The Growth Share Matrix
The Growth share matrix, also known as the BCG matrix as it was developed by the Boston Consulting Group, is designed to help companies assess their portfolio of business units and determine which strategies are most suitable to each unit. It is a two by two matrix with each business unit assessed based on the growth rate of its market and its market share relative to its largest competitor. Within the matrix, the rate of market growth indicates the level of attractiveness of the market, and the relative market share indicates the degree of competitive advantage the unit has. The matrix ranks business units as having either high or low market share and high or low market growth rates.
The matrix assumes that the higher the relative market share, the more profits the unit will generate. This is because the experience curve and economies of scale help firms to develop cost advantages and the level of brand exposure and market power can give differentiation advantages. In contrast, the rate of growth of the market implies that additional capital must be invested to increase capacity to maintain market position. Therefore, rapidly growing markets will consume more capital. As such, business units are positioned on the matrix according to how much cash they are generating, and the amount of capital they are consuming. Bruce Henderson, the BCG founder who developed the matrix, argued that firms should invest the cash from business units in markets with low growth rates into business units with rapidly growing markets, to help these units increase their experience and size and hence develop competitive advantages.
As a result, the matrix has four categories based on the four possible combinations of market growth rate and market share.
“Cash cows” are business units with high market share in markets with low growth rates. As a result, they are generating significant amounts of profits, but do not require much additional capital in order to continue to grow as the market is mature. As a result, the strategy for these business units should focus on ‘milking’ as much cash from them as possible to invest in other business units. Cash cows are generally used by companies to cover their overheads and pay large dividends to shareholders. However, companies need to be aware that the cash cow’s market may begin to shrink, and hence should look to produce more cash cows to take over from declining ones.
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“Stars” are business units with high market share in rapidly growing markets. As such, they are generating significant profits but also demand large amounts of capital to continue to grow with the market. As a result, their profits tend to be reinvested in raising more capital, thus they have no net impact on the cash generated by the firm. However, stars are desirable as, if the unit can maintain its market share for long enough, then it will turn into a cash cow as the market matures. The process of developing enough stars to replace the expiring cash cows is a critical part of successful business portfolio management.
“Dogs” are the opposite of stars, in that they have low market share in markets with low growth rates. Similar to stars, most of their small profits are taken up in investments; hence dogs have a very small net impact on the overall capital of the business. However, dogs will tend not to produce any significant return on the capital invested in them, and hence effectively take up capital which could be better used in other areas. As such, unless the business unit can be turned around and obtain a larger market share, dogs should be sold or liquidated, and the resulting capital invested into stars.
“Question marks” are business units with low market shares in rapidly growing markets. As a result, they tend not to generate much profits, but to demand large amounts of capital investment to keep growing. This makes question marks the most difficult of the four groups to manage, and question marks are often referred to as “problem children”. A business can continue to invest in the business in the hope that it will obtain more market share and become a star, however this runs the risk that the business will not obtain more market share, and will become a dog when market growth declines and will result in a loss. As such, the safest decision is to dispose of the question mark business unit and avoid the additional capital expense. However, very few business units are born as stars: most start out as question marks when a company enters an attractive new market. As such, if a business disposes of all of its question marks, it will greatly reduce its future earnings potential. This implies that question marks need to be analysed and managed carefully to decide whether to invest in them, and to manage the investment to ensure they become a future star, and hence a cash cow.
Limitations of the matrix
Whilst the growth share matrix was highly popular when it was introduced, it has since been superseded by other, more complete, portfolio planning models. One of the major limitations of the matrix is that it focused solely on market growth rate and relative market share as factors in the industry attractiveness and competitive advantage. However, there are many other factors which can influence the profitability of a business unit. In addition, the matrix assumes that each business unit operates independently, when in reality some business units which the matrix considers to be dogs could be making a vital contribution to other stars or cash cows. As a result of this, the BCG matrix is now largely seen as, in the words of BCG, a “primer in the principles of portfolio management”.