The BCG matrix, also known as the growth-share matrix, was created by the Boston Consulting Group, a prestigious business consulting firm. The purpose of the matrix is to allow a corporation that has multiple business units or is the parent company holding multiple businesses to categorize and examine those businesses based upon their market share and growth rates. These sub-businesses are known as “strategic business units”.
Structure of the BCG Matrix
The matrix is a 2 x 2 quadrant a column heading “Market Share” and row heading “Market Growth Rate”. Market share compares the SBUs sales in the current year versus those of competitors. The market growth rate is this year’s industry sales minus the past year’s industry sales. Note, the market share is a company-specific metric; while, the market growth rate is an industry metric. Below is a visual representation of the matrix.
Metrics and Scale of the BCG MatrixFigure: BCG Matrix
The matrix has four boxes to identify the combination of high or low growth rate and market share. To evaluate the market share SBUs, the midpoint is set at 1. The scale for market share ranges from 1/10th of the industry average to 10 times the industry average. To evaluate the market growth rate, the the industry average growth rate is used. If SBUs are in distinct industries, the general growth rate for the overall economy is used.
Plotting Strategic Business Units
Strategic business units are plotted in the matrix based upon their market share and the overall market growth rate. The categories are as follows:
- Stars – Strategic business units with large market shares in fast-growing industries. This means that the SBU likely generates significant revenue; however, the costs of growth and maintenance of market share can eat much of the profit margin (or even cause losses). These stars will generally evolve into cash cows at a later point in their business cycle. They are also a prime target for acquisition by a larger strategic competitor or company seeking to enter the industry.
- Cash Cows – SBUs that hold a large market share in a slow-growth market (generally a mature and established market). The size of the market share produces a large amount of revenue (which may be growing slowly, stable, or declining). These companies generally employ cost strategies or have a stable form of differentiation. The low growth costs (marketing and sales expenses) allow for high profits or large profit margins. This profits are the key resource of the holding company. The profits from these SBUs generally go into research and development or support SBUs in other categories.
- Question Marks – Question Mark SBUs hold a small market share in a fast-growing industry. These a startup ventures that require lots of growth to be sustainable (or demonstrate itself as a viable business). Growth expenses (sales and marketing) are the heaviest cost for the business and require lots of resources. If the business begins to establish a strong growth rate or presence in the market, the business will continue to pursue growth and expansion with the hopes that the business can become a star. If the business does not prove capable of grabbing market share, the business will attempt a strategic shift or reduce resources allocation to reduce costs. Reducing costs and constricting can turn the SBU into a dog.
- Dogs – Dogs are SBUs with low market share in a slow-growth industry. Because these businesses show low growth and generate low revenue, the firm does not invest a great deal of resources in the venture. As such, it is difficult for a dog to ever establish any sort of competitive advantage that allows for growth. Further, these firms generally are unable to leverage cost advantages through economies of scale. Holding companies will generally seek to eliminate or reduce the significance of dogs in their portfolios. The exception is when the dog offers some other strategic advantage for other portfolio companies.
Using the BCG Matrix Results
The combination of market share and growth rate helps a firm to understand where its competitive advantage lies. It allows for strategic decision making with regard to resource allocation. The function is one of comparative advantage. If a SBU is unable to demonstrate market strength and potential, it may be better to allocated resources to SBUs that demonstrate a competitive advantage for the firm.
The problems with this approach are the lack of precision and the absence of cost-drivers as a metric in its classification of SBUs. It can be difficult to define the market when SBUs cross various and diverse industries. The cost-structure for industries may vary a great deal, meaning that market share does not allows adequately indicate value. A firm must do an independent analysis of profitability. Further, this analysis does not tell whether dogs (low-growth, low market share) firms provide necessary value that contributes to the growth and market share of other SBUs. Lastly, the assumption that any SBU will morph or evolve through each lifecycle is far from certain.
An proposed update of the BCG Matrix proposes using strategic adaptations (“strategic experimentation”) of the model based upon the firm and business. The revision notes that there must be additional metrics regarding competitiveness to accompany measures of market share.