The BCG matrix product portfolio method

The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business  unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product’s market grows the better it is for the company.

 

Placing products in the BCG matrix results in 4 categories in a portfolio of a company:

1. Stars (=high growth, high market share)
– use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.
– frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold share, because the rewards will be a cash cow if market share is kept.
2. Cash Cows (=low growth, high market share)
– profits and cash generation should be high , and because of the low growth, investments needed should be low. Keep profits high
– Foundation of a company
3. Dogs (=low growth, low market share)
– avoid and minimize the number of dogs in a company.
– beware of expensive ‘turn around plans’.
– deliver cash, otherwise liquidate
4. Question Marks (= high growth, low market share)
– have the worst cash characteristics of all, because high demands and low returns due to low market share
– if nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, a dog.
– either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash

The BCG Matrix method can help understand a frequently made strategy mistake: having a one-size-fits-all-approach to strategy, such as a generic growth target (9 percent per year) or a generic return on capital of say 9,5% for an entire corporation.

In such a scenario:

A. Cash Cows Business Units will beat their profit target easily; their management have an easy job and are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash amounts in their businesses which are mature and not growing anymore.

B. Dogs Business Units fight an impossible battle and, even worse, investments are made now and then in hopeless attempts to ‘turn the business around’.

C. As a result (all) Question Marks and Stars Business Units get mediocre size investment funds. In this way they are unable to ever become cash cows. These inadequate invested sums of money are a waste of money. Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become a cash cow (or star), or otherwise companies are advised to disinvest and try to get whatever possible cash out of the question marks that were not selected.

Some limitations of the Boston Consulting Group Matrix include:

  • High market share is not the only success factor
  • Market growth is not the only indicator for attractiveness of a market
  • Sometimes Dogs can earn even more cash as Cash Cows

BCG Growth-Share Matrix

Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970’s the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors:

BCG Growth-Share Matrix

Resources are allocated to business units according to where they are situated on the grid as follows:

  • Cash Cow – a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units.
  • Star – a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.
  • Question Mark (or Problem Child) – a business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown.
  • Dog – a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. However, the approach has received some negative criticism for the following reasons:

  • The link between market share and profitability is questionable since increasing market share can be very expensive.
  • The approach may overemphasize high growth, since it ignores the potential of declining markets.
  • The model considers market growth rate to be a given. In practice the firm may be able to grow the market.

These issues are addressed by the GE / McKinsey Matrix, which considers market growth rate to be only one of many factors that make an industry attractive, and which considers relative market share to be only one of many factors describing the competitive strength of the business unit.

Recommended Reading

The Boston Consulting Group, Perspectives on Strategy

Perspectives on Strategy contains Bruce Henderson’s original writings on the BCG growth-share matrix. Specific articles include:

  • The Product Portfolio – introduces the growth-share matrix and its dynamics, including the success sequence and the disaster sequence.
  • Cash Traps – explains why the majority of products are cash traps.
  • The Star of the Portfolio – and why market share is so important.
  • Anatomy of the Cash Cow – including the buying and selling of market share for cash cows.
  • The Corporate Portfolio – discussing the advantages of diversified companies.
  • Renaissance of the Portfolio – after the portfolio concept’s falling out of favor, this article makes the case for its return.

The 75 articles in Perspectives on Strategy also include the pricing paradox, segment-of-one marketing®, time-based competition, and other articles summarizing the insights of Bruce Henderson and other BCG members.

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