No strategic management or marketing text appears to be complete without the inclusion of the Boston Consulting Group (BCG) growth

-share matrix. When used effectively, this model provides guidance for resource allocation. And despite its inherent weaknesses, is probably one of the most widely used management instrument as far as portfolio management is concern. For instant, each SBU (strategic business unit) of large companies such as General Electric, Siemens, and Centrica require different strategies to compete effectively and efficiently. It is not a question of one strategy fits all SBUs since the likelihood for each of them experiencing the same market growth rate, industry-threats and leverage is very slim. This is where the BCG model comes into play as a management analytical tool. The ensuing examines the underpinnings of the model, for what it is used, how to use it and why it is used.

INTRODUCTION WHAT IS THE BCG GROWTH-SHARE MATRIX?

To begin with, BCG is the acronym for Boston Consulting Group²a general management consulting firm highly respected in business strategy consulting. BCG Growth-Share Matrix (see figure 1) happens to be one of many of BCG's strategic concepts the organisationdeveloped in the late 1970s, and is being taught at leading business schools and executive education programmes around the world.

It is a management tool that serves four distinct purposes (McDonald 2003; Kotler 2003; Cipher 2006): it can be used to classify product portfolio in four business types based on four graphic labels including Stars, Cash Cows, Question Marks and Dogs; it can be used to determine what priorities should be given in the product portfolio of a company; to classify an organisation¶s product portfolio according to their cash usage and generation; and offers management available strategies to tackle various product lines. Consider companies like Apple

Computer, General Electric, Unilever, Siemens, Centrica and many more, engaging in diversified product lines. The BCG model therefore becomes an invaluable analytical tool to evaluate an organisation¶s diversified product lines as later seen in the ensuing sections.

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The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and market growth. They often are pointers to healthiness of a business (Kotler 2003; McDonald 2003). In other words, products with greater market share or within a fast growing market are expected to wield relatively greater profit margins. The reverse is also true. Let¶s look at the following components of the model:

Analysts believe it is the impetus for Apple's financial rebirth 40% of Apple's sales is attributed to the iPod product line (Cantrell 2006). This phenomenon is often likened to the experience curve paradigm that when an organisation enjoys lower costs. it tends to develop new ways in performing those tasks better which results in lower operating cost (Cipher 2006). The PC manufacture giant occupies a worldwide market share of 18.Figure 1 Relative Market Share According to the proponents of the BCG (Herndemson 1972). As earlier emphasized above. The basic tenet of this postulation is that the more an organisation performs a task often. market share is correlated with experience. improved efficiency from conducting business operations overtime. which occupies a dominant 73% share the portable music player market (Cantrell 2006). It captures the relative market share of a business unit or product.1%. But that is not all! It allows the analysed business unit be pitted against its competitors. Hence. . What that suggests is that the experience curve effect requires that market share is increased to be able to drive down costs in the long run and at the same time a company with a dominant market share will inevitably have a cost advantage over competitor companies because they have the greater share of the market. Dell¶s PC line shares the same market dominance theory as the iPod. A case in point is Apple Computer¶s flagship product called the iPod. Similarly. which is commensurate to its large market revenue above its competitors (see figure 2). this is due to the sometime correlation between relative market share and the product¶s cash generation.

Cash Cows These products are said to have high profitability. surplus cash from cash cow products should be channelled into Stars and Questions in order to create the future Cash Cows. and predicates the cash requirement a product needs relative to the growth of that market. and pulls a lot of organisation¶s resources in an effort to increase gains. and require low investment for the fact that they are market leaders in a low-growth market. They supply the investment resource for other products. . They pay the corporate dividend. They pay the corporate interest charges. Protect them (Henderson 1976). and tends to attract a lot of competition. They supply the funds for R&D. Kotler 2003. correlates with the product life cycle paradigm. Therefore. A fast growing market is generally considered attractive. They justify the debt capacity for the whole company. A case in point is the technological market widely consider by experts as a fast growing market. They pay the corporate overhead. McDonald 2003). This viewpoint is captured by the founders themselves thus: The cash cows fund their own growth. According to experts (Drummond & Ensor 2004. a product life cycle and its associated market play a key role in decision-making.Figure 2 Market Growth Market growth axis.

