Modified BCG Matrix 2.0
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NEW Harvard Business Review labelled the BCG Matrix as one of the frameworks that changed the world. In the late 1970s and early 1980s, about half of the Fortune 500 companies employed this framework. But in today's time, where the business world is ever more dynamic and much more unpredictable than in the 1970-80s, how can the BCG matrix still stay relevant for firms seeking to manage their product portfolio effectively?
What is the BCG Matrix? Quick Recap
The
BCG Growth Share Matrix or simply, BCG Matrix, was proposed by Bruce Henderson (Founder, Boston Consulting Group) in the 1970s. It helped companies in prioritizing their businesses and markets based on 2 dimensions:
market attractiveness (i.e., market growth rate) and
company competitiveness (i.e., relative market share). Based on these 2 factors, any business/product portfolio could be classified into 4 quadrants – Cash Cows, Dogs (Pets), Stars, and Question Marks.
The Relevance of the Original BCG Matrix Today
The BCG Matrix helped conglomerates and firms with a diversified product portfolio to effectively direct the cash from the Cash Cow businesses to the Stars with a higher growth potential. It also provided them with a tool to strike a balance between the exploration of new businesses and the exploitation of mature businesses.
The BCG Matrix was based on the logic that a market leader (i.e., the company having the largest market share), would be able to earn superior returns through benefits from scale and experience, which competitors couldn't emulate. Also, a higher growth rate meant that businesses could be scaled up quickly to achieve leadership.
However, since the introduction of the BCG Matrix in the 1970s, the business environment has changed a lot. The number of conglomerates (i.e., companies with multiple or even many mature businesses), has been reduced since 1970. And firms now face a more dynamic and unpredictable business environment than before. Thus, they have to constantly adapt themselves to retain a competitive edge - by frequently shifting resources between businesses. Furthermore, market share is no longer considered the sole driver of success (BCG analysis showed that the probability that a market leader is also the profit leader has more than halved since 1970s). Other key drivers, such as in particular the various abilities to adapt to changing environments (
organizational agility), are more relevant today.
These changes mentioned above have affected the distribution and dynamics of businesses across the four quadrants of the BCG Matrix. Businesses now move around the quadrants more quickly. In other words, the average time spent in a particular quadrant has dramatically decreased. As mature businesses continue to face
disruptions, the number of Cash Cows have decreased (the life of Cash Cows has been curtailed). As a result, Cash Cows now contribute lesser to the total profit share of the firm, than they did in the 1970s (and thus, challenging the fact that market share greatly influences the strategic competitiveness).
A MODIFIED BCG MATRIX 2.0 FOR DYNAMIC & UNPREDICTABLE MARKETS
Considering today's dynamic environments, BCG suggests that the matrix hasn't lost its value, although its significance has changed.
The matrix should be applied to businesses with a greater agility. The relative market share should be done away with as the sole indicator for success (horizontal axis in the BCG matrix). Also, there should be more focus on
strategic experimentation (exploring new business models, markets, and products) to adapt to changing business environments. For this, the matrix needs to be inculcated deep within the organizational culture to promote strategic experimentation. In the meanwhile, the firm must ensure that it avoids wastage by using its resources efficiently.
Based on these assertions,
BCG suggests the following four action imperatives for using the BCG Matrix for successful experimentation in the current business environments:
- ACCELERATE (increase the pace of innovation): The firm should constantly evaluate its businesses, and keep re-innovating itself to match the speed of the dynamic business environment.
- BALANCE EXPLORATION AND EXPLOITATION (balance investments between established, cash-generating and new, unproven businesses): With a culture which supports risk-taking and experimentation, the firm should maintain an adequate number of Question Marks. These businesses need to be tested rapidly and economically – strategically choosing businesses which have the potential of becoming Stars. Alongside, the firm should also milk Cash Cows efficiently, by improving the profitability through process streamlining and incremental innovation. The firm should learn from the failures of Dogs to drive future decisions, and lower the exit barriers before making a divestiture.
- SELECT RIGOROUSLY (choose divestments and investments in a disciplined way): Companies should develop predictive analytics to pragmatically select which Question Marks to invest in, and which Cash Cows and Dogs to divest.
- MEASURE AND MANAGE PORTFOLIO ECONOMICS OF EXPERIMENTATION (meticulously measure and monitor experimentation): The firm should assess the costs & benefits associated with experimentation to determine the number of Question Marks. The firm should strive to maintain a higher conversion probability of Question Marks to Stars, while also lowering the cost of failure of Question marks. In the long run, the firm should maintain a portfolio balance of young Stars and Question Marks which drive enough profitability to replace the old Cash Cows in the future.
⇒ Do you think the BCG Matrix, with the suggested updates, will be able to last for quite some time as a leading portfolio management instrument? Or do you think additional modifications are needed to better suit today's dynamic business environment?
Source: Reeves, M., Moose, S. & Venema, T. (2014) "BCG Classics Revisited – The Growth Share Matrix", BCG Perspectives.
