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:

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 theory underlying the Boston Matrix is the Product Life Cycle concept (below), which states that business opportunities moves through 'life-cycle' phases of introduction, growth, maturity and decline.  These phases are typically represented by an anti-clockwise movement around the Boston Matrix quadrants in the following order:

It is much more common for new products to be launched into high rather than low growth markets, as the perception is that high growth markets will eventually generate a greater return. However the drain on cash at this stage can be great. Initially the volume of product sold will be low and significant marketing expenditure will be required to raise market awareness and stimulate volume sales. If the corporate objective of building sales to achieve market leadership is pursued, then the combination of high market growth rates and high promotional expenses will create a large demand for cash.

Moreover, the technology involved in production may also be at the growth phase of its life cycle. This results in a proliferation of product types, step jumps in terms of quality (compared with previous generations of the same utility) and presence in the market only for a relatively short period of time. All of this requires a significant investment to fund the continuous development programme and (quite probably) an expensive manufacturing operation.

If the initial investment decisions were sound, and sales follow on at a faster rate than for other competing products, the product will move into the 'Star' category as increases in relative market share are achieved. If such investments are not made, then the product will at best maintain a static market position and in time, lose market position to other competitive products. Its ultimate demise will be into the 'Dog' category.

The two extremes of strategy available for managing 'Question Marks' are:

• To make the major investment decision, gain a disproportionate share of new sales, or achieve sales by acquiring competitor’s products. The objective is to turn the ‘Question Mark’ into a 'Star'.

• To divest and exit from the opportunity if the stakes are too high.

The adoption of a segmentation strategy – i.e. use more limited resource and focus in on key market niches in which one can play a leading role – may be an alternative and lower risk strategy.

• Almost all new products start life as Question Marks

• Focus is the keyword to maximise the chances of success

'Stars' are successful products for which there is significant market demand. Usually they have grown from 'Question Marks' by gaining a high relative market share. They may be approaching the mature phase of their life

Like 'Cash Cows', 'Stars' are in market leading positions; unlike 'Cash Cows', 'Stars' must have sales which continue to grow at a high rate in order to maintain their market positions. Whilst 'Stars' will yield a significant cashflow to the business, they will also require high levels of cash injection to finance growing sales. 'Stars' are therefore prime candidates for investment.

Sustaining high sales growth requires that new users for the product be found as well as penetrating further into existing markets. Therefore the appropriate strategies for 'Stars' are those which protect existing market share and result in increased volume supply into the market, e.g. product enhancements, improved distribution, cost efficiencies etc.

When the market growth rate slows, 'Stars' should become the business’s 'Cash Cow' products.

• Very desirable position where brand and product image and market position are strong

• Coincident with the mature phase of the market life cycle

• Should be cash rich and generate significant cash surpluses.

If (as is often the case with Dog products) the opportunity is moribund, decisive action should be taken such as:

• Focusing attention and resources to other segments that will provide a better return

• Focusing attention and resources to other segments which can be ring-fenced.

• Maximising cashflow from the product by reducing to a minimum all production and marketing costs.

• Disposing of the product, selling the rights to the product or the business.

• Dropping the product from the portfolio.

• Generally not a very strong or particularly desirable market position

Strategic Implications

The importance of achieving a balanced Product / Market portfolio cannot be underestimated, but what exactly constitutes a winning portfolio is more difficult to determine.

A policy of continuous product development resulting in the steady launch of new products is essential to corporate health. It therefore follows that a portfolio in equilibrium will include a number of 'Question Mark' and 'Star' products, though the number of 'Question Marks' should be greater than 'Stars' to allow for market failures. To achieve the required balance, branded products with strong market positions can either be acquired or developed in-house. The frequency at which new products should be developed will be different for each market and industry but will be linked to:

• Rate at which competitors launch new products

• Market’s history and current trends for product development

• Market’s / Industry’s typical product life cycles.

• Scope for actual or perceived product differentiation.

There also needs to be sufficient cash rich product to generate a cash surplus. A healthy portfolio will have a number of 'Cash Cow' products (minimum of two) to reduce the obvious risks associated with the business being dependent upon the sales of a single product. Ideally there should be relatively few 'Dog' products.

A portfolio with all of the products positioned in the bottom of the matrix where all the company's products are sold into low growth markets does not represent a balanced portfolio. Although it does not represent an immediate potential threat to the health of the business it should be cause for concern in the medium to long term. A preponderance of products in the lower half of the matrix suggests the possibility of either or a combination of the following:

• A dearth of new 'Question Mark' and 'Star' products being launched.

• Incorrect or 'low' market growth rates specified for the company’s segments.

To change the capital of the business and allow resources to be used elsewhere.



 

Criticisms of the Boston Matrix Technique.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. Whilst it has stood the test of time, the Boston Matrix is not without its critics. Attention has been drawn to the following shortcomings of the technique:

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.