BCG MATRIX

One of the most common and long standing ways of conceiving  of the balance of a portfolio of businesses is in terms of the relationship between market share and market growth the Boston Consulting Group identified (Johnson & Scholes).

Boston Consulting Group ’s growth/share matrix has become one of the most widely used approaches that facilitate corporate strategic analysis of likely “generators” and optimum “users” of corporate resources. Exhiit 1 represents the BCG approach and shows the terms typically employed to refer to the kinds of businesses in such a portfolio.  Each of the company’s businesses is positioned in the matrix in accordance with its market growth rate and relative competitive position. Market growth rate refers to the projected rate of sales growth for the market that a particular business caters to.

It is usually measured as the percentage increase in sales in a market or unit volume over the two most recent years. Market growth rate indicates relative attractiveness of the markets each of the businesses serves in a portfolio of businesses. Relative competitive position means the ratio of a business’s market share divided by the market share of the largest competitor in that market and provides a basis for comparing the relative strengths of different businesses in the portfolio. The BCG matrix is shown in a diagram.

Stars

Stars are businesses that have high market share in a high growth environment. They are growing rapidly and are the best long-run opportunities in terms of growth and profitability in the firm’s portfolio. They are leaders in their business and generate large amount of cash.  They require substantial investment to maintain and expand their dominant position in a growing market. The investment requirement often exceeds the internal cash generation. These business, therefore, are short-tern, priority consumers of corporate resources.  Because of their high share, they are expected to enjoy a lower cost structure than their lower share competitors because of the experience effects.

Cash Cows

Cash cows are low-growth, high market-share products or divisions. Because of their high market share, they have low costs and generate cash. Since growth is slow, reinvestment costs are low. Cash cows provide funds for overhead, dividends, and investment for the rest of the firm and are in excess of their needs. Therefore, these businesses serve as a source of corporate resources for deployment elsewhere (to stars and question marks) and are managed to maintain their strong market share while efficiently generating excess They are the foundation of the firm, and stability is the appropriate strategy for them.

Dogs

Such businesses are defined as those in which the growth rate is slow and the relative market share is low compared to the leading competitors. Because of their low market share these businesses are often expected to have a higher cost structure than industry leaders. It is difficult and extremely expensive for them to gain share in a mature market. Divestment or rapid harvesting are the recommended strategies for such weak businesses. Often these low capital intensity businesses can be fruitful cash generators.            

Question marks

Question marks are high-growth, low-market-share products or divisions. Their conditions are the worst, for their cash needs are high, but cash generation is low. Such businesses are seen to indicate opportunity. They need to gain share by generating additional market share and hence lower cost via experience gains, while the growth rate in the industry is high. The primary objective of such businesses should be to gain share rather than maximize short- term profitability. So question marks should be converted into stars, then later into cash cows. This strategy will lead to a cash drain in the short run but positive flow in the long run. The other option is divestment.          

This technique usually applies to multiple-SBU firms making decisions about the expansion, maintenance and retrenchment of different SBUs. Its’ goal is to determine the corporate strategy that best provides a balanced portfolio of business units. 

The growth share matrix allows business unit to be evaluated in relation to a market share and the growth rate of that market and in this respect the life cycle development of that market. In this manner, it considers the balance and development of a portfolio. 

The market growth rate is important for a business unit searching to dominate a market as it may be simpler to acquire dominance when a market is in its growth state.Ina situation of maturity, a market is more likely to be stable, as the customer are fairly loyal, so it is more difficult to increase market share. However, if many of the competitors in the growth market are attempting to enhance their market share, competition will be very intense; so it will be essential to invest in that business unit for the purposes of gaining market share and acquire market dominance. Moreover, there are chances that such a business unit will require to keep the price low or spend huge amounts on advertising and personal selling or both.This strategy involves high risk  unless this low profit margin game is financed by products earning high profit margins. This takes to the concept of a balanced mix of business units.
 
Some of the Boston Consulting Group prescriptions could ultimately lead to a lack of innovative product introductions, since by  definition, new products start as a dog or question marks” The BCG matrix was a valuable initial development in the portfolio approach to corporate-level strategy evaluation. BCG’s ideal, balanced portfolio would have the largest sales in cash cows and starts, with only a few question marks and very few dogs.

BCG matrix makes two major contributions to corporate strategic choice

The assignment of a specific role or mission for each business unit.
The integration of multiple business units into a total corporate strategy.

Criticism of BCG matrix

BCG matrix suffers from a number of limitations:

Since it is difficult to define a market clearly, measuring market share and market growth rate becomes more difficult.
 Dividing the matrix into four cells based on a high/low classification scheme is too simplistic. It does not recognize the markets with average growth rates or the businesses with average market shares.
 The relationship between market share and profitability varies across industries and market segments. In some industries a large market share creates major advantages in unit costs; in others it does not. Some companies, for instance Mercedes Benz and Polaroid, with low market share can generate superior profitability and cash flow with careful strategies based on differentiation, innovation or market segmentation.

The matrix is not helpful particularly in comparing relative investment opportunities across different business units in the corporate portfolio. For example, is every star better than a cash cow? How should one question mark be compared to another in terms of whether it should be built into a star or divested?    Strategic evaluation of a set of businesses requires examination of more than relative market shares and market growth. The attractive of an industry may increase based on technological, seasonal, competitive, or other considerations as much as on growth rate. Likewise, the value of a business within a corporate portfolio is often linked to considerations other than market share. The four colorful classification in the BCG matrix somewhat oversimplify the types of businesses in a corporate portfolio. Likewise, the simple strategic missions recommended by the BCG matrix often don’t reflect the diversity of options available.
      Executives dislike the use of terminology such as dog, question mark cash- cow in BCG matrix. These terms are seen as negative, stable and unnecessarily graphic.