BCG Growth-Share Matrix

I find this BCG Growth-Share Matrix very handy at work.

Although it is a portfolio planning model (developed by Bruce Henderson of the Boston Consulting Group in the early 1970's)  used to primarily map out business units categorising them into four groups based on combinations of market growth and market share relative to the largest competitor, I find it useful on a micro level as well.

Using it on a rather smaller scale within a business unit, I have substituted 'business units' with products, as well as target segments of a product to map out growth and share and identify the Cash Cows, the Stars, the Dogs and the Question Marks.


















Here is brief textbook description of the BCG Matrix:

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This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption is often true because of the experience curve; increased relative market share implies that the firm is moving forward on the experience curve relative to its competitors, thus developing a cost advantage. A second assumption is that a growing market requires investment in assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indication of its cash generation and its consumption.

Henderson reasoned that the cash required by rapidly growing business units could be obtained from the firm's other business units that were at a more mature stage and generating significant cash. By investing to become the market share leader in a rapidly growing market, the business unit could move along the experience curve and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix was born.

Here are the four categories:

Dogs (low market growth, low market share)
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 divestiture.

• Dogs are in low growth markets and have low market share.
• Dogs should be avoided and minimized.
• Expensive turn-around plans usually do not help.

Question Marks (high market growth, low market share)
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 and matures. 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.

• These products are in growing markets but have low market share.
• Question marks are essentially new products where buyers have yet to discover them.
• The marketing strategy is to get markets to adopt these products.
• Question marks have high demands and low returns due to low market share.
• These products need to increase their market share quickly or they become dogs.
• The best way to handle Question marks is to either invest heavily in them to gain market share or to sell them.

Stars (high market growth, high market share)
Stars generate large amounts of cash because of their large 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 wil 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.

• Stars are defined by having high market share in a growing market.
• Stars are the leaders in the business but still need a lot of support for promotion a placement.
• If market share is kept, Stars are likely to grow into cash cows.

Cash Cows (low market growth, high market share)
As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generating 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 required to turn question marks into stars, and maintain investments required for stars to eventually become cows. Cash cows 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 value of its cash stream using a discounted cash flow analysis.

• Cash cows are in a position of high market share in a mature market.
• If competitive advantage has been achieved, cash cows have high profit margins and generate a lot of cash flow.
• Because of the low growth, promotion and placement investments are low.
• Investments into supporting infrastructure can improve efficiency and increase cash flow more.
• Cash cows are the products that businesses strive for.