What is Boston Consulting Group Matrix?
Boston Consulting Group (BCG) is a global consulting firm advising a range of industries and sectors. BCG Matrix is also known as the growth-share matrix and was developed in 1968 by Bruce Henderson, who was the founder of Boston Consulting Group.
It was published in Perspectives – BCG’s short essays. At its peak, the growth-share matrix was a mainstream metric used by large companies. The matrix helps companies to prioritise specific products, verticals or segments.
It is a table which is in four parts depicting a level of profitability to the overall company. These four parts include stars, question marks, cash cows, and pet (mostly represented by dog). Management takes crucial capital allocations after allocating products or segment to each category.
How does BCG Matrix work?
BCG Matric was developed on a notion that market leadership in categories is a source of superior returns for the firm. The market leader will, over time, develop a competitive advantage to achieve superior returns for the firm.
Meanwhile, the competitive advantages developed by the firm should be hard to replicate by the competing firms. On the vertical side of the matrix, there is growth, and relative market share is on the horizontal side of the matrix.
It helps companies to decide where to invest based on two factors: market attractiveness and competitiveness. These factors are, in turn, driven by relative market share and growth rate of the firm.
Firms also use the growth-share matrix to explore an appropriate marketing strategy for a product given its market share and growth. Since the growth-share matrix is also used for a set of products, it tends to be relevant for large organisations.
Relative market share is used to evaluate the business against the competing firms. It is widely accepted that higher market share means higher cash returns since revenues will likely be higher comparatively.
But firms would also need economies of scale to translate relatively higher revenues into higher profits. However, firms with sustainable cost advantages will likely be able to grow profits irrespective of market share.
Market growth rate means the intensity of change in revenues relative to the prior period. Firms with higher growth rates will have higher revenues, but it doesn’t necessarily mean similar growth in profits because growth comes at the cost of investments.
Businesses operating in abnormal/higher growth industries burn cash to achieve market share, and such businesses are worth when they are expected to maintain market share over the future. Now, let's discuss four quadrants.
Dogs (pets) – low market share, low growth
Since this category has a low market share and low growth rate, firms perceive that these categories are not worth investing because the returns are generally lower or even negative. Sometimes firms are inclined to keep supporting dogs due to longevity of profits, synergies for other brands, or simply competition.
When firms are inclined to keep dogs in the portfolio, it usually because the products are running on a break-even or marginal profits and could be strategically crucial for the business model. Oftentimes, these products, categories or segment are at the risk of discontinuation or divestments.
In cases when firms perceive a turnaround is possible in the pets category, it is likely that there would be reinvestment in the segments to achieve higher market share or higher growth rate.
Cash cows – low growth, high market share
Products and categories under this segment have high market share and low growth, and firms intend to push their products or categories to this segment eventually. Cash cows are highly profitable brands for the firms and should be ‘milked’ for cash generation.
The cash generated from these products gives firms better reinvestment capabilities for other products or verticals, which could become cash cows eventually. Cash used on cash cows should be for the purpose of maintaining market share.
But when cash cows are whole vertical with several products, there would be a need for reinvestments, especially in the new product development and innovation. Cash cows generate more cash than they consume and fund various capital allocation decisions like capital expenditure, debt servicing, dividends.
Stars – high growth, high market share
Products under these categories trade in high growth industries and have a high market share. They also use cash to exhibit growth and generate cash, as well. When investing back into the firms, stars are the prime targets for the management.
It is expected that stars will eventually become cash cows as growth in the industry normalises. After growth normalises in the industry, the focus of the firms turns to maintain the market share. But not all stars become cash cows.
Given the rapidly changing business landscape, innovation and development in an industry, the stars could well turn into dogs rather cash cows. Products and services that have first-mover advantage, monopoly are often considered as stars.
Question marks – high growth, low market share
Products under this category require substantial efforts of the firm. They operate in a high growth market with market share, meaning that these are usually new products in a new market with the potential to grow.
Cash generation is mostly negative under this category, and firms incur losses and burn cash to operate question marks. Since question marks are largely new products, they have the potential to become stars and eventually cash cows.
But this is also not necessarily true since question marks could turn into dogs as well. Even after huge investments and efforts, the outcome of turning into pets is detrimental for the firms.
