BCG Matrix & GE Matrix

Background
The BCG Matrix (Growth-Share Matrix) was created in the late 1960s by
the founder of the Boston Consulting Group, Bruce Henderson, as a tool to
help his clients with efficient allocation of resources among different
business units. It has since been used as a portfolio planning and analysis
tool for marketing, brand management and strategy development.
In order to ensure successful long-term operation, every business
organization should have a portfolio of products/services rather than just
one product or service. This portfolio should contain both high-growth and
low-growth products/services. High-growth products have the potential to
generate lots of cash but also require substantial amounts of investment.
Low-growth products with high market share, on the other hand, generate
lots of cash while needing minimal investment.
How it Works
The BCG Matrix helps a company with multiple business units/products by
determining the strengths of each business unit/product and the course of
action for each business unit/product. An understanding of these factors
will give the company the highest probability of winning against its
competitors, since the intelligence generated can be used to develop
portfolio management strategies.
The BCG Matrix helps managers classify business units/products as low or
high performers using the following criteria:
1. Relative market share (strength of a business units position in that
market)
2. Market growth rate (attractiveness of the market in which a business
unit operates)
Relative market share (RMS) is the percentage of the total market that is
being controlled by the company being analyzed.
This classification places business units/products in the following four
categories:
1. Stars BUs/products characterized by high-growth and high- market
share. They often require heavy external investment to sustain their rapid
growth as they may not be producing any positive cash flow. Eventually,
their growth will slow, and they will turn into cash cows.
2.Cash Cows BUs/products characterized by low-growth, high-market
share. These are well established and successful BUs that do not require
substantial investment to keep their market share. They produce a lot of
cash to be used for other business units (Stars and Question Marks) of the
company.
3. Question Marks BUs/products characterized by low-market share in
high-growth markets. They require a lot of financial resources to increase
their share since they cannot generate enough cash themselves. The
crucial decision is to decide which Question Marks to phase out and which
ones to grow into Stars.
4. Dogs BUs/products with low-growth, low-market share. In addition,
they often have poor profitability. The business strategy for a Dog is most

often to divest. However, occasionally management might make a

decision to hold a Dog for possible strategic repositioning as a Question
Mark or Cash Cow.
The BCG model follows the following major steps:
1. Identify major organizational business units (BUs) and identify RMS and
MGR for each BU
2. Plot the BUs on the BCG Matrix
3. Classify the BUs as Question Marks, Stars, Cash Cows and Dogs
4. Develop strategies for each BU based on their position and movement
trends within the matrix
Strengths and Weaknesses
Strengths of the BCG Model:
The BCG Matrix allows for a visual presentation of the competitive position
of all units in a business portfolio.
The BCG model allows companies to develop a customized strategy for
each product or business unit instead of having a one-size-fits-all
approach.
Simple and easy to understand.
It works well for companies with multiple divisions and products
Allows for quick and simple screening of business opportunities in order to
determine investment priorities in the portfolio of products/business units.
It is used to identify how corporate cash resources can be best allocated
to maximize a companys future growth and profitability.
Useful for the development of investment, marketing and operating
decisions:
a. Investment in the business unit in order to build its market share
b. Sufficient investment to maintain the business units market share at
the current level
c. Determine which business unit/product will function as a cash cow to
provide necessary cash flow for the other business units/products
d. Divest a business unit
Weaknesses of the BCG Model:
The BCG model assumes that high market share and market growth are
the only success factors. Based on numerous real life examples, we can
conclude that high market share does not always lead to profitability.
Businesses with low market share can be highly profitable as well. Relative
market strength is also determined by the following factors which the BCG
does not take into account:
a. Technological competence
b. Ability to maintain low manufacturing costs
c. Financial strength of competition
d. Distribution capabilities
e. Human resources

The BCG model focuses on major competitors when analyzing the

relative market share of a company. However, it neglects some small
competitors with fast growing market shares

It is a rather short-term model that doesnt fully show how

characteristics of business units change over the long term.

