Strategy Tools

BCG (Boston) Matrix

Brief History

• Invented by the Boston Consulting Group in

the late 1960’s
• Also know as ...
• Boston Box
• BCG Matrix
• Growth-Share Matrix
• Had a huge impact on Western Co.’s and
prevailed until late 1970’s
This is achieved by 3 aspects of balance

Growth Balance
• Gap objectives
• Adequacy of current products / markets
• Requirements for new products / markets

Competitive Balance
• Strength relative to its major rivals
• Changes in strength into the future

Risk Balance
• Dependency on 1 or 2 product or market areas
BCG Structure

• 2x2
• 4 box (quadrant)
plot
 BCG Structure cont.
HIGH
Market growth rate (%)

Classification into ...

• Relative Market
Share (RMS)
• Market growth rate

LOW
HIGH Relative Market Share LOW
RMS as a Determinant of Competitive
Position

What is Relative Market Share (RMS) ?

• In BCG terms “ratio of your market share

to that of your largest competitor”
• Your Market Share
Your Largest Competitor’s Market Share
 RMS cont.
Why is the RMS axis mid-point 1 ?

HIGH 1 LOW
Relative Market Share
• If you have a higher share than that of your
largest competitor …
Your Relative Share is > 1
• If you have a lower share than that of your
largest competitor ...
Your Relative Share is < 1
• A mid-point of 1 is therefore appropriate for the
RMS axis
 RMS cont.
Why the RMS axis is a Logarithmic Scale

10x 1 0.5x
Relative Market Share
• Firm A has 40 % market share and its largest
competitor 10 % …
A’s Relative Market Share is 400 % or 4 x
• Firm B has 5 % market share and its largest
competitor 10 % …
B’s Relative Market Share is 50 % or 0.5 x
• The RMS axis’s logarithmic scale shows values
that are 10 x each other as linearly spaced
 RMS cont.
Why is Market Share measured Relatively ?

• A firm competes in 2 markets as follows …

Aircraft in which it has a 40% market share

Motor Vehicles a 20% market share

In which market is the firm more powerful ?

• Only an analysis of the firm’s market share

relative to its competitors in these markets can
answer this question
 RMS cont.
Why Relative Market Share ? Continued
Aircraft Motor vehicles
Market Share 40 % 20 %
Competitor A 60 % Comp. B 5%
Comp. C 8%
Σ E to G < 2 % True market
Total 100 % 100 % power
Relative
2.5 x
Market Share 0.67 x

In other words, it is not your market share that

counts but your market power
 Market / Industry Growth Rate as a
Determinant of Competitive Position

What is the correct definition of Market Growth Rate?

• The expected future annual growth rate (over
next 5 years) in volume (units of production) of
the market as a whole.
This has been amended in practice with variations
relating to:
• Current and future scenarios
• Defining time horizons
• Use of volumes & other measures of Market Share
• Definition of what constitutes the served market
Market / Industry Growth Rate as a
Determinant of Competitive Position, Cont.

The Seven Myths of Corporate Growth

• Growth is common
• We are ending a short and unusual period of
downsizing - “normal” times are ahead
• It’s the economy
• Big companies cannot grow
• We’re in a dead (no-growth) industry
• Most large company growth is created through
acquisition
• Cost cutting sets the stage for growth
Market / Industry Growth Rate as a
Determinant of Competitive Position, Cont.

Plotting Market Growth Rate

HIGH • Is plotted on the vertical axis
• Uses a simple % scale
Market growth rate (%)

• The range and midpoint is dependent on

analysis
e.g. In Information Technology the
High may be 50, the Low 10, and
the average (midpoint) 30
In Tobacco, the High may be 10,
LOW
the Low -10, and the midpoint 0
Plotting Market Growth Rate, Cont.

• The scale chosen should ensure that the average

growth rate is close to the midpoint to allow the top-
half to reflect high growth rate markets and the lower
half to capture lower growth markets
Value of Annual Sales

• Final element in the construction of a matrix

• Circle size captures annual sales proportionately
• Circle is placed at the co-ordinates of the Product /
Market RMS and Market Growth Rate
Illustration of a Product Portfolio

Fictitious Chemical Co. Ltd.

Product Portfolio Data 1999
Product Company Largest Company Company Market
Sales Rival Sales RMS Turnover Growth
(tons) (tons) (Rm) Rate (%)

Chemical A 18400 5000 3.68 3.1 -5

Chemical B 26000 9000 2.89 4.1 -3
Chemical C 44000 140000 0.31 5.0 10
Chemical D 1500 4000 0.38 0.4 12
Chemical E 500 4500 0.11 0.2 0

High = 12 Low = -5 Ave. = 3

Illustration of a Product Portfolio, Cont.

Fictitious Chemical Co. Ltd.

Product Portfolio Profiles 1999
Product Leadership Internal Growth Label
Ranking Rating
Sales

Chemical A Yes 3 Low Cash Cow

Chemical B Yes 2 Low Cash Cow
Chemical C No 1 High Question Mark
Chemical D No 4 High Question Mark
Chemical E No 5 low Dog
The Matrix Construction Process.
For Fictitious Chemical Co. Ltd.