Since the future is uncertain for question marks, the firms are required to close attention and consideration while formulating strategies for question marks.
What is Nasdaq? Nasdaq Stock Market is a global electronic marketplace for buying and selling securities on an automatic, transparent and speedy electronic network. It trades through a computer system rather than in a physical trading floor for the traders to trade directly between them. It is an American stock exchange located in the Financial District of Lower Manhattan in New York City. NASDAQ is owned by the company Nasdaq. Inc. and ranked second on the list of stock exchanges as per market capitalisation of shares traded. The first rank goes to the New York Stock Exchange. Nasdaq-National Association of Securities Dealers Automated Quotations, was founded in 1971 by the National Association of Securities Dealers (NASD) to avoid inefficient trading and delays. Nasdaq. Inc. company also owns the Nasdaq Nordic stock market network in addition to other exchanges. The exchange has more than 3,100 companies listed. They are the highest trade volume companies in the US market, valued more than US$14 trillion in total. Good read: NASDAQ surged up above 10,000 – Tech stocks setting a new benchmark What is Nasdaq known for? Nasdaq currently is the largest electronic stock market, and it is most well-known for its high-tech stocks. But it also has a variety of companies listed such as capital goods, healthcare, consumer durables and nondurables, energy, public utilities, finance and transportation. Nasdaq boasts of having some of the largest blue-chip companies in the world and attracts high growth-oriented companies. Its stocks are known to be volatile than those listed on other exchanges. Apart from listed stocks, Nasdaq also trades in over the counter (OTC) stocks. The ticker symbols for the listed companies’ stocks on the Nasdaq have four or five letters. The Nasdaq Composite index was initially termed as Nasdaq. It included all the stocks listed on Nasdaq stock market and also many stocks listed on Dow Jones Industrial Average and S&P 500 Index. The index has more than 3,000 stocks listed on it which include the world’s largest technology and biotech giants like Microsoft, Apple, Amazon, Alphabet, Facebook, Gilead Sciences, Tesla and Intel. Did you read: Blue-chip stocks: Value versus Growth in Covid-19 Era Companies have to meet certain criteria to get listed on the NASDAQ National Market. The entities have to meet financial, liquidity, and corporate governance-related requirements. Have to get registered with the Securities Exchange Commission (SEC) Have to maintain the stock price of at least US$1. Company’s value of outstanding stocks must total at least US$1.1 million. The small companies which cannot meet the criteria can get listed on NASDAQ Small Caps Market. Nasdaq changes the companies as the eligibility of the companies keeps changing. Image: Kalkine What are different Nasdaq indexes? Nasdaq uses an index to list its stocks like any other stock exchange. The index delivers stock performance snapshots. The New York Stock Exchange (NYSE) has the Dow Jones Industrial Average (DJIA) as its primary index; it tracks the stock price of 30 big companies. Nasdaq Composite and the Nasdaq 100 are two indices of Nasdaq. Nasdaq Composite measures the performance of more than 3,100 listed companies’ stocks trading daily on Nasdaq. Nasdaq 100 is a modified capitalisation-weighted index. This index has listed companies from various sectors, but the majority is from the technology industry. Depending on their market value, Nasdaq adds or removes the companies from its index Nasdaq 100. Both the NASDAQ Composite and the NASDAQ 100 indexes have listed companies from the United States as well as global companies. On the other hand, Dow Jones Industrial Average index does not include companies outside of the US. Did you read: Hanging Up Your Boots? Investment Strategies to Help you Relax and Build Wealth Brief history Nasdaq performance in the past has been groundbreaking and extraordinary. One of its highly regarded accomplishments is that Nasdaq was the first-ever stock exchange for offering electronic trading. It was the first to launch a website and stored all the records in the cloud. Interestingly, Nasdaq also sold its technology to other stock exchanges. Nasdaq invented the modern Initial Public Offering (IPO) as it listed venture-capital-backed companies. Initially, it merged with the American Stock Exchange. It formed the Nasdaq-AMEX Market Group, later on, the AMEX index was acquired by NYSE Euronext, and the entire data was integrated into NYSE. In 2007 Nasdaq acquired OMX which is a Swedish-Finnish financial company. Followed by which Nasdaq changed its name to NASDAQ OMX Group. NASDAQ OMX Group bought the Boston Stock Exchange and also the Philadelphia Stock Exchange which was the oldest stock exchange in the US. Also read: Nasdaq index’s Tech Titans kicks off with Bold Performances How to trade on Nasdaq? Though the New York Stock Exchange is the largest exchange by market capitalisation, Nasdaq is the largest by trading volume due to its electronic quote mechanism. Nasdaq is a dealer’s market where the public buys and sells stocks with the help of the market maker (a registered broker/dealer). The market maker provides the buy and sell quotes and takes the position in those stocks. NYSE works differently as the buyers and sellers can trade directly with each other, and a specialist allows the trade. On Nasdaq, the market maker owns inventory and trade stocks in his/her capacity. Good read: Why NASDAQ Composite index plunged 5%?
