows.
4. Conclusion
This paper explored the concepts of the Boston Consulting Group (BCG) matrix as relates to companies’ strategic business units (SBUs). While useful in the allocation of resources, the matrix has been criticized on account of its inability to factor in declining markets and its assumptions that the market growth rate is given and that increased market share always leads to profitability. Applied to Coca Cola Company, four SBUs can be recognized and these are Coca Cola North America (CCNA), Coca Cola Africa, Coca Cola Asia, and Coca Cola Europe. All these can be classified as stars except CCNA where the industry is mature and CCNA controls a large share of the market.