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Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors:

      BCG Growth-Share Matrix

Resources are allocated to business units according to where they are situated on the grid as follows:

• Cash Cow - a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units.

• Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.

• Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown.

• Dog - a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. However, the approach has received some negative criticism for the following reasons:

• The link between market share and profitability is questionable since increasing market share can be very expensive.

• The approach may overemphasize high growth, since it ignores the potential of declining markets.

• The model considers market growth rate to be a given. In practice the firm may be able to grow the market.

These issues are addressed by the GE / McKinsey Matrix, which considers market growth rate to be only one of many factors that make an industry attractive, and which considers relative market share to be only one of many factors describing the competitive strength of the business unit.

Recommended Reading

The Boston Consulting Group, Perspectives on Strategy

Perspectives on Strategy contains Bruce Henderson's original writings on the BCG growth-share matrix. Specific articles include:

• The Product Portfolio - introduces the growth-share matrix and its dynamics, including the success sequence and the disaster sequence.
• Cash Traps - explains why the majority of products are cash traps.
• The Star of the Portfolio - and why market share is so important.
• Anatomy of the Cash Cow - including the buying and selling of market share for cash cows.
• The Corporate Portfolio - discussing the advantages of diversified companies.
• Renaissance of the Portfolio - after the portfolio concept's falling out of favor, this article makes the case for its return.

       
 

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