UGM June 2019 Q53
- Option : D
- Explanation : According to the Boston Consulting Group, which compiled the BCG matrix in 1960, products of a multi-product organization can be categorized in a matrix classification. A broad interpretation is attached to the term “products”. Products are not necessarily only physical objects. They can also be services, while departments or branches of a large organization, or enterprises that operate as independent SBUs, are often regarded as “product” of the larger parent organization. The BCG matrix measures a firm’s SBUs according to two factors: the annual growth rate of the SBU, and the SBU’s market share relative to that of its largest competitor, suggesting that long-term profitability is best predicted by these two indicators. The matrix is defined by the market growth rate and the products’ relative market share. Four different product classes with very descriptive names are distinguished and represented in the matrix. > Stars are relatively new products in the themarket-growth phase of their life cycle. Each star has attained a relatively large market share and has growth potential. However. they need cash to maintain their position because of the many competitors entering the target market under such satisfactory circumstances. Traditionally the stars use more cash than they generate. The growth rates will necessarily dwindle with time and stars will either become “cash cows” or lose their position in the market. > Cash cows are the successful stars of the preceding period. They are well established in respect of market share, but few prospects exit for further market growth. They are probably in the maturity phase and do not require much cash to keep them in this profitable position. These products generate cash. > Problem children (also called “wildcats”) have a relatively small market share and require a continued marketing effort just to retain their market share. The problem child is often a new product which can become a star if it develops successfully. However, much cash is required to develop the problem child to its full potential. > Dogs have a low market share and market growth possibilities are limited (or do not exist at all). Because prospects are poor, cash flow to these products is limited. Dogs can be sold to other organizations or they can be withdrawn from the market. > New products that are still in the developmental phase have no place in the market growth-market share classification of products because it is not known whether growth possibilities exist for them. The success of the organization nevertheless depends on the quality of new products that can be manufactured. The BCG matrix is therefore an original portfolio analysis tool that uses single measures of market attractiveness and company strength to predict future cash flows for SBUs. The matrix is an objective measure and relatively straightforward to use, however, managers should beware of oversimplifying the situation.
