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 “Questionmark” 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.
- 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. It’s 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:
- “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.
- “Cashcows” generate the funds required to invest in the higher growth parts of the portfolio. Ensure enough investment to sustain their leadership position – don’t milk them dry! The typical investment stance for cashcows should be “Milk and Defend” – spend the minimum to maintain relative leadership, but don’t 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.
- 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”
- “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 company’s 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 “question-mark” 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.
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 HP’s 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. HP’s challenge is that it is so far behind IBM and Accenture that even big bolt-on acquisitions don’t shift it much closer to being a Star.
HP’s 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?
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
- You can cut it geographically, plotting different countries on the BCG matrix
- You can cut it by product, with each market a different product segment
- You can cut it by segment, with each market a different customer segment
- You can cut it by business, with each market a different business unit
- Or you can use a combination of these, combining product and geographical cuts