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No strategic management or marketing text appears to be complete without the inclusion of the Boston Consulting Group (BCG) growth-share matrix. When used effectively, this model provides guidance for resource allocation. And despite its inherent weaknesses, is probably one of the most widely used management instrument as far as portfolio management is concern. For instant, each SBU (strategic business unit) of large companies such as General Electric, Siemens, and Centrica require different strategies to compete effectively and efficiently. It is not a question of one strategy fits all SBUs since the likelihood for each of them experiencing the same market growth rate, industry-threats and leverage is very slim. This is where the BCG model comes into play as a management analytical tool. The ensuing examines the underpinnings of the model, for what it is used, how to use it and why it is used.
WHAT IS THE BCG GROWTH-SHARE MATRIX?
To begin with, BCG is the acronym for Boston Consulting Group—a general management consulting firm highly respected in business strategy consulting. BCG Growth-Share Matrix (see figure 1) happens to be one of many of BCGs strategic concepts the organisation developed in the late 1970s, and is being taught at leading business schools and executive education programmes around the world.
It is a management tool that serves four distinct purposes (McDonald 2003; Kotler 2003; Cipher 2006): it can be used to classify product portfolio in four business types based on four graphic labels including Stars, Cash Cows, Question Marks and Dogs; it can be used to determine what priorities should be given in the product portfolio of a company; to classify an organisation’s product portfolio according to their cash usage and generation; and offers management available strategies to tackle various product lines. Consider companies like Apple Computer, General Electric, Unilever, Siemens, Centrica and many more, engaging in diversified product lines. The BCG model therefore becomes an invaluable analytical tool to evaluate an organisation’s diversified product lines as later seen in the ensuing sections.
WHAT ARE THE MAIN ASPECTS OF THE BCG GROWTH-SHARE MATRIX?
The BCG Growth-Share Matrix is based on two dimensional variables: relative market share and market growth. They often are pointers to healthiness of a business (Kotler 2003; McDonald 2003). In other words, products with greater market share or within a fast growing market are expected to wield relatively greater profit margins. The reverse is also true. Let’s look at the following components of the model:
Fig. 1: Source: 12manage.com 2006
Relative Market Share
According to the proponents of the BCG (Herndemson 1972), It captures the relative market share of a business unit or product. But that is not all! It allows the analysed business unit be pitted against its competitors. As earlier emphasized above, this is due to the sometime correlation between relative market share and the product’s cash generation. This phenomenon is often likened to the experience curve paradigm that when an organisation enjoys lower costs, improved efficiency from conducting business operations overtime. The basic tenet of this postulation is that the more an organisation performs a task often; it tends to develop new ways in performing those tasks better which results in lower operating cost (Cipher 2006). What that suggests is that the experience curve effect requires that market share is increased to be able to drive down costs in the long run and at the same time a company with a dominant market share will inevitably have a cost advantage over competitor companies because they have the greater share of the market. Hence, market share is correlated with experience.
A case in point is Apple Computer’s flagship product called the iPod, which occupies a dominant 73% share the portable music player market (Cantrell 2006). Analysts believe it is the impetus for Apples financial rebirth 40% of Apples sales is attributed to the iPod product line (Cantrell 2006). Similarly, Dell’s PC line shares the same market dominance theory as the iPod. The PC manufacture giant occupies a worldwide market share of 18.1%, which is commensurate to its large market revenue above its competitors (see figure 2).
Figure 2: Source: Reuters 2006
Market Growth
Market growth axis, correlates with the product life cycle paradigm, and predicates the cash requirement a product needs relative to the growth of that