The BCG Matrix and the danger of simple frameworks

The Boston Consulting Group (BCG) Matrix, also known as the Growth-Share Matrix, was developed in the early 1970s by Bruce D. Henderson for the Boston Consulting Group (BCG). The purpose of this matrix was to help corporations analyze their business units or product lines to assist in investment decisions and to prioritize resources among the various business units.

The timing of the publication is no coincidence. US firms enjoyed solid growth in the 1960s, and many used the excess cash to diversify by building new strategic business units (SBUs) for new competing in new product-market domains. To better understand how to allocate resources across different SBUs, a strategic portfolio approach was needed.

The BCG Matrix classifies business units or products into four categories based on combinations of market growth and market share relative to the largest competitor. These categories are:

1. Stars: Products or business units with high market share in fast-growing industries. These are seen as promising and profitable, often requiring substantial investment to support their growth.

2. Cash Cows: These have a high market share in a low-growth industry. They generate more cash than what is needed to maintain the business, often funding other business units.

3. Question Marks: They are in high-growth markets but have a low market share. They require significant investment to improve their market position.

4. Dogs: These have a low market share in low-growth markets. They typically generate just enough cash to maintain themselves without being major profit centers.

The success and versatility of the Boston Consulting Group (BCG) Matrix largely stem from its focus on two crucial dimensions - market share and market growth. These dimensions, in a broader context, address the two fundamental questions of #competitivestrategy: "where to compete" and "how to win."

1. Market Share (How to Win): Market share represents a company's competitive position within a market. It's a direct measure of how well a company is doing against its competitors. A higher market share often implies cost advantages due to economies of scale, greater customer loyalty, and better market dominance. In the BCG Matrix, market share is used to assess the strength of a business within its market. This answers the strategic question of "how to win" by emphasizing the importance of building and maintaining a strong market position.

2. Market Growth (Where to Compete): Market growth indicates the potential for future profits in a market. High-growth markets are generally more attractive as they offer opportunities for expanding revenues and profits. By evaluating market growth, companies can determine where to compete. The BCG Matrix categorizes markets into high and low growth, helping companies decide which markets (or product areas) offer the best opportunities for investment and growth and which are less promising.

However, the normative simplicity of this model comes at a cost. Normative models, by definition, suggest What-If causality. For example, if market growth is low and market share is high, this SBU is considered a “cash cow”. Such a causality is based on multiple assumptions, which might be inaccurate or outright wrong.

The diagram indicates three important assumptions that must be assessed before the normative conclusions of the framework can be accepted.

1. Market Share and Profitability Linkage: The matrix assumes a strong correlation between market share and profitability. It is based on the idea that a higher market share typically leads to lower costs due to economies of scale and higher market power, which in turn leads to higher profits.

2. Market Growth as a Proxy for Industry Attractiveness: The BCG Matrix uses market growth rate as a key indicator of market attractiveness. The assumption is that fast-growing markets are more attractive investments due to the potential for higher returns.

3. Lifecycle Stages and Cash Flow Dynamics: The BCG Matrix presumes that business units and products typically progress through a lifecycle that begins with high market growth and then transitions to low market growth. During the high growth phase, it is expected that products will not generate significant free cash flow, as revenue is usually reinvested to fuel further growth. It's only when the market growth decelerates that substantial cash flow can be harvested.

 #strategy #imdimpact

If you are committed to lifelong learning, check out STRATEGIC THINKING. This new 8-week online program with 1-1 coaching helps you to become a better strategist while working on a concrete strategic initiative for your organization.

It runs every quarter. You can find the following dates by clicking here: https://www.imd.org/strategy/st/online-course-strategy/.