BCG Growth-Share Matrix
BCG Growth-Share Matrix
BCG Growth-Share Matrix
This framework assumes that an increase in relative market share will result in an
increase in the generation of cash. This assumption often is true because of the
experience curve; increased relative market share implies that the firm is moving
forward on the experience curve relative to its competitors, thus developing a cost
advantage. A second assumption is that a growing market requires investment in
assets to increase capacity and therefore results in the consumption of cash. Thus the
position of a business on the growth-share matrix provides an indication of its cash
generation and its cash consumption.
Henderson reasoned that the cash required by rapidly growing business units could be
obtained from the firm's other business units that were at a more mature stage and
generating significant cash. By investing to become the market share leader in a
rapidly growing market, the business unit could move along the experience curve and
develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix was
born.
Dogs - Dogs have low market share and a low growth rate and thus neither
generate nor consume a large amount of cash. However, dogs are cash traps
because of the money tied up in a business that has little potential. Such
businesses are candidates for divestiture.
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Question marks - Question marks are growing rapidly and thus consume large
amounts of cash, but because they have low market shares they do not
generate much cash. The result is a large net cash consumption. A question
mark (also known as a "problem child") has the potential to gain market share
and become a star, and eventually a cash cow when the market growth slows. If
the question mark does not succeed in becoming the market leader, then after
perhaps years of cash consumption it will degenerate into a dog when the
market growth declines. Question marks must be analyzed carefully in order to
determine whether they are worth the investment required to grow market
share.
Stars - Stars generate large amounts of cash because of their strong relative
market share, but also consume large amounts of cash because of their high
growth rate; therefore the cash in each direction approximately nets out. If a
star can maintain its large market share, it will become a cash cow when the
market growth rate declines. The portfolio of a diversified company always
should have stars that will become the next cash cows and ensure future cash
generation.
Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined soley by
whether it had become the market leader during the period of high growth.
While originally developed as a model for resource allocation among the various
business units in a corporation, the growth-share matrix also can be used for resource
allocation among products within a single business unit. Its simplicity is its strength -
the relative positions of the firm's entire business portfolio can be displayed in a single
diagram.
Limitations
The growth-share matrix once was used widely, but has since faded from popularity as
more comprehensive models have been developed. Some of its weaknesses are:
Market growth rate is only one factor in industry attractiveness, and relative
market share is only one factor in competitive advantage. The growth-share
matrix overlooks many other factors in these two important determinants of
profitability.
The framework assumes that each business unit is independent of the others. In
some cases, a business unit that is a "dog" may be helping other business units
gain a competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market. A
business unit may dominate its small niche, but have very low market share in
the overall industry. In such a case, the definition of the market can make the
difference between a dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool
for viewing a corporation's business portfolio at a glance, and may serve as a starting
point for discussing resource allocation among strategic business units.
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