The BCG Growth / Market Share Portfolio Matrix
This is another posting of the Strategy 101 kind, in this case to introduce another of the basic tools that professional service firm strategists need to have in their toolboxes. This tool was first mentioned on this blog in my previous posting Love Your Dogs?
Only firms that have superior market share that can grow their business and develop the organizational learning capabilities to really capitalize on their experience. Empirical studies by the Harvard Business School in the 1970s first confirmed the basis for this assumption, leading the way to the development of the Boston Consulting Group's (BCG) Growth / Market Share Portfolio Matrix.
In the professional service firm context, the BCG matrix is a tool to determine the attractiveness of a service or practice area, based on the service life cycle and the experience curve. In other words, it provides critical information that strategists need, to help decide where the firm should be focusing resources over the next strategy cycle.
On the "y" axis, it plots the degree to which the market for a particular service (or an industry that is being served, or a complete practice area) is growing. (Not just in the firm, but in the market overall.) On the "x" axis, it plots the relative market share that the firm enjoys. Market share is measured as a percentage of the market share held by the largest firm in that area. For instance, if the relevant practice area in the firm has a market share in IP law in its market of 20% and it's biggest competitor has a market share of 40% , then its relative market share is 0.5.
The purpose of the analysis is to determine the best strategy for each practice area. To maximize profits, the firm should aim to maximize its market share in as many high growth practice areas as possible. This is achieved by funding growth with cash from those areas that are no longer growing.
Figure 1: The BCG Growth / Market Share Portfolio Matrix (click on the picture for a larger image.)
STARS
High Growth Rate, High Market Share
These are the future of the firm. The high growth rate requires heavy investment, but according to the experience curve it is highly likely that stars will reward the attention by producing high margins and strong cash flow. While stars grow, at least some of the profits generated should be invested in further growth. When growth slows as they enter first maturity and then the declining phase of the service life cycle, they become cash cows. Investment in them stops and they become the funders of new emerging stars.
CASH COWS
Low Growth Rate, High Market Share
Investment in cash cows is directed only at protecting market share and cash flows. Because of their maturity, cash cows typically do not require much development capital anyway. Cash cows are an extremely valuable asset to the business. Without them, the firm would need to rely far more heavily on external capital for funding the growth of stars, or troubleshooting question marks. Innovation in cash cows is typically aimed at increasing cash flow, for instance by reducing transactional costs so as to increase margins.
DOGS
Low Growth Rate, Low Market Share
Because dogs have a poor growth, it is unlikely that efforts to increase market share will yield value. Also, low market share suggests an uncompetitive cost structure. Unless one chooses to accept the lack of profitability prospects and allow cross subsidization, for instance where the "dog" provides an indirect and important support function for one of the profitable areas, there are only three possible strategies:
1.Withhold further investment; milk for any cash that can be generated and then divest
2.Sell the business to another firm or close it down
3.If a part of the business is promising enough, focus on growing that niche practice only
One of the problems with professional service firms is that business units do not comprise manufacturing equipment or industrial facilities but people, and there would be some sensitivity to them being termed "dogs." The model is not intended to accommodate inter-personal niceties or collegiality, though. Simply to analyze the firm's business portfolio, coldly and objectively.
QUESTION MARKS
High Growth Rate, Low Market Share
Question marks have uncompetitive cost structures because of low market share, and could develop one of two ways. If market share can be grown, then they become stars and later, cash cows. If not, then as maturity sets in, growth slows as price competition heats up and they become dogs. Careful analysis is required to determine whether to invest in growing market share. The BCG model suggests that if a question mark has worthwhile prospects, investment should be made to grow market share. If not, then that brutal reality needs to be faced and no further investment made in it.
Figure 2: The Sequence of Strategy Utilizing the BCG Growth / Market Share Portfolio Matrix
The BCG Matrix presents a great deal of important data in one concise illustration so it is useful for getting a quick, accurate, overall view of the firm's strategic options. Areas requiring more study are highlighted and the model provides a robust and manageable framework for monitoring market changes that may alter the status of the firm's key practice areas and service offerings.
Some of the other strengths of the BCG Portfolio Matrix are:
Future Focus
Because the model is inherently focused on where future internal investment should be focused, it forces the firm's leaders to concentrate on the future rather than fixating on historical data.
Ease of Communication
The BCG Matrix diagram itself is intuitive and easy to understand.
Trend Analysis
Matrixes for different time periods can be compared to detect trends.
Entrenches Focus on Business Units
It moves leader thinking away from the idea of strategy as something applied indiscriminately across multi-faceted professional service firms, to where it is applied at the business unit (e.g. practice group / industry group) level. It is effective at making the link between practice level strategy and firm-wide strategy, cutting across silos to create a platform for the best strategic decisions for the whole firm.
Do you know where i can get a BCG on General Motors?
No idea, Roland, Short of googling it, I guess you'd have to ask them. Rob
Is there an example available explaining this concept? eg. with fictitious numbers?
Hello, do you know where I can get a BCG matrix bout shoes industry (for instence for Bally)
doing research on ford motors how would i go about doing a BCG matrix on them ?
I have a problem with the y axis. Lets say my competitor has had a growth of 15% in € and I myself had a growth of 2%. Would I simply put him then at 15% on y and myself at 2% or is it relative to the entire market development (let's say a decline of 2% in the beer market)? I'm having trouble ending up with a BCG matrix that seems right.
which is best share stock in indian market
Great article.
Where can I get free BCG Matrix sample reports? I need PEST/SWOT reports also. Please help.
please send me a BCG matrix pictures
can u describe a short use of BCG in shoe industry?
hello, may i know how to reach the quantitative data of any industry and how to use it in this model?/
Is there an example available explaining this concept? eg. with fictitious numbers?
Where can I get free BCG Matrix sample as excel sheet?
thank you
nathaly
ANY EXAMPLE OF ANY PRODUCT IN CONTEXT TO INDIAN MARKET ? ? ?
Where can I find a BCG analysis of General Motor?
How can i apply the BCG matrix to the banking industry? how can i calculate the market growth?
THanks
Do u have any example for automobile maufutures industry?Please send me i like to look that.
thanks
Do you know where i can get a BCG on General Motors?
hi can anybody tell me any example of question marks company ..??!!
From where can i get the BCG analysis of any indian co preferably in th automobile sector?..pls help
Where can I get free BCG Matrix sample as excel sheet? i need your help....