The growth-share matrix (aka the product portfolio matrix,Boston Box, BCG-matrix, Boston matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that was created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations to analyze their business units, that is, their 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. Some analysis of market performance by firms using its principles has called its usefulness into question.
As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually, the market stops growing; thus, the business unit becomes a cash cow. At the end of the cycle, the cash cow turns into a dog.
As BCG stated in 1970:
Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:
- stars whose high share and high growth assure the future;
- cash cows that supply funds for that future growth; and
- question marks to be converted into stars with the added funds.
"To be successful, a company should have a portfolio of products with different growth rates and different market shares. The portfolio composition is a function of the balance between cash flows. High growth products require cash inputs to grow. Low growth products should generate excess cash. Both kinds are needed simultaneously."--Bruce Henderson.
For each product or service, the 'area' of the circle represents the value of its sales. The growth-share 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.
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 percent, 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 percent, 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.
On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is that the most stable position (at least in fast-moving consumer goods markets) is for the brand leader to have a share double that of the second brand, and triple that of the third. Brand leaders in this position tend to be very stable--and profitable; the Rule of 123.
The selection of the relative market share metric was based upon its relationship to the experience curve. The market leader would have greater experience curve benefits, which delivers a cost leadership advantage.
Another reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow. 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.
Rapidly growing in rapidly growing markets, are what organizations strive for; but, as we have seen, the penalty is that they are usually net cash users - they require investment. The reason for this is often because the growth is being 'bought' by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits. The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment. The cut-off point is usually chosen as 10 per cent per annum. Determining this cut-off point, the rate above which the growth is deemed to be significant (and likely to lead to extra demands on cash) is a critical requirement of the technique; and one that, again, makes the use of the growth-share matrix problematical in some product areas. What is more, the evidence, from fast-moving consumer goods markets at least, is that the most typical pattern is of very low growth, less than 1 per cent per annum. This is outside the range normally considered in BCG Matrix work, which may make application of this form of analysis unworkable in many markets. Where it can be applied, however, the market growth rate says more about the brand position than just its cash flow. It is a good indicator of that market's strength, of its future potential (of its 'maturity' in terms of the market life-cycle), and also of its attractiveness to future competitors. It can also be used in growth analysis.
While theoretically useful, and widely used, several academic studies have called into question whether using the growth-share matrix actually helps businesses succeed, and the model has since been removed from some major marketing textbooks. One study (Slater and Zwirlein, 1992) which looked at 129 firms found that those who follow portfolio planning models like the BCG matrix had lower shareholder returns.
There are further criticisms to the B.C.G Matrix. The Matrix assumes that dogs have low market share and relatively low market growth rate. This can be challenged as there are several dogs on the market which are very profitable and retain significant market share. BIC razor blades are a modern day example. BIC Razor Blades cost the firm an average of £0.05 to produce and have a retail selling price of £2.43. This market is to expand by 25% annually for the next 5 years. This demonstrates how the B.C.G Matrix contradicts itself as a dog with little cash usage has considerably high market share within the market.
As originally practiced by the Boston Consulting Group, the matrix was used in situations where it could be applied for graphically illustrating a portfolio composition as a function of the balance between cash flows. If used with this degree of sophistication its use would still be valid. However, later practitioners have tended to over-simplify its messages. In particular, the later application of the names (problem children, stars, cash cows and dogs) has tended to overshadow all else--and is often what most students, and practitioners, remember.
This is unfortunate,[according to whom?] since such simplistic use contains at least two major problems:
Perhaps the most important danger is, however, that the apparent implication of its four-quadrant form is that there should be balance of products or services across all four quadrants; and that is, indeed, the main message that it is intended to convey. Thus, money must be diverted from 'cash cows' to fund the 'stars' of the future, since 'cash cows' will inevitably decline to become 'dogs'. There is an almost mesmeric inevitability about the whole process. It focuses attention, and funding, on to the 'stars'. It presumes, and almost demands, that 'cash cows' will turn into 'dogs'.
The reality is that it is only the 'cash cows' that are really important--all the other elements are supporting actors. It is a foolish vendor who diverts funds from a 'cash cow' when these are needed to extend the life of that 'product'. Although it is necessary to recognize a 'dog' when it appears (at least before it bites you) it would be foolish in the extreme to create one in order to balance up the picture. The vendor, who has most of his (or her) products in the 'cash cow' quadrant, should consider himself (or herself) fortunate indeed, and an excellent marketer, although he or she might also consider creating a few stars as an insurance policy against unexpected future developments and, perhaps, to add some extra growth. There is also a common misconception that 'dogs' are a waste of resources. In many markets 'dogs' can be considered loss-leaders that while not themselves profitable will lead to increased sales in other profitable areas.
As with most marketing techniques, there are a number of alternative offerings vying with the growth-share matrix although this appears to be the most widely used. The next most widely reported technique is that developed by McKinsey and General Electric, which is a three-cell by three-cell matrix--using the dimensions of 'industry attractiveness' and 'business strengths'. This approaches some of the same issues as the growth-share matrix but from a different direction and in a more complex way (which may be why it is used less, or is at least less widely taught). A more practical approach is that of the Boston Consulting Group's Advantage Matrix, which the consultancy reportedly used itself though it is little known amongst the wider population.
The initial intent of the growth-share matrix was to evaluate business units, but the same evaluation can be made for product lines or any other cash-generating entities. This should only be attempted for real lines that have a sufficient history to allow some prediction; if the corporation has made only a few products and called them a product line, the sample variance will be too high for this sort of analysis to be meaningful.