The growth-share matrix is a chart created by the Boston Consulting Group in 1970 to help corporations analyze their business units or product lines, and decide where to allocate cash. It was popular for two decades,
and is still used as an analytical tool.
To use the chart, corporate analysts would plot a scatter graph of
their business units, ranking their market shares and the growth rates of
their respective industries. This led to a categorization of four different types of businesses:
- Cash cows, units with high market share in a slow-growing industry. These units typically generate cash in excess of
the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every
corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as
possible, since such investment would be wasted in an industry with low growth.
- Dogs, or more charitably called pets, units with low market share in a mature, slow-growing industry. These
units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even
unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting
point of view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company
is being managed. Dogs, it is thought, should be sold off.
- Question marks, units with low market share in a fast-growing industry. Such business units require large amounts of
cash to grow their market share. The corporate goal must be to grow the business to become a star. Otherwise, when the
industry matures and growth slows, the unit will fall down into the dogs category.
- Stars, units with a high market share in a fast-growing industry. The hope is that stars become the next
cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what
it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain
their category leadership.
As a particular industry matures and its growth slows, all business units become either cash cows or dogs.
The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much;
and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence
to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG
stated in 1970:
- Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth
opportunities. The balanced portfolio has:
-
- stars whose high share and high growth assure the future;
- cash cows that supply funds for that future growth; and
- question marks to be converted into stars with the added funds.
Risks and criticisms
The BCG growth-share matrix ranks only market share and industry growth rate, and only implies actual profitability, the purpose of any business. (It is certainly possible that a particular dog can be
profitable without cash infusions required, and therefore should be retained and not sold.) The matrix also overlooks other
elements of industry attractiveness and competitive advantages. Another matrix evaluation scheme that attempts to mend these
problems has been the GE
McKinsey Matrix.
With this or any other such analytical tool, ranking business units has a subjective element involving guesswork about the
future, particularly with respect to growth rates. Unless the rankings are approached with rigor and skepticism, optimistic
evaluations can lead to a dot com mentality in which even the most dubious businesses
are classified as "question marks" with good prospects; enthusiastic managers may claim that cash must be thrown at these
businesses immediately in order to turn them into stars, before growth rates slow and it's too late. Poor definition of a
business's market will lead to some dogs being misclassified as cash cows.
Other uses of the growth-share matrix
The initial intent of the growth-share matrix was to evaluate business units, but the same evaluation can be made for product lines or any other cash-generating entities. This should only be attempted
for real lines that have a sufficient history to allow some prediction; if the corporation has made only a few products and
called them a product line, the sample variance will be too high for
this sort of analysis to be meaningful.
References
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