11/1/2015

BCGMatrix

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TheBCGGrowthShareMatrix

TheBCGGrowthShareMatrixisaportfolioplanningmodeldevelopedbyBruce

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HendersonoftheBostonConsultingGroupintheearly1970's.Itisbasedonthe
Home
observationthatacompany'sbusinessunitscanbeclassifiedintofourcategories
About
basedoncombinationsofmarketgrowthandmarketsharerelativetothelargest
competitor,hencethename"growthshare".Marketgrowthservesasaproxyfor
Privacy
industryattractiveness,andrelativemarketshareservesasaproxyforcompetitive
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advantage.Thegrowthsharematrixthusmapsthebusinessunitpositionswithin
TermsofUse
thesetwoimportantdeterminantsofprofitability.

BCGGrowthShareMatrix

Thisframeworkassumesthatanincreaseinrelativemarketsharewillresultinan
increaseinthegenerationofcash.Thisassumptionoftenistruebecauseofthe
experiencecurveincreasedrelativemarketshareimpliesthatthefirmismoving
forwardontheexperiencecurverelativetoitscompetitors,thusdevelopingacost
advantage.Asecondassumptionisthatagrowingmarketrequiresinvestmentin
assetstoincreasecapacityandthereforeresultsintheconsumptionofcash.Thus
thepositionofabusinessonthegrowthsharematrixprovidesanindicationofits
cashgenerationanditscashconsumption.
Hendersonreasonedthatthecashrequiredbyrapidlygrowingbusinessunitscould
beobtainedfromthefirm'sotherbusinessunitsthatwereatamorematurestage
andgeneratingsignificantcash.Byinvestingtobecomethemarketshareleaderin
arapidlygrowingmarket,thebusinessunitcouldmovealongtheexperiencecurve
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BCGMatrix

anddevelopacostadvantage.Fromthisreasoning,theBCGGrowthShareMatrix
wasborn.
Thefourcategoriesare:
DogsDogshavelowmarketshareandalowgrowthrateandthusneither
generatenorconsumealargeamountofcash.However,dogsarecashtraps
becauseofthemoneytiedupinabusinessthathaslittlepotential.Such
businessesarecandidatesfordivestiture.
QuestionmarksQuestionmarksaregrowingrapidlyandthusconsume
largeamountsofcash,butbecausetheyhavelowmarketsharestheydonot
generatemuchcash.Theresultisalargenetcashcomsumption.Aquestion
mark(alsoknownasa"problemchild")hasthepotentialtogainmarket
shareandbecomeastar,andeventuallyacashcowwhenthemarketgrowth
slows.Ifthequestionmarkdoesnotsucceedinbecomingthemarketleader,
thenafterperhapsyearsofcashconsumptionitwilldegenerateintoadog
whenthemarketgrowthdeclines.Questionmarksmustbeanalyzedcarefully
inordertodeterminewhethertheyareworththeinvestmentrequiredtogrow
marketshare.
StarsStarsgeneratelargeamountsofcashbecauseoftheirstrongrelative
marketshare,butalsoconsumelargeamountsofcashbecauseoftheirhigh
growthratethereforethecashineachdirectionapproximatelynetsout.Ifa
starcanmaintainitslargemarketshare,itwillbecomeacashcowwhenthe
marketgrowthratedeclines.Theportfolioofadiversifiedcompanyalways
shouldhavestarsthatwillbecomethenextcashcowsandensurefuturecash
generation.
CashcowsAsleadersinamaturemarket,cashcowsexhibitareturnon
assetsthatisgreaterthanthemarketgrowthrate,andthusgeneratemore
cashthantheyconsume.Suchbusinessunitsshouldbe"milked",extracting
theprofitsandinvestingaslittlecashaspossible.Cashcowsprovidethecash
requiredtoturnquestionmarksintomarketleaders,tocoverthe
administrativecostsofthecompany,tofundresearchanddevelopment,to
servicethecorporatedebt,andtopaydividendstoshareholders.Becausethe
cashcowgeneratesarelativelystablecashflow,itsvaluecanbedetermined
withreasonableaccuracybycalculatingthepresentvalueofitscashstream
usingadiscountedcashflowanalysis.
Underthegrowthsharematrixmodel,asanindustrymaturesanditsgrowthrate
declines,abusinessunitwillbecomeeitheracashcoworadog,determinedsoley
bywhetherithadbecomethemarketleaderduringtheperiodofhighgrowth.
Whileoriginallydevelopedasamodelforresourceallocationamongthevarious
businessunitsinacorporation,thegrowthsharematrixalsocanbeusedfor
resourceallocationamongproductswithinasinglebusinessunit.Itssimplicityisits
strengththerelativepositionsofthefirm'sentirebusinessportfoliocanbe
displayedinasinglediagram.

Limitations
Thegrowthsharematrixoncewasusedwidely,buthassincefadedfrompopularity
asmorecomprehensivemodelshavebeendeveloped.Someofitsweaknessesare:
Marketgrowthrateisonlyonefactorinindustryattractiveness,andrelative
marketshareisonlyonefactorincompetitiveadvantage.Thegrowthshare
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matrixoverlooksmanyotherfactorsinthesetwoimportantdeterminantsof
profitability.
Theframeworkassumesthateachbusinessunitisindependentoftheothers.
Insomecases,abusinessunitthatisa"dog"maybehelpingotherbusiness
unitsgainacompetitiveadvantage.
Thematrixdependsheavilyuponthebreadthofthedefinitionofthemarket.
Abusinessunitmaydominateitssmallniche,buthaveverylowmarketshare
intheoverallindustry.Insuchacase,thedefinitionofthemarketcanmake
thedifferencebetweenadogandacashcow.
Whileitsimportancehasdiminished,theBCGmatrixstillcanserveasasimpletool
forviewingacorporation'sbusinessportfolioataglance,andmayserveasa
startingpointfordiscussingresourceallocationamongstrategicbusinessunits.

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