8/21/2015

BCG Matrix

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TheBCGGrowthShareMatrix

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TheBCGGrowthShareMatrixisaportfolioplanningmodeldevelopedbyBruce
Home
HendersonoftheBostonConsultingGroupintheearly1970's.Itisbasedonthe
About
observationthatacompany'sbusinessunitscanbeclassifiedintofourcategories
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basedoncombinationsofmarketgrowthandmarketsharerelativetothelargest
competitor,hencethename"growthshare".Marketgrowthservesasaproxyfor
Reprints
industryattractiveness,andrelativemarketshareservesasaproxyforcompetitive
TermsofUse
advantage.Thegrowthsharematrixthusmapsthebusinessunitpositionswithin
thesetwoimportantdeterminantsofprofitability.

BCGGrowthShareMatrix

Thisframeworkassumesthatanincreaseinrelativemarketsharewillresultinan
increaseinthegenerationofcash.Thisassumptionoftenistruebecauseofthe
experiencecurveincreasedrelativemarketshareimpliesthatthefirmismoving
forwardontheexperiencecurverelativetoitscompetitors,thusdevelopingacost
advantage.Asecondassumptionisthatagrowingmarketrequiresinvestmentin
assetstoincreasecapacityandthereforeresultsintheconsumptionofcash.Thusthe
positionofabusinessonthegrowthsharematrixprovidesanindicationofitscash
generationanditscashconsumption.
Hendersonreasonedthatthecashrequiredbyrapidlygrowingbusinessunitscouldbe
obtainedfromthefirm'sotherbusinessunitsthatwereatamorematurestageand
generatingsignificantcash.Byinvestingtobecomethemarketshareleaderina
rapidlygrowingmarket,thebusinessunitcouldmovealongtheexperiencecurveand
developacostadvantage.Fromthisreasoning,theBCGGrowthShareMatrixwas
born.
Thefourcategoriesare:
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BCG Matrix

DogsDogshavelowmarketshareandalowgrowthrateandthusneither
generatenorconsumealargeamountofcash.However,dogsarecashtraps
becauseofthemoneytiedupinabusinessthathaslittlepotential.Such
businessesarecandidatesfordivestiture.
QuestionmarksQuestionmarksaregrowingrapidlyandthusconsumelarge
amountsofcash,butbecausetheyhavelowmarketsharestheydonot
generatemuchcash.Theresultisalargenetcashcomsumption.Aquestion
mark(alsoknownasa"problemchild")hasthepotentialtogainmarketshare
andbecomeastar,andeventuallyacashcowwhenthemarketgrowthslows.If
thequestionmarkdoesnotsucceedinbecomingthemarketleader,thenafter
perhapsyearsofcashconsumptionitwilldegenerateintoadogwhenthe
marketgrowthdeclines.Questionmarksmustbeanalyzedcarefullyinorderto
determinewhethertheyareworththeinvestmentrequiredtogrowmarket
share.
StarsStarsgeneratelargeamountsofcashbecauseoftheirstrongrelative
marketshare,butalsoconsumelargeamountsofcashbecauseoftheirhigh
growthratethereforethecashineachdirectionapproximatelynetsout.Ifa
starcanmaintainitslargemarketshare,itwillbecomeacashcowwhenthe
marketgrowthratedeclines.Theportfolioofadiversifiedcompanyalways
shouldhavestarsthatwillbecomethenextcashcowsandensurefuturecash
generation.
CashcowsAsleadersinamaturemarket,cashcowsexhibitareturnon
assetsthatisgreaterthanthemarketgrowthrate,andthusgeneratemore
cashthantheyconsume.Suchbusinessunitsshouldbe"milked",extractingthe
profitsandinvestingaslittlecashaspossible.Cashcowsprovidethecash
requiredtoturnquestionmarksintomarketleaders,tocovertheadministrative
costsofthecompany,tofundresearchanddevelopment,toservicethe
corporatedebt,andtopaydividendstoshareholders.Becausethecashcow
generatesarelativelystablecashflow,itsvaluecanbedeterminedwith
reasonableaccuracybycalculatingthepresentvalueofitscashstreamusinga
discountedcashflowanalysis.
Underthegrowthsharematrixmodel,asanindustrymaturesanditsgrowthrate
declines,abusinessunitwillbecomeeitheracashcoworadog,determinedsoleyby
whetherithadbecomethemarketleaderduringtheperiodofhighgrowth.
Whileoriginallydevelopedasamodelforresourceallocationamongthevarious
businessunitsinacorporation,thegrowthsharematrixalsocanbeusedforresource
allocationamongproductswithinasinglebusinessunit.Itssimplicityisitsstrength
therelativepositionsofthefirm'sentirebusinessportfoliocanbedisplayedinasingle
diagram.

Limitations
Thegrowthsharematrixoncewasusedwidely,buthassincefadedfrompopularity
asmorecomprehensivemodelshavebeendeveloped.Someofitsweaknessesare:
Marketgrowthrateisonlyonefactorinindustryattractiveness,andrelative
marketshareisonlyonefactorincompetitiveadvantage.Thegrowthshare
matrixoverlooksmanyotherfactorsinthesetwoimportantdeterminantsof
profitability.
Theframeworkassumesthateachbusinessunitisindependentoftheothers.In
somecases,abusinessunitthatisa"dog"maybehelpingotherbusinessunits
gainacompetitiveadvantage.
Thematrixdependsheavilyuponthebreadthofthedefinitionofthemarket.A
businessunitmaydominateitssmallniche,buthaveverylowmarketsharein
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BCG Matrix

theoverallindustry.Insuchacase,thedefinitionofthemarketcanmakethe
differencebetweenadogandacashcow.
Whileitsimportancehasdiminished,theBCGmatrixstillcanserveasasimpletool
forviewingacorporation'sbusinessportfolioataglance,andmayserveasastarting
pointfordiscussingresourceallocationamongstrategicbusinessunits.

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