The Boston Consulting Group (BCG) Growth-Share Matrix

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of
the Boston Consulting Group in the early 1970's. It is based on the observation that a company's
business units can be classified into four categories based on combinations of market growth and
market share relative to the largest competitor, hence the name "growth-share". Market growth
serves as a proxy for industry attractiveness, and relative market share serves as a proxy for
competitive advantage. The growth-share matrix thus maps the business unit positions within
these two important determinants of profitability.

The business portfolio is the collection of businesses and products that make up the company.
The best business portfolio is one that fits the company's strengths and helps exploit the most
attractive opportunities.

The company must:

(1) Analyze its current business portfolio and decide which businesses should receive more or
less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst
at the same time deciding when products and businesses should no longer be retained.

A Strategic Business Unit (SBU) is a unit of the company that has a separate mission and
objectives and that can be planned independently from the other businesses. An SBU can be a
company division, a product line or even individual brands - it all depends on how the company
is organized.

Using the BCG Matrix, a company classifies all its SBU's according to two dimensions:

On the horizontal axis: relative market share - this serves as a measure of SBU strength in the
market

On the vertical axis: market growth rate - this provides a measure of market attractiveness
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 BCG Growth-Share Matrix

Assumptions:

1. The framework assumes that an increase in relative market share will result in an increase
in the generation of cash. This assumption often is true because of the experience curve;
increased relative market share implies that the firm is moving forward on the experience
curve relative to its competitors, thus developing a cost advantage.
2. A growing market requires investment in assets to increase capacity and therefore results
in the consumption of cash. Thus the position of a business on the growth-share matrix
provides an indication of its cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units could be obtained
from the firm's other business units that were at a more mature stage and generating significant
cash. By investing to become the market share leader in a rapidly growing market, the business
unit could move along the experience curve and develop a cost advantage. From this reasoning,
the BCG Growth-Share Matrix was born.

By dividing the matrix into four areas, four types of SBUs can be distinguished:

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 Stars - Stars generate large amounts of cash because of their strong relative market share,
but also consume large amounts of cash because of their high growth rate; therefore the
cash in each direction approximately nets out. If a star can maintain its large market
share, it will become a cash cow when the market growth rate declines. The portfolio of a
diversified company always should have stars that will become the next cash cows and
ensure future cash generation.

 Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is
greater than the market growth rate, and thus generate more cash than they consume.
Such business units should be "milked", extracting the profits and investing as little cash
as possible. Cash cows provide the cash required to turn question marks into market
leaders, to cover the administrative costs of the company, to fund research and
development, to service the corporate debt, and to pay dividends to shareholders. Because
the cash cow generates a relatively stable cash flow, its value can be determined with
reasonable accuracy by calculating the present value of its cash stream using a discounted
cash flow analysis.

 Question Marks/Problem Children - Question marks are growing rapidly and thus
consume large amounts of cash, but because they have low market shares they do not
generate much cash. The result is a large net cash consumption. A question mark has the
potential to gain market share and become a star, and eventually a cash cow when the
market growth slows. If the question mark does not succeed in becoming the market
leader, then after perhaps years of cash consumption it will degenerate into a dog when
the market growth declines. Question marks must be analyzed carefully in order to
determine whether they are worth the investment required to grow market share.
Management have to think hard about "question marks" - which ones should they invest
in? Which ones should they allow to fail or shrink?

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  Dogs - Dogs have low market share and a low growth rate and thus neither generate nor
consume a large amount of cash. However, dogs are cash traps because of the money
tied up in a business that has little potential. Dogs refer to businesses or products that
have low relative share in unattractive, low-growth markets. Dogs may generate enough
cash to break-even, but they are rarely, if ever, worth investing in. Such businesses are
candidates for divestiture.

Under the growth-share matrix model, as an industry matures and its growth rate declines, a
business unit will become either a cash cow or a dog, determined solely by whether it had
become the market leader during the period of high growth.

While originally developed as a model for resource allocation among the various business units
in a corporation, the growth-share matrix also can be used for resource allocation among
products within a single business unit. Its simplicity is its strength - the relative positions of the
firm's entire business portfolio can be displayed in a single diagram.

Conventional strategic thinking suggests there are four possible strategies for each SBU:

(1) Build Share: here the company can invest to increase market share (for example turning a
"question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present position

(3) Harvest: here the company reduces the amount of investment in order to maximize the short-
term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash
Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the
resources elsewhere (e.g. investing in the more promising "question marks").

Note that the above are generic strategies. Therefore, it is expected that the strategies
listed in the e-Tutor Presentation be examined to determine which is/are most appropriate
for each quadrant.
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Limitations of BCG Matrix

The growth-share matrix once was used widely, but has since faded from popularity as more
comprehensive models have been developed. Some of its weaknesses are:

 Market growth rate is only one factor in industry attractiveness, and relative market share
is only one factor in competitive advantage. The growth-share matrix overlooks many
other factors in these two important determinants of profitability.
 The framework assumes that each business unit is independent of the others. In some
cases, a business unit that is a "dog" may be helping other business units gain a
competitive advantage. At times, dogs may help other businesses in gaining competitive
advantage. They can earn even more than cash cows sometimes.
 The matrix depends heavily upon the breadth of the definition of the market. A business
unit may dominate its small niche, but have very low market share in the overall industry.
In such a case, the definition of the market can make the difference between a dog and a
cash cow.
 BCG matrix classifies businesses as low and high, but generally businesses can be
medium also. Thus, the true nature of business may not be reflected.
 Market is not clearly defined in this model.
 High market share does not always leads to high profits. There are high costs also
involved with high market share.
 This four-celled approach is considered as to be too simplistic.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing
a corporation's business portfolio at a glance, and may serve as a starting point for discussing
resource allocation among strategic business units.

The BCG Growth-Share Matrix displays three (3) elements of information for each product:

1. Product sales volume is indicated by the diameter of the product circle. The greater the
volume, the larger the circle.

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2. Market growth rate is indicated by the product circle’s position on the vertical axis.
Market growth rate represents the attractiveness of the market segment in which the
product is competing.

3. Relative market share is indicated by the product circle’s position on the horizontal axis.
Relative market share represents the competitive strength of your product compared to the
market leader’s product.