The Boston Consulting Group (BCG) growth share matrix
- The BCG matrix is a two-by-two matrix that classifies businesses, divisions or products according to the present market share and the future growth of that market.
- Growth is seen as the best measure of market attractiveness.
- Market share is seen to be a good indicator of competitive strength
Products are then shown in a diagram where the money value of sales is indicated by the relative size of the circle:
Based on this there are four possible classifications.
A cash cow has a high relative market share in a low-growth market and should be generating substantial cash inflows.
The period of high growth in the market has ended (the product life cycle is in the maturity or decline stage), and consequently the market is less attractive to new entrants and existing competitors.
Cash cow products thus tend to generate cash in excess of what is needed to sustain their market positions.
Profits support the growth of other company products.
The firm's strategy is oriented towards maintaining the product's strong position in the market.
A star has a high relative market share in a high-growth market. A star may be only cash-neutral despite its strong position, as large amounts of cash may need to be spent to defend an organisation's position against competitors.
Competitors will be attracted to the market by the high growth rates.
Failure to support a star sufficiently strongly may lead to the product losing its leading market share position, slipping eastwards in the matrix and becoming a problem child.
A star, however, represents the best future prospects for an organisation.
Market share can be maintained or increased through price reductions, product modifications, and/or greater distribution.
As industry growth slows, stars become cash cows.
A problem child (sometimes called 'question mark') is characterised by a low market share in a high-growth market. Substantial net cash input is required to maintain or increase market share.
The company must decide whether to do nothing (but cash continues to be absorbed) or market more intensively (requiring substantial investment) or get out of this market ("double or quit").
The questions are whether this product can compete successfully with adequate support and what that support will cost.
The dog product has a low relative market share in a low-growth market. Such a product tends to have a negative cash flow, that is likely to continue.
It is unlikely that a dog can wrest market share from competitors without getting bigger but the market is not attractive enough to warrant such investment.
Competitors, who have the advantage of having larger market shares, are likely to fiercely resist any attempts to reduce their share of a low-growth or static market.
An organisation with such a product can attempt to appeal to a specialised market, delete the product or harvest profits by cutting back support services to a minimum.
Assessing the rate of market growth as high or low is difficult because it depends on the market. New markets may grow explosively while mature markets grow hardly at all. The midpoint of the growth dimension is usually set at 10% annual growth rate; markets growing in excess of 10% are considered to be high-growth markets and those growing at less are low-growth markets.
Relative market share is defined by the ratio of market share to the market of the largest competitor. The log scale is used so that the midpoint of the axis is 1.0, the point at which an organisation's market share is exactly equal to that of its largest competitor. Anything to the left of the midpoint indicates that the organisation has the leading market share position.
Having a balanced portfolio
An organisation would want to have in a balanced portfolio:
- cash cows of sufficient size and/or number that can support other products in the portfolio
- stars of sufficient size and/or number which will provide sufficient cash generation when the current cash cows can no longer do so
- problem children that have reasonable prospects of becoming future stars
- no dogs or, if there are any, there would need to be good reasons for retaining them.
Strategic movements on the BCG matrix
A product's place in the matrix is not fixed for ever as the rate of growth of the market should be taken into account in determining strategy.
- Stars tend to move vertically downwards as the market growth rate slows, to become cash cows.
- The cash that they then generate can be used to turn problem children into stars, and eventually cash cows.
The ideal progression is illustrated below:
Criticisms of the BCG matrix
(1)The matrix uses only two measures
The only two measures used in the BCG matrix are growth and market share. These may be too limited as a basis for policy decisions.The Boston Consulting Group has now developed a further matrix to meet this criticism:
The vertical axis now indicates the number of ways in which a unique advantage may be achieved over competitors, and the horizontal axis is a measure of the size advantage that may be created over competitors. The new matrix makes the exercise much more a matter of qualitative judgement.
(2)The matrix encourages companies to adopt holding strategies
The strategic principles involved advocate that companies with large market shares in static or low-growth markets (i.e. cash cows) adopt holding or harvesting strategies rather than encouraging them to try to increase the total demand of the markets in which their products are selling. Compliance with these strategic tenets has led to devastating results for some companies.
There are a number of dangers in assuming that a product is a 'cash cow'. (BCG defines a cash cow as a product occupying a strong position in a static or slow growing market.) First, management may be tempted to pull back on investment, by treating the product as in 'safe-water', and second make assumptions about future cash flow that may be unrealistic. Yamaha destroyed the dominance of the well-established US musical instrument manufacturers who concentrated on milking their mature products for profit rather than on planning how to defend their market shares.
