The BCG matrix classifies
business-unit performance on the basis of the unit's relative market share and
the rate of market growth as shown in Figure 1.
Products and
their respective strategies fall into one of four quadrants. The typical
starting point for a new business is as a question mark. If the product is new,
it has no market share, but the predicted growth rate is good. What typically
happens in an organization is that management is faced with a number of these
types of products but with too few resources to develop all of them. Thus, the
strategic decision-maker must determine which of the products to attempt to
develop into commercially viable products and which ones to drop from
consideration. Question marks are cash users in the organization. Early in
their life, they contribute no revenues and require expenditures for market
research, test marketing, and advertising to build consumer awareness.
If the correct decision is made
and the product selected achieves a high market share, it becomes a BCG matrix
star. Stars have high market share in high-growth markets. Stars generate large
cash flows for the business, but also require large infusions of money to
sustain their growth. Stars are often the targets of large expenditures for
advertising and research and development to improve the product and to enable
it to establish a dominant position in the industry.
Cash cows are business units
that have high market share in a low-growth market. These are often products in
the maturity stage of the product life cycle. They are usually well-established
products with wide consumer acceptance, so sales revenues are usually high. The
strategy for such products is to invest little money into maintaining the
product and divert the large profits generated into products with more
long-term earnings potential, i.e., question marks and stars.
Dogs are businesses with low
market share in low-growth markets. These are often cash cows that have lost
their market share or question marks the company has elected not to develop.
The recommended strategy for these businesses is to dispose of them for
whatever revenue they will generate and reinvest the money in more attractive
businesses (question marks or stars).
Despite its simplicity, the BCG
matrix suffers from limited variables on which to base resource allocation
decisions among the business making up the corporate portfolio. Notice that the
only two variables composing the matrix are relative market share and the rate
of market growth. Now consider how many other factors contribute to business
success or failure. Management talent, employee commitment, industry forces
such as buyer and supplier power and the introduction of
strategically-equivalent substitute products or services, changes in consumer
preferences, and a host of others determine ultimate business viability. The
BCG matrix is best used, then, as a beginning point, but certainly not as the
final determination for resource allocation decisions as it was originally
intended. Consider, for instance, Apple Computer. With a market share for its
Macintosh-based computers below ten percent in a market notoriously saturated
with a number of low-cost competitors and growth rates well-below that of other
technology pursuits such as biotechnology and medical device products, the BCG
matrix would suggest Apple divest its computer business and focus instead on
the rapidly growing iPod business (its music download business). Clearly,
though, there are both technological and market synergies between Apple's
Macintosh computers and its fast-growing iPod business. Divesting the computer
business would likely be tantamount to destroying the iPod business.
A more stringent approach, but still one with
weaknesses, is a competitive assessment. A competitive assessment is a
technique for ranking an organization relative to its peers in the industry.
The advantage of a competitive assessment over the BCG matrix for
corporate-level strategy is that the competitive assessment includes critical
success factors, or factors that are crucial for an organizational to prevail
when all organizational members are competing for the same customers. A
six-step process that allows corporate strategist to define appropriate
variables, rather than being locked into the market share and market growth
variables of the BCG matrix, is used to develop a table that shows a businesses
ranking relative to the critical success factors that managers identify as the
key factors influencing failure or success.
