Actions

BCG Matrix

BCG Matrix is a four celled matrix (a 2 * 2 matrix) developed by Boston Consulting Group, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment.

According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share.

Relative Market Share = SBU Sales this year leading competitors sales this year.

Market Growth Rate = Industry sales this year - Industry Sales last year.[1]

The idea behind the BCG (aka growth share) matrix is that the amount of cash that a product uses is proportional to the rate of growth of that product in the market, and the generation of cash is a function of market share for that product.

Money generated from high-market-share/low-growth products is used to develop high-market-share/high-growth products, and low-market-share/high-growth products.


Under the BCG matrix, products are classified into four business types: (see figure below)

BCG Matrix
source: Tom Spencer


  • Stars are leaders in high growth markets. Stars grow rapidly and therefore use large amounts of cash. Stars also have a high market share and therefore generate large amounts of cash. Over time, the growth of a product will slow. So, if a Star maintains a high market share, it eventually becomes a Cash Cow. If not, it becomes a Dog.
  • Cash Cows are highly profitable, and require low investment because they are market leaders in a low-growth market. Growth is slow and therefore cash use is low, and market share is high and therefore cash generation is high. Money generated from cash cows is used to pay dividends, interest, and overheads, and to develop Stars and Question Marks.
  • Question Marks are the real cash traps and gambles. Question Marks grow rapidly and therefore use large amounts of cash. However, they do not have a dominant market position and hence do not generate much cash.
  • Dogs generate very little cash because of their low market share in a low growth market. BCG refers to these products as cash traps. Although they may be sold profitably in the market, Dogs are net cash users and BCG indicates that, in terms contributing to growth, they are essentially worthless.[2]


Advantages and Disadvantages of the BCG Matrix[3]

Benefits of the BCG Matrix:

  • Easy to perform;
  • Helps to understand the strategic positions of business portfolio;
  • It’s a good starting point for further more thorough analysis.


Growth-share analysis has been heavily criticized for its oversimplification and lack of useful application.
Following are the main limitations of the analysis:

  • Business can only be classified to four quadrants. It can be confusing to classify an SBU that falls right in the middle.
  • It does not define what ‘market’ is. Businesses can be classified as cash cows, while they are actually dogs, or vice versa.
  • Does not include other external factors that may change the situation completely.
  • Market share and industry growth are not the only factors of profitability. Besides, high market share does not necessarily mean high profits.
  • It denies that synergies between different units exist. Dogs can be as important as cash cows to businesses if it helps to achieve competitive advantage for the rest of the company.


BCG Matrix Example: How it can be applied to digital marketing strategies?[4]
The BCG Model is based on products rather than services, however it does apply to both. You could use this if reviewing a range of products, especially before starting to develop new products.

Looking at the British retailer, Marks & Spencer, they have a wide range of products and many different lines. We can identify every element of the BCG matrix across their ranges:

  • Stars

Example: Lingerie. M&S was known as the place for ladies underwear at a time when choice was limited. In a multi-channel environment, M&S lingerie is still the UK’s market leader with high growth and high market share.

  • Question Marks/Problem Child

Example: Food. For years M&S refused to consider food and today has over 400 Simply Food stores across the UK. Whilst not a major supermarket, M&S Simply Food has a following which demonstrates high growth and low market share.

  • Cash Cows

Example: Classic range. Low growth and high market share, the M&S Classic range has strong supporters.

  • Dogs

Example: Autograph range. A premium priced range of men’s and women’s clothing, with low market share and low growth. Although placed in the dog category, the premium pricing means that it makes a financial contribution to the company.

What to watch for?

The BCG Model is seen as simplistic and it can be difficult to classify products in smaller businesses where the relative market share is too small to quantify. It’s also based on the concept that market share can be achieved by spending more on the marketing budget.

However, in contrast to the glory days of BCG Matrix, the model nowadays appears to be in the declining phase of its life cycle, or in the BCG Model’s own terms, it has perhaps become an old “dog” waiting to be put to sleep. Three possible reasons might explain this decline.

Firstly, the BCG Model emphasizes cost leadership as the game winner. However, lean operations alone, though a significant component of leading products, may not be enough to become #1, particularly in our technologically advanced world. To succeed, operational efficiency must be backed by product differentiation. Because everyone else is achieving similar levels of cost reduction, product differentiation has become the most significant factor in market leadership in most industries today.


Second, BCG Matrix assumes that profits and sales are perfectly correlated. But having the biggest market share does not guarantee the biggest share of profit, and I would argue that the latter is far better than the former. From this limitation alone, some of the strategies devised from the BCG Model become questionable, particularly those for dogs, for which BCG had practically no answer but to "kill" them. If market share and profit are not perfectly correlated, then it is apparent that the prescription of death to products within the “dog” category may be premature. Some products, when well positioned, can still be profitable for a long time, even without substantial growth in market share.

Finally, the BCG Model overlooks synergies between business units. For example, suppose Pepsi Co. has 3 business units; the soft drink is the segment’s star, the water business is a question mark, and the bottling business a dog. Let’s also assume that the bottling business’s outlook is bleak at best, and sales in this market are supposed to continue to shrink for the foreseeable future. The BCG model would recommend to liquidate the bottling business. However, in doing so, Pepsi Co. would have to rely on outside suppliers to package its products. This dependency will add complexity and uncertainty to Pepsi Co.’s supply chain, which would negatively affect future soft drink and water units’ profitability. In this example, the bottling business adds value to other business units. As such, divesting the bottling business will destroy value from both the soft drinks and the water businesses.[5]


References

  1. What is the BCG Matrix MSG
  2. BCG Matrix Explained Tom Spencer
  3. Benefits and Limitations of the BCG MatrixGrowth Share Matrix
  4. How to use the BCG Matrix model Smart Insights
  5. Understang the BCG Model Jean M