Implications of BCG Model in Strategic Financial Planning

Finance ManagementBanking & FinanceGrowth & Empowerment

The BCG model is the simplest tool for businesses to understand their strategic position in the business lifecycle. The model helps business firms understand what they must do in order to achieve more profits in accordance with their position in the BCG matrix.

The implications of the model in strategic financial planning can be discussed by breaking the matrix into the given four blocks that represent four lifecycle conditions of a product or project finance.

These four segments or blocks are as follows −

Stars segment

The ‘Stars’ segment implies market dominance in terms of both market share and market growth. Companies in the ‘Stars’ phase should try to maximize their profits and elongate their presence in the segment for the maximum duration. The ‘Stars’ phase is the best phase in the BCG matrix. It is hard to achieve the ‘stars’ status in a matured market where there are many products or where companies have already achieved success in terms of finance previously. Companies should try to derive as much profit as possible when they are in this phase. Once the cash flow goes above the normal or when there is enough extra cash generated from the market, the position of the company goes to the ‘Cash Cow’ status.

Cash Cows segment

In the ‘Cash Cows’ phase, the firms have low growth but high market share. This stage is usually reached by companies after the ‘Stars’ phase. Companies in this phase continue to earn enough revenues but their growth gets limited due to competition and large market share. As the products in this stage are well known in the market, companies may use their reputation or brand to expand their portfolios and start new projects with the help of already existing brands. This implies that there is a general tendency of the companies to go to the ‘Wild cats’ segment from the ‘Cash cows’ segment.

Dogs segment

The ‘Dogs’ segment is the deathbed of a project or product. Both market share and market growth are low in this segment. As there is no chance of survival for the products and projects of the ‘Dogs’ segment, the best way to handle the ‘Dogs’ segment is to divest or liquidate them.

Wild Cats segment

In this segment, projects have high market growth but low market share. Therefore, firms must look for opportunities to capture the market in this segment. The ‘Wild cats’ segment often leads to the ‘Stars’ segment and that is why companies having a ‘Cash Cow’ project looks into opportunities to be placed in the ‘Wild Cats’ segment with a new or existing product or a brand.

Implications of BCG Model in Strategic Financial Planning

The BCG model is the simplest, yet one of the most used methods for judging a company’s performance and realizing the overall environment and position of a company.

Following are the key implications of this model in a strategic financial planning −

Declining Unit Cost

The BCG model depends on an experience curve with an assumption that a unit cost is a declining function of accumulated experience. Accumulated experience can be linked to market share. So, the company with the highest market share will have the lowest cost and the best, stable profits with net cash flows.

Small Growth Desirability

The dominant position should be obtained during the growth phase because small growth is desirable along with profitability. The companies in the dominant market position should hold their position by keeping the prices low. This helps in keeping the high-cost competitors away from the markets.

Negative Cash Flow

Cash flows during the growth phase may be negative. It is so because companies need to keep their profits low to accumulate a greater market share, and thereby achieve growth, keeping the prices lower than competitors.

This will, however, offer plenty of profitability and inward cash flow in the mature position of the life-cycle of the company. Moreover, as the market share grows heavily, the companies can go to the ‘Stars’ segment without having to do a lot of hard work.

raja
Updated on 23-May-2022 12:32:07

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