Chapter 11
The BCG growth–share matrix
Most firms operate in more than one line of business. In such multi-business firms, it can be challenging to figure out how they all fit together and where the priorities for future investment might be. The BCG ‘growth–share matrix’ is a simple model to help with this analysis.
When to use it
- To describe the different lines of business within a multi-business firm.
- To help prioritise which businesses to invest in and which ones to sell.
Origins
In the post-war era, firms in the USA and Europe had grown in size dramatically. Conglomerate firms such as ITT, GE and Hanson had started to emerge – typically they had large numbers of unrelated businesses, all controlled using financial measures from the centre.
The BCG growth–share matrix was invented by The Boston Consulting Group in response to this diversification trend. It offered an intuitive way of mapping all the different businesses controlled by a firm onto a 2×2 matrix, and some simple guidelines for how each of those businesses should be managed by those in the corporate headquarters. It became very popular among large firms because it helped them to get their hands around what was often a very diverse set of businesses.
The simplicity of the BCG matrix was also one of its limitations, and over the years a number of variants were put forward, for example by the consultancy McKinsey and by General Electric (GE). Versions of this matrix were used throughout the 1970s and 1980s, but the trend moving into the 1990s was towards far less diversification, as people realised there were few synergies available among unrelated businesses. Big conglomerates were broken up, sometimes by private-equity-based ‘corporate raiders’ and sometimes by their own leaders as a way of creating focus. The BCG matrix gradually fell out of favour, though it is still used today – often in a fairly informal way.
What it is
The BCG matrix has two dimensions. The vertical axis indicates ‘market growth’, and it is a measure of how quickly a specific market is growing. For example, the market for milk may be growing at 1 per cent per year, while the market for smartphones may be growing at 10 per cent per year. The horizontal axis indicates ‘relative market share’ (that is, market share relative to the market-share leader), and it is a measure of how strong your business is within that market. For example, you might have a 20 per cent stake in the slow-growing milk market and a 4 per cent share in the fast-growing smartphone market.
Each business line is plotted on the matrix, and the size of the circle used is typically indicative of the amount of sales coming from that business (in top-line revenues). Each quadrant on the matrix is then given a name:
- High growth/high share: These are ‘star’ businesses that are the most attractive part of your portfolio.
- High growth/low share: These are known as ‘question mark’ businesses because they are relatively small in market share, but they are in growing markets. They are seen as offering potential.
- Low growth/high share: These are your ‘cash cow’ businesses – very successful but in low-growth, mature markets. Typically they provide strong, positive cash flows.
- Low growth/low share: These are ‘dog’ businesses and are considered to be the weakest ones in your portfolio. They need to be turned around rapidly or exited.
Source: Adapted from The BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group (BCG). Reproduced with permission.
The vertical ‘growth’ dimension is a proxy measure for the overall attractiveness of the market in which you are competing, and the horizontal ‘share’ dimension is a proxy for the overall strength of your business in terms of its underlying capabilities.
How to use it
By positioning all your businesses within a single matrix, you immediately get a ‘picture’ of your corporate portfolio. This in itself was a useful feature of the BCG matrix, because some of the conglomerate firms in the 1960s and 1970s, when the matrix was popular, had 50 or more separate lines of business.
The matrix also provides you with some useful insights about how well the businesses are doing and what your next moves should be. Cash cow businesses are generally in mature and gradually declining markets, so they have positive cash flows. Question mark businesses are the reverse – they are in uncertain growth markets, and they require investment. One logical consequence of this analysis, therefore, is to take money out of the cash cow businesses and invest it in the question mark businesses. These then become more successful, their market share grows and they become stars. As those stars gradually fade, they become cash cows, and their spare cash is used to finance the next generation of question mark businesses. Dog businesses, as noted above, are generally exited as soon as possible, though sometimes they can be rapidly turned around so that they become question marks or cash cows.
While this logic makes sense, it actually gives the corporate headquarters a very limited job to do. If you think about it, the reason we have ‘capital markets’ in developed countries such as the UK and the USA is to provide firms with access to capital that they can invest. If you think a firm is in an attractive market, you are likely to invest more of your money in it; if you think it is in a bad market, you might sell your shares. It therefore makes very little sense for the corporate headquarters to restrict itself to the role of moving money around between businesses – the capital markets typically can do that more efficiently.
The biggest limitation of the BCG matrix, in other words, is that it underplays the potentially important role that the corporate HQ can play in creating value across its portfolio. Nowadays, diversified firms have a much more sophisticated understanding of the ways they add and destroy value – for example, by sharing technologies and customer relationships among businesses, and transferring knowledge between lines of business. The ‘parenting advantage’ matrix developed by Campbell, Goold and Alexander (1995) addresses these issues in an effective way.
Top practical tip
As a first step in making sense of your business portfolio, the BCG matrix can be very useful. It gives you an indication of where the most- and least-promising opportunities lie. However, you should be very cautious about drawing strong conclusions from the analysis.
Remember, the market-growth and market-share dimensions are proxies for the underlying attractiveness of the market and the underlying strength of the business respectively. It is often useful to try out other ways of measuring these dimensions. For example, you can do a ‘five forces analysis’ of a market to understand its overall attractiveness in detail, rather than assuming that growth is the key variable.
You should also think very carefully about how to define market share. For example, does BMW have a very low share (<1 per cent) of the overall car market? Or does it have a high share (>10 per cent) in the luxury sedan car market? Depending on how you define the boundaries around the market, the position of the business changes dramatically. Again, it is important to think carefully about what the analysis tells you and how much the result is a function of the specific numbers you have used as inputs.
Top pitfall
One particularly dangerous aspect of the BCG matrix is that it can create self-fulfilling prophecies. Imagine you are running a business that has been designated as a cash cow. Your corporate headquarters tells you that your spare cash will be taken away from you and invested in a question mark business. This means you cannot make any new investments, and as a result your market share drops further. It is a self-fulfilling prophecy.
The obvious way to guard against this risk is to try to make a case for reinvesting in the business. Even though the business is mature, it may still have opportunities to regenerate and grow, given the right level of investment. Hopefully the corporate executives at headquarters are sufficiently enlightened that they can see this potential.
Further reading
Campbell, A., Goold, M., Alexander, M. and Whitehead, J. (2014) Strategy for the Corporate Level: Where to invest, what to cut back and how to grow organizations with multiple divisions. San Francisco, CA: Jossey-Bass.
Campbell, A., Goold, M. and Alexander, M. (1995) ‘Corporate strategy: The quest for parenting advantage’, Harvard Business Review, 73(2): 120–132.
Kiechel, W. (2010) Lords of Strategy: The secret intellectual history of the new corporate world. Boston, MA: Harvard Business School Press.