The BCG Growth-Share Matrix is a portfolio-planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970s. It was devised as a planning tool for marketers to help them analyse their product lines and decide where to allocate money. It 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. 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.
The matrix proceeds from the assumption 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 rate, the speed at which the market is expanding, is plotted against relative market share - the percentage of consumers in the market that buy your service or product. Products or services have either high or low market growth rates or relative market shares.
| Stage of PLC Position in the matrix | |
| Product launch | Problem children (or question marks)are products or services that are not yet established,or well known, in the market. They will consume resources- for example, time or money - before giving a return on investment (ROI).In some cases these products or services may never be profitable- make the company money -especially if they are in a slow-growing business sector or a saturated market, such as diet drinks or the mobile phone market. |
| Growth | Stars (or rising stars)have both high market growth rate and high relative market share. These products or services are probably in a fast-growingbusiness sector. They generate high cash flows,but are not always profitable. Profitability depends on the amount investedin the star. |
| Maturity | Cash cowshave high relative market share, but little market growth. They are products or services that consumers know, trust and consume. They generate profitas they don't need much investment. They can be used to feed research and developmentfor other products. |
| Decline | Dogsare products or services that have low relative market share and low market growth. They consume resources and do not create profit. They may generatea negative cash flow- that is, they make a loss.The best course of action is to raise prices to maximize income, known as harvesting,before finally dropping the line- taking the product or service off the market. |
This 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. A second assumption is that 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.
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. The BCG matrix can help understand a frequently made strategic mistake: having a one-size-fits-all approach to strategy such as a generic growth target or a generic return on capital for the entire corporation.
In such a scenario:
• Cash Cows will beat their profit target easily; their managers have an easy job and are often praised anyhow.
• Dogs fight an impossible battle and, even worse, investments are made now and then in hopeless attempts to "turn the business around".
• As a result, Question Marks and Stars get mediocre investment funds. In this way they are unable to ever become cash cows and earn money.
Limitations. The BCG 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.
• 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.
5.9 Mark the following statements as True or False.
1) The Boston Matrix is a strategic planning tool.
2) Managers can compare the finances of Strategic business Units (SBUs) inside one company.
3) A company’s SBU is a cash cow.
4) Dogs often become stars and make a lot of money.
5) Cash cows require a lot of investment.
6) Stars have low market share but a lot of potential.
7) Question marks may become dogs or stars.
8) Cash cows may become dogs.
9) The Boeing 747 is the cash cow of the Boeing Corporation.
10) An example of cash cows that became dogs is the 5.25" floppy disk.
5.10 Identify which product is being described in each extract.
The four categories of the Boston matrix are:
1) ….. These products have a low market share in a market that's not growing and thus neither generate nor consume a large amount of cash.
However, they are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture. And, as you can guess, the best thing to do with a …. is take it for a walk - outside of your product portfolio. …. are in the decline stage of the product life cycle and should probably be retired.
2) …..These as you might guess, are products where no one is positive what's going on. They have a low market share, but they are also in a growing market area. A ….. has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the ….. does not succeed in becoming the market leader, then after years of cash consumption it will degenerate into a dog when the market growth declines. ….. must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.
3) …..These are recently-introduced products with a large market share. But, unlike cash cows, the market is growing, so ….. have the chance to attract even more new customers. They generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rates; therefore the cash in each direction approximately nets out. If a ….. 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 …. that will become the next cash cows and ensure future cash generation.
4).....These are mature products that have a large market share and that are earning a lot of money. The market is static, so there's not much opportunity for growth, but that's not a problem. As leaders in a mature market, they exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. ….. provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund R&D, to service the corporate debt, and to pay dividends to shareholders. Because the….. generates a relatively stable cash flow, its value can be accurately determined by calculating the present value of its cash stream using a discounted cash flow analysis.
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