Mtm1 white paper bcg portfolio matrix

BCG Growth/Share Portfolio Matrix
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Abstract
The Boston Consulting Group (BCG) Growth/Share portfolio matrix is a four celled grid (i.e., a 2x2)
developed by my friend and BCG Founder, Bruce D. Henderson (1915-1992) back in the late 1960s. It is a
corporate portfolio analysis tool that the analyst uses to generate a graphic representation to examine
all the different businesses (or Strategic Business Units – SBUs) in an organization’s portfolio. The
managerial focus of this analysis tool is that (scarce) corporate resources should be allocated to the
business units according to their situation on the grid. As such, it can be used for complementing your
organization’s own strategic and business planning efforts or to better understand what a rival might do
in terms of supporting its own strategies.
The Method’s Primary Value
The BCG Growth/Share Portfolio Matrix helps you to quickly and simply assess the opportunities
amongst the portfolio of businesses your corporation has competing in the marketplace, enabling you to
identify where best to invest the finite amount of money, time, and effort the corporation has available.
It can also be used to understand where a competitor corporation might be allocating its scarce
resources among its portfolio of business opportunities.
Overview of the Method
The Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2x2 matrix) developed by BCG
Founder and my friend, Mr. Bruce Henderson back in the 1960s. It is a two-dimensional corporate
portfolio analysis tool that the analyst uses to generate a graphic representation for an organization to
examine all the different businesses (or Strategic Business Units – SBUs) in its portfolio.
The BCG matrix separates the various businesses into quadrants with the horizontal axis representing
relative market share and the vertical axis denoting market growth rate. Distinctions for each business
are made on the basis of their 1) relative market share and 2) industry growth rates by classifying each
SBU as “high” or “low” according to their evaluation vis-a-vis these two variables.
Relative Market Share = SBU Sales in the most recent year versus its leading competitor’s sales.
Market Growth Rate = Industry sales this year - Industry Sales last year
The dimension of business strength, relative market share, will measure comparative advantage
indicated by market dominance. The key theory underlying this is existence of an experience curve and
that market share is achieved due to overall cost leadership.

The mid-point of relative market share is set at 1.0 if all the SBU’s are in same industry, the average
growth rate of the industry is used. If all the SBU’s compete in different industries (usually as
determined by NAICS or similar industry-level coding), then the mid-point is set at the growth rate for
the primary economy in which industry sales occur.
The managerial focus of this analysis tool is that (scarce) corporate resources should be allocated to the
business units according to their situation on the grid. The four cells of this matrix are labeled stars, cash
cows, question marks/problem children and dogs. Each of these cells represents a particular type of
business. In the example below, we’ll apply it to some of Apple’s better known SBUs for illustration
purposes.
Figure: BCG Matrix
Dogs: Low Market Share / Low Market Growth (Apple Example: Apple retail stores)
In these areas, the market presence of the business is weak, so it's going to take a lot of
resources to generate headway. The business does not experience the scale economies of the larger
10 x 1 x 0.1 x

players, making it difficult to generate profits. Low market growth compounds the problem, meaning
that a major innovation or turn-around strategy may be in order for the unit.
Cash Cows: High Market Share / Low Market Growth (Apple Example: iPod)
Businesses in this cell are well-established. They have an easier time and more
resources available for making the most of new opportunities. Nevertheless, since the new
opportunities in these slow-growing markets are likely to be limited, some resources should
be allocated to opportunities where the growth potential is higher (see Stars).
Stars: High Market Share / High Market Growth (Apple Example: iPad, iPhone, iTunes)
Businesses in this cell are established and the growth occurring in this market space is
promising. There should be some strong opportunities to make further investments and resource
allocations to these SBUs, and business leaders must be decisive and act effectively to realize them.
Problem Children / ?: Low Market Share / High Market Growth (Apple Example: MacBook Air)
Most companies have at least a few questions marks, and these are the SBUs that are
often most important for competitive analysis. These are the opportunities that aren't generating much
revenue right now because market share remains small, but the potential to be a great success is there
due to the high growth in the market.
Where the Method Fits in Planning and Strategy
Good planning systems guide the development of strategic alternatives for an enterprise’s current
businesses and new business opportunities. It must also provide for two key intelligence topics: 1)
management’s review of these strategic alternatives and for 2) corresponding resource allocation
decisions. The result of these analyses and decision is a set of business plans that, taken as a whole,
represent the strategic direction of the firm. This process begins starts with, and its success is largely
determined by, the development of sound strategic alternatives.
Executives of multi-business firms cannot generate these strategic alternatives. Instead, they rely on the
managers of its business ventures and on its corporate development personnel. However, top

