BCG Growth-Share Matrix

No strategic management or marketing text appears to be complete without the inclusion of the Boston Consulting Group (BCG) growth-share matrix. When used effectively, this model provides guidance for resource allocation. And despite its inherent weaknesses, is probably one of the most widely used management instrument as far as portfolio management is concern. For instant, each SBU (strategic business unit) of large companies such as General Electric, Siemens, and Centrica require different strategies to compete effectively and efficiently. It is not a question of one strategy fits all SBUs since the likelihood for each of them experiencing the same market growth rate, industry-threats and leverage is very slim. This is where the BCG model comes into play as a management analytical tool. The ensuing examines the underpinnings of the model, for what it is used, how to use it and why it is used.

WHAT IS THE BCG GROWTH-SHARE MATRIX?

To begin with, BCG is the acronym for Boston Consulting Group—a general management consulting firm highly respected in business strategy consulting. BCG Growth-Share Matrix (see figure 1) happens to be one of many of BCG's strategic concepts the organisation developed in the late 1970s, and is being taught at leading business schools and executive education programmes around the world.

It is a management tool that serves four distinct purposes (McDonald 2003; Kotler 2003; Cipher 2006): it can be used to classify product portfolio in four business types based on four graphic labels including Stars, Cash Cows, Question Marks and Dogs; it can be used to determine what priorities should be given in the product portfolio of a company; to classify an organisation’s product portfolio according to their cash usage and generation; and offers management available strategies to tackle various product lines. Consider companies like Apple Computer, General Electric, Unilever, Siemens, Centrica and many more, engaging in diversified product lines. The BCG model therefore becomes an invaluable analytical tool to evaluate an organisation’s diversified product lines as later seen in the ensuing sections.

WHAT ARE THE MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX?

The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and market growth. They often are pointers to healthiness of a business (Kotler 2003; McDonald 2003). In other words, products with greater market share or within a fast growing market are expected to wield relatively greater profit margins. The reverse is also true. Let’s look at the following components of the model:

Fig. 1: Source: 12manage.com 2006

Relative Market Share

According to the proponents of the BCG (Herndemson 1972), It captures the relative market share of a business unit or product. But that is not all! It allows the analysed business unit be pitted against its competitors. As earlier emphasized above, this is due to the sometime correlation between relative market share and the product’s cash generation. This phenomenon is often likened to the experience curve paradigm that when an organisation enjoys lower costs, improved efficiency from conducting business operations overtime. The basic tenet of this postulation is that the more an organisation performs a task often; it tends to develop new ways in performing those tasks better which results in lower operating cost (Cipher 2006). What that suggests is that the experience curve effect requires that market share is increased to be able to drive down costs in the long run and at the same time a company with a dominant market share will inevitably have a cost advantage over competitor companies because they have the greater share of the market. Hence, market share is correlated with experience.

A case in point is Apple Computer’s flagship product called the iPod, which occupies a dominant 73% share the portable music player market (Cantrell 2006). Analysts believe it is the impetus for Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product line (Cantrell 2006). Similarly, Dell’s PC line shares the same market dominance theory as the iPod. The PC manufacture giant occupies a worldwide market share of 18.1%, which is commensurate to its large market revenue above its competitors (see figure 2).

Figure 2: Source: Reuters 2006

Market Growth

Market growth axis, correlates with the product life cycle paradigm, and predicates the cash requirement a product needs relative to the growth of that market. A fast growing market is generally considered attractive, and pulls a lot of organisation’s resources in an effort to increase gains. A case in point is the technological market widely consider by experts as a fast growing market, and tends to attract a lot of competition. Therefore, a product life cycle and its associated market play a key role in decision-making.

Cash Cows

These products are said to have high profitability, and require low investment for the fact that they are market leaders in a low-growth market. This viewpoint is captured by the founders themselves thus:

The cash cows fund their own growth. They pay the corporate dividend. They pay the corporate overhead. They pay the corporate interest charges. They supply the funds for R&D. They supply the investment resource for other products. They justify the debt capacity for the whole company. Protect them (Henderson 1976).

According to experts (Drummond & Ensor 2004; Kotler 2003; McDonald 2003), surplus cash from cash cow products should be channelled into Stars and Questions in order to create the future Cash Cows.

Stars

Stars are leaders in high growth markets. They tend to/should generate large amounts of cash but also use a lot of cash because of growth market conditions. For example, Apple Computer has a large share in the rapidly growing market for portable digital music players (Cantrell 2006).

Question Marks

Question Marks have not achieved a dominant market position, and hence do not generate much cash. They tend to use a lot of cash because of growth market conditions. Consider Hewlett-Packard’s small share of the digital camera market, behind industry leader Canon’s 21% (Canon 2006). However, this is a rapidly growing market.

Dogs

Dogs often have little future and are big cash drainers on the company as they generate very little cash by virtue of their low market share in a highly low growth market.

Consider Pfizer’s Inspra (Gibson 2006): “Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child, despite anaemic sales of roughly $40 million in the $2.7 billion heart-failure market dominated by Toprol-XL (metoprolol). It was thought to gain market share and become a star, and eventually a cash cow when the market growth slowed. But, according to industry’s experts, Inspra is likely to remain a dog, despite any amount of promotion, given its perceived safety issues and a cheaper, more effective spironolactone in the same Pfizer portfolio. Because Pfizer invested heavily in promotion early on with Inspra, the drug's earnings potential and positive cash flow is elusive at best. A portfolio analysis of Pfizer's cardiovascular franchise would suggest redeploying promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin) or torcetrapib to ensure those drugs reach their sales potential.”