BCG Growth Matrix

This tool was developed by the Boston Consulting Group and first presented in 1973. It was one of the first of many matrix type tools designed to assist organisations to consider the balance of an overall portfolio of business units. Focus and Scope This tool is designed to assist with analysis of the fit between business portfolio and industry factors. It also allows managers to examine the relationship between different business units within their overall portfolio on a few selected dimensions. It provides insight into business performance and ways of balancing business mix to achieve organisational objectives. The tool is of greatest benefit for analysis at the corporate level with significant flow on implications for individual business strategy. It does not directly consider indirect external factors or internal environmental factors effecting business performance, focusing instead on the business mix and its 'fit' with industry and competitor factors. The chief contribution of the BCG growth share matrix is the attention it draws to the cash flow and investment characteristics of various types of businesses and how corporate financial resources can be shifted between businesses to optimise the performance of the whole corporate portfolio. Alternatives include the GE matrix which uses a nine cell matrix. The axes in this case are Long Term Industry Attractiveness (high, medium and low) and Competitive Position (strong average weak)

Description The axis of the BCG matrix most commo nly chosen are:

industry growth rate; and market share

As noted above alternative axes include:

long term industry attractiveness competitive strength; and stage of product or industry evolution.

A third variable is accommodated in the form of the size of the circle. The circle (area) is scaled in proportion to the revenue the business it represents provides as a proportion of total company revenue.

Thompson and Strickland recommend placing the dividing line between high and low industry growth rates such that business units growing faster than the economy fall in the 'high' cells and those growing more slowly than the economy fall in the 'low' cells. They also suggest that relative market share be compared with the largest rival and that the comparison is made on the basis of volume not dollars. Business units are classified as either:

stars; question marks; cash cows; or dogs;

depending on where they fall on the matrix. Star Stars have strong competitive positions in rapidly growing industries and are major contributors to corporate revenue and profit growth. An issue to consider with stars is the business life-cycle stars may vary in expected longevity. Question marks Rapid growth but low market share raises the question as to whether these businesses can compete effectively given the possible existence of larger and more efficient rivals. Question marks commonly have a high cash requirement as they are frequently businesses in an early stage of development or introduction to the market. Large cash injections may be required just to maintain parity in the face of fast industry growth or to attempt to propel the business into the star category. The alternative is to divest the business. The decision will hinge on the business' potential to gain market share in the face of rivals - including rivals with an established presence and who are further along the experience curve.

Cash Cows Cash cows generate revenue in excess of that required for their effective maintenance. Cash cows typically arise from businesses which were stars at an earlier stage of industry maturity. Cash cows should receive investment only to maintain their market position. Surplus revenue they provide is used to support stars or to attempt to move question marks into the star category. Dogs Dogs are under performing businesses. Weaker dogs should be harvested or divested, stronger dogs may be maintained for so long as they contribute some useful cash flow or have some other strategic value such as maintaining a presence in a multi-point competitive situation or provide useful learning in a potentially valuable business sector with future growth potential.

Applications Application of this tool is simple, it involves:

selecting variables for the axes researching the revenue contribution of each business (some judgment may be required in deciding how to disaggregate business units for the purpose) researching growth rates and market share placing business units on the matrix examining overall trends and movements for each business considering how the overall portfolio is balanced considering different strategies for moving or re-balancing the portfolio, taking into account overall industry and business trends.

Example Examine the diagram shown above. Business A is a star which currently contributes a small but slowly growing amount of revenue. It is slowly losing market share and growth. Reasons for this may suggest strategies for improving its medium term position or its contribution to revenue. For example, better marketing may reduce the loss of market share, or better competitive strategy may be required. Reducing costs of production may improve its relative contribution to revenue. Business B is a n increasingly important contributor to revenue. It is holding market share but growth is declining possibly due to market maturity. It requires little additional investment and will shortly become a cash cow, delivering significant cash flow for minimal input. Strategies should be geared to maintaining its effective lifespan. Business C is moving from a question mark towards a star. Using cash flow from existing cash cows may accelerate this move and improve the businesses contribution.

Business D, while in a high g rowth sector, has minimal market share and little importance as a revenue source. While it has potential, it would take significant investment to move it towards a star. It is probably best to divest this business - it would probably have good sale potential. Business E is a dog but is moving (under current strategies towards being a useful (if diminishing) source of cash. A harvest strategy would be best for this business. Business F is performing very poorly and as it is in a low growth situation its prospects are very poor. Divesting or liquidation would be most appropriate. Business G is an important cash earner and its status is not changing much at all. Following an assessment of its expected life span, surplus cash it produces should be used to accelerate the move of business C towards star performance and to slow the decline of businesses A and B. Tips

Remember that under performing products may still be contributing important value as a part of an overall product mix in a particular competitive environment. Look at how shifting support and leveraging current performance for different products or services can help reposition individual items within the mix to improve overall performance. When you have used this tool, step back and ask what environmental factors your assessment is contingent upon.