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THE BOSTON CONSULTING GROUP (BCG) GROWTH-SHARE MATRIX

Nhyira Premium, IBL

THE MODEL

  • The BCG matrix is a two-by-two matrix that classifies businesses, divisions, or products according to the present market share and the future growth of that market.
  • Growth is seen as the best measure of market attractiveness.
  • Market share is seen to be a good indicator of competitive strength

Products are then shown in a diagram where the money value of sales is indicated by the relative size of the circle:

Based on this there are four possible classifications.

CASH COW

A cash cow has a high relative market share in a low-growth market and should be generating substantial cash inflows.

  • The period of high growth in the market has ended (the product life cycle is in the maturity or decline stage), and consequently the market is less attractive to new entrants and existing competitors.
  • Cash cow products thus tend to generate cash in excess of what is needed to sustain their market positions.
  • Profits support the growth of other company products.
  • The firm’s strategy is oriented towards maintaining the product’s strong position in the market.

STAR

A star has a high relative market share in a high-growth market. A star may be only cash-neutral despite its strong position, as large amounts of cash may need to be spent to defend an organisation’s position against competitors.

  • Competitors will be attracted to the market by the high growth rates.
  • Failure to support a star sufficiently strongly may lead to the product losing its leading market share position, slipping eastwards in the matrix and becoming a problem child.
  • A star, however, represents the best future prospects for an organisation.
  • Market share can be maintained or increased through price reductions, product modifications, and/or greater distribution.
  • As industry growth slows, stars become cash cows.

PROBLEM CHILD

A problem child (sometimes called ‘question mark’) is characterised by a low market share in a high-growth market. Substantial net cash input is required to maintain or increase market share.

  • The company must decide whether to do nothing (but cash continues to be absorbed) or market more intensively (requiring substantial investment) or get out of this market (“double or quit”).
  • The questions are whether this product can compete successfully with adequate support and what that support will cost.

DOG

The dog product has a low relative market share in a low-growth market. Such a product tends to have a negative cash flow, that is likely to continue.

  • It is unlikely that a dog can wrest market share from competitors without getting bigger but the market is not attractive enough to warrant such investment.
  • Competitors, who have the advantage of having larger market shares, are likely to fiercely resist any attempts to reduce their share of a low-growth or static market.
  • An organisation with such a product can attempt to appeal to a specialised market, delete the product, or harvest profits by cutting back support services to a minimum.

MEASUREMENT ISSUES

Assessing the rate of market growth as high or low is difficult because it depends on the market. New markets may grow explosively while mature markets grow hardly at all. The midpoint of the growth dimension is usually set at 10% annual growth rate; markets growing in excess of 10% are considered to be high-growth markets and those growing at less are low-growth markets.

Relative market share is defined by the ratio of market share to the market of the largest competitor. The log scale is used so that the midpoint of the axis is 1.0, the point at which an organisation’s market share is exactly equal to that of its largest competitor. Anything to the left of the midpoint indicates that the organisation has the leading market share position.

HAVING A BALANCED PORTFOLIO

An organisation would want to have in a balanced portfolio:

  • cash cows of sufficient size and/or number that can support other products in the portfolio
  • stars of sufficient size and/or number which will provide sufficient cash generation when the current cash cows can no longer do so
  • problem children that have reasonable prospects of becoming future stars
  • no dogs or, if there are any, there would need to be good reasons for retaining them.

STRATEGIC MOVEMENTS ON THE BCG MATRIX

A product’s place in the matrix is not fixed for ever as the rate of growth of the market should be taken into account in determining strategy.

  • Stars tend to move vertically downwards as the market growth rate slows, to become cash cows.
  • The cash that they then generate can be used to turn problem children into stars, and eventually cash cows.

CRITICISMS OF THE BCG MATRIX

(1) The matrix uses only two measures

The only two measures used in the BCG matrix are growth and market share. These may be too limited as a basis for policy decisions. The Boston Consulting Group has now developed a further matrix to meet this criticism:

 

The vertical axis now indicates the number of ways in which a unique advantage may be achieved over competitors, and the horizontal axis is a measure of the size advantage that may be created over competitors. The new matrix makes the exercise much more a matter of qualitative judgement.

(2) The matrix encourages companies to adopt holding strategies

The strategic principles involved advocate that companies with large market shares in static or low-growth markets (i.e., cash cows) adopt holding or harvesting strategies rather than encouraging them to try to increase the total demand of the markets in which their products are selling. Compliance with these strategic tenets has led to devastating results for some companies.

There are a number of dangers in assuming that a product is a ‘cash cow’. (BCG defines a cash cow as a product occupying a strong position in a static or slow growing market.) First, management may be tempted to pull back on investment, by treating the product as in ‘safe-water’, and second make assumptions about future cash flow that may be unrealistic. Yamaha destroyed the dominance of the well-established US musical instrument manufacturers who concentrated on milking their mature products for profit rather than on planning how to defend their market shares.

(3) The matrix implies only those with large market shares should remain

There are many examples of businesses with a low market share continuing to operate profitably. Sometimes this is because the market is not unitary, but fragmented, and the small competitor has found itself a particular market niche; on other occasions large companies may prefer smaller competitors to preserve the impression of competition.

The link between profitability and market share may be weak because:

  • low share competitors entering the market late may be on the steepest experience curve
  • low share competitors may have some in-built cost advantage
  • not all products have costs related to experience
  • large competitors may receive more government attention and regulation.

(4) The matrix implies that the most profitable markets are those with high growth

Again, this is not always so, due to:

  • high entry barriers, especially in high-technology industries
  • high price competition.

Both of these problems are typified by the microcomputer business. Despite impressive rates of growth, a number of companies have been unable to make profits because of the high levels of initial investment followed by extreme price competition from low-cost late entrants.

(5)Not all dogs should be condemned

A very large number of small but successful businesses are ‘dogs’, and according to the BCG concept are ripe for reinvestment or liquidation. However, this would not always be the case. Dog products are often used not with the primary aim of maximising the profit from the product itself, but to provide economies of scale in manufacturing, marketing and administration to sustain the overall business.

Furthermore, the BCG portfolio theory does not seem to take into account the need for competitive strategy. A company might, for example, launch a product to act as a ‘second front’ to support the thrust of its main offering, although the product, by definition, is a dog.

When the Clorox company (the market leader in the US for bleach) introduced a new product, ‘Wave’, the purpose was to try to deflect Procter & Gamble’s attack by creating a ‘second front’, rather than to generate substantial profits from Wave.

Despite these criticisms, in certain circumstances the model provides a useful method by which a company can

  • attempt to achieve overall cost leadership in its market(s) through aggressive use of directed efficiency;
  • focus its expenditures and capital investment programmes; and
  • plan for an appropriate balance of resources between conflicting product-market claims. Also, the information and analysis required to construct the matrix will provide meaningful indicators. It should, however, not be used in a rigid, stereotype manner.

The model ought to be used as a means to an end, not as representing the end objective in itself.

THE EVIDENCE

Several studies have been carried out on the use of the BCG, and on the whole, these would not encourage uncritical use of the model. In particular, the link between quadrant and cash flow is not particularly strong, and there are many exceptions. Fortune once described this model as the worst business model ever devised.