BCG Matrix as Corporate Portfolio Analysis Technique

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BCG Matrix- (Corporate Portfolio Analysis Technique)

BCG Matrix

The BCG matrix is a tool that can be used to determine what priorities should be given in the product portfolio of a business unit. It has 2 dimensions; market share and market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product’s market grows the better it is for the company. Placing products in the BCG matrix results in 4 categories in a portfolio of a company.

Boston Consulting Group’s growth/share matrix has become one of the most widely used approaches that facilitate corporate strategic analysis of likely “generators” and optimum “users” of corporate resources. Each of the company’s businesses is positioned in the matrix in accordance with its market growth rate and relative competitive position.

Market growth rate refers to the projected rate of sales growth for the market that a particular business caters to. It is usually measured as the percentage increase in sales in a market or unit volume over the two most recent years. Market growth rate indicates relative attractiveness of the markets each of the businesses serves in a portfolio of businesses.

Relative competitive position means the ratio of a business’s market share divided by the market share of the largest competitor in that market and provides a basis for comparing the relative strengths of different businesses in the portfolio.

Stars:

Stars are businesses that have high market share in a high growth environment. They are growing rapidly and are the best long-run opportunities in terms of growth and profitability in the firm’s portfolio They are leaders in their business and generate large amount of cash. They require substantial investment to maintain and expand their dominant position in a growing market.

The investment requirement often exceeds the internal cash generation. These businesses, therefore, are short-tern, priority consumers of corporate resources. Because of their high share, they are expected to enjoy a lower cost structure than their lower share competitors because of the experience effects. In brief,

Stars (=high growth, high market share)

  1. Use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.
  2. Frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold share, because the rewards will be a cash cow if market share is kept.
Cash Cows:

Cash cows are low-growth, high market-share products or divisions. Because of their high market share, they have low costs and generate cash. Since growth is slow, reinvestment costs are low. Cash cows provide funds for overhead, dividends, and investment for the rest of the firm and are in excess of their needs.

Therefore, these businesses serve as a source of corporate resources for deployment elsewhere (to stars and question marks) and are managed to maintain their strong market share while efficiently generating excess. They are the foundation of the firm, and stability is the appropriate strategy for them.

Cash Cows (=low growth, high market share)

  1. profits and cash generation should be high, and because of the low growth, investments needed should be low. Keep profits high
  2. Foundation of a company
Dogs:

Such businesses are defined as those in which the growth rate is slow and the relative market share is low compared to the leading competitors. Because of their low market share these businesses are expected to have a higher cost structure than industry leaders.

It is difficult and extremely expensive for them to gain share in a mature market. Divestment or rapid harvesting is the recommended strategies for such weak businesses. Often these low capital intensity businesses can be fruitful cash generators.

Dogs (=low growth, low market share)

  1. Avoid and minimize the number of dogs in a company.
  2. Beware of expensive ‘turn around plans’.
  3. Deliver cash, otherwise liquidate

Question Marks (=high growth, low market share)

  1. Have the worst cash characteristics of all, because high demands and low returns due to low market share.
  2. If nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, a dog.
  3. Either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash.

Question marks are high-growth, low-market-share products or divisions. Their conditions are the worst, for their cash needs are high, but cash generation is low. Such businesses are seen to indicate opportunity. They need to gain share by generating additional market share and hence lower cost via experience gains, while the growth rate in the industry is high.

The primary objective of such businesses should be to gain share rather than maximize short-term profitability. So question marks should be converted into stars, then later into cash cows. This strategy will lead to a cash drain in the short run but positive flow in the long run. The other option is divestment.

This technique usually applies to multiple-SBU firms making decisions about the expansion, maintenance and retrenchment of different SBUS. Its’ goal is to determine the corporate strategy that best provides a balanced portfolio of business units. Glueck observes, ‘The goal of all this is to have a balanced portfolio of product or divisions’.

Some of the BCG prescriptions could ultimately lead to a lack of innovative product introductions, since by definition, new products start as a dog or question marks”

The BCG matrix was a valuable initial development in the portfolio approach to corporate-level strategy evaluation. BCG’s ideal, balanced portfolio would have the largest sales in cash cows and starts, with only a few question marks and very few dogs.

BCG matrix makes two major contributions to corporate strategic choice:

  1. The assignment of a specific role or mission for each business unit.
  2. The integration of multiple business units into a total corporate strategy.

Limitations of BCG Matrix

BCG matrix suffers from a number of limitations:

  1. Since it is difficult to define a market clearly, measuring market share and market growth rate becomes more difficult.
  2. Dividing the matrix into four cells based on a high/low classification scheme is too simplistic. It does not recognize the markets with average growth rates or the businesses with average market shares.
  3. The relationship between market share and profitability varies across industries and market segments. In some industries a large market share creates major advantages in unit costs; in others it does not. Some companies, for instance Mercedes Benz and Polaroid, with low market share can generate superior profitability and cash flow with careful strategies based on differentiation, innovation or market segmentation.
  4. The matrix not helpful particularly in comparing relative investment opportunities across different business units in the corporate portfolio. For example, is every star better than a cash cow? How should one question mark be compared to another in terms of whether it should be built into a star or divested?
  5. Strategic evaluation of a set of businesses requires examination of more than relative market shares and market growth. The attractiveness of an industry may increase based on technological, seasonal, competitive, or other considerations as much as on growth rate. Likewise, the value of a business within a corporate portfolio is often linked to considerations other than market share.
  6. The four colorful classification in the BCG matrix somewhat oversimplify the types of businesses in a corporate portfolio. Likewise, the simple strategic missions recommended by the BCG matrix often don’t reflect the diversity of options available.
  7. Executives dislike the use of terminology such as dog, question mark cash-cow in BCG matrix. These terms are seen as negative, stable and unnecessarily graphic.

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