What is an impairment? Impairment is accounting write off of a company’s asset, which can be an intangible asset as well as a fixed asset. An impairment loss is incurred when the fair value of the asset is lower than the carrying value in the balance sheet. Alternatively, impairment charges can be incurred when the recoverable value of the asset is lower than the book value. Impairment charges are recorded in the income statement of the company as an expense. Image Source: © Kalkine Group 2020 A widespread economic crisis is followed by a recession, which usually impacts the value of assets held by a company. Such events force companies to test the value of assets in the balance sheet, and this often leads to an impairment charge. IFRS accounting standards ensure that a company’s carrying value of assets depicts a value which is not in excess of the recoverable amount. Why are impairments charged by companies? As per the accounting rules, a business is often measured by its book value of assets. Specifically, the assets of the company carry the capability to generate future cash flows for the firm. When the ability of an asset to deliver expected future returns is hampered, the value of assets is decreased. Therefore, it becomes an ethical responsibility of the companies to show a fair picture of the assets. Goodwill generated at the time of business combination is required to be tested for impairments annually. Companies are required to assess any indication that could cause a potential devaluation to the asset. When a company is holding intangible assets with an indefinite life, they are required to test the assets for impairments annually. Cash generating units are often valued on the discounted value of future cash flows. Consequently, when market interest rates are rising, it impacts the discount rate used in estimating the recoverable amount. Assets can be impaired because of other reasons as well. Suppose the plant and machinery of the company were damaged due to earthquake, it would result in a reduction in the value of an asset or even full write-off of the asset. Image Source: © Kalkine Group 2020 Companies often avail consulting services to improve the performance of the business. Consultants may advise companies to shut down operations at any plant, which could result in the sale of the asset at a consideration lower than carrying value. Oftentimes, internal reporting of the companies indicate that the performance of the asset may not yield expected benefit. This would force the management to undertake impairment testing for the asset. Impairment vs amortisation Amortisation is a systematic decrease in the value of an intangible asset. Amortisation of intangible assets is a process of capitalising the expense incurred on the acquisition of the asset, and then periodically recording the expense on the income statement. Impairment, on the other hand, is an irreversible decrease in the value of the asset, which is shown as an expense in the income statement. It is charged when the recoverable amount from the asset is lower than the carrying value of the asset. Impairment vs depreciation Depreciation is a periodic devaluation of fixed assets. It is undertaken by the companies to account for the wear and tear caused to the asset during its useful life. When a firm seeks to sell an existing asset, the buyer of the asset will deduct the depreciation from the cost of the asset before adding any premium or discount to the value for arriving at the purchase price. Impairment on fixed assets could be related to an unusual fall in the fair value of the asset. For instance, the fair value of the machinery could be impacted significantly when a new and more efficient machine is available in the market. Similarly, an earthquake or fire can also devalue the value of the fixed asset in the balance sheet. Reversal of impairment loss Under the reversal of impairment loss, the approach used to determine reversal is similar to the approach used in identifying the impairment loss. Reversal of impairment loss cannot be undertaken for goodwill, and it is prohibited. Companies assess whether any impairment loss recognised in the prior periods may no longer exist or have decreased. Impairment losses can only be reversed when the estimates used in determining recoverable amount are changed. Individual asset Previously incurred impaired individual asset can be reversed only when the estimates used in calculating the recoverable amount have changed. For instance, the changes in market interest rates could impact the discount rates used in calculating the recoverable amount. Unless the reversal relates to a revalued asset, the reversal of impairment loss is recognised in the income statement. The revalued asset should not be more than depreciated historical cost without impairment. Cash generating unit In a cash-generating unit, the reversal of impairment loss is allocated on a pro-rata basis with the carrying amounts of the assets. The carrying value of an asset must not be increased above the lower of: recoverable amount and carrying amount should have been determined without any prior impairment loss, net of amortisation and depreciation.
