Boston Consulting Group’s approach to portfolio analysis

By | April 11, 2014

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1.1 Boston Consulting Group’s approach to portfolio analysis

BCG Growth-Share Matrix is a model developed by Boson Consulting Group in the 1970s for managing a portfolio of different product lines (Unknown 2007). The matrix classifies 4 kinds of business units with two dimensions: relative market share which measure the ability of cash generation of the business unit; and market growth rate.

Figure 4.0 BCG Growth-Share Matrix

There are 4 kinds of positions indentified in the matrix.

The question mark (low market share & high growth rate) which means the business units that in this position are currently occupying a small market share and it is questionable about the future of the business. But there is change that the business unit will develop in a good direction in the future which will bring great benefit to the companies. A business unit could changed to a star if succeeds or a dog if fails. But in most case it is hard to measure which direction it will go because of many uncertainties and other factors that together decide the development of the particular business unit.

The Star position (high growth rate & high market share) describe a business that has a strong ability in cash generation but still in need of continual heavy investment. If the business is developing well it could be change to the cash cow with the development of the industry.

The cash caw (low growth rate, high market share) is the most expected business unit that is expected by the business men. It generates the most profit for the companies, but it requires very little investment as the industry is very mature. The cash caw provides the major income for the company to pay the salary, R&D expenses and operational expenses and etc. But there is still problem for the cash caw business units. As they are not fixed, they may fall to the dog category as the industry is going down which is also driven by a lot of factors.

The dogs (low growth rate & low market share) are in most case considered worthless to the company. Even though it does not require the companies to invest a lot in the business, but its low growth rate has to some extent determined that there is hope for the future of the business units in this category.

1.2 The importance of the “question mark”

Even though the business units in the position of “question mark” are considered to be less productive in cash generation, most management would find it hard to dispose of them. The reasons are provided below:

Figure 5.0 BCG positions

Firstly, as seen in the figure above, product line are developing from introduction to decline in sequence from question mark to dog. The first reason for not disposing of the question mark is that question mark is the beginning stage of the business units. In order to find a cash cow, most companies will have to find business in the question mark first and invest in them to hope that they will develop to the star stage and finally to the cash cow stage which is expected most. There is no reason to abandon the seeds which will bring harvest if possible.

Secondly, the cost of question mark is high but will not last long. As it is high in growth rate which also means it is high in investment required, companies will in need to invest some resource in the business units and to see how it will change. But the good news is that when it fails most companies will drop it, but if it change to a star, then it still worth investing. So in many cases companies will invest several business units in the question mark in hope that it will someday evolve to the star stage. This short term investment even though cost money, but as it is in a short term and if some of them change to stars they will bring profit in some cases, then in total the cost for investing in these business units are worth.

Thirdly, good question mark could be picked up. With the increasing experience of the management, some managers will have very good instinct in picking up good business units in good question mark. With good risk control measure and experiences in the new product line development, managers will be skill full to select good question marks and develop them in a good trend. Even though 100 percent successful rate could not be guaranteed by most managers, but a higher successful rate is to some extent a kind of requirement of a good manager of this kin.

Finally, the pressure of investment in the question mark comes from the decline of the cash caw. As the cash caw would not last forever, there is a possibility for any cash caw to go down to be a dog which is not worthy to the company. Then if the cash caw falls, then the company will fall if there is not coming cash caw. So dividing some profit generated by the cash caw to invest in the question mark in hop to find more cash caw is a practical need.