3/7/2016

WhatIsaBCGMatrix?

WhatIsaBCGMatrix?
Ifyou'retheownerofanestablishedcompany,youmaywonderhowbesttodeployresourcesto
enhanceyourprospects.Since1968,theBCGmatrix,alsoknownastheBostonorgrowthshare
matrix,hashelpedcompaniesanswerthatquestionbyprovidingthemawaytoanalyzeproductlines
insearchofgrowthopportunities.
Namedforitscreator,theBostonConsultingGroup,theBCGmatrixaimstoidentifyhighgrowth
prospectsbycategorizingthecompany'sproductsaccordingtogrowthrateandmarketshare.By
optimizingpositivecashflowsinhighpotentialproducts,acompanycancapitalizeonmarketshare
growthopportunities.
ReevesMartin,seniorpartnerandmanagingdirectorofBostonConsultingGroup,saidthatnearly50
yearsafteritsinception,theBCGmatrixremainsavaluabletoolforhelpingcompaniesunderstand
theirpotential.
"TheconceptofBCG'sgrowthsharematrix,centralnowadaystobusinessschools'curriculumon
strategy...providedcompanieswithadisciplinedandsystematictoolforportfoliomanagement,"
MartintoldBusinessNewsDaily."Recently,HarvardBusinessReviewnamedBCG'smatrixoneof
five'frameworksthatchangedtheworld.'"
Understandingthematrix
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TocreateaBCGmatrix,businessesgathermarketshareandgrowthratedataontheirbusiness
unitsorproducts.Onelargesquareisdrawnandisdividedintofourequalquadrants.Alongthetop
ofthebox,amarketshareorcashgenerationiswritten,andagrowthrateorcashuseiswritten
downtheleftside.Onthetopleftishighmarketshare,andlowmarketshareisontheleft.Onthe
lefthandside,highcashuseisatthetopandlowcashuseorgrowthrateisatthebottom.
Withinthediagram,"stars"gointheupperleftquadrant,and"questionmarks"areputintheupper
rightsquare.Atthebottom,"cashcows"goontheleft,and"dogs"areplacedontheright.The
diagramvisuallyshowsthatstarshavehighmarketshareandahighgrowthrate,whilequestion
markshavelowmarketshareandahighgrowthrate.Onthebottom,cashcowshavealowgrowth
ratebutahighmarketshare,anddogshavealowmarketshareandalowgrowthrate.

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Credit:DeiMosz/Shutterstock
Thefollowingideasapplytoeachquadrantofthematrix:
Stars:Thebusinessunitsorproductsthathavethebestmarketshareandgeneratethemostcash
areconsideredstars.Monopoliesandfirsttomarketproductsarefrequentlytermedstars.However,
becauseoftheirhighgrowthrate,starsalsoconsumelargeamountsofcash.Thisgenerallyresults
inthesameamountofmoneycominginthatisgoingout.Starscaneventuallybecomecashcowsif
theysustaintheirsuccessuntilatimewhenthemarketgrowthratedeclines.Companiesareadvised
toinvestinstars.
Cashcows:Cashcowsaretheleadersinthemarketplaceandgeneratemorecashthanthey
consume.Thesearebusinessunitsorproductsthathaveahighmarketshare,butlowgrowth
prospects.AccordingtoNetMBA,cashcowsprovidethecashrequiredtoturnquestionmarksinto
marketleaders,tocovertheadministrativecostsofthecompany,tofundresearchanddevelopment,
toservicethecorporatedebt,andtopaydividendstoshareholders.Companiesareadvisedtoinvest
incashcowstomaintainthecurrentlevelofproductivity,orto"milk"thegainspassively.
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Dogs:Alsoknownaspets,dogsareunitsorproductsthathavebothalowmarketshareandalow
growthrate.Theyfrequentlybreakeven,neitherearningnorconsumingagreatdealofcash.Dogs
aregenerallyconsideredcashtrapsbecausebusinesseshavemoneytiedupinthem,eventhough
theyarebringingbackbasicallynothinginreturn.Thesebusinessunitsareprimecandidatesfor
divestiture.
Questionmarks:Thesepartsofabusinesshavehighgrowthprospectsbutalowmarketshare.
Theyareconsumingalotofcashbutarebringinglittleinreturn.Intheend,questionmarks,also
knownasproblemchildren,losemoney.However,sincethesebusinessunitsaregrowingrapidly,
theydohavethepotentialtoturnintostars.Companiesareadvisedtoinvestinquestionmarksifthe
producthaspotentialforgrowth,ortosellifitdoesnot.
AsBCGfounderBruceHendersonwrotein1968,"allproductseventuallybecomeeithercashcows
orpets[dogs].Thevalueofaproductiscompletelydependentuponobtainingaleadingshareofits
marketbeforethegrowthslows."
Onceacompanyplotsoutitsmatrix,itcanbegintofurtheranalyzeitsproducts'potential.
Understandingcashflow
TounderstandtheelementsoftheBostonmatrix,companiesshouldbemindfulofthesourcesof
cashflow.Hendersonwrotethatfourrulesareresponsibleforproductcashflow:
Marginsandcashgeneratedareafunctionofmarketshare.Highmarginsandhighmarketshare
gotogether.
Growthrequirescashinputtofinanceaddedassets.Theaddedcashrequiredtoholdshareisa
functionofgrowthrates.
Highmarketsharemustbeearnedorbought.Buyingmarketsharerequiresanadditional
incrementorinvestment.
Noproductmarketcangrowindefinitely.Thepayofffromgrowthmustcomewhenthegrowth
slows,oritneverwill.Thepayoffiscashthatcannotbereinvestedinthatproduct.
Alternativesandnextsteps
WhilethetraditionalBostonmatrixisapowerfulandpopulartool,ithasbeencriticizedforimplying
thateverycompanywillidentifyproductsineachquadrant,andthatthereisorshouldbesteady
movementofproductsamongthequadrantsastheyprogressintheirlifecycles.
Forthatreason,someconsultantsadvocatetheuseoftheGE/McKinseyMatrixinstead.The
GE/McKinseyMatrixoffersmorecategorizationoptionsandmeasuresproductsaccordingto
businessunitstrengthandindustryattractivenessratherthanmarketshare,thecomplexityofwhich
maybeoutsidethecontrolofanindividualcompany.
BCGhasacknowledgedthatthebusinessworldischanging,andin2014,thecompanyissueda
revisiontothematrixthatfocusesondifferentdriversofcompetitiveadvantage,suchashowquickly
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acompanycanadapttochangingcircumstances.TheupdatedversioncanbefoundonBCG's
website.
"Withafewtweaks,thematrixcanbeadaptedtohelpcompaniesdrivethestrategicexperimentation
requiredforsuccess,eveninunpredictablemarkets,"Martinsaid."Thematrixneedstobeapplied
withacceleratedspeed,whilebalancingtheinvestmentsbetweenexplorationinnewsegmentsand
exploitationofestablishedsegments.Inaddition,theinvestmentsanddivestmentsneedtobe
managedrigorously,whilecarefullymeasuringandmonitoringtheportfolioeconomicsof
experimentation."
OtheranalysismodelsincludePorter'sFiveForces,SWOTandSPACE.
Onceyourproductshavebeencategorizedusinganyofthesetools,yourcompanywillneedto
decideonastrategyforexploitingtheirstrengthsandcorrectingtheirweaknesses.TheQuantitative
StrategicPlanningMatrix(QSPM)canhelpyousortthroughalternativesandsettleontheright
approach.
Templatesandexamples
Additionaltemplatesandguidelinescanbefoundhere:

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