management should establish a conceptual framework within which to develop these alternatives. A
helpful framework is the portfolio matrix associated with the Boston Consulting Group (BCG). Briefly,
the portfolio matrix is used to establish an ideal mix of businesses in order to maximize the long-term
earnings growth of the firm.
The portfolio matrix represents a real advance in strategic planning in several ways in that it:
• Encourages top management to evaluate the prospects of each of the company’s businesses
individually and to set tailored objectives for each business based on the realistic contribution it
can make to corporate goals.
• Stimulates the use of externally focused empirical data to augment managerial judgment in
assessing a business’s potential.
• Explicitly raises the issue of cash flow balancing as executives address growth.
• Gives managers a potent tool for analyzing competitors and for diagnosing competitive
responses to strategic moves.
• Provides a financial and strategic context for evaluating acquisitions and divestitures.
Cautions with Applying this Method
The BCG Matrix produces a framework for allocating resources among different business units and
makes it possible to compare many business units at a glance. But BCG Matrix is not free from
limitations.
BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the
true nature of business may not be reflected.
1. Market is not clearly defined in this model.
2. High market share does not always leads to high profits. High costs can also be involved with high
market share.
3. Growth rate and relative market share are not the only indicators of profitability. This model ignores
and overlooks other indicators of profitability.
4. At times, dogs may help other businesses in gaining competitive advantage. They can earn even
more than cash cows sometimes.
5. Does not address negative growth (i.e., shrinking) markets.
6. This four-celled approach is considered as to be too simplistic.
Many of these limitations can be overcome by 1) astute analysis and 2) using this tool as a complement
with additional tools of competitive analysis. See our section on complementary tools below about this.
Applying the Method
To use the Boston Matrix to look at your resource allocation opportunities amongst your businesses, use
the following steps:

Step One: Plot your products on a worksheet (there are numerous ones of these available in open
sources on the internet) according to their market share and market growth rate. The growth rate
should reflect expected/forecast future rates for the time period you are analyzing. You do not need the
actual market shares, but rather the sales for the company and the comparable sales for its largest
market competitor. If the company and its largest competitor do not share approximately the same
market definition, you may need to modify the numbers - if so, clearly indicate what you did and why.
Step Two: Classify them into one of the four categories. If a product seems to fall right on one of the
lines, take a hard look at the situation and rely on past performance to help you decide which side you
will place it.
Tip 1: There’s nothing “magical” about the position of the lines between the quadrants or
products/SBUs that “straddle” the lines. There may be very little real difference, for example, between a
Problem Child with a market share of 49%, and a Star with a market share of 51%. It’s also not
necessarily true that the line should run through the 50% market share position. When in doubt, use
your common sense and experience.
Step Three: Determine what you will do with each product/product line included in the matrix. There
typically are four different generic strategies which are applicable:
• Divest: Rid the corporation of the Dogs, and use the capital generated by these sales to invest in
Stars and Question Marks.
• Build/Grow Share: Make further investments (for example, to maintain Star status, or to turn a
Problem Child/Question Mark into a Star).
• Hold: Maintain the status quo and invest at current levels.
• Harvest: Reduce investment levels (enjoy positive cash flow and maximize profits from a Star or
a Cash Cow).

Tip 2: The astute analyst still knows that choices must be made about which options have higher
likelihoods of achieving their organization’s goals. The use of options choice matrices, weighted values,
or other comparison approaches re warranted.
Complementary Methods
• Competitor profiling
• Experience curve
• Portfolio analysis
• Product life cycle analysis
• STEEP analysis
Additional Resources
See chapter 3 (pg. 23-43) on BCG/Growth share portfolio matrices in the (2013) book Analysis without
Paralysis: 12 Tools to Make Better Strategic Decisions, 2nd
Ed., by Babette E. Bensoussan and Craig S.
Fleisher, Upper Saddle River, NJ: FT Press.
Hedley, Barry (1977). “Strategy and the business portfolio,” Long Range Planning, 10, pp. 9-15.

Stern, Carl an M.S. Deimler (2006). The Boston Consulting Group on Strategy: Classic Concepts and New
Perspectives. 2nd
Ed. Hoboken, NJ: John Wiley & Sons.

Mtm1 white paper bcg portfolio matrix

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