The BCG Matrix – Growth/Share Matrix – Strategic Analysis
Posted: Thu Dec 05, 2024 7:00 am
The Strategic Analysis Matrix designed in the 1970s by the Boston Consulting Group and better known as the BCG Matrix , fundamentally measures the participation of the various strategic business units that the company or its products have in a given market based on two variables: growth and participation .
It is perhaps the strategic analysis matrix most used since then by marketing consultants , professionals, students and entrepreneurs to graphically show their business or product portfolio in the market and, based on this, subsequently carry out the strategic planning necessary to advance their corporate objectives.
It is also, from my point of view, the strategic analysis matrix that presents the most shortcomings in current competitive environments, since to graphically represent the position of businesses or products and to carry out a subsequent assessment of that position, much more is needed than a 2x2 matrix and 4 possible scenarios.
In the 80s, there were already many detractors of the BCG matrix (an opinion that I share), mainly for the following reasons:
1. Growth and profitability are not always so closely linked. In reality, they tend to compete with each other or be in opposition.
2. Good planning cannot ignore investment opportunities that promise adequate profitability.
3. The best business portfolios are generally not those that the strategist balances taking into account internal cash flow.
Basically, the BCG approach consists of comparing the SBUs with each other using a matrix based on two dimensions: relative market share and high growth.
German Pineiro's BlogThe image provided provides an example of such a matrix. The horizontal dimension measures relative market share; the vertical dimension measures industry growth rate. Each circle represents a SBU. The center of each circle corresponds to the SBU's position in the two dimensions of the matrix. The size of each circle is proportional to the sales revenue earned by each business in the firm's portfolio. The larger the circle, the greater the size of a SBU relative to total corporate revenue.
The BCG matrix graphically shows the differences among divisions in terms of their relative market share and industry growth rate. The BCG matrix enables a multi-divisional organization to manage its business portfolio by analyzing the relative market share and industry growth rate of each division relative to all other divisions in the organization.
In a BCG matrix, relative market share position is shown on the X-axis. The midpoint of the X-axis is typically set at .50, which would correspond to a market share split that has half of the market owned by the industry’s leading firm. The Y-axis represents the industry’s sales growth rate, measured as a percentage. Y-axis growth rate percentages can range from –20 to +20%, with 0.0 being the midpoint. These represent the numerical scale typically used for the X-axis, but an organization could set any numerical values it deems appropriate.
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The BCG matrix is structured as follows:
It is divided into four cells: SBUs in cell 1 are defined as stars, in
cell 2 they are defined as question marks, in cell 3 as dairy cows, and in cell 4 as dogs.
The BCG argues that these different types of SBUs have different long-term projections and different implications for cash flows.
-Stars: The leading SBUs in a company's portfolio are the stars. These have a high relative market share and are based in high-growth industries. They have both competitive strengths and opportunities for expansion. Consequently, they provide long-term performance and growth opportunities. Divisions that have a considerable relative market share and a high growth rate for the industry must attract significant investment to maintain or strengthen their dominant positions. These divisions should consider the convenience of forward, backward and horizontal integration strategies (I will explain in another post what integrations consist of and the types that exist); market penetration, product development and joint ventures.
- Question Marks: These are relatively weak SBUs in competitive terms (i.e. they have low relative market share). However, they are located in high-growth industries or sectors and thus can offer opportunities to provide profits and long-term growth. If a Question Mark is nurtured appropriately, it can become a star. To become a market leader, a Question Mark requires considerable capital and resource injections, i.e. it requires investment. Therefore, it must be decided whether a particular Question Mark has the potential to become a star and, therefore, whether it is worth the capital investment necessary to become a star. They occupy a relatively small market share but compete in a high-growth industry or sector. The company must also decide whether to strengthen them with intensive strategies (market penetration, market development or product development) or to sell them.
