Copyright Dr. Raj S Murthy Ph.D 2011.All Rights Reserved Page 1 BCG MATRIX / PORTFOLIO MATRIX The BCG matrix (B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram) is a chart created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. It uses market growth rate and market share as its two main indicators in order to classify companies into one of four quadrants: stars, question marks, cash cows and dogs. Why use market share and market growth rate? It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth-share". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of medium to long term profitability. The four categories Dogs Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for potential divesture unless they provide a strategic advantage as a means of dealing with competitors. Stars Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. If a star can maintain its large market share, it will potentially become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation. Question Marks: Products with low share of a high- growth market. Candidates for future conversion to cash cows. Use money from cash cows to make these stars. Stars: Products with high share of a high-growth market. Candidates for building up. Analyze carefully and spend. Cash Cows: Products with high share of a low-growth market. Candidates for harvesting. Enjoy the cash. Dogs: Products with low share of a low-growth market. Candidates for divesture unless they provide significant competitive or synergistic strategic advantages. Copyright Dr. Raj S Murthy Ph.D 2011. All Rights Reserved Page 2 Question marks Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. A question mark (also known as a "problem child") has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. Most new products and SBU’s start our as a question mark since their future is not yet known. Cash cows As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. Such business units should be "milked", extracting the profits and investing as little cash as possible. Cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders. Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis. Using the matrix Theoretically, most products pass through all four stages as they mature, starting out as question marks and ending up as dogs. Some products can also sit right on a border between categories. (Note: while the term “products” is used here, you can use the matrix to analyze services, brands or entire businesses as a whole) As a quick illustration, lets imagine that you are a chief marketing officer (CMO) at Coca-Cola. Assume you are only looking at four brands in your selection here, they are full throttle your energy drink that was introduced a while ago but has not quite built market share yet in a somewhat stagnant market, your real money maker Coke on which you spend little but holds significant market share in a mature market, a new bottled water product Dasani that is gaining market share and your sweetened juice drink Hi-C that has not been doing as well as you had hoped. Your select portfolio is likely to look like: Question Mark: your energy drink brand (Full Throttle) Star: your bottled water (Dasani) Cash Cow: Coke your namesake soft drink (Coca-Cola Classic) Dog: your sweetened juice drink (Hi-C) As Coca-Cola’s CMO, you could decide to use income from Coke to invest primarily in Dasani and perhaps drop Full Throttle as a product line (not divest but merely dissolve) if analysis and projections do not bear out its future success. If analysis indicates the potential success of Full throttle in a market dominated by Red Bull then you could choose to use the money from Coke to build up Full Throttle as well along with Dasanio. Hi-C is a clear candidate to sell (divest) to some private equity fund or another company with money to pay for the brand. Before you decide that this is the most ideal course of action, it is necessary to properly understand the limitations and the assumptions that govern the use of the portfolio matrix. Copyright Dr. Raj S Murthy Ph.D 2011. All Rights Reserved Page 3 Assumptions Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined solely by whether it had become the market leader during the period of high growth. Limitations The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are: Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability. The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage. The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow. How can the limitations and assumptions affect your decisions? Markets change with the economy and other conditions — sometimes very quickly. What if consumers make a massive shift from bottled water to tap water, as many municipal governments and environmental activists are doing? Dasani is doomed. One company’s dog is another company’s cash cow (or better). Some investors have struck gold by buying another company’s dogs. In 2003, Nike bought troubled Converse for only $305 million (less than what the movie “Iron Man” earned in two months). Nike then marketed Converse through retailers (such as Target) where it would not allow its own brand to be sold. In 2007, Converse earned $550 million. With Nike’s resources and marketing ingenuity, this old dog learned a few tricks. What makes sense for your firm? Sometimes it is preferable to occupy one quadrant over another, especially for established companies. For example, some companies might prefer to have cows over stars, because cows require less advertising and innovation. They are also less risky so it makes sense for an older firm. One more example of BCG usage Consider the GM corporation. As we all know, SUV’s were stars just a few years ago, while small cars were dogs. SUVs were preferred by almost 43% of the US market but recently (because of gas prices), SUV’s are barking (dogs) while small cars are shining (stars). So by advertising the Hummer, the Yukon and similar SUV’s it appears that GM put their money into a dog. As you can say by looking at the BCG, that was clearly not the best possible use of their limited resources. Try running a few BCG analyses of your own to see if your decisions hold up to market reality.