BCG Matrix Overview
Boston Consulting Group (BCG) Matrix
Raymond S. Kulzick
Business Growth Rate
This represents "the growth of the market, not the growth of the company within the market" (Hedley, 1977, p. 12). Market growth should be expected growth rate over the next several years.
Relative Competitive Position
This is also called relative market share. This represents the company’s "market share in the business divided by that of the largest other competitor" (Hedley, 1977, p. 10). The same number can also be computed by dividing the company’s sales by that of its largest competitor. If the company is the largest in the industry, it will have a ratio more than one, since it will divide it’s sales by that of the number two company. If the company is in any other position than number one, its ratio will be less than one because its sales will be divided by those of the largest company in the industry.
Stars
"Growing rapidly, they use large amounts of cash to maintain position. They are also leaders in the business, however, and should generate large amounts of cash. As a result, star businesses are frequently roughly in balance on net cash flow, and can be self-sustaining in growth terms. They represent probably the best profit growth and investment opportunities available to the company, and every effort should therefore be made to maintain and consolidate their competitive position. This will sometimes require heavy investment beyond their own generation capabilities and low margins may be essential at times to deter competition..." (Hedley, 1977, p. 10).
Cash Cows
"...should have an entrenched superior market position and low costs. Hence profits and cash generation should be high, and because of low growth reinvestment needs should be light. Thus large cash surpluses should be generated by these businesses. Cash cows pay the dividends and interest, provide the debt capacity and provide cash for investment elsewhere in the company’s portfolio of businesses. They are the foundation on which the company rests" (Hedley, 1977, p. 11).
Dogs
"Their poor competitive position condemns them to poor profits. ... The business therefore becomes a ‘cash trap’ likely to absorb cash perpetually unless further investment in the business is rigorously avoided. ... A company should take every precaution to minimize the proportion of its assets that remain in this category" (Hedley, 1977, p. 11).
Question Marks
"...their cash needs are high because of their growth, but their cash generation is small because of their low share. If nothing is done to change its market share, the question mark will simply absorb large amounts of cash in the short term and later, as growth slows, become a dog" (Hedley, 1977, p. 11). Question marks infer that the business must make a choice between two courses of action. "One strategy ... is to make whatever investments are necessary to gain share, to try to fund the business to dominance so that it becomes a star .... ... The only logical alternative is divestment" (Hedley, 1977, p. 11).
Source:
Hedley, Barry (1977). Strategy and the ‘business portfolio.’ Long Range Planning, 10, pp. 9-15.
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