BCG MATRIX

What is it?
The matrix was invented by Boston Consulting Group (BCG) in the 1970s to help organizations with
their portfolio strategy. This framework applies two inputs, market growth and market share to a
portfolio of segments, products or businesses, and then draws conclusions about how resources (e.g.
talent, investment) should be allocated across the portfolio.

Stars (high growth and market share) are the first priority for resources.

Cash Cows (low growth and high market share) are also attractive businesses, but do not need as
much investment. They fund your business.

The hardest choices are in the Problem Child or Question mark segment (high market
growth and low market share). These are double-or-quit businesses, where you should make a
binary choice to invest to become the leader or bow out.

Businesses in the Dog segment should be the lowest priority for scarce resources hard to do because
they are usually the neediest of businesses.

Underlying Theory/Assumptions

High market share drives superior returns on investment. This could be through economies of
scale or experience curve effects, or just investing behind strength since if you have high
market share you are likely to have a competitive advantage.

Higher growth markets deliver more attractive returns on investment. This could be true
because to grow you are winning the business of brand new customers, which is generally
easier than taking existing customers from a competitor and because your investment in your
position will grow with the the market, leading to better future returns than in a shrinking
market. Imagine the NPV difference between building a brand in a growing vs a shrinking
market.

We have defined markets correctly can be tricky. Is Europe one market or 40? What about
India? This is tricky if you define markets differently, businesses could move from Dog to
Star or vica versa, with very different portfolio allocation implications

Each part of the portfolio has similar resource/return dynamics

Resources can genuinely be allocated across the portfolio [this may not be possible e.g. it
may be hard to allocate talent across businesses]

Resources are constrained trade-offs need to be made across the portfolio, otherwise you
can just invest in them all

Before you draw firm conclusions, check that each of these assumptions is valid for your business.

When is it useful?
The BCG matrix is a good starting point for resource allocation decisions across a portfolio.

It is versatile, able to be used for a portfolio of business units, products or market segments. Its
popularity and ease of understanding makes it a powerful communication tool to explain difficult
resource allocation decisions to the organization [see limitations].

It is also based on objective data. This makes it harder to challenge and thus useful as a tool to push
through tough decisions.

a) Individual business units Check that the strategic objective of a business matches its
quadrant:

1. Stars should receive the best people, and first priority for discretionary investments.
Critical to the future of the business, they must be defended at all costs. The typical
investment stance for Stars should be Invest prevent market share loss at all costs, and if
possible grow share while the market is still expanding.

2. Cashcows generate the funds required to invest in the higher growth parts of the portfolio.
Ensure enough investment to sustain their leadership position dont milk them dry! The
typical investment stance for cashcows should be Milk and Defend spend the
minimum to maintain relative leadership, but dont invest to increase market share you are
already getting the benefit of market leadership, and this discretionary money could be better
spent investing in higher growth markets.

3. The third quadrant is either called Problem Children or Questionmark. They are
the toughest businesses to know what to do with. The market is growing, however we are
starting from a position of relative weakness. A binary decision must be taken. Selected bets
will be made with very heavy investment to grow market share and make them the Stars of
the future. Because they are coming from behind, they will not deliver the short term returns
of the stars. Therefore the business must make these bets very selectively where they
genuinely believe they can achieve a leadership position, and make the tough decision to
ignore other high growth opportunities. The best name for this binary investment stance
is Double or Quits

4. Dog quadrant has a typical investment stance or Harvest/Exit. In reality though, it

will not make sense to divest or exit businesses rapidly in this quadrant beacuse they will have
low value and will distract management during the sale process. Frequently their weak
competitive position leaves them incapablre of being harvested either if investment is
reduced they may disappear very quickly. Rather they could be set up to operate with minimal
resource drain on the rest of the portfolio, as the best people and all discretionary resources
are diverted to more attractive businesses. Over time they will become a diminishing portion
of the portfolio.
b) Overall portfolio health. The second decision that can be driven from this analysis is Do we
need to rebalance our portfolio? Do we have enough Stars? Do we have too much deadwood in the
Exit quadrant? The companys competitive position is fragile is it has many dog businesses. Are we
making too many long term bets on Problem Children? If most of the businesses are in the questionmark quadrant, it is a portfolio that requires heavy investment. Can it be funded? Should we divest
some of our Cash Cows and invest the proceeds in higher growth businesses? If our portfolio is
concentrated in cash cows, the company will have issues with long term growth.

