BCG's GROWTH-SHARE MATRIX
BCG’s Growth-Share Matrix
BCG’s Portfolio Analysis is based on the premise that majority
of the companies carry out multiple business activities in a number of
different product-market segments. Together these different businesses form the
Business Portfolio which can be characterised by two parameters:
- Company’s relative market share for the business, representing the firms competitive positions; and
- The overall growth rate of that business.
The BCG model proposes that for each business activity within
the corporate portfolio, a separate strategy must be developed depending on its
location in a two by-two portfolio matrix of high and low segments on each of
the above mentioned axes.
Relative Market Share is stressed on the
assumption that the relative competitive position of the company would
determine the rate at which the business generates cash. An organization with a
higher relative share of the market compared to its competitors will have
higher profit margins and therefore higher cash flows.
Relative Market Share is defined as the market share of the
relevant business divided by the market share of its largest competitor. Thus,
if Company X has 10 per cent, Company Y has 20 per cent, and Company Z has 60
per cent share of the market, then X’s Relative Market Share is 1/6m, Y’s
Relative Market Share is 1/3, and Z’s Relative Market Share 60/20 = 3. Company
Z has Company Y as its leading competitor, whereas Companies X and Y have Company
Z as their lead competitor.
The selection of the Rate of Growth of the associated
industry is based on the understanding that an industrial segment with high
growth rate would facilitate expansion of the operations of the participating
company. It will also be relatively easier for the company to increase its
market share, and have profitable investment opportunities. High growth rate
business provides opportunities to plough back earned cash into the business
and further enhance the return on investment. The fast growing business,
however, demands more cash to finance its growth.
If an industrial sector is not growing, it would be more
difficult for the participating company to have profitable investments in that
sector. In a slow growth business, increase in the market share of a company
would generally come from corresponding reduction in the competitors’ market
share.
The BCG matrix classifies the business activities along the
vertical axis according to the ‘Business Growth Rate” (meaning growth of the
market for the product), and the ‘Relative Market Share’ along the horizontal
axis. The two axes are divided into Low and High sectors, so that the BCG
matrix is divided into four quadrants (refer to Figure 1). Businesses
falling into each of these quadrants are classified with broadly different
strategic categories, as explained below:
Cash Cows
The businesses with low growth rate and high market share are
classified in this quadrant. High market share leads to high generation of cash
and profits. The low rate of growth of the business implies that the cash
demand for the business would be low. Thus, Cash Cows normally generate large
cash surpluses. Cows can be ‘milked’ for cash to help to provide cash required
for running other diverse operations of the company. Cash Cows provide the
financial base for the company. These businesses have superior market position
and invariably low costs. But, in terms of their future potential, one must
keep in mind that these are mature businesses with low growth rate.
Dogs
If the business growth rate is low and the company’s relative
market share is also low, the business is classified as DOG. The low market
share normally also means poor profits. As the growth rate is also low,
attempts to increase market share would demand prohibitive investments. Thus,
the cash required to maintain a competitive position often exceeds the cash
generated, and there is a net negative cash flow. Under such circumstances, the
strategic solution is to either liquidate, or if possible harvest or divest the
DOG business.
Figure-1: BCG Matrix
Question Marks
Like Dogs, Question Marks are businesses with low market share
but the businesses have a high growth rate. Because of their high growth, the
cash requirement is high, but due to their low market share, the cash generated
is also low.
As the business growth rate is high, one strategic option is to
invest more to gain market share, pushing from low share to high. The Question
Mark business then moves to a STAR (discussed later) quadrant, and subsequently
has the potential to become cash low, when the business growth rate reduces to
a lower level.
Another strategic option is when the company cannot improve its
low competitive position (represented by low market share). The management may
then decide to divest the Question Mark business.
These businesses are called Question Marks because they raise
the question as to whether more money should be invested in them to improve
their relative market share and profitability, or they should be divested and
dropped from the portfolio.
Stars
Businesses which have high growth rate and high market share,
are called Stars. Such businesses generate as well as use large amounts of
cash. The Stars generate high profits and represent the best investment opportunities
for growth. The best strategy regarding Stars is to make the necessary
investments and consolidate the company’s high relative competitive position.
Methodology for Building BCG Matrix
The Boston Consulting Group suggests the following step-by-step
procedure to develop the business portfolio matrix and identify the appropriate
strategies for different businesses.
- Classify various activities of the company into different business segments or Strategic Business Units (SBUs).
