Image Source: The BCG Matrix
As a startup you probably won’t be able to pay top turn-around experts and consultants who finished from the best business schools and have their offices located in top business districts across Africa. Don’t fret about that because you can use their methods to push your startup off the ground without incurring much expense.
The Boston Consulting Group (BCG) matrix is a model that can be used to assess which products should be developed for future growth, and whether a business entity has an appropriate mix of products for achieving growth. This matrix is useful for startups that provide a number of products (or services) for different markets. The model categorizes all products or services in four types: stars, cash cows, dogs and question marks.
Stars are products that have high market growth, high market share and are usually new products. Stars might not yet be profitable, but new investment in the product should provide high financial returns in the future. Entities need ‘stars’ in order to succeed in the future, and so should invest in them.
Because the market is strong and experiencing growth, there are no problems with overcapacity in production and over-supply to the market. This means that the startup has some control over the prices that it can charge. A ‘star’ product has more potential for profits, and it is worthwhile to invest more money in this product to increase sales. Eventually when the growth in sales slows down, a star will become a cash cow. This means that a product that is a star early in its life cycle ,will become a cash cow during the maturity stage of it’s lifespan.
Cash cows are products where the market is growing slowly, or is not growing at all, and the product enjoys a large share of the total market. These products are very profitable and provide large cash inflows for the entity. Businesses needs cash cows to survive in the long-term. The cash generated from cash cows can be used to finance other ‘star’ products. Eventually, cash cows must be replaced when the product reaches the end of its economic life. The strategy for managing a cash cow should be maintaining and protecting the position of the product in the market, and to keep costs under some measure of control.
Dogs are products where the market is growing slowly or not growing at all, and the product has only a small share of the total market. These products are often losing money. The strategic decision is to withdraw the product from the market altogether.
Question marks are products where the market is growing at a fast rate, but the company’s product has only a small share of the total market. These products are currently losing money. Investing in marketing or research and development, may be needed to turn a ‘question mark’ into a ‘star’. However, there is also a risk that the product will become a ‘dog’ when the growth in the market slows down. Investing in these products will be a strategic gamble.
Startups can use the BCG matrix to analyze the range of products that it sells, and to plan its future investment in products. The aim should be to ensure that there is a sufficient investment in ‘stars’, and that cash cows will generate enough cash flow to finance investment in the ‘stars’. To carry out an analysis, data is needed for each product including total market size, growth rate in the total market, the company’s share of the total market and changes in the company’s share of the total market.
The BCG matrix is just one of the business models developed by top tier consulting firms available for free on the internet. As an entrepreneur, you must be diligent in your quest for knowledge because you never know how valuable it will be to your business.
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