c
 


c 





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.




c
  
c 





To begin with, BCG is the acronym for Boston Consulting Group²a 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.


c


  

     
c 




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:

Figure 1

 

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


  

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.

  

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 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 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.
ConsiderHewlett-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 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):

³Pfizer 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 samePfizer 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 ofPfizer'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.´

c  %&   
c 



 
  
'
SBUs or products are represented on the model by circles and fall into one of the four cells of
the matrix already described above. Mathematically, the mid-point of the axis on the scale of
Low-High is represented by 1.0 (Drummond & Ensor 2004; Kotler 2003). At this point, the
SBU¶s or product¶s market share equals that of its largest competitor¶s market share
(Drummond & Ensor 2004; Kotler 2003). Next, calculate the relative market share and market
growth for each SBU and product. Figure 3 depicts the formulas to calculate the relative market
share and market growth.

Figure 3
›ftentimes, if you are versed with a particular industry and companies operating in it, you
could draw up a BCG matrix for any company without necessarily computing figures for the
relative market share and market growth. Figure 4 depicts a fairly accurate BCG growth-share
matrix for Apple Computer developed in the spring of 2005 without the author calculating the
relative market share and market growth.

Figure 4

›nce the products or SBUs have been plotted, the planner then has to decide on the objective,
strategy and budget for the business lines. Basically, at this juncture the organisations should
strive to maintain a balanced portfolio. Cash generated from Cash Cows should flow into Stars
and Question Marks in an effort to create future Cash Cows. Moreover, there are 4 major
strategies that can be pursued at this stage as described in the ensuing section.



%
&
&

 


"(
The product or SBU¶s market share needs to be increased to strengthen its position. Short-term
earnings and profits are deliberately forfeited because it is hoped that the long-term gains will
be higher than this. This strategy is suited to Question Marks if they are to become stars.

(
The objective is to maintain the current share position and this strategy is often used for Cash
Cows so that they continue to generate large amounts of cash.

 
Here management tries to increase short-term cash flows as far as possible (e.g. price increase,
cutting costs) even at the expense of the products or SBU¶s longer-term future. It is a strategy
suited to weak Cash Cows or Cash Cows that are in a market with a limited future. Harvesting
is also used for Question Marks where there is no possibility of turning them into Stars, and for
Dogs.

 
The objective of this strategy is to rid the organisation of the products or SBUs that are a drain
on profits and to utilize these resources elsewhere in the business where they will be of greater
benefit. This strategy is typically used for Question Marks that will not become Stars and for
Dogs.

c 
   

 
    
c 




Information for the BCG Growth-Share matrix is generated from multiple sources including
company¶s annual reports, sec fillings and a host of specialised research organisations such as
IDC, Hoover, Edgar, Forrester and many more. Armed with this information, developing a
BCG growth-share matrix should pose less of a problem.




&)#
The BCG model is criticised for having a number of limitations (Kotler 2003; McDonald
2003):
There are other reasons other than relative market share and market growth that could influence
the allocation of resources to a product or SBU: reasons such as the need for strong brand name
and product positioning could compel resource allocation to an SBU or product (Drummond &
Ensor 2004).
h What is more, the model rests on net cash consumption or generation as the
fundamental portfolio balancing criterion. That is appropriate only in a capital
constrained environment. In modern economies, with relatively frictionless capital
flows, this is not the appropriate metric to apply ± rather, risk-adjusted discounted cash
flows should be used (ManyWorlds 2005).
h Also, the matrix assumes products/business units are independent of each other, and
independent of assets outside of the business. In other words, there is no provision for
synergy among products/business units. This is rarely realistic.
h The relationship between cash flow and market share may be weak due to a number of
factors including (Cipher 2006): competitors may have access to lower cost materials
unrelated to their relative share position; low market share producers may be on steeper
experience curves due to superior production technology; and strategic factors other
than relative market share may affect profit margins.
h In addition, the growth-share matrix is based on the assumption that high rates of
growth use large cash resources and that maturity of the life cycle brings about the
expected profit returns. This may be incorrect due to various reasons (Cipher 2006):
capital intensity may be low and the business/product could be grown without major
cash outlay; high entry barriers may exist so margins may be sustainable and big
enough to produce a positive cash flow and a growth at the same time; and industry
overcapacity and price competition may depress prices in maturity.
h Furthermore, market growth is not the only factor or necessarily the most important
factor when assessing the attractiveness of a market. A fast growing market is not
necessarily an attractive one. Growth markets attract new entrants and if capacity
exceeds demand then the market may become a low margin one and therefore
unattractive. A high growth market may lack size and stability.