(3)The matrix implies only those with large market shares should remain
There are many examples of businesses with a low market share continuing to operate profitably. Sometimes this is because the market is not unitary, but fragmented, and the small competitor has found itself a particular market niche; on other occasions large companies may prefer smaller competitors to preserve the impression of competition.
The link between profitability and market share may be weak because:
- low share competitors entering the market late may be on the steepest experience curve
- low share competitors may have some in-built cost advantage
- not all products have costs related to experience
- large competitors may receive more government attention and regulation.
(4)The matrix implies that the most profitable markets are those with high growth
Again this is not always so, due to:
- high entry barriers, especially in high-technology industries
- high price competition.
Both of these problems are typified by the microcomputer business. Despite impressive rates of growth, a number of companies have been unable to make profits because of the high levels of initial investment followed by extreme price competition from low-cost late entrants.
(5)Not all dogs should be condemned
A very large number of small but successful businesses are 'dogs', and according to the BCG concept are ripe for reinvestment or liquidation. However, this would not always be the case. Dog products are often used not with the primary aim of maximising the profit from the product itself, but to provide economies of scale in manufacturing, marketing and administration to sustain the overall business.
Furthermore, the BCG portfolio theory does not seem to take into account the need for competitive strategy. A company might, for example, launch a product to act as a 'second front' to support the thrust of its main offering, although the product, by definition, is a dog.
When the Clorox company (the market leader in the US for bleach) introduced a new product, 'Wave', the purpose was to try to deflect Procter & Gamble's attack by creating a 'second front', rather than to generate substantial profits from Wave.
Despite these criticisms, in certain circumstances the model provides a useful method by which a company can
- attempt to achieve overall cost leadership in its market(s) through aggressive use of directed efficiency;
- focus its expenditures and capital investment programmes; and
- plan for an appropriate balance of resources between conflicting product-market claims. Also the information and analysis required to construct the matrix will provide meaningful indicators. It should, however, not be used in a rigid, stereotype manner.
The model ought to be used as a means to an end, not as representing the end objective in itself.
Several studies have been carried out into the use of the BCG, and on the whole these would not encourage uncritical use of the model.In particular, the link between quadrant and cash flow is not particularly strong, and there are many exceptions. Fortune once described this model as the worst business model ever devised.
Portfolio analysis tools
As part of strategic analysis and strategic choice, firms will need to assess their strategies for individual products but also consider their overall product portfolios.
More specifically, portfolio analysis:
- is designed to reveal whether the organisation has:
- too many declining products or services
- too few products or services with growth potential
- insufficient product or service profit generators to maintain present organisation performance or to provide investment funds for the nurturing of tomorrow's successful ventures
- portfolio analysis can be very valuable in assessing how the balance of activities contributes to the strategic capability of the organisation
- should be applied to SBUs, that is units dealing with particular market segments not whole markets
- will result in different targets and expectations for different parts of the organisation, which will impact on the resource allocation processes - both capital and revenue budgets
This page looks at some of the tools available for this purpose.
Public sector portfolio matrix
A similar approach can be used to assess the different services provided by public sector organisations.
The dimensions of the matrix are:
- can the service can be provided effectively while giving value for money
- the desirability of the service - public support and funding attractiveness.
The major problem with the application of the public sector portfolio matrix is that its dimensions (the organisation's ability to serve effectively by providing value for money, and the public's need and support and the funding attractiveness) are all subjective, and largely dependent on the user's own perceptions as to what the body should be doing, and what the public sector body is good at.
The Directional Policy Matrix
The Directional Policy Matrix (DPM) is a method of business portfolio analysis formulated by Shell International Chemical Company.
Rather than simply market growth and share, the DPM considers a range of factors including the following.
Business sector prospects
- Market - demographic factors, growth, seasonality, maturity.
- Competition - number and size of competitors, price competition, barriers to entry, substitutes.
- Technology - sophistication, rate of change, lead time, patents.
- Economic - leverage, capital intensity, margins.
- Government - subsidies/grants, purchases, protection, regulation, taxation.
- Geography - location, markets, communications, environment.
- Social - pressure groups, trade unions, availability of labour.
- Market - share, growth, product maturity, product quality, product mix, marketing ability, price strategy, customer loyalty.
- Technological - skills, patent protection, R&D, manufacturing technology.
- Production - costs, capacity utilisation, inventory control, maintenance, extent of vertical integration.
- Personnel - employee quality, top management quality, industrial relations, trade union strength, training, labour costs.
