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What is The 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.

INTRODUCTION

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:
Figure 1

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

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.”

HOW TO DEVELOP GOOD BCG GROWTH-SHARE MATRIX OF A COMPANY?


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

Oftentimes, 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
Once 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.

AVAILABLE STRATEGIES TO PURSUE

Build
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.

Hold
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.

Harvest
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.

Divest
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.

WHERE TO FIND INFORMATION FOR THE BCG GROWTH-SHARE MATRIX?


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.

Limitations
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).
• 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).
• 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.
• 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.
• 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.
• 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.

Given the aforementioned weaknesses, the BCG Growth-Share matrix must be used with
care; nonetheless, it is a best-known business portfolio evaluation model (Kotler 2003).

If you found this article useful please have a look at the other articles we have written:
Ansoff analysis, McKinsey 7S Framework, SWOT analysis, Scenario Planning, Porter's 5
Forces analysis, Product Life Cycle, Value chain analysis, Pest Analysis, Balanced
Scorecard, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing
Mix and Porter's Generic Strategies.

References
12Management (2006). BCG Matrix. www.12management.com [Accessed: September
23, 2006]

Asong, B. (2005). Case Study: Apple Computer Market Assessment and Product Launch
Strategy. CLC-PHW: London, pp. 17-40.

BCG (2006). The Growth-Share Matrix. www.bcg.com [Accessed: September 20, 2006]
Canon (2006). InfoSource research puts Canon No.1 in the UK & Ireland. [Accessed:
September 28, 2006]

Cantrell, A. (2006). Apple’s Remarkable Comeback Story. [Accessed: September 28,


2006]

Drummond, G. & Ensor, J. (2004). Strategic Marketing: Planning & Control. 2nd Ed.
Butterworth-Heinemann: MA, pp. 96-100.

Henderson, B. (1976). Anatomy of the Cash Cow. Accessed: September 21, 2006]

Lane, S. (2006). Overall Mac OS usage market share declining? [Accessed: September
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ManyWorlds (2005). Models and Concepts.[Accessed: September 24, 2006]

McDonald, M. (2003). Marketing Plans: How To Prepare Them, How To Use Them.
MA: Butterworth-Heinemann, pp. 175-245.

MindTools (2006). The Boston Matrix.


www.mindtools.com/pages/article/newTED_97.htm [Accessed: September 28, 2006]

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