- For each business segment determine the growth rate of the market. This is later plotted on a linear scale.
- Compile the assets employed for each business segment and determine the relative size of the business within the company.
- Estimate the relative market shares for the different business segments. This is generally plotted on a logarithmic scale.
- Plot the position of each business on a matrix of business growth rate and relative market share.
Strategic Implications
Most companies will have different segments scattered across the
four quadrants of BCG matrix, corresponding to Cash Cow, Dog, Question Mark and
Star businesses. The general strategy of a company with diverse portfolio is to
maintain its competitive position in the Cash Cows, but avoid over-investing.
The surplus cash generated by Cash Cows should be invested first in Star
businesses, if they are not self-sufficient, to maintain their relative
competitive position. Any surplus cash left with the company may be used for
selected Question Mark businesses to gain market share for them. Those
businesses with low market share, and which cannot adequately be funded, may be
considered for divestment. The Dogs are generally considered as the weak
segments of the company with limited or now new investments allocated to them.
The BCG Growth-share matrix links the industry growth
characteristic with the company’s competitive strength (market share), and
develops a visual display of the company’s market involvement, thereby
indirectly indicating current resource deployment. (The sales to asset ratio is
generally stable over time across industries). The underlying logic is that
investment is required for growth while maintaining or building market share.
But, while doing so, a strong competitive business in an industry with low
growth rate will provide surplus cash for deployment elsewhere in the
Corporation. Thus, growth uses cash whereas market competitive strength is a potential
source of cash. In terms of BCG classification, the cash position of various types
of businesses can be visualised as in Table -1.
Limitations of BCG Matrix
The Growth-share BCG Matrix has certain limitations and weak
points which must be kept in mind while using portfolio analysis for developing
strategic alternatives. These are now briefly discussed.
Predicting Profitability from Growth and Market Share
BCG analysis assumes that profits depend on growth and market
share. The attractiveness of an industry may be different from its simple
growth rate, and the firm’s competitive position may not be reflected in its
market share. Some other sophisticated approaches have been evolved to overcome
such limitations.
There have been specific research studies which illustrate
that the well-managed Dog businesses can also become good cash generators. These
organizations relying on high-quality goods, with medium pricing and judicious
expenditure on R & D and marketing, can still provide impressive return on
investment of above 20 per cent.
Difficulty in Determining Market Share
There is a heavy dependence on the market share of a business as
an indicator of its competitive strength. The calculation of market share is
strongly influenced by the way the business activity and the total market are
defined. For instance, the market for helicopters may encompass all types of
helicopters, or only heavy helicopters or only heavy military helicopters.
Furthermore, from geographical point of view the market may be defined on
worldwide, national or an even regional bases. In case of complex and interdependent
industries, it may also be quite difficult to determine the market share based
on the sales turnover of the final product only.
No Consideration for Experience Curve Synergy
In the BCG approach, businesses in each of the different
quadrants are viewed independently for strategic purposes. Thus, Dogs are to be
liquidated or divested. But, within the framework of the overall corporation,
useful experiences and skills can be acquired by operating low-profit Dog
businesses which may help in lowering the costs of Star or Cash Cow businesses.
And this may contribute to higher corporate profits.
Disregard for Human Aspect
The BCG analysis, while considering different businesses does
not take into consideration the human aspects of running an organization. Cash
generated within a business unit may come to be symbolically associated with
the power of the concerned manager. As such managing a Cash Cow business may be
reluctant to part with the surplus cash generated by his unit. Similarly, the
workers of a Dog business which has been decided to be divested may react
strongly against changes in the ownership. They may deem the divestiture as a
threat to their livelihood or security. Thus, BCG analysis could throw up
strategic options which may or may not be easy to implement.
BCG Modifications
It was in 1981 that the Boston Consulting Group realised the
limitations of equating market share with the competitive strength of the
company. They have admitted that the calculation of market share is strongly
influenced by the way business activity and the total market domain are
defined. A broadly defined market will give lower market share, whereas a
narrow market definition will result in higher market share resulting in the
company as the leader. It was, therefore, recommended that products should be
regrouped according to the manufacturing process to highlight the economies of
scale manufacturing, instead of stressing the market leadership.
On the other hand, BCG still maintain that for branded goods it
is important to be the market leader so that the advantages of economies of
scale and price leadership can be fully utilised. But they also concede that
such advantages may still be achieved even if the company is not the largest
producer in the industry. Some other versions of portfolio analysis have
however developed much beyond these minor modifications of BCG analysis.
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