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What are the limitations or challenges of using BCG matrix in a dynamic and competitive environment?

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The BCG matrix is a popular tool for analyzing the strategic position and potential of a business portfolio. It classifies products or business units into four categories based on their relative market share and market growth rate: stars, cash cows, question marks, and dogs. The matrix suggests different strategies for each category, such as investing, harvesting, divesting, or repositioning. However, the BCG matrix also has some limitations or challenges, especially in a dynamic and competitive environment. In this article, we will discuss some of these limitations and how to overcome them.

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Andrew Constable, DBA (Cand), MBA, BSP

Creating Value with Strategy | Strategy Consultant @ Visualise | Lead Coach @ Strategyzer, Leanstack | BSI Balanced…

1 Assumptions and simplifications

One of the main limitations of the BCG matrix is that it relies on some assumptions and simplifications that may not hold true in reality. For example, it assumes that market share and market growth are the only two factors that determine the profitability and attractiveness of a product or business unit. It also assumes that these factors are stable and predictable over time. However, in a dynamic and competitive environment, there may be other factors that influence the performance and potential of a product or business unit, such as customer preferences, innovation, differentiation, cost structure, regulation, or competition. Moreover, these factors may change rapidly and unexpectedly, making the market share and market growth estimates inaccurate or outdated.

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Andrew Constable, DBA (Cand), MBA, BSP

Creating Value with Strategy | Strategy Consultant @ Visualise | Lead Coach @ Strategyzer, Leanstack | BSI Balanced Scorecard Professional (BSP) & Senior Associate | Blue Ocean Strategy Certified | Six Sigma Black Belt??
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It simplifies business operations by assuming only market growth rate and relative market share affect performance, neglecting factors like customer preferences, tech advancements, regulations, and competition. It's also volatile, as 'stars' can become 'dogs' quickly in fast-changing markets. The matrix is a snapshot and doesn't capture changes over time, making adaptation challenging. Furthermore, it assumes business units operate independently, ignoring potential synergies and interdependencies which could lead to suboptimal decisions if overlooked.

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2 Relative measures

Another limitation of the BCG matrix is that it uses relative measures of market share and market growth, rather than absolute measures. This means that the position of a product or business unit in the matrix depends on the performance and potential of the other products or business units in the portfolio, as well as the definition and size of the market. Therefore, the same product or business unit may fall into different categories in different matrices, depending on the comparison and the scope. For example, a product that is a star in a narrow market may be a question mark or a dog in a broader market. Similarly, a product that is a cash cow in a mature market may be a star or a question mark in a growing market.

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3 Static snapshot

A third limitation of the BCG matrix is that it provides a static snapshot of the current situation, rather than a dynamic view of the future evolution. The matrix does not capture the changes and transitions that may occur in the market or in the portfolio over time. For example, it does not show how a star may become a cash cow, or how a question mark may become a star or a dog, depending on the changes in market share and market growth. It also does not show how the strategies and actions of the business may affect the position and potential of the products or business units in the matrix. Therefore, the matrix may not reflect the actual opportunities and threats that the business faces in a dynamic and competitive environment.

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Andrew Constable, DBA (Cand), MBA, BSP

Creating Value with Strategy | Strategy Consultant @ Visualise | Lead Coach @ Strategyzer, Leanstack | BSI Balanced Scorecard Professional (BSP) & Senior Associate | Blue Ocean Strategy Certified | Six Sigma Black Belt??
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The BCG matrix is a snapshot in time, representing the market conditions and relative competitive positioning at a specific point. However, markets and competition are ever-changing, especially in today's fast-paced business world. Rapid technological advancements, shifting consumer preferences, evolving regulatory landscapes, and unforeseen events can drastically alter the business landscape. Therefore, a static snapshot like the BCG matrix may fail to capture these shifts accurately and timely.

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4 How to overcome the limitations

The BCG matrix can still be a beneficial tool for strategic analysis and decision making, but with caution and when complemented with other methods. To overcome its limitations, consider using multiple criteria and indicators to assess the profitability and attractiveness of products or business units, such as customer satisfaction, brand loyalty, innovation potential, competitive advantage, or strategic fit. Additionally, use absolute and relative measures of market share and market growth to gain a thorough understanding of the market and portfolio. Furthermore, it’s important to update the matrix regularly to monitor changes and trends in the market and portfolio. Utilizing scenario analysis and forecasting techniques can help anticipate possible future outcomes. Lastly, portfolio optimization and diversification techniques can help balance risk and return of the portfolio.

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Andrew Constable, DBA (Cand), MBA, BSP

Creating Value with Strategy | Strategy Consultant @ Visualise | Lead Coach @ Strategyzer, Leanstack | BSI Balanced Scorecard Professional (BSP) & Senior Associate | Blue Ocean Strategy Certified | Six Sigma Black Belt??
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To overcome these limitations, it's crucial to use the BCG Matrix in conjunction with other strategic tools that capture a more holistic view of the business environment. Tools like the PESTEL analysis can provide insights into the macro-environment, while Porter's Five Forces can help understand competitive forces. Moreover, regular updates to the BCG matrix, in response to market changes, can help maintain its relevance. It's also important to consider the synergies and interdependencies among business units, not assuming them as independent entities.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the limitations or challenges of using BCG matrix in a dynamic and competitive environment?

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2

3

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5

1 Assumptions and simplifications

2 Relative measures

3 Static snapshot

4 How to overcome the limitations

5 Here’s what else to consider

Business Strategy

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What are the limitations or challenges of using BCG matrix in a dynamic and competitive environment?

1

2

3

4

5

1 Assumptions and simplifications

2 Relative measures

3 Static snapshot

4 How to overcome the limitations

5 Here’s what else to consider

Business Strategy

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