Why Boston Consulting Group Growth Share Matrix Helps
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. Yellow Belt
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
The BCG Matrix
Fill in the BCG Matrix by taking a group of alternative products or business activities. Then estimate their growth potential on one axis and market share on the other axis.
The assumption is that something with a high growth rate and in which we can have a high market share is the ideal business opportunity. On the other hand, something with a low market share and a low growth rate is doomed to be a very mediocre operation at best.
In the original usage, high growth rate was assumed to be a high cash consumer. This is because the business needed to use cash to feed the growth opportunities. Looking at the market share axis was considered to reflect the ability of the company to generate cash by virtue of having greater or lesser market share. The bigger the market share, the more cash the business can presumably generate because of economies of scale. That is, things reduce in cost the more you buy/make.
In an ideal, self-funding, business there might be one or more high market share 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.
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.
The dogs have a low market share 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.
The question mark operations are rapidly growing and therefore consume large amounts of cash. They have not yet obtained high market share. And maybe they never will!
Because they have a low market share they don’t generate much cash in return. 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 market share. Therefore, move into the stars quadrant in the short term, and possibly ultimately into the cash cows when their growth rate is exhausted.
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 after some time spent consuming cash for a low return.
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 market share can be closed down or divested as quickly as possible. Otherwise, they will eventually deteriorate into the dog quadrant.
Stars generate large amounts of cash because of their strong relative market share but they will consume large amounts of cash. This is because of their growth rate. Growth requires resources and hence their consumption of cash and other resources will be considerable. However, they have the off-setting advantage of having large market share where there will be economies of scale.
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.
By the time a business operation has made it into the cash cow quadrant, it has a large market share in a mature market . 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.
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
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 market share 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.
The original used market share and growth rate but, in a smaller business, “profitability” might be of more interest than “market share”.
It also assumes that business units can operate independently of each other. This may be fairly simplistic 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.
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.
How to create a BCG Growth Share Matrix video (12 minutes).
The Boston Matrix is introduced and explained in this short video (14 minutes).