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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

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

Growth Balance

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

• 2 x 2• 4 box (quadrant)

plot

BCG Structure cont.

• Relative Market Share (RMS)

• Market growth rate

Classification into ...

Relative Market Share

Mar

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HIGH

LOW

HIGH LOW

RMS as a Determinant of Competitive Position

• In BCG terms “ratio of your market shareto that of your largest competitor”

• Your Market ShareYour Largest Competitor’s Market Share

What is Relative Market Share (RMS) ?

RMS cont.Why is the RMS axis mid-point 1 ?

• 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

Relative Market ShareHIGH LOW1

RMS cont.Why the RMS axis is a Logarithmic Scale

• 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

Relative Market Share10x 0.5x1

RMS cont.Why is Market Share measured Relatively ?

• A firm competes in 2 markets as follows …

Aircraft in which it has a 40% market shareMotor 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 %60 %

100 %

0.67 x

20 %5 %8 %

< 2 %100 %

2.5 x

Competitor A Comp. BComp. CΣ E to G

Total


True market power

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 aDeterminant 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 aDeterminant of Competitive Position, Cont.

Plotting Market Growth Rate

Mar

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HIGH

LOW

• Is plotted on the vertical axis

• Uses a simple % scale

• 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, 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

CompanySales(tons)

184002600044000

1500500

LargestRival Sales

(tons)

50009000

14000040004500

CompanyRMS

3.682.890.310.380.11

CompanyTurnover

(Rm)

3.14.15.00.40.2

MarketGrowth

Rate (%)

-5-310120

High = 12 Low = -5 Ave. = 3

Product

Chemical AChemical BChemical CChemical DChemical E

Illustration of a Product Portfolio, Cont.

Fictitious Chemical Co. Ltd.Product Portfolio Profiles 1999

Product

Chemical AChemical BChemical CChemical DChemical E

Leadership

YesYesNoNoNo

InternalRanking

Sales

32145

GrowthRating

LowLowHighHigh

low

Label

Cash CowCash Cow Question MarkQuestion Mark Dog

The Matrix Construction Process.For Fictitious Chemical Co. Ltd.


Mar

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row

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ate

(%)

14

-85 0.1

3

1

• From the data best fit scales are chosen

The Matrix Construction Process.For Fictitious Chemical Co. Ltd., Continued


Mar

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row

th R

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(%)

14

-85 0.1

3

1

A

B

C

D

E

• The “bubbles” have been positioned from the RMS and Market Growth data

• The circle size has been calculated from the annual turnover

The Quadrants (A First Peek)

• Are segmented using “strategic labels” as follows:

£££

StarsQuestion

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 FlowCont.

£££

- - - -+++++

- - - -+

+++++++- -

- - - -+++

• Stars are cash flow modest

• Cash Cows are cash positive (major)

• Question Marks are cash flow negative (major)

• Dogs are cash flow modest and are divided into Cashdogs vs Genuine dogs

Genuinedogs

Cashdogs


Mar

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)

HIGH

LOW

HIGH 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 QuadrantsContinued

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

£££


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


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

2 3

4

1. Defend the Cash Cows selectively. Do not milk them to the detriment of their future ability to generate cash

2. The Stars must receive required investment to gain or 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.

£££

1

2 3

4

3. Continued ...

Although the BCG suggested this should be selective investment, the general opinion is that this is the great flaw in the system

4. The lowest priority is 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 today’s Cash Cows to fund a limited number of question marks and to build up a suite of products which will be the future Stars and Cash Cows

£££

Z

w xy

Disaster Movements of Cashover Time

• Cash is reinvested in end-of-life-cycle productsTheir future is limited£££

A BC

How does this compare with Ideal/Disaster Product Market sequences?

£££

B

A

C

E

D

• Ideal movements of products over time

• Reflects a well-managed, sequenced portfolio management approach

How does this compare with Ideal/Disaster Product Market sequences?

£££

H

K

G

J

F

I

• Disaster movements of products over time

• The products are all losing market share to rivals and the portfolio is becoming progressively weaker

The Quest for Balance ...

£££

• This is difficult to achieve in practice

A “Balanced Portfolio”

The Quest for Balance ...

£££

• 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”

An Unbalanced Portfolio

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. BuildThe 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.


2. HoldThe 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.


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.


4. DivestThe 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.

Cash Flow Range Gauge

Portfolio GaugeProduct Life Cycle Gauge

SBU Portfolio Gauge Gap Analysis Gauge Relative Market Share Gauge

The “Pull Together” for Individual Product / Market Units …

+ve

-ve

Development

us Largest Competitor

Objective

GrowthMaturityDecline

Gap

KPI line

Documents

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