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The BCG Matrix method is the most well-known portfolio management tool.
It is based on product life cycle
theory. It was developed in the early 70s by the Boston Consulting Group.
The BCG Matrix can be used to determine what priorities should be given in
the product portfolio of a business unit. 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 Boston Consulting Group Matrix has 2 dimensions: market share
and market growth. The basic idea behind it is: if a product has a
bigger market share, or if the product's market grows faster, it is better
for the company.
 The
four segments of the BCG Matrix
Placing products in the BCG matrix provides 4 categories in a portfolio
of a company:
- Stars (high growth, high market share)
- Stars are using large amounts of cash. Stars are leaders in the business.
Therefore they should also generate large amounts of cash.
- Stars are frequently roughly in balance on net cash flow. However
if needed any attempt should be made to hold your market share in Stars,
because the rewards will be Cash Cows if market share is kept.
- Cash Cows (low growth, high market share)
- Profits and cash generation should be high. Because of the low growth,
investments which are needed should be low.
- Cash Cows are often the stars of yesterday and they are the foundation
of a company.
- Dogs (low growth, low market share)
- Avoid and minimize the number of Dogs in a company.
- Watch out for expensive ‘rescue plans’.
- Dogs must deliver cash, otherwise they must be liquidated.
- Question Marks (high growth, low market share)
- Question Marks have the worst cash characteristics of all, because
they have high cash demands and generate low returns, because of their
low market share.
- If the market share remains unchanged, Question Marks will simply
absorb great amounts of cash.
- Either invest heavily, or sell off, or invest nothing and generate
any cash that you can.
the BCG Matrix and one size fits all strategies
The BCG Matrix method can help to understand a frequently made strategy
mistake: having a one size fits all strategy approach, such as a generic growth
target (9 percent per year) or a generic return on capital of say 9,5% for
an entire corporation.
In such a scenario:
- Cash Cows Business Units will reach their profit target easily. Their
management have an easy job. The executives are often praised anyhow. Even
worse, they are often allowed to reinvest substantial cash amounts in their
mature businesses.
- Dogs Business Units are fighting an impossible battle and, even worse,
now and then investments are made. These are hopeless attempts to "turn
the business around".
- As a result all Question Marks and Stars receive only mediocre investment
funds. In this way they can never become Cash Cows. These inadequate invested
sums of money are a waste of money. Either these SBUs should receive enough
investment funds to enable them to achieve a real market dominance and become
Cash Cows (or Stars), or otherwise companies are advised to disinvest. They
can then try to get any possible cash from the Question Marks that were
not selected.
Other uses and benefits of the BCG Matrix
- If a company is able to use the experience curve to its advantage, it
should be able to manufacture and sell new products at a price that is low
enough to get early market share leadership. Once it becomes a star, it
is destined to be profitable.
- BCG model is helpful for managers to evaluate balance in the firm’s
current portfolio of Stars, Cash Cows, Question Marks and Dogs.
- BCG method is applicable to large companies that seek volume and experience
effects.
- The model is simple and easy to understand.
- It provides a base for management to decide and prepare for future actions.
Limitations of the BCG Matrix
Some limitations of the Boston Consulting Group Matrix include:
-
It neglects the effects of synergy between business
units.
-
High market share is not the only success factor.
-
Market growth is not the only indicator for attractiveness
of a market.
-
Sometimes Dogs can earn even more cash as Cash Cows.
-
The problems of getting data on the market share and market
growth.
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There is no clear definition of what constitutes a "market".
-
A high market share does not necessarily lead to profitability
all the time.
-
The model uses only two dimensions – market share and growth
rate. This may tempt management to emphasize a particular product, or to
divest prematurely.
-
A business with a low market share can be profitable too.
-
The model neglects small competitors that have fast growing
market shares.
Book: Carl W. Stern,
George Stalk - Perspectives on Strategy from The Boston Consulting Group -
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Compare with the BCG Matrix: McKinsey
Matrix | ADL Matrix
| Product/Market Grid
| Stage-Gate |
Three Dimensional
Business Definition |
Relative Value of Growth
| Rule of Three
| Core Competence |
Bass Diffusion Model
| STRATPORT |
Profit Pools |
Product Life Cycle |
Blue Ocean Strategy
| Four
Trajectories of Industry Change |
Positioning |
Strategic Types
Return to Management Hub: Decision-making & Valuation | Finance & Investing | Marketing
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