The Bcg Matrix

THE BCG MATRIX

INTRODUCTION

The BCG Matrix and strategic portfolio planning in general grew up during a time (1970's) when conglomerates of unrelated businesses were common among U.S.

corporations. Strategists needed some way to understand the sometimes complex (maybe even bizarre??) combinations of businesses within their purview. How should these combinations be evaluated? How does one determine whether one should keep a business in the portfolio or divest it? The Boston Consulting Group (BCG) came up with an easy to understand tool to address this issue. The tool has come to be known as the BCG matrix. The matrix is structured along two dimensions. The first dimension summarizes an industry's attractiveness in terms of its rate of growth. The second dimension indexes the strength of a business unit's position within an industry in terms of the unit's market share. Four cells within the matrix are thus defined: business units having high market share within a high growth industry ("stars"), units having low share within a high growth industry ("question marks"), units having high share in slow growth industries ("cash cows"), and units having low share in slow growth industries ("dogs").

The logic behind this segmentation was that industry attractiveness and competitive

dominance within an industry are two crucial metrics that must be evaluated when

assessing the viability of a business unit's future. By classifying firms into categories

defined by these two dimensions, strategists were given a clear strategic mandate: divest "dogs" with no future, and use "cash cows" to fund the further growth of "stars" and "question marks."

An Overview of The Boston Consulting Group Growth/Share Matrix

BCG Growth Matrix

Real HIGH STAR PROBLEM CHILD

Market

Growth LOW CASH COW DOG

HIGH LOW

Relative Market Share

Stars œ High growth rate, High market share

Earnings: high, stable, growing

Cash: neutral

Strategy: invest for growth

The high growth rate of stars requires heavy cash investment although they should also generate a strong cash flow due to their strong market share position.