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

Book: Carl W. Stern, George Stalk - Perspectives on Strategy from The Boston
Consulting Group -
GE / McKinsey Matrix

In consulting engagements with General Electric in the 1970's, McKinsey &

Company developed a nine-cell portfolio matrix as a tool for screening GE's large
portfolio of strategic business units (SBU). This business screen became known
as the GE/McKinsey Matrix and is shown below:

GE / McKinsey Matrix

Business Unit Strength

High Medium Low

High

Medium

Low

The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it

maps strategic business units on a grid of the industry and the SBU's position in
the industry. The GE matrix however, attempts to improve upon the BCG matrix
in the following two ways:

• The GE matrix generalizes the axes as "Industry Attractiveness" and

"Business Unit Strength" whereas the BCG matrix uses the market growth
rate as a proxy for industry attractiveness and relative market share as a
proxy for the strength of the business unit.
• The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry attractiveness and business unit strength are calculated by first

identifying criteria for each, determining the value of each parameter in the
criteria, and multiplying that value by a weighting factor. The result is a
quantitative measure of industry attractiveness and the business unit's relative
performance in that industry.
Industry Attractiveness

The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is

determined by factors such as the following:

• Market growth rate

• Market size
• Demand variability
• Industry profitability
• Industry rivalry
• Global opportunities
• Macroenvironmental factors (PEST)

Each factor is assigned a weighting that is appropriate for the industry. The
industry attractiveness then is calculated as follows:

Industry attractiveness = factor value1 x factor weighting1

+ factor value2 x factor weighting2
.
.
.

+ factor valueN x factor weightingN

Business Unit Strength

The horizontal axis of the GE / McKinsey matrix is the strength of the business
unit. Some factors that can be used to determine business unit strength include:

• Market share
• Growth in market share
• Brand equity
• Distribution channel access
• Production capacity
• Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated
value of each factor by the factor's weighting, as done for industry attractiveness.
Plotting the Information

Each business unit can be portrayed as a circle plotted on the matrix, with the
information conveyed as follows:

• Market size is represented by the size of the circle.

• Market share is shown by using the circle as a pie chart.
• The expected future position of the circle is portrayed by means of an
arrow.

The following is an example of such a representation:

The shading of the above circle indicates a 38% market share for the strategic
business unit. The arrow in the upward left direction indicates that the business
unit is projected to gain strength relative to competitors, and that the business
unit is in an industry that is projected to become more attractive. The tip of the
arrow indicates the future position of the center point of the circle.

Strategic Implications

Resource allocation recommendations can be made to grow, hold, or harvest a

strategic business unit based on its position on the matrix as follows:

• Grow strong business units in attractive industries, average business units

in attractive industries, and strong business units in average industries.
• Hold average businesses in average industries, strong businesses in
weak industries, and weak business in attractive industies.
• Harvest weak business units in unattractive industries, average business
units in unattractive industries, and weak business units in average
industries.

There are strategy variations within these three groups. For example, within the
harvest group the firm would be inclined to quickly divest itself of a weak
business in an unattractive industry, whereas it might perform a phased harvest
of an average business unit in the same industry.

While the GE business screen represents an improvement over the more simple
BCG growth-share matrix, it still presents a somewhat limited view by not
considering interactions among the business units and by neglecting to address
the core competencies leading to value creation. Rather than serving as the
primary tool for resource allocation, portfolio matrices are better suited to
displaying a quick synopsis of the strategic business units.

vision

The creation of a vision statement can be a great asset to just about any type of
organization. Essentially, a vision statement takes into account the current status of the
organization, and serves to point the direction of where the organization wishes to go. As
a means of setting a central goal that the organization will aspire to reach, the vision
statement helps to provide a focus for the mission of the corporation, business, or non-
profit entity. Here is some information about the construction of a vision statement.

While vision statements and mission statements are very similar in nature, there is a fine
point of difference between the two documents. A mission statement is more concerned
with the overall aim of the business, a simple statement of the company’s reason for
being. Often the statement will include verbiage that makes a pledge to deliver a superior
product or service to customers on a consistent basis. From this perspective, a mission
statement is about maintaining a certain quality or attribute.

The vision statement, by contrast, is not about what the company currently is, but what
the company hopes to become. As an example, a vision statement may acknowledge that
the company already meets industry standards in customer support, while at the same
time setting goals for moving customer care to a higher level within a given time period.

The vision statement is a form of values statement. Value statements are simply an
acknowledgment of the inherent worth of the company and the products it produces.
Value statements are usually brief and to the point. In like manner, a vision statement
also is intended to be no more than a couple of sentences that clearly outline a specific
goal of the company, while not providing the details of how that goal will be reached.
Thus, the vision statement provides the direction for the company, while not inhibiting
the development of the strategy that will allow the company to reach that lofty goal.

Many different types of organizations operate with a vision statement. Along with
businesses, many faith based organizations, including religious denominations and
individual congregations find the drafting of a vision statement to be helpful. Not for
profit organizations have also found that a vision statement is a way of keeping everyone
focused on an ultimate goal, even if there may have to be some changes in operation. As
a means of reaching toward the future, a properly drafted vision statement can provide
motivation and inspiration, without stifling creativity in finding the way to the ultimate
aim of the statement .
Mission:
A mission statement is a formal, short, written statement of the purpose of a company or
organization. The mission statement should guide the actions of the organization, spell
out its overall goal, provide a sense of direction, and guide decision-making. It provides
"the framework or context within which the company's strategies are formulated."

Mission statements often contain the following:

• Purpose and aim of the organization

• The organization's primary stakeholders: clients, stockholders, congregation, etc.
• Responsibilities of the organization toward these stakeholders
• Products and services offered

According to Hill, the mission statement consists of: 1. a statement containing the reason
for using your product 2. a statement of some desired future state (vision) 3. a statement
of the key values the organization is committed to 4. a statement of major goals

The mission statement can be used to resolve differences between business stakeholders.
Stakeholders include: employees including managers and executives, stockholders, board
of directors, customers, suppliers, distributors, creditors, governments (local, state,
federal, etc.), unions, competitors, NGO's, and the general public. Stakeholders affect,
and are affected by, the organization's strategies.

According to Vern McGinis, a mission should:

Define what the company is

Define what the company aspires to be
Limited to exclude some ventures
Broad enough to allow for creative growth
Distinguish the company from all others
Serve as framework to evaluate current activities
Stated clearly so that it is understood by all

Mission of the company communicates the firm's core ideology and visionary goals. It
should contain the company's core values, core purpose, and visionary goals. When the
visionary goals are selected, the core values and purpose of the firms should be
discovered. Values and purpose are in the company already; the mission just describes
them. In that case, the stakeholders are more likely to believe in the company's mission.