14
Market Growth Rate (%)

• From the data

best fit scales
are chosen
3

-8
5 1 0.1
Relative Market Share
The Matrix Construction Process.
For Fictitious Chemical Co. Ltd., Continued

14
D
• The “bubbles” have
Market Growth Rate (%)

C been positioned
from the RMS and
Market Growth data
3
E
B • The circle size has
been calculated
A
from the annual
turnover
-8
5 1 0.1
Relative Market Share
The Quadrants (A First Peek)

• Are segmented using “strategic labels” as follows:

Question
Stars Marks

£££

Cash Cows Dogs

The BCG as a Predictor of Cash Flow

• The previous example was considered

exclusively from a marketing perspective

• However the BCG super-imposed a theory of

cash management referred (confusingly) as
PORTFOLIO MANAGEMENT

• Knowing the position of a product is indicative

of its cash characteristics
 The BCG as a Predictor of Cash Flow
Cont.

• Stars are cash flow HIGH

modest

Market growth rate (%)

• Cash Cows are cash
positive (major) ---- ----
+++++ +
• Question Marks are
cash flow negative
(major) £££
Genuine
dogs
• Dogs are cash flow ----
+++++++ Cash
modest and are +++
divided into Cash -- dogs
LOW
dogs vs Genuine dogs
HIGH Relative Market Share LOW
Cash Characteristics of the Quadrants

Stars
• The upper left quadrant combines High growth with High
RMS
• High growth means heavy investment and this will
therefore be a cash user
• High RMS assumes economies of scale and able to
generate cash
• Positive or negative cash flow is unlikely until the market
growth declines (not always supported in practice)
Cash Characteristics of the Quadrants
Continued
£££

Cash Cows
• The lower left quadrant has High RMS but Low growth
and contains units seen to be cash generators
• When market growth rate falls, Stars usually fall into
the cash Cow position (leaders in a stable market)
• These units need little investment and will therefore
generate both cash and profits (which could be used
to support Stars)
• The strategic danger is that these units become
under-supported and loose market share
Cash Characteristics of the Quadrants
Continued

Dogs
• The lower right quadrant (Dogs) has Low RMS and
Low growth
• These units need little investment but are unlikely to
be major profit earners
• The decision is whether to hold on to these for
strategic reasons in the hope that the market will grow
• However, units in this quadrant often consume more
management time than they justify and need to be
phased out of the portfolio
Cash Characteristics of the Quadrants
Continued

Question Marks
• Units falling into this quadrant are sometimes referred
to as Problem Children or Wild Cats
• They exist in High growth markets but have not yet
achieved a High market share; or their market share
has become less dominant as the competition has
become more aggressive
• Question Marks require large investment to maintain
market growth and their Low RMS means low profits.
These units are therefore cash users
How to use the Cash

1. Defend the Cash Cows

selectively. Do not milk them
2 3 to the detriment of their future
ability to generate cash

£££
2. The Stars must receive
required investment to gain or
1 4 maintain market share
3. The 3rd priority is to invest in
Question Marks from cash
generated by the Cows
How to use the Cash, Cont.

3. Continued ...
Although the BCG suggested
2 3 this should be selective
investment, the general
opinion is that this is the great
£££
flaw in the system
4. The lowest priority is
1 4 investment in dogs. This
investment must be minimal
and a harvest / divest for cash
is encouraged
Ideal Movements of Cash over Time

• Cash is drawn from

x today’s Cash Cows to
w fund a limited number of
y question marks and to
build up a suite of
£££
products which will be the
future Stars and Cash
Z Cows
Disaster Movements of Cash
over Time

• Cash is reinvested in
end-of-life-cycle
products
£££
Their future is limited
A B
C
How does this compare with
Ideal/Disaster Product Market
sequences?

C • Ideal movements of
products over time
B
D • Reflects a well-managed,
£££
sequenced portfolio
management approach
A
E
How does this compare with
Ideal/Disaster Product Market
sequences?

• Disaster movements of
F products over time
H
G • The products are all
£££
losing market share to
I rivals and the portfolio is
becoming progressively
J K weaker
The Quest for Balance ...

A “Balanced Portfolio”

• This is difficult to
achieve in practice
£££
The Quest for Balance ...

An Unbalanced Portfolio

• In this portfolio there is a

dominant generator of
cash
£££ • This solicits the view that
there must be a reduction
in this dependency
• This brings in “a stream
of new products”
 Weaknesses ...
• Closed cash system
• Only 2 factors determine strategic position
• Only high relative market shares are desirable
• Relationships between market share and profitability
• High growth rates are best
• Dog products are worthless
• Definition of relative market share
• The served market
• Central planning (a tool for the centre)
• Strategic labels can create misconceptions
 Strengths ...

• Quick but not necessarily dirty

• Principles of portfolio planning are essentially correct
• Principles are at least applicable at SBU level, and the
segment level within business units
• Combining portfolio planning with shareholder value at
SBU level is strongly recommended
• Complements further portfolio analysis
 Strengths, cont. ...

• Aggregate strategic position for managerial decision

making by combining

- Life cycle and adoption cycle trends

- Sales volume and sales value
- Cash contribution
- Strategic position relative to true competitors

• Strategic position in relation to unit’s overall portfolio

• Contribution to the overall risk profile of the unit
Generic Strategies ...

1. 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.
Generic Strategies ...

2. 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.
Generic Strategies ...

3. 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.
Generic Strategies ...

4. Divest
The objective in this strategy is to rid the organisation
of the products or SBUs that are a drain on profits
and to utilise these resources elsewhere in the
business where they will be of greater benefit. This
strategy is also used for Question Marks and Dogs.
The “Pull Together” for Individual
Product / Market Units … Development
Maturity
Decline
Growth
Product Life Cycle Portfolio Gauge Cash Flow Range
Gauge Gauge
+ve

-ve

SBU Portfolio Gauge Gap Analysis Gauge Relative Market Share

Gauge

Gap
Objective

KPI line

us Largest Competitor