Q: Describe growth share matrix provided by BCG

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1 Q: Describe growth share matrix provided by BCG The BCG Growth-Share Matrix The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth-share". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability. The BCG matrix (aka B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis This matrix is one means of analyzing the balance of an organization s product portfolio. According to this matrix, two basic factors define a product s strategic stance in the market place: 1. Relative Market Share for each product, the ratio of the share of the organization s product divided by the share of the market leader; 2. Market Growth Rate for each product, the market growth rate of the product category. Relative market share is important because, in the competitive battle of the market place, it is advantageous to have a larger share than rivals: this gives room for manoeuvre, the scale to undertake investment and the ability to command distribution. Some researchers, such as Buzzell and Gale,22 claim to

2 have found empirical evidence to support these statements. For example, in a survey of major companies, the two researchers found that businesses with over 50 per cent share of their markets enjoy rates of return three times greater than businesses with small market shares. There are other empirical studies that also support this broad conclusion.23 However, Jacobsen and Aaker24 have questioned this relationship. They point out that such a close correlation will also derive from other differences in businesses. High market share companies do not just differ on market share but on other dimensions as well: for example, they may have better management and may have more luck. However, Aaker has conceded that portfolios do have their uses, along with their limitations. Market growth rate is important because markets that are growing rapidly offer more opportunities for sales than lower growth markets. Rapid growth is less likely to involve stealing share from competition and more likely to come from new buyers entering the market. This gives many new opportunities for the right product. There are also difficulties, however perhaps the chief being that growing markets are often not as profitable as those with low growth. Investment is usually needed to promote the rapid growth and this has to be funded out of profits. Relative market share and market growth rate are combined in the growth share matrix, as shown in It should be noted that the term matrix is misleading. In reality, the diagram does not have four distinct boxes, but rather four areas which merge into one another. The four areas are given distinctive names to signify their strategic significance. Stars. The upper-left quadrant contains the stars: products with high relative market shares operating in high-growth markets. The growth rate will mean that they will need heavy investment and will therefore be cash users. However, because they have high market shares, it is assumed that they will have economies of scale and be able to generate large amounts of cash.

3 Overall, it is therefore asserted that they will be cash neutral an assumption not necessarily supported in practice and not yet fully tested. Cash cows. The lower-left quadrant shows the cash cows: product areas that have high relative market shares but exist in low-growth markets. The business is mature and it is assumed that lower levels of investment will be required. On this basis, it is therefore likely that they will be able to generate both cash and profits. Such profits could then be transferred to support the stars. However, there is a real strategic danger here that cashcows become undersupported and begin to lose their market share. Problem children (Question Mark). The upper-right quadrant contains the problem children: products with low relative market shares in high-growth markets. Such products have not yet obtained dominant positions in rapidly growing markets or, possibly, their market shares have become less dominant as competition has become more aggressive. The market growth means that it is likely that considerable investment will still be required and the low market share will mean that such products will have difficulty generating substantial cash. Hence, on this basis, these products are likely to be cash users. Dogs. The lower-right quadrant contains the dogs: products that have low relative market shares in low-growth businesses. It is assumed that the products will need low investment but that they are unlikely to be major profit earners. Hence, these two elements should balance each other and they should be cash neutral overall. In practice, they may actually absorb cash because of the investment required to hold their position. They are often regarded as unattractive for the long term and recommended for disposal. Overall, the general strategy is to take cash from the cash cows to fund stars and invest in future new products that do not yet even appear on the matrix. Cash may also be invested selectively in some problem children to turn them into stars, with the others being milked or even sold to provide funds for elsewhere. Typically in many organizations, the dogs form the largest category

4 and often represent the most difficult strategic decisions. Should they be sold? Could they be repositioned in a smaller market category that would allow them to dominate that category? Are they really cash neutral or possibly absorbing cash? If they are Limitations The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are: 1. Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growthshare matrix overlooks many other factors in these two important determinants of profitability. 2. The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage. 3. The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market

5 share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow. 4. While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation's business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units. CONCLUSION There are a number of problems associated with the matrix. The most obvious difficulty is that strategy is defined purely in terms of two simple factors and other issues are ignored. Further problems include: The definition of market growth. What is high market growth and what is low? Conventionally, this is often set above or below 5 per cent per annum, but there are no rules. The definition of the market. It is not always clear how the market should be defined. It is always possible to make a product dominate a market by defining the market narrowly enough. For example, do we consider the entire European steel market, where Usinor would have a small share, or do we take the French segment only, when the Usinor share would be much higher? This could radically alter the conclusions. The definition of relative market share. What constitutes a high relative share and a low share? Conventionally, the ratio is set at 1.5 (organisation s product to share of market leader s product) but why should this be so? Hence, although the BCG matrix has the merit of simplicity, it has some significant weaknesses. As a result, other product portfolio approaches have been developed.