-Cash Cows: They have a high market share in low-growth industries or sectors and a strong competitive position in mature industries. Their competitive strength comes from generating the greatest decline in the experience curve. They are cost leaders in their industries. The BCG argues that this position allows a SBU or product to remain very profitable. However, low growth implies a lack of opportunities for future expansion. As a consequence, the BCG argues that the capital investment requirements of cash cows are not substantial and, consequently, they are represented as generating strong positive cash flow. Cash cow divisions should be managed so that their strong position can be maintained for as long as possible. Product development or concentric diversification may be attractive strategies for strong cash cows. However, as the cash cow division weakens, entrenchment or divestiture become more desirable.
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-Dogs: Found in low-growth industries but with low market share, these businesses have a weak competitive position in unattractive industries and are therefore seen to offer little benefit to a company. The BCG suggests that such SBUs are not likely to generate much in the way of positive cash flow and may in effect become pigs. Although they offer little projection for future growth in terms of returns, dogs may require considerable capital investments just to maintain their low market share. Because of their weak internal and external position, these businesses are often liquidated, discarded, or cut back through entrenchment. When a
division has just become a dead dog, entrenchment may be the best strategy to pursue, because many dead dogs have managed to re-emerge after strenuous asset and cost reductions and have become viable and profitable divisions.
The main benefit of the BCG matrix is that it focuses attention on the cash flow, investment characteristics, and needs of the various divisions of the organization. Many companies' divisions evolve over time: dogs become question marks, question marks become stars, stars become cash cows, and cash cows become dogs with a constant counterclockwise rotation. Less often, stars become question marks, question marks become dogs, dogs become cash cows, and cash cows become stars (with a clockwise rotation). In some organizations, there appears to be no cyclical movement. Over time, organizations should strive to achieve a portfolio of divisions that are all stars.
The BCG matrix, like all analytical techniques, has its limitations . For example, considering every business to be a star, cash cow, dog, or question mark is an oversimplification; many businesses fall right in the middle of the BCG matrix and therefore cannot be easily classified. Furthermore, the BCG matrix does not reflect whether or not various divisions are growing, or whether their industries are growing over time; that is, the matrix has no temporal qualities, but rather is a snapshot of an organization at a given point in time.
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As discussed above, there are other variables apart from the relative market position and the industry's sales growth rate, such as market size and competitive advantages, which are important for making strategic decisions about different divisions.
The ultimate goal of the Boston Consulting Group's portfolio matrix is to identify how best to use corporate cash resources to maximize a company's future growth and profitability.
The Boston Consulting Group's generic recommendations are as follows:
1. Surplus cash from any cash cow can be used to support the development of selected question marks and to foster stars. The long-term goal is to consolidate the position of stars and convert favored question marks into stars, thereby making the company's portfolio more attractive.
2. Question marks with the weakest or most uncertain long-term prospects should be decommissioned to reduce demands on a company's cash resources.
3. The company should exit any industry or sector where SBUs are dogs.
4. If a company lacks sufficient cash cows, stars, or question marks, it should consider acquisitions and divestitures to build a more balanced portfolio. A portfolio should contain enough stars and question marks to ensure a healthy growth and earnings outlook for the company and enough cash cows to support the investment requirements of stars and question marks.
In future articles I will present other strategic analysis matrices, including the only matrix that measures 3 dimensions, " the infinity matrix ", which I personally developed more than 10 years ago and have applied successfully since then.
Some bibliography consulted:
-Henderson, Bruce D., and Alan J. Zakon, "Corporate Growth Strategy: How to Develop and Implement It," in Kenneth J. Albert (editor), Handbook of Business Problem Solving, McGraw-Hill, New York, 1980, pp. 1.3-1.19.
-Lewis, W. Walker, Planning by Exception, Strategic Planning Associates, Washington, DC, 1977.
-Marakon Associates, «Criteria for Determining Optimal Business Portfolio,» Presentation made at The Institute of Management Sciences, November li, 1980.
