Tag: BCG matrix

Beware the Big Bad BCG

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:

  1. Margins and funds generated increase with market share as a result of experience and scale effects.
  2. sales growth depends on cash to finance working capital and increases in capacity.
  3. To increase market share you need to invest cash which supports share-gaining tactics.
  4. 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:

  1. Dogs:  These products have low market share and low growth.  They produce low profit levels or even losses.  They take up valuable management time.
  2. 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.
  3. 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….
  4. 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.

 

Expanding the BCG Matrix

The Boston Consulting Group Matrix has been taught to both marketing and business undergraduates for decades and like all long-established theories it has been regularly criticised.  As a result of this criticism, several attempts have been made to amend or add to the Boston box concept.

The Boston Consulting Group Growth Share Matrix measures relative market share against market growth rate.  Your products market share is compared to the market leader.  It creates four categories of product:

  1. Stars – these have a high market growth rate (e.g. above 7%) and your product has a high relative market share.  In effect, the product is a market leader.
  2. Problem Children (Question Marks) – These have a high market growth rate but a low relative market share.  Often these are new products to the market which can either become stars or fail.
  3. Cash Cows – these products are usually in the mature stage of their life cycle they have a high relative market share but a low growth rate.  These are the products which supply significant cash flow to your business.
  4. Dogs – These are products with a low growth rate and a low share of the market.  Often these are products in the decline stage of their life-cycle.

The BCG matrix measures cash flow rather than profits.  It assumes that market growth has an adverse effect on cash flow because of the investment required to finance that growth.  It also assumes that market share has a positive effect on cash flow as increases in profits are linked to rising market share.

Image result for boston consulting group matrix template

The matrix sees products moving through the four segments as they move through their life cycle.  Most will begin life as Problem Children/Question Marks.  If a problem child is successful it becomes a star.  Otherwise it can become a dog.  As star products mature, they become cash cows. When a cash cow declines in becomes a Dog.

The following strategies are suggested if you are using the matrix to manage your product portfolio:

  1. Stars – Build sales and/or grow market share. Invest in the product to maintain your market leadership position. Repel the challenge of competitors.  Obviously, it can cost to defend a market leading product.  Star products could be loss-making as the cost of maintaining the market leader position.
  2. Cash Cows – Hold sales levels and market share.  Defend your market position.  Use the cash generated by a cash cow to support star products and to select problem children for development.
  3. Problem Children/Question Marks – Select problem children for investment.  Divest the rest, Harvest them for cash or focus on a defendable market niche.
  4. Dogs – Harvest them for cash; divest, or focus on a defendable niche.

The aim of the matrix is to ensure that your company has a balanced portfolio of products.  If all your products are Dogs, your business will likely fail.

There have been several criticisms of the matrix.  It ignores the goal of achieving competitive advantage.  It assumes that stars will have a weak cash flow, when this is not necessarily the case; some stars have significant positive cash flow. it also assumes that all products have a standard life cycle. It ignores fads and products which will be treated as staples.  The strategies suggested are highly dependent on the actions of competitors not the actions of the company using the matrix to determine strategy.

As a business focused on smaller businesses, the BCG matrix has one significant drawback, by comparing a small businesses products with a market leader, the smaller business will almost never be in a position to have a star product or even a problem child.  The best a small firm can hope for is a cash cow but most of its products will automatically be classed as dogs.  If a small firm was to use the BCG matrix, it would automatically be shown to have an unbalanced product mix.

There are other problems with the matrix, for example, it ignores products with falling market share or a negative growth rate.  One of the first adaptations to the matrix was the concept of the ‘cash dog’.  These products sit on the boundary between a cash cow and a dog.  In effect they are dog products that have an ability to generate cash flow.

Leeds Metropolitan University published a conference paper which extended the BCG matrix.  Called the Family Portfolio matrix, it suggested several new product categories:

  1. Infants – These are new products to the market which generate cash for a low spend,  they have a low market growth rate and a medium to high market share.
  2. Ideas and Concepts – These are products that are in development.  They are new to the market.  The producer of these goods however are spending on their introduction to the market.
  3. Research and Development – These are products have a high potential market growth rate but are yet to be placed on the market.  They have no market share and make no income.  There is significant spend on these products as they are prepared for the market.
  4. Hibernating Squirrels – These are products which have been withdrawn from sale but which may be returned to the market at a later date.  There is a small cost to these products e.g. the maintenance of intellectual property rights, storage of equipment etc.
  5. Warhorses – These are products with a high relative market share but a negative growth rate.  A product in decline but which still makes money.
  6. Dodos – These are products which have a low relative market share and a negative market growth rate.  These are products on the road to divestment.  A good example are ‘Findus Crispy Pancakes’.  The Findus brand was bought by Northern Foods several years ago. The sales of crispy pancakes have fallen dramatically since they were introduced in the 1970s.  Northern foods first dropped the Findus name from the pancake range, selling the product as a generic discount brand.  This was a staged removal from the market.
  7. Lingering Memories – these are products which have long-been removed from the market but still resonate in the minds of consumers. An example would be the Texan chew bar.  Competitors may make a version of this product so there may be some residual benefit which can be drawn upon.

No portfolio model is without criticism.  If you are using strategic models to plan your product portfolio, it may be sensible to compare different strategic models, for example the GE matrix, the Shell directional policy framework or the McDonald model.