- Financial - resources, capital structure, margins, tax position, financial control, investment intensity.
DPM strategic choices
Possible strategic choices
The cell labels shown in the diagram above represent possible strategic choices or types of resource deployments most appropriate for the firm, given its score on each of the two axes. More specifically these cell labels have the following implications.
- Withdrawal - probably already losing money; net cash flow negative over time. Losses may be minimised by divesting or even liquidation.
- Phased withdrawal - probably not generating sufficient cash to justify continuation; assets can be redeployed.
- Cash generation - equivalent to a 'cash cow' in the BCG grid. This cell would be occupied by a firm or product in later stages of the life cycle that does not warrant heavy investment, but can be 'milked' of cash due to its strong competitive position.
- Proceed with care - similar to a 'problem child'; firms falling in this sector may require some investment support but heavy investment would be extremely risky.
- Growth - a firm, product or SBU in these sectors would call for investment support to allow growth with the market. It should generate sufficient cash on its own.
- Double or quit - units in this sector should become 'high fliers' in the not-too-distant future. Consequently those in the upper right corner of this cell should be singled out for full support. Others should be abandoned.
- Try harder - external financing may be justified to push a unit in this sector to a leadership position. However, such a move will require judicious application of funds.
- Leader - the strategy for this segment is to protect this position by external investment (funds beyond those generated by the unit itself - occasionally); earnings should be quite strong and a major focus may be maintaining sufficient capacity to capitalise on strong demand.
In addition to considering the position on the directional policy matrix in static terms, changes over time need also to be considered.
- Ideally, products in the cash-generating sectors should be able to finance expenditure on products in the attractive business/weak position sectors, so as to move them to the attractive business/strong position sectors.
- Later these products move down to become cash generators themselves and the cycle is completed.
The market attractiveness/SBU strength matrix
A more sophisticated directional policy matrix has been developed by General Electric, McKinsey and Shell. As can be seen in the diagram below, the matrix has four dimensions on two axes.
- Industry attractiveness - which includes the size, growth, diversity, profitability and competitive structure of the industry, as well as relevant political, economic, social and technological factors.
- Business or competitive strengths - another composite dimension including size, growth, share, position, profitability, image, strengths and weaknesses.
- Size of industry - products or services (strategic business units) are entered onto the policy matrix as circles, with size proportional to turnover size of circle.
- Share of industry - represented by a segment of the circle.
Each axis should be defined in terms of meaningful to that company. Some examples are given below.
|Competitive Strengths||Industry Attractiveness|
- Relative market share
- Distribution/brand strengths
- Technology strengths
- Profit margins relative to competitors
- Ability to compete on price and quality
- Knowledge of customer and market
- Caliber of management
- Market size, growth, diversity
- Inflation recovery
- Technology protection
- Socio/political risks
- Economies of scale
- Barriers to entry and exit
This matrix can also be used to develop and clarify strategic choices:
- depending on where a unit is positioned in the matrix, its broad strategic mandate will be to invest/build, hold or harvest
- arrows can be attached to the circles showing the direction in which the strategist wants the product to move
- the direction of movement can often be changed by management action - for example, competitive strength could be increased if resources were directed at technological innovation.
The implied strategies may be as shown in the chart below.
|Business strength/Competitive position|
|Long-term industry attractiveness High|
- Enhance leadership
- Diversify product/market segment
- Re-invest most aggressively in technology, capacity and marketing
- Hold leadership position
- Leverage strengths into more attractive segments
- Use economies of scale to outspend competition
- Maintain leadership in more attractive segments
- Harvest work segments
- Shrink production line
|Long-term industry attractiveness Medium|
- Avoid 'me too' strategy
- Segment market carefully
- Differentiate product, service or business approach
- Concentrate on re-investment
- Increase level segmentation to differentiate strategies between growth and harvest
- Avoid perpetrating high shared overheads
- Harvest by pricing up, selling shares and cutting costs aggressively through line pruning
|Long-term industry attractiveness Low|
- Apply high degree of segment focus
- Seek advantage, e.g. proprietary technology
- Harvest by sale to larger company in market
Strengths and weaknesses of this matrix
There are strengths and weaknesses of this approach.
- The use of multiple criteria provides sounder judgement.
- The criteria used can be tailored to business level or business type and the matrix is relevant to many business situations.
- However the analysis is not totally quantitative and judgements need to be made.
- To be effective the matrix needs sophisticated users.
Created at 10/11/2012 9:37 AM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 11/2/2016 9:45 AM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Ratings & Comments
(Click the stars to rate the page)