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It is perhaps the strategic analysis matrix most used since then by marketing consultants , professionals, students and entrepreneurs to graphically show their business or product portfolio in the market and, based on this, subsequently carry out the strategic planning necessary to advance their corporate objectives.
It is also, from my point of view, the strategic analysis matrix that presents the most shortcomings in current competitive environments, since to graphically represent the position of businesses or products and to carry out a subsequent assessment of that position, much more is needed than a 2x2 matrix and 4 possible scenarios.
In the 80s, there were already many detractors of the BCG matrix (an opinion that I share), mainly for the following reasons:
1. Growth and profitability are not always so closely linked. In reality, they tend to compete with each other or be in opposition.
2. Good planning cannot ignore investment opportunities that promise adequate profitability.
3. The best business portfolios are generally not those that the strategist balances taking into account internal cash flow.
Basically, the BCG approach consists of comparing the SBUs with each other using a matrix based on two dimensions: relative market share and high growth.
German Pineiro's BlogThe image provided provides an example of such a matrix. The horizontal dimension measures relative market share; the vertical dimension measures industry growth rate. Each circle represents a SBU. The center of each circle corresponds to the SBU's position in the two dimensions of the matrix. The size of each circle is proportional to the sales revenue earned by each business in the firm's portfolio. The larger the circle, the greater the size of a SBU relative to total corporate revenue.
The BCG matrix graphically shows the differences among divisions in terms of their relative market share and industry growth rate. The BCG matrix enables a multi-divisional organization to manage its business portfolio by analyzing the relative market share and industry growth rate of each division relative to all other divisions in the organization.
In a BCG matrix, relative market share position is shown on the X-axis. The midpoint of the X-axis is typically set at .50, which would correspond to a market share split that has half of the market owned by the industry’s leading firm. The Y-axis represents the industry’s sales growth rate, measured as a percentage. Y-axis growth rate percentages can range from –20 to +20%, with 0.0 being the midpoint. These represent the numerical scale typically used for the X-axis, but an organization could set any numerical values it deems appropriate.
You may also be interested in: Google+ key in the new online marketing +1
The BCG matrix is structured as follows:
It is divided into four cells: SBUs in cell 1 are defined as stars, in
cell 2 they are defined as question marks, in cell 3 as dairy cows, and in cell 4 as dogs.
The BCG argues that these different types of SBUs have different long-term projections and different implications for cash flows.
-Stars: The leading SBUs in a company's portfolio are the stars. These have a high relative market share and are based in high-growth industries. They have both competitive strengths and opportunities for expansion. Consequently, they provide long-term performance and growth opportunities. Divisions that have a considerable relative market share and a high growth rate for the industry must attract significant investment to maintain or strengthen their dominant positions. These divisions should consider the convenience of forward, backward and horizontal integration strategies (I will explain in another post what integrations consist of and the types that exist); market penetration, product development and joint ventures.
- Question Marks: These are relatively weak SBUs in competitive terms (i.e. they have low relative market share). However, they are located in high-growth industries or sectors and thus can offer opportunities to provide profits and long-term growth. If a Question Mark is nurtured appropriately, it can become a star. To become a market leader, a Question Mark requires considerable capital and resource injections, i.e. it requires investment. Therefore, it must be decided whether a particular Question Mark has the potential to become a star and, therefore, whether it is worth the capital investment necessary to become a star. They occupy a relatively small market share but compete in a high-growth industry or sector. The company must also decide whether to strengthen them with intensive strategies (market penetration, market development or product development) or to sell them.
-Cash Cows: They have a high market share in low-growth industries or sectors and a strong competitive position in mature industries. Their competitive strength comes from generating the greatest decline in the experience curve. They are cost leaders in their industries. The BCG argues that this position allows a SBU or product to remain very profitable. However, low growth implies a lack of opportunities for future expansion. As a consequence, the BCG argues that the capital investment requirements of cash cows are not substantial and, consequently, they are represented as generating strong positive cash flow. Cash cow divisions should be managed so that their strong position can be maintained for as long as possible. Product development or concentric diversification may be attractive strategies for strong cash cows. However, as the cash cow division weakens, entrenchment or divestiture become more desirable.