What is a Baby Boomer? According to Merriam Webster - Baby Boomer is a person born during a period in which there is a marked rise in a population's birthrate. This term is used primarily for a person born in the United States following the end of the Second World War and in the years from 1946 to 1964. Though this is the literal meaning, in general terms, this word is used to describe the older section of our society. What is the story behind the baby boomer term? Most nations' economies and industries were destroyed after the World War 2, and only the US was thriving. The country turned its war production into consumer products to meet the world demand, and it had no such competition from other countries. It led to the fastest growing economic prosperity for the nation and created the highest standard of living in any country ever witnessed in such a short span of time. From the automobile to telecommunication to atomic energy, most of the industries in the US were booming along with its population. Hence the children born during this time are called boomers. Generational cohorts are defined mainly by birth year, not current age, there are other cohorts such as Generation X, Generation Y or Millennials, and Generation Z. The term "Millennial" has become popular, and Generation Z is the youngest people on the planet right now. Also read: Millennials on Crowd Media's Radar, Tapping into Influencer Market Space The baby boomer generation is the progeny of the Silent Generations and precede Generation X. They are also known as parent of the Millennials. The silent generations grew up with the hardship of the Great Depression and won World War 2. On the other hand, baby boomers had everything handed to them in the era of newfound prosperity. The first use of the word baby boomer is from January 1963. The Daily Press newspaper article described an increase of college enrollments as the oldest boomers coming of age. In the Oxford English Dictionary, the term dates to a January 23, 1970 article published in the newspaper The Washington Post. This new generation of the Post War era were the inhabitants of the modern world, which concluded the war following it countries around the world came together to lay the foundation of the Universal Declaration of Human Rights. Its purpose is to provide equal human rights and also value and protect all lives regardless of faith, colour, and gender. Also read: Retirement, Baby Boomer Generation and Australia's Tax Scenario When were the baby boomers born? In most of the Western countries, the baby boomers are referred to those born immediately after the end of World War II with the rise of the birth rate that came with it. Interestingly in Australia, the birth rate was on the rise, even during WWII. In Europe, birth rates started rising from the mid-1930s, and it saw a post-war baby boom which lasted till the late 1960s. In China, the baby boom cohort is the largest in the world. For Korea, the baby boom happened after the Korean War. Its government then encouraged people to have two children. In the US, baby boomers are as much as 20% of the entire American population. The population played a substantial role in shaping American culture at large. Currently, most boomers are at retirement age, a matter of great concern as to how the country will deal with the ageing population. Why is the baby boomer’s generation so significant? The generation before baby boomers faced a lot of difficulty in the US. They saw the Great Depression; during the war, they endured food shortages etc. When it was all over this generation could finally afford to have a lot of children. The post-war era also saw a wave of unprecedented economic prosperity. With it came the optimism for a better life. The spike in birth rate elevated American fertility rate hike, and it continued for another 18 years. With the growth of these boomers from babies to children to adults to now seniors, the US reshaped itself. Different industries saw unprecedented growth, manufactures and advertisers targeted this new generation in the new prosperous world. Baby boomers dominated the popular culture in the 1950s and 1960s. They led the social change, which changed the basic fabric of the country. Be it the Civil Rights Movements or protest against the Vietnam War, the boomers were the forefront of it. They also gave a platform to the feminist movement. Their concerns and life experiences show a significant influence on American culture. How do baby boomers want to plan their life ahead of retirement? We need to understand the baby boomers are the generation of first men to walk on the moon, and they are the generation which promoted civil rights and encouraged an end to the Vietnam War. They also were high spirited and wanted to change the world to be a better place, but they also witnessed assassinations of iconic figures like Robert Kennedy, Martin Luther King. Depression-era parents raised them. Most importantly, they saw the rise of technology. Children of Baby boomers have seen a massive change in technology across. A quick read through How has Trading Changed for Millennials? Technology Taking Charge in Shaping Trading Habits, will help to update on how stock trading changed for them. Now that the baby boomers are at the retirement age or already retired, study suggests most of them plan on fulfilling their bucket list items like travelling or living in the countryside on a farm. The Greatest or the Silent Generation had very few investment options, typically in bonds or certificates of deposit. But baby boomers have a varied range of options to grow their hard-earned money and also enjoy its rewards. Industry experts suggest that the baby boomers may choose not to retire early. It could mean postponing retirement, or consulting or getting a part time job. Another important aspect is healthcare. Many baby boomers are in their last 60s and early 70s, it's never too late to work on the healthcare plan. Also read: Five Smart Investment Tips for Millennials
