The BCG matrix (aka B-Box, B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. Analysis of market performance by firms using its principles has called its usefulness into question, and it has been removed from some major marketing textbooks.
Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix). It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment.
BCG growth share matrix is based on the observation that a company’s business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name “growth-share”. The BCG growth share matrix thus maps the business unit positions within these two important determinants of profitability.
The Boston Consulting Group (BCG) Portfolio Matrix
According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share. Each of the corporation’s product lines or business units is plotted on the matrix according to both the growth rate of the industry in which it competes and its relative market share. The relative market share serves as a measure of SBU strength in the market. The market growth rate provides a measure of market attractiveness.
For each product or service, the ‘area’ of the circle represents the value of its sales. The BCG Matrix thus offers a ‘map’ of the organization’s product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cashflows.
The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate.
Relative Market Share = SBU Sales this year leading competitors sales this year.
This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of ‘economies of scale’ (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster the higher the share. The exact measure is the brand’s share relative to its largest competitor. Thus, if the brand had a share of 20 percent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 per cent, however, the ratio would be 1:3, implying that the organization’s brand was in a relatively weak position. If the largest competitor only had a share of 5 per cent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows. If this technique is used in practice, this scale is logarithmic, not linear.
The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flows. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective.
Relative Market Share = Sales This Year / Leading Rival’s Sales This Year
Market Growth Rate = Industry sales this year — Industry Sales last year
Market share is the percentage of the total market that is being serviced by a company under consideration, measured either in revenue terms or unit volume terms. Higher the market share, the higher the proportion of the market one controls. The Boston Matrix assumes that if the company under consideration is enjoying a high market share then it will be making more money. (This assumption is based on the idea that company has been in the market for long enough to have learned how to be profitable, and will be enjoying scale economies that gives an advantage). Market growth is used as a measure of a market’s attractiveness. Markets experiencing high growth are ones where the total market is expanding, meaning that it’s relatively easy for businesses to grow their profits, even if their market share remains stable. While, competition in low growth markets is often bitter, and while you might have high market share now, it may be hard to retain that market share without aggressive discounting.
The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership.
BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBU’s are in same industry, the average growth rate of the industry is used. While, if all the SBU’s are located in different industries, then the mid-point is set at the growth rate for the economy.
Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.
- Stars – Stars are high growth businesses or products competing in markets where they are relatively strong compared with the competition. They are typically at the peak of their product life cycle. Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate. Often they need heavy investment to sustain their growth. Eventually their growth will slow and will become cash cows.
- Cash Cows – Cash cows are low-growth businesses or products with a relatively high market share. These are mature, successful businesses with relatively little need for investment. They typically bring in far more money than is needed to maintain their market share. In this decline stage of their life cycle, these products are “milked” for cash that will be invested in new question marks.
- Question marks – Question marks are businesses or products with low market share but which operate in higher growth markets. Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. A question mark (also known as a “problem child”) has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after years of cash consumption it will degenerate into a dog when the market growth declines. Management have to think hard about “question marks” – which ones should they invest in? Which ones should they allow to fail or shrink?
- Dogs – Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.
The Boston Consulting Group(BCG) Portfolio Matrix simplicity is its strength – the relative positions of the firm’s entire business portfolio can be displayed in a single diagram. Its limitation is market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The BCG growth share matrix overlooks many other factors in these two important determinants of profitability.
Benefits of BCG Matrix
Organizations that are very large such that they require setting up business units usually face the test of the allocation of resources among those business units. The BCG matrix was developed for the management of various business units.
- The BCG is an effective management tool and it offers a good framework for resource allocation among various units. This enables the managers to compare several business units whenever they want. It simplifies many business factors through showing employees the market share as well as growth rate and how to use them to create new strategies.
- Even though BCG matrix may be among the oldest matrices ever formulated, it is also the most common and best known matrix taught all over the world. There are forums on the internet where individuals share their ideas on the best methods of using BCG matrix because of its popularity. This means that those looking to use it will never lack assistance and support. The BCG still remains a quick and beneficial guide for resource allocation and ensuring better profits.
- The BCG allows for the making of comparisons so as to measure the growth and development rate of a company against the average growth rate in that specific industry. In addition, this particular matrix is also enjoyable to use, encouraging better decision making.
Limitations of BCG Matrix
The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as;
- BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected.
- Market is not clearly defined in this model.
- High market share does not always leads to high profits. There are high costs also involved with high market share.
- Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability.
- At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes.
- This four-celled approach is considered as to be too simplistic.