In the mid 1960s the Boston Consulting Group (BCG) was founded to provide advice to strategic marketing planners. Building on previous work and evidence relating to the experience curve effect BCG developed a simple, but potentially powerful, framework for analysing an organization’s business with a view to providing strategic guidelines. The essentials of BCG’s growth/share matrix.
Compiling the BCG matrix
The completion of the matrix is straightforward. The four steps are:
BCG’s growth/share matrix
Interpreting and using the matrix
An illustration of a completed growth/share matrix. Having completed the growth/share matrix, each SBU may be classified as follows:
As the term implies, these products or SBUs generate more cash than they use and can be used for funding other products or SBUs.
These products or SBUs tend to be loss makers, but might provide small amounts of cash; long term their potential is usually weak. When a ‘dog’ produces a small profit it is termed a ‘cash dog’, and where it produces a loss it is termed a ‘true dog’.
Managed well, these SBUs or products have the potential to become cash cows of the future. This means that the company must maintain their market share, usually in the face of strong competition, until market growth subsides. This means that these products or SBUs tend to be heavy users of cash arising from high promotional expenditures in growth markets.
The concept of building a balanced portfolio
Once strategic business units have been analysed in this way, a key feature of the BCG approach is its emphasis on the need to build a balanced portfolio of businesses or products. This notion is captured in the following quote from Lancaster and Massingham:
A balanced portfolio would ideally contain few or no dogs, some problem children, some stars and some cash cows. The balance between problem children, stars and cash cows should be such as to ensure that the company has sufficient net positive cash flow from its cash cows to fund its stars and turn them eventually into cash cows. Funds from cash cows are also used to turn products which are currently problem children . . . into stars. Not all problem children can be moved in this way and eventually some of them will . . . become dogs. In the long run all dogs are potential candidates for elimination from the product range.
A balanced portfolio is thus intended to ensure sufficient positive net cash flow to guarantee longrun success for the company as a whole. In order to achieve this, each SBU or product must be analysed and a decision made as to which of the following strategies is to be applied in order to maintain the balanced portfolio:
Example of a completed BCG matrix
The BCG approach offers a simple method of analysing and evaluating current businesses, and is a relatively straightforward way of arriving at future strategies for them. There are, however, a number of problems with the use of the BCG growth/share matrix.
Criticisms and limitations of the BCG approach
Among the major criticisms and limitations of this portfolio technique we include:
Partly because of these criticisms, a number of other techniques have been developed which go some way to countering these problems. The techniques we now examine are some of the better known examples of these, i.e. the McKinsey/General Electric business screen, the Shell International directional policy matrix, and the product life cycle portfolio matrix. We commence with the McKinsey/General Electric model.
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