Boston Consulting Group Matrix (BCG)

The Boston Consulting Group Matrix is another very well-known analysis tool. Note that it is
sometimes known as a portfolio analysis and it really makes sense to use the BCG Matrix if there is
more than one product (or product line) in a company ’ s portfolio. The axes of the matrix are
relative market share and the market or industry growth rate.

Relative market share = The company’s market share/Largest market share

We’ll go through each quadrant in turn.

๏ Question mark/problem child. This product has a high growth rate but a low market share.
Why is it known as a question mark or problem child? Well, the BCG analysis suggests that
there is no long-term future for this product if it has only a small market share. Suppliers who
have large market shares have much greater economies of scale and could easily dominate
the small supplier. The question therefore is: should we get out of this product or should we
try and grab a large market share? If we go for the large market share, this will require
investment. It will be a heavily negative cash flow because money has to be spent on
promotion, research and development or investing the margin (that is reducing the selling
price to win a higher market share).

๏ Star products. If the quest by the problem child for high market share is successful, the
product will become a star. This isn’t as good as it sounds. Although we now have a high
market share (and therefore would enjoy economies of scale and are well down the
experience curve), because we have one of the highest market shares, and highest profiles,
competitors will be trying to steal market share from us. We will be the target for competitors
also wanting to gain a high market share. Remember, if the market has a high growth rate this
product is perceived as a product with a future and many companies will be anxious to get a
large share of the action. Therefore, cash flow with the star product is usually soon to be
roughly zero.
๏ Cash cows. The initially high growth rate of products will always slow down, perhaps to zero
or even becoming negative (a declining market). The product then becomes a cash cow. It’s a
cash cow because we still have a high market share but nearly all the initial expenses will
have been written off. Also, because this is now perceived as an old product, competitors will
not be keen in stealing market share from us. Essentially they leave us alone. We therefore
enjoy high cash inflows without having to spend a lot on promotion, or research and
development, or defending our market share.

๏ The dog sector is on its own. Cash cow products do not turn into dogs! This is a product
which has a low growth rate and we don’t have much of a market share. Therefore, get out of
it: divest. There’s no point spending time effort and money achieving a high market share in
an old product. So, close down the production facilities or try to sell them to another
company.
There are considerable flaws in the BCG analysis. For example:
๏ It puts a lot of emphasis on the importance of a high market share, but there are many
companies with only small market shares which are successful in the long-term. For example,
the Porsche car company has a small market share when compared to Ford, General Motors
and Toyota. Yet, it is one of the most profitable car companies per car sold in the world.
Really, you have to define very carefully what your market is. That can be room for relatively
small specialist suppliers who can continue to make good profits year in, year out.
๏ The second problem is to do with how the BCG is interpreted. If a product went from just
being a star product to just being a cash cow product because of a slight change in market
growth rate, to suddenly cutback massively on promotion, research and development, and
defending the product. The interpretation must not be too black and white. If market growth
rate goes from 10.1 to 9.9, with 10 being the division between star and cash cow, in reality not
a lot has changed and the change in treatment of the produce should not be abrupt.
๏. Third, relative market share and market growth rate are probably inadequate measures. By
relative market share we really mean competitive strength, but there’s much more to
competitive strength than just our market share. For example our brand name, or where our
production facilities are located can give us very high competitive strength. Similarly, instead
of just having a market growth rate what we really mean is market attractiveness.
Attractiveness depends on factors such as risk and the amount of competition which is
present in that market. We might prefer to go for a product which has a relatively low growth
rate, but which is relatively low risk.

These criticisms do not mean that BCG is useless but, like any model, care needs to be exercised in
interpreting the results. No model guarantees the truth.
Finally let’s return to the name portfolio analysis. If we have lots and lots of problem children they
will all require financing and where is that money going to come from? If we have almost
exclusively cash cows we have a very positive cash flow now, but a few years down the line the
market for those cash cows could have declined rapidly and what are we going to replace those
cash flows with?
A well-balanced portfolio has some cash cows and some question marks. The cash generated from
the cash cows can be used to invest in the question marks, so securing the long-term future of the
company