The Boston Consulting Group’s (BCG) growth/share matrix - Marketing Management

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:

  1. For each strategic business unit (SBU) or product determine annual growth rate in the market.
  2. According to this growth rate, next determine the extent to which the growth rate is ‘high’ or ‘low’. Normally, growth rates of 10 per cent or more are considered ‘high’.
  3. BCG’s growth/share matrix

    BCG’s growth/share matrix

  4. For each SBU or product determine relative market share. Normally this is calculated on the basis of market share compared to that of the largest competitor.
  5. According to relative market share, determine the extent to which this is ‘high’ or ‘low’. Normally a relative market share of 10 per cent is required to fall into the ‘high’ category. We now have all the information we need to position our SBUs or products in the matrix. We can also calculate the value of the turnover of each SBU or product and denote this by using circles, where the area of the circle is proportionate to its turnover.

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:

  • Low growth/high share: ‘cash cows’

As the term implies, these products or SBUs generate more cash than they use and can be used for funding other products or SBUs.

  • Low growth/low share: ‘dogs’

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’.

  • High growth/low share: ‘problem children’ (sometimes called ‘question marks’ or ‘wildcats’) These are products with possible long-term potential, but they tend to use large amounts of cash. This is so if they are to increase their market share, as they must do if they are to survive in the long run.
  • High growth/high share: ‘stars’

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:

  • Build: As the term implies, this means increasing the product or SBU’s market share, usually implying a net input of cash or resources.
  • Hold: This strategy is aimed at maintaining market share and is therefore appropriate for strong cash cows.
  • Harvest: Here a decision is made to generate as much short-term cash flow from the SBU or product as is possible and it is appropriate to weak cash cows.
  • Divest: A divest strategy means either selling or liquidating the SBU. This strategy is appropriate for weaker problem children and for most dogs. It should be noted that sometimes dogs may be retained for other strategic reasons such as maintaining a full product portfolio.

Example of a completed BCG matrix

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:

  • Over-simplification: The matrix uses only the factors of market growth and relative market share to assign products or SBUs to its various cells. This is based on strong empirical evidence showing that cash flow is related to these two factors. There are usually many more factors that can, and do, affect net cash flow in a company.
  • Cash flow as the performance criterion: Some doubt the use of cash flow as being the most appropriate objective in a company, arguing instead that return on investment is more appropriate.
  • Ambiguity in classifications: The analysis in BCG’s product portfolio matrix can be undertaken either at the SBU level, or for each product/market. It is, however, often difficult in practice to separate these. There is also controversy over what constitutes a ‘high’ versus a ‘low’ market growth rate and what constitutes a ‘high’ versus ‘low’ market share.
  • The technique does not deal with issues surrounding new products, or in markets with negative rates of growth.

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.

All rights reserved © 2018 Wisdom IT Services India Pvt. Ltd Protection Status

Marketing Management Topics