What is a partnership? In business, a partnership is an arrangement where two or more persons share the profits according to agreements. Partners are collectively co-owners of the enterprise and also contribute to the capital of the business. Partners also share the management responsibilities of the firm. A partnership is essentially an agreement to advance the mutual interest of the partners. Partners in the agreement could involve businesses, Governments, individuals, schools, or a combination of any of these. Partnership laws in each jurisdiction govern the rules, regulations, and obligations of the partnership firms. Partners not only share profits but losses and liabilities as well. What are the advantages of a partnership? Easier and fewer obligations Partnership structure was designed to spur growth in small businesses. Unlike limited companies, a partnership structure tends to have lesser obligations like simpler accounting standards. In most jurisdictions, partnerships attract different tax structures, and the entity is not taxed, instead the income of partners is taxed. Companies are incorporated under company laws and have a plethora of obligations, but partnerships come with relatively lesser obligations. Sharing the booms and boons In a sole proprietorship, capital is employed by a single person, who has all the obligations for the liabilities and is the owner of all assets. Conversely, a partnership enables sharing capital deployment, asset, liabilities, losses, and profits. Partnership structure allows sharing roles and responsibilities in the business enterprise. Knowledge, experience, reach and skills With many partners in a firm, it allows broadening the capability of the management decision and outcomes. Partnership firms also onboard new partners based on their needs. For instance, a law partnership could invite a new partner, who specialises in a practice lacking at the firm. Collective financial commitment Partners in a firm are invested in the business through the capital. Losses and profits are also shared on a share in the firm, which is usually based on the proportion of capital invested in the business. It also motivates the partners to remain committed to the firm since losses and profits would be shared as well. What are the disadvantages of a partnership firm? No separate legal entity A partnership firm has no independent legal existence unless the agreement has a specific provision in place. When the partners of the firms leave or cease to be partners anymore, the firm is dissolved. In this way, the firms could be unstable and uncertain. Taxation Since partnership firms are not taxed separately and the profits are shared by the partners that are taxed at individual income tax level, partners cannot retain the earnings. Partnership firms do not provide tax planning opportunities compared to limited companies. Thus, making it tax inefficient for the partners. Profit-sharing Even if one partner has made significantly more efforts compared to other partners, the profits would be shared as per the partnership agreement. Profit and loss sharing could be good, but it may well turn out to be disastrous as well. Disagreement with partners More number of partners in a firm increases the chances of higher level of disagreements among them. Since decisions are also bound to be consulted with each partner, the decision-making ability of the firm could be hampered in the event of disagreements among partners. What are the types of partnerships? General Partnerships General Partnerships are the most common partnership firms that exist in many jurisdictions. Small businesses often incorporate a General Partnership since it is the simplest partnership, which requires minimal formalities. Share of profits could be enlisted in the partnership agreement and is usually based on a similar proportion of the capital invested by the partners. At least one partner in GP has unlimited liabilities since a partnership is not a separate legal entity. In this way, partners will be held accountable if the firm enters bankruptcy and dues are supposed to be cleared by the partners. Limited Partnerships Limited Partnerships allow one to have limited partners in the firm. LPs can have a mix of general partners and limited partners. It is incorporated to designate limited partners with specific responsibilities without bearing any significant liability. It can be the case that limited partners are not involved in the daily operations of the business and contribute on a consulting basis. Limited partners usually invest capital in the business and take a share of profit. They largely remain out of the decision-making roles. Limited Liability Partnerships Limited Liability Partnerships are a more complex type of partnerships. The structure allows partners to have limited liabilities along with limited scope on managerial decisions. These limits are often defined by the extent of a partner’s investment in the firm.