You may also be interested in: Office supplies survive digitalization in the workplace
-Dogs: Found in low-growth industries but with low market share, these businesses have a weak competitive position in unattractive industries and are therefore seen to offer little benefit to a company. The BCG suggests that such SBUs are not likely to generate much in the way of positive cash flow and may in effect become pigs. Although they offer little projection for future growth in terms of returns, dogs may require considerable capital investments just to maintain their low market share. Because of their weak internal and external position, these businesses are often liquidated, discarded, or cut back through entrenchment. When a
division has just become a dead dog, entrenchment may be the best strategy to pursue, because many dead dogs have managed to re-emerge after strenuous asset and cost reductions and have become viable and profitable divisions.
The main benefit of the BCG matrix is that it focuses attention on the cash flow, investment characteristics, and needs of the various divisions of the organization. Many companies' divisions evolve over time: dogs become question marks, question marks become stars, stars become cash cows, and cash cows become dogs with a constant counterclockwise rotation. Less often, stars become question marks, question marks become dogs, dogs become cash cows, and cash cows become stars (with a clockwise rotation). In some organizations, there appears to be no cyclical movement. Over time, organizations should strive to achieve a portfolio of divisions that are all stars.
The BCG matrix, like all analytical techniques, has its limitations . For example, considering every business to be a star, cash cow, dog, or question mark is an oversimplification; many businesses fall right in the middle of the BCG matrix and therefore cannot be easily classified. Furthermore, the BCG matrix does not reflect whether or not various divisions are growing, or whether their industries are growing over time; that is, the matrix has no temporal qualities, but rather is a snapshot of an organization at a given point in time.
You may also be interested in: Olfactory marketing: an increasingly widespread trend
As discussed above, there are other variables apart from the relative market position and the industry's sales growth rate, such as market size and competitive advantages, which are important for making strategic decisions about different divisions.
The ultimate goal of the Boston Consulting Group's portfolio matrix is to identify how best to use corporate cash resources to maximize a company's future growth and profitability.
The Boston Consulting Group's generic recommendations are as follows:
1. Surplus cash from any cash cow can be used to support the development of selected question marks and to foster stars. The long-term goal is to consolidate the position of stars and convert favored question marks into stars, thereby making the company's portfolio more attractive.
2. Question marks with the weakest or most uncertain long-term prospects should be decommissioned to reduce demands on a company's cash resources.
3. The company should exit any industry or sector where SBUs are dogs.
4. If a company lacks sufficient cash cows, stars, or question marks, it should consider acquisitions and divestitures to build a more balanced portfolio. A portfolio should contain enough stars and question marks to ensure a healthy growth and earnings outlook for the company and enough cash cows to support the investment requirements of stars and question marks.
In future articles I will present other strategic analysis matrices, including the only matrix that measures 3 dimensions, " the infinity matrix ", which I personally developed more than 10 years ago and have applied successfully since then.
Some bibliography consulted:
-Henderson, Bruce D., and Alan J. Zakon, "Corporate Growth Strategy: How to Develop and Implement It," in Kenneth J. Albert (editor), Handbook of Business Problem Solving, McGraw-Hill, New York, 1980, pp. 1.3-1.19.
-Lewis, W. Walker, Planning by Exception, Strategic Planning Associates, Washington, DC, 1977.
-Marakon Associates, «Criteria for Determining Optimal Business Portfolio,» Presentation made at The Institute of Management Sciences, November li, 1980.
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CategoriesBlockchain , Business Management , Gurus and Thinkers , Marketing
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Present
Blockchain
Cloud Computing
Ecommerce
Companies
Business Manag chile consumer mobile number list ement
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Marketing
Online Marketing
New Technologies
Miscellaneous and Curiosities
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