When I say beware of the big bad BCG, I am not referring to Roald Dahl’s friendly giant. I am also not referring to the inoculation every UK teenager gets and which produces a large purple pustule on your arm. What I mean by the big bad BCG is the Boston Consulting Group’s Growth Share Matrix which is a prominent method of portfolio analysis.
Drucker (1963) identified that portfolio analysis was an important strategic marketing tool. He declared that it helped firms:
- Identify tomorrow’s breadwinners
- Identify today’s breadwinners
- Identify products capable of making a contribution to turnover
- Identify yesterday’s breadwinners
- Identify also-rans; and
- Identify failures.
Every student studying business at college or university is taught the Boston Consulting group growth share matrix as the predominant method of analysing a company’s product portfolio. However the matrix must be treated with care and it cannot be used in isolation. Doing so could lead to some very expensive mistakes.
The BCG matrix plots the rate of market growth for a product or strategic business unit (SBU) against that product/SBU’s market share when compared with the largest competitor in the market. The latter is plotted on a logarithmic scale.
When using the matrix to examine product portfolios, you must consider the future potential of the market. This can be achieved through using the market growth rate as one of the matrix elements.
What results from the matrix is an expression of a products competitive position.
The 2×2 grid produced in the matrix relies on four assumptions:
- Margins and funds generated increase with market share as a result of experience and scale effects.
- sales growth depends on cash to finance working capital and increases in capacity.
- To increase market share you need to invest cash which supports share-gaining tactics.
- Growth slows as products reach life cycle maturity. At maturity, additional cash can be generated without loss of market share. This cash can be used to support new products and those which are in the growth segment of their life cycle.
Each of the four quadrants produced by the matrix has a distinctive name:
- Dogs: These products have low market share and low growth. They produce low profit levels or even losses. They take up valuable management time.
- Question Marks: (previously known as Problem Children) These products have low market share but high growth. They require cash investment if they are to succeed with an improved market position. Often these are adolescent products entering the growth stage and there is a strategic choice between supporting them or divesting: picking winners and losers.
- Stars: These products have high market share and a high growth rate. These are often market leading products. Cash is needed to maintain market position and to defend against competitors. Often star products are not the most profitable due to the cost of maintaining market position. However, over time these products can become….
- Cash Cows: These products have high market share but a low growth rate. These are often established mature products. These products generate cash which can then be used to support stars and selected question marks. Often these products produce economies of scale and high profit margins.
Harris et al. (1992) expanded the matrix to add two additional ‘quadrants’:
5. War Horses: which have high market share but negative growth
6. Dodos: Which have low market share and negative growth.
A further suggested group is products which sit between cash cows and dogs. These ‘cash dogs’ can be harvested for additional margins.
The BCG matrix suggests four potential product strategies:
- Build: Increase market share by investing in a product or SBU
- Hold: Defend your current position (useful for cash cows.
- Harvest: Increase short-term cash flows (Dogs and rejected question marks). This is for products with no long-term future where you mortgage the product’s future for short-term gain.
- Divest: Get rid of products which are a drain on turnover and make better use of the money invested in them elsewhere.
There are significant pitfalls with the use of the BCG growth-share matrix for portfolio analysis. It needs care in its interpretation. It provides a snapshot of the current position. It often results in products being required to meet unrealistic growth targets. It also requires that products and SBUs need individual management.
Other typical mistakes in the use of the BCG matrix are:
- Businesses investing heavily in an attempt to improve the market position of dog products
- Businesses maintaining too many question mark products which means that resources are spread too thin.
- Draining cash cows of funds which weakens them prematurely. Alternatively investing too much in cash cows so funds cannot be used to support question marks and star products.
- Seeing portfolio analysis as offering more than a contribution to management of products and that a products position produces only one potential strategy e.g. You must only defend a cash cow or that you must divest dog products.
For SMEs, the BCG matrix can be a poor tool to use. It is unlikely that an SME’s products are going to be market leaders unless they operate is a specific niche market.
Properly used, BCG growth share matrix is a relatively easy to use tool for management and can offer a useful basis for strategic thought. It can help identify product portfolio priorities.
However, it can be a poor guide for wider strategies as only market growth rate and market share are considered and other market factors are ignored.
It is difficult to calculate market share, particularly that of your competitors. Smaller firms will nearly always have a smaller level of market share than that of multinationals. The model driven by the matrix sees cashflow as being dependent on market growth. This is not necessarily the case.
The BCG growth-share matrix fails to recognise the nature of marketing strategy and the forms of competitive advantage which will lead to success.
If you are going to use the BCG growth-share matrix, it is best to do so in conjunction with other portfolio models such as the GE strategic direction matrix, The BCG growth-gain matrix and the Shell Directional Policy matrix.