given its perceived safety issues and a cheaper. Because Pfizer invested heavily in promotion early on with Inspra. Mathematically. However. calculate the relative market share and market growth for each SBU and product. the drug's earnings potential and positive cash flow is elusive at best. and hence do not generate much cash. ConsiderHewlett-Packard¶s small share of the digital camera market.0 (Drummond & Ensor 2004. But. A portfolio analysis ofPfizer's cardiovascular franchise would suggest redeploying promotional spend on Inspra to up-andcoming stars like Caduet (amlodipine/atorvastatin) or torcetrapib to ensure those drugs reach their sales potential. Kotler 2003). Dogs Dogs often have little future and are big cash drainers on the company as they generate very little cash by virtue of their low market share in a highly low growth market. . For example. despite any amount of promotion. Next. despite anaemic sales of roughly $40 million in the $2. according to industry¶s experts. Inspra is likely to remain a dog. They tend to/should generate large amounts of cash but also use a lot of cash because of growth market conditions. more effective spironolactone in the samePfizer portfolio. Figure 3 depicts the formulas to calculate the relative market share and market growth. the mid-point of the axis on the scale of Low-High is represented by 1.´ HOW TO DEVELOP GOOD BCG GROWTH-SHARE MATRIX OF A COMPANY? SBUs or products are represented on the model by circles and fall into one of the four cells of the matrix already described above. this is a rapidly growing market. It was thought to gain market share and become a star. Apple Computer has a large share in the rapidly growing market for portable digital music players (Cantrell 2006). and eventually a cash cow when the market growth slowed. Consider Pfizer¶s Inspra (Gibson 2006): ³Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child. the SBU¶s or product¶s market share equals that of its largest competitor¶s market share (Drummond & Ensor 2004. At this point.Stars Stars are leaders in high growth markets. Question Marks Question Marks have not achieved a dominant market position. Kotler 2003).7 billion heart-failure market dominated by Toprol-XL (metoprolol). They tend to use a lot of cash because of growth market conditions. behind industry leader Canon¶s 21% (Canon 2006).

Figure 4 . Figure 4 depicts a fairly accurate BCG growth-share matrix for Apple Computer developed in the spring of 2005 without the author calculating the relative market share and market growth. if you are versed with a particular industry and companies operating in it. you could draw up a BCG matrix for any company without necessarily computing figures for the relative market share and market growth.Figure 3 Oftentimes.

Moreover. price increase. Limitations The BCG model is criticised for having a number of limitations (Kotler 2003. This strategy is typically used for Question Marks that will not become Stars and for Dogs. and for Dogs.Once the products or SBUs have been plotted. at this juncture the organisations should strive to maintain a balanced portfolio. strategy and budget for the business lines. Harvest Here management tries to increase short-term cash flows as far as possible (e. Short-term earnings and profits are deliberately forfeited because it is hoped that the long-term gains will be higher than this. Cash generated from Cash Cows should flow into Stars and Question Marks in an effort to create future Cash Cows.g. there are 4 major strategies that can be pursued at this stage as described in the ensuing section. Hoover. This strategy is suited to Question Marks if they are to become stars. the planner then has to decide on the objective. Harvesting is also used for Question Marks where there is no possibility of turning them into Stars. sec fillings and a host of specialised research organisations such as IDC. It is a strategy suited to weak Cash Cows or Cash Cows that are in a market with a limited future. developing a BCG growth-share matrix should pose less of a problem. WHERE TO FIND INFORMATION FOR THE BCG GROWTH-SHARE MATRIX? Information for the BCG Growth-Share matrix is generated from multiple sources including company¶s annual reports. Edgar. Hold The objective is to maintain the current share position and this strategy is often used for Cash Cows so that they continue to generate large amounts of cash. Forrester and many more. Basically. Armed with this information. McDonald 2003): . cutting costs) even at the expense of the products or SBU¶s longer-term future. Divest The objective of this strategy is to rid the organisation of the products or SBUs that are a drain on profits and to utilize these resources elsewhere in the business where they will be of greater benefit. AVAILABLE STRATEGIES TO PURSUE Build The product or SBU¶s market share needs to be increased to strengthen its position.

y Also. A high growth market may lack size and stability. risk-adjusted discounted cash flows should be used (ManyWorlds 2005). the BCG Growth-Share matrix must be used with care. with relatively frictionless capital flows. and independent of assets outside of the business. it is a best-known business portfolio evaluation model (Kotler 2003). That is appropriate only in a capital constrained environment. the model rests on net cash consumption or generation as the fundamental portfolio balancing criterion. this is not the appropriate metric to apply ± rather. the growth-share matrix is based on the assumption that high rates of growth use large cash resources and that maturity of the life cycle brings about the expected profit returns. y What is more. low market share producers may be on steeper experience curves due to superior production technology. In modern economies. In other words. and strategic factors other than relative market share may affect profit margins. there is no provision for synergy among products/business units. the matrix assumes products/business units are independent of each other. Growth markets attract new entrants and if capacity exceeds demand then the market may become a low margin one and therefore unattractive. This is rarely realistic. y In addition. nonetheless. y Furthermore. This may be incorrect due to various reasons (Cipher 2006): capital intensity may be low and the business/product could be grown without major cash outlay. A fast growing market is not necessarily an attractive one. high entry barriers may exist so margins may be sustainable and big enough to produce a positive cash flow and a growth at the same time. . and industry overcapacity and price competition may depress prices in maturity. Given the aforementioned weaknesses. y The relationship between cash flow and market share may be weak due to a number of factors including (Cipher 2006): competitors may have access to lower cost materials unrelated to their relative share position. market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market.y There are other reasons other than relative market share and market growth that could influence the allocation of resources to a product or SBU: reasons such as the need for strong brand name and product positioning could compel resource allocation to an SBU or product (Drummond & Ensor 2004).

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