The BCG model is more focused on business units than individual

products

Assumes that high rates of profit are directly related to high market
share

The BCG model looks at a business unit in isolation without taking

into consideration the possible cooperation among various business
units within the organization

BCG is a primarily qualitative model

The Y axis represents the annual market growth which fails to see
the full picture that goes beyond a one year span

It does not take into consideration other important factors such as:
market barriers/restrictions, market density, profitability, politics

With this or any other such analytical tool, ranking business units
has a subjective element involving guesswork about the future,
particularly with respect to growth rates.
GE/McKinsey Matrix
The GE/McKinsey Matrix was developed jointly by McKinsey and General
Electric in the early 1970s as a derivation of the BCG Matrix. GE, by that
time, had approximately 150 different business units and was
disappointed with the profits derived from its investments. This raised
internal concerns about the approach the organization had to investment
decision making. While exploring new models to implement, GE started to
be interested in visual strategic frameworks like the Growth-Share Matrix
created by the Boston Consulting Group (BCG) a few years before.
However, the BCG Matrix showed to have some limitations. It was
considered not flexible enough to include all the broader issues that a
company was facing while operating in a fast changing global
environment. The GE/McKinsey Matrix solves most of the issues of the
BCG model and proposes a more sophisticated and comprehensive
approach to investment decision making.
How it Works
The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix and it is primary
used to perform business portfolio analysis on the strategic business units
(SBU) of a corporation. A business portfolio is the collection of all the
business units within a corporation and a large corporation has normally
many SBUs. Each SBU is a distinctive and unique unit that falls under the
same strategic hat. A well balanced portfolio is one of the top priorities of
a large organization. The strategic business units are the basic blocks that
compose a business portfolio. A unit can be a divisions or even a whole
company owned by the parent organization.
The nine-box matrix provides decision makers with a systematic and
effective framework for a decentralized corporation to make better
supported investment decisions and for developing strategies for future
product development or new market segment entries. Instead of looking
solely at each units future prospects, a corporation can adopt a multidimensional approach based on two components that will indicate how
well the unit will perform in the future. The two components used to

evaluate businesses, which also serve as the axes of the matrix, are the
attractiveness of the relevant industry and the units competitive
strength within the same industry. Each axis is then divided into Low,
Medium and High.
Six steps are necessary to implement the GE/McKinsey analysis:
1. Determine which factors are relevant for the corporation in the industry
where it operates
2. Assign a weight to each factor
3. Score each factor
4. Multiply the relative scores and weights
5. Sum all up and interpret the graph
6. Perform a review / sensitivity analysis
The plotted circles convey the information in the following way:
The size of the circle represents the market size of the SBU
The share owned by the SBU is expressed as a pie slice with its relative
percentage inside
The expected future direction of the SBU is represented with an arrow
The circles representing SBUs are then placed within the matrix. As a
result, the executives of the corporation will have a clear and powerful
analytic map for understanding and managing their entire multi-unit
business. The units that fall above the diagonal indicate the investment
and growth to be pursued; the units along the diagonal require a thorough
analysis and individual selection for investment; finally the units below the
diagonal might indicate divestments are necessary or otherwise that
businesses can be kept only for cash reasons. The placement of the units
within the matrix is a necessary first step before the analysis phase that
requires human judgement can begin. For example, a strong unit in a
weak industry is in a very different situation than a weak unit in a highly
attractive industry.

Strengths and Weaknesses

The GE/McKinsey Matrix, as an extension of the BCG framework, shares
the aforementioned advantages of the BCG model. Though the
GE/McKinsey Matrix is more sophisticated than the BCG matrix and can
provide higher value information for the executive management, it has
several flaws and limitations:

No proven relationship between market attractiveness and business

position.

The relationships between different units are not taken into account.

The core-competencies that lead to value creation are not taken into
consideration.

The approach requires extensive data gathering.

Scoring is personal and subjective (risk of bias)

There is no hard and fast rule on how to weight elements.

The GE/McKinsey Matrix offers a broad strategy and does not indicate how
best to implement it.
For the above limitations and issues, the GE/McKinsey Matrix can serve

more as a quick strategic visual framework rather than as a resource

allocation tool.