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The BCG (Boston Consulting Group) Growth-Share Matrix depicted in table below is the simplest way to portray a corporation's portfolio of investments.  Each of the corporation's product lines or business units is plotted on the matrix according to both the growth rate of the industry in which it competes and its relative market share.  A unit's relative competitive position is defined as its market share in the industry divided by that of the largest other competitor.  By this calculation, a relative market share above 1.0 belongs to the market leader.  The business growth rate is the percentage of market growth, that is, the percentage by which sales of a particular business unit classification of products have increased. The matrix assumes that, other things being equal, a growing market is attractive.

 

 

 

Figure 5.1 The BCG Growth-Share Matrix

 

 

          Dimensions of the Matrix

External:  Market growth rate(%) (year 20x3) =

       

 

Internal:   Relative market share (year 20x3) =

 

Cut-off points

 

Horizontal: Industry growth  rate, on  GNP  growth rate, or weighted average of industries growth rate, or managerial objective for overall growth.

Vertical: Relative market share equal to 1 for separating leadership from followership, or equal to 1.5 to indicate strong leadership or dominance.

 

The BCG Growth-Share Matrix has a lot in common with the product life cycle.  As a product moves through its life cycle, it is categorized into one of four types for the purpose of funding decisions:

 

Question marks (sometimes called “problem children” or “wildcats”) are new products with the potential for success, but they need a lot of cash for development.  If such a product is to gain enough market share to become a market leader and thus a star, money must be taken from more mature products and spent on a question mark.

 

Stars are market leaders typically at the peak of their product life cycle and are usually able to generate enough cash to maintain their high share of the market.  When their market growth rate slows, stars become cash cows.

 

Cash cows typically bring in far more money than is needed to maintain their market share.  In this declining stage of their life cycle, these products are “milked” for cash that will be invested in new question marks.  Question marks unable to obtain a dominant market share (and thus become stars) by the time the industry growth rate inevitably slows become dogs.

 

Dogs have low market share and do not have the potential (because they are in an unattractive industry) to bring in much cash. According to the BCG Growth-Share Matrix, dogs should be either sold off or managed carefully for the small amount of cash they can generate.

 

*There is a selective application of the strategy depending on the decision made with regard to the business: either to enter aggressively or withdraw.

 

Table: Generic Strategies for BCG Matrix

 

Underlying the BCG Growth-Share Matrix is the concept of the experience curve.  The key to success is assumed to be market share.  Firms with the highest market share tend to have a cost leadership position based on economies of scale, among other things.  If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price low enough to garner early market share leadership (assuming no successful limitation by competitors). Once the product becomes a star, it is destined to be very profitable, considering its inevitable future as a cash cow.

 

Having plotted the current positions of its products lines or business units on a matrix, a company can project their future positions, assuming no change in strategy.  Present the projected matrixes can thus be used to help identify major strategic issues facing the organization. The goal of any company is to maintain a balanced portfolio so it can be self-sufficient in cash and always working to harvest mature products in declining industries to support new ones in growing industries.

 

The BCG Growth-Share Matrix is a very well-known portfolio concept with some clear advantages.  It is quantifiable and easy to use.  Cash cows, dogs, and stars are an easy to remember way to refer to a corporation's business units or products. Unfortunately the BCG Growth-Share Matrix also has some serious limitations:

 

The use of highs and lows to form four categories is too simplistic.

The link between market share and profitability is not necessarily strong. Low-Share businesses can also be profitable.

Growth rate is only one aspect of industry attractiveness.

Product lines or business units are considered only in relation to one competitor: the market leader.  Small competitors with fast-growing market shares are ignored.

Market share is only one aspect of overall competitive position.