Limitations of this framework

The primary danger is that this framework is too simplistic and neat, determining major strategic
decisions without considering other factors. For example, when a low growth, high share business
follows a cash cow approach it may become a self-fulfilling prophecy. Lack of investment in
innovation may be exactly what is holding growth back. Using alternative axes (e.g. Competitive
Position) can adjust for this, but brings in more subjective judgement. Look at the GE Matrix for an
alternative that brings in more factors, at the price of requiring more subjective judgements. To
overcome this limitation, this framework should not be used in isolation the decisions it indicates
can be confirmed by other analyses e.g. incremental returns on capital.

How do you do the analysis?

The original matrix axes are designed to be objective and fact-based. The only judgement is the
definition of market, which should be consistent across the portfolio. Market growth should be the
future long term expected growth rate (e.g. forecast growth for next 3 years) since a strategic decision
is being taken for future investment returns. Remember it is the TOTAL market growth rate, not the
company growth rate. Since the purpose of the framework is to show relative attractiveness across a
portfolio, the midpoint should be the industry average growth rate. Note that the Y-axis is not related

to the company when you analyse the portfolio of different companies in an industry, the Y-axis
position will not change, just the X-axis.

Relative Market Share is measured relative to your largest competitor in each market. If they are twice
as large as you, you have an RMS of 0.5. If you are twice as large as your nearest competitor, you have
an RMS of 2.0. Conventionally, the mid-point is 1.0, so you are market leader for everything on the
right side of the framework and a follower on everything to the left.

Draw the positions as bubbles proportional to revenue helps you visualise what is most important, to
prioritise issues.

Finally, adding arrows showing the trend on both axes of each segment turns a static picture into a
dynamic one, showing what the matrix will look like in the future is the trend is maintained.

An Example?

The portfolio of HP is illustrated in the BCG matrix on the left. The circles are roughly proportional to
revenue and the arrows show the trend line is the industry accelerating or decellerating and is
market share growing or shinking?

Overall portfolio conculsions

The overall conclusion from the matrix anbout BCG is that medium term growth is a major challenge.
There are no stars in the portfolio.

Based on the position of the businesses, you would expect the cashcows to be funding the
questionmarks. This is exactly HPs strategy over the last decade, churning the cashflow from the
printer division into multiple acquisitions to try to boost the market share of their problem children,
especially services.

Other important issues:

The Imaging and Printing cashcow will become less and less attractive since the growth rate is
declining, as people print less and share pictures digitally.

The PC division was market leader, but is sliding into dog territory. It is unlikely to end as a
cash cow, but fade to a less and less attractive dog. Their idea to spin it off is a natural choice
for a business in this position.

Services is an attractive industry with healthy returns and growth prospects. HPs challenge is
that it is so far behind IBM and Accenture that even big bolt-on acquisitions dont shift it much
closer to being a Star.

Conclusion:

HPs business portfolio is not in healthy shape. One possible resolution could be to acquire some star
technology businesses directly, although these will be very expensive acquisitions.

How can you adapt this concept?

Alternative axes
1) Alternative axis for market share could be Competitive Position a weighted composite measure
(e.g. brand equity, profit share) if market share is not a good proxy for cashflow potential. This
introduces more subjectivity.

2) Instead of Relative Market Share, absolute market share can be plotted. This might be a more
accurate metric for increasing returns from scale in a highly fragmented market for instance.

3) An alternative axis for Market Growth could be Market Attractiveness a weighted composite
measure (e.g. business/product/segment profitability) if growth rate alone is poorly related to long
term value potential. Key to note is that this axis is independent of company all competitors would
rate this axis the same.

4) Use historic growth rates, not expected future long term expected growth rates. This removes more
judgement from the matrix position, at the expense of relevence.

TIP: If it gives roughly the same answer as a more subjective axis, use objective, fact-based
numbers. There will be less debate about the positions on the matrix, the whole discussion can focus
on so what decisions should we take, not how did you pick these numbers?

Include current market size on the framework, as a bubble chart (with the market size proportional to
the area of the circle). Market size makes no difference to the right strategic objective of the individual
elements of the portfolio, but including it can provided an immediate visual picture of what are the
most important business units and the overall strategic health of the portfolio.

Alternative market cuts

You may get more insight by cutting your business along different dimensions

1. You can cut it geographically, plotting different countries on the BCG matrix

2. You can cut it by product, with each market a different product segment

3. You can cut it by segment, with each market a different customer segment

4. You can cut it by business, with each market a different business unit

5. Or you can use a combination of these, combining product and geographical cuts