|
 The BCG matrix
method is based on the product
life cycle theory that can be used to determine what priorities should be given in the
product portfolio of a business unit. To ensure long-term
value creation, a company should have a portfolio of products that
contains both high-growth products in need of cash inputs and low-growth
products that generate a lot of cash. It has 2 dimensions: market share and
market growth. The basic idea
behind it is that the bigger the market share a product
has or the faster the product's market grows the better it is for the
company.
Placing products
in the BCG matrix results in 4 categories in a portfolio of a
company:
1. Stars (=high growth, high market
share)
- use large amounts of cash and are leaders in the business so they should
also generate large amounts of cash.
- frequently roughly in balance on net cash flow. However if needed any
attempt should be made to hold share, because the rewards will be a cash
cow if market share is kept.
2. Cash Cows (=low growth,
high market share)
- profits and cash generation should be high , and because of the
low
growth, investments needed should be low. Keep profits high
- Foundation of a company
3. Dogs (=low growth, low
market share)
- avoid and minimize the number of dogs in a company.
- beware of expensive ‘turn around plans’.
- deliver cash, otherwise liquidate
4. Question Marks (= high
growth, low market share)
- have the worst cash characteristics of all, because high demands and low
returns due to low market share
- if nothing is done to change the market share, question marks will
simply absorb great amounts of cash and later, as the growth stops, a dog.
- either invest heavily or sell off or invest nothing and generate
whatever cash it can. Increase market share or deliver cash
The BCG Matrix method can help understand a
frequently made strategy mistake: having a one-size-fits-all-approach to
strategy, such as a generic growth target (9 percent per year) or a
generic return on capital of say 9,5% for an entire corporation.
In such a scenario:
A. Cash Cows Business Units will beat their
profit target easily; their management have an easy job and are often
praised anyhow. Even worse, they are often allowed to reinvest substantial cash
amounts in their businesses which are mature and not growing anymore.
B. Dogs Business Units fight an impossible
battle and, even worse, investments are made now and then in hopeless
attempts to 'turn the business around'.
C. As a result (all) Question Marks and Stars Business Units
get mediocre size investment funds. In this way they are unable to ever
become cash cows. These inadequate invested sums of money are a waste of
money. Either these SBUs should receive enough investment funds to enable them
to achieve a real market dominance and become a cash cow (or star), or
otherwise companies are advised to disinvest and try to get whatever
possible cash out of the question marks that were not selected.
Some limitations of the Boston Consulting Group Matrix include:
-
High market share is not the only success factor
-
Market growth is not the only indicator for attractiveness
of a market
-
Sometimes Dogs can earn even more cash as Cash Cows
Book: Carl W. Stern, George Stalk - Perspectives on
Strategy from The Boston Consulting Group - 
Read more in the BCG Matrix Forum on the 12manage website.
Compare with the BCG Matrix:
GE / McKinsey Matrix |
ADL Matrix |
Core Competence |
Bass Diffusion
model |
Relative Value of Growth |
STRATPORT |
Profit Pools |
Product Life Cycle |
Blue Ocean Strategy
|
Four Trajectories of Industry Change |
Positioning
More management models
|
