- In Boston Consulting Group’s BCG growth-share Matrix analysis SBUs are evaluated from two ways, (A) the attractiveness of the SBU’s market (market growth) and (B) the strength of the SBU’s position in that market (market share).
- In BCG approach, the company classifies all its SBUs into 4 types as “stars”, “cash cows”, “question marks”, “dog” according to their market growth and relative market share.
- The BCG growth share matrix model, as being both simple and easily quantifiable, suggests that an analysis of the market can best be summarized by knowing its growth rate and that the best summary indication of a firm strength in a market share.
- The growth dimension is defined by the ratio of market share to the market of the largest competitor.
- Are high growth, high share business or products. They often need heavy investment to finance their rapid growth. Therefore they may not be producing a positive cash flow. The business strategy will generally be for growth fueled by externally acquired capital. Eventually their growth will slow, and they will turn into cash cows.
- Are low growth, high share business or product. These established and successful SBUs need less investment in to keep their market share. They produce lot of cash to be used for other business units of the company. They are either milked for investment in stars or question marks or harvested if there is little optimism for a stable future.
- Sometimes called problem children are low-share business units in high growth markets. They need a lot of cash to keep and increase their share; they cannot generate enough cash themselves. Management must decide which question marks it should build into stars and which should phase out.
- Are low growth, low share business and products. They often have poor profitability therefore; the business strategy for a dog is most often to divest, but occasionally to hold for possible strategic re positioning as a question marks or cash cow.
The company can
- Invest more in the business unit in order to build (increase) its share.
- Invest just enough to hols (keep) the SBU’s share at the current level.
- It can harvest the SBU, milking its short-term flow regardless of the long-term effects.
- Divest (kill) the SBU by selling it or phasing it out and using the resources elsewhere.
Strategic implication of BCG matrix
- The strategies for the overall portfolio product are concerned with the issue of balance, i.e. is the portfolio of product balanced internally in terms of the following:
- Are there a sufficient number of cash cows to support those other portfolios which are at the stages of their lifecycle where they require cash?
- Are there question marks which have reasonable prospects of becoming future stars and which do not at present constitute disproportionate drain on current cash flow?
- Are there any appropriate number of stars which will provide sufficient cash generation when the current cash cows are no longer able to fulfill this role?
- Are there any dogs and if so why?
Assumptions and limitation of BCG matrix
- The use of high and lows to make just four categories is too specific.
- The link between market share and profitability inst necessarily strong. Low share business can be profitable too.
- Growth rate is only one aspect of industry attractiveness. High growth rate market may not always be the best for every business unit or product line.
- It considers the product line or business unit only relation to one competitor, the market leader. It misses smaller competitor with fast growing market share
- Market share is only one aspect of overall competitive position.