The BCG Growth Share Matrix is a quick way to visualise what activities are going to be the most productive and which are Dogs best got rid of. It works equally well, for example, for sales, profit and staff. Blue Belt.
Table of Contents
The Boston Consulting Group developed the BCG Growth Share Matrix in the early 1970’s. It was quite a breakthrough in the way it provided a visualisation of the areas a company should operate in and which it should get out of.
Although originally used to visually display growth potential and market share options for existing business operations, it can just as easily be used to measure such things as:
• Growth products
• Staff productivity
• New business opportunities
Our version measuring the contribution of existing, or potential, products to your overall profitability is below.
Review your Product Mix
Over time, the value of each of the products your business produces (called your Product Mix) will change and often deteriorate.
It is good management to review your Product Mix (say) 6 monthly to check for unnoticed changes that might be impacting your profitability.
The assumption is that something with a high growth rate and high profitability is the ideal business opportunity. On the other hand, something with a low profitability and a low growth rate is doomed to be a very mediocre contributor at best.
In an ideal, self-funding, business there might be one or more high profit and low growth rate products. These generate sufficient cash to fund the businesses to expand their operations in products with more opportunity in the high growth rate and high market share cell.
Explaining each Cell
BCG gave each of these cells a name which reflects their usefulness to the business. The four categories have different roles and/or different potential within your business.
Dogs
The dogs have a low profitability and a low growth rate and therefore don’t generate or consume large amounts of cash.
However, they are often a cash trap because money is tied up in maintaining the Dogs which have very little potential when the same cash could be used in one of the other quadrants of the matrix.
By and large, Dogs are something to either minimise, close down or sell, if that is possible. They have little future and are a drain on the company.
Question Marks
The Question Mark operations are rapidly growing and therefore consume large amounts of cash. They have not yet obtained a good profitability . And maybe they never will!
These are Question Marks or “problem children“. They will probably continue to be large users of cash and possibly loss making operations while they remain in this quadrant.
The business operator needs to decide whether operations in the Question Mark quadrant can grow their profitability and therefore move into the Stars quadrant in the short term.
Alternatively, if the opportunity to grow the Question Mark product market share is not realised, then they will eventually deteriorate into the Dog quadrant. And in the meantime, they have been consuming cash with little resulting profitability.
It is important to examine your Question Mark operations very closely and quite quickly. Those which deserve to survive can be fed cash and other resources to maximise their potential. Alternatively, those that are unlikely to achieve high profitability can be closed down or divested as quickly as possible. Otherwise, they will eventually deteriorate into the Dog quadrant.
If your business is cash-strapped, you might be able to “park” these for a while to conserve cash.
Stars
Stars generate large amounts of cash because of their strong relative profitability. Their growth will also consume large amounts of cash before generating further profits (expenditure comes before it earns revenue). For this reason, their growth rate might need to be “throttled” to ensure it is not so fast as to adversely impact your cashflow.
Eventually Stars will slow down in their growth and ideally slip comfortably into the Cash Cow quadrant where they will spin off substantial amounts of cash to feed the next generation of Stars.
Cash Cows
By the time a business operation has made it into the Cash Cow quadrant, it has a good profitability and a steady customer demand. And probably can sit there for many years comfortably generating income to finance profitability and/or the growth of other new operations.
The Cash Cow analogy is that we “milk” them for this purpose.
Usually a Cash Cow’s productivity can be measured fairly well because there is quite good data available for them from the accounting system and other metrics.
Go to the article: Living with a Cash Cow.
What is the next step for the Growth Share Matrix?
To do a quick check of your businesses ‘stars’ and ‘dogs’. Draw this matrix on a piece of paper and put an “X” for each product in the most appropriate quadrant and part way along each dimension; growth and market share.
If you have a large number of products, as in a department store, group them into categories.
What does this exercise tell you about your product mix?
Unless you are already a very astute business manager, you will have Dogs to consider disposing of and Question Marks to ponder if they have a future.
Other applications
Although we have been talking here of products, the same type of analysis can apply to:
• Members of staff.
• Geographic sales regions; city, region, state, world
• Demographic sales regions like young, Seniors, men/women etc.
• Start-up alternatives. You definitely want to try to start-up a potential Star rather than a potential Dog!
Also, readers familiar with the 80/20 Rule will realise this matrix reflects the productivity of the cash cows as the 20% and the other 80% being less productive.
Go to the Skills Module introduction: SM2.0 80/20 Sales Growth; Double Sales, Triple Profits
Limitations
Although the BCG Matrix benefits from being very easy to understand, it does have some weaknesses that we should note.
The attractiveness of being in a particular industry or a business operation based on just growth rate and profitability is only one component of overall competitive advantage. There are a number of other reasons why we might want to continue in a less attractive cell when it gives us some other competitive advantage.
It also assumes that business units can operate independently of each other. This may not not true, for example, if something that is in the Dog quadrant is a necessary component input to something that is in the Cash Cow quadrant.
Throughput Accounting and Theory of Constraints tell us that a well-tuned production line will have surplus capacity almost everywhere once we shift our focus to the ‘constraint’ in the system. Given that surplus capacity can operate at just the cost of materials because the capital costs are already covered, it may be possible to produce products that would otherwise be Dogs in a manner that makes them profitable to your business but not to others.
The matrix results depend heavily on how the market is defined.
Go to the Skills Module introduction: Theory of Constraints (TOC)
If a particular business operation dominates a comparatively small niche, it might look like a worthwhile activity, however if that niche is a very low yielding niche having a small part in the total market, it may not be the right niche to enter into.
Resources
Wikipedia
Background information about the Boston Consulting Group and links to the concepts developed.
Boston Consulting Group’s Growth Share Matrix – overview of terms and practical uses.
YouTube
How to create a BCG Growth Share Matrix video (12 minutes).
The Boston Matrix is introduced and explained in this short video (14 minutes).
This article was provided by Scott Williams AO FAIDC. It describes the way best practice in many management areas has been brought together in the 12Faces GamePlan System. The Goal is to provide an easy to use and repeatable “flywheel” to improve small business owners’ outcomes. Scott is the Founder of NFP small business support services 12Faces and MentorSME and has a Philanthropic Foundation supporting students in education. Scott’s business Petals Network was National Small Business of the Year and 4 times in the Top 100 Fastest Growing Australian Businesses LinkedIn