Portfolio (BCG) Matrix

Marketing

In the early 1970's, BCG Matrix first propounded by Bruce Henderson of the Boston Consulting
Group.  It is also known as BCG matrix ,Boston Consulting Group Matrix, BCG Growth-Share
Matrix or Matrix Quadrants.

Using the Product Portfolio Matrix approach, a company classified all its SBUs or Products/Markets
according to Growth-Share Matrix. Therefore, it is best describe as Portfolio planning model.

BCG Matrix

In this Matrix Quadrants, the plate is divided 4 categories named

The division is based on Market Share and Growth rate. A brief discussion comes follow:

A. Star: Leader [i.e. high market share] of high growth market is called star.
These SBUs are net user of cash, because they always require heavy investment to finance rapid
growth and to sustain market share. When the product comes to mature stage, then the growth slow
down and they turn to cash cow.

B. Cash Cow: Cash cows are low growth but high market share (Market leader) businesses or
products.
Their high earnings, coupled with their depreciation, represent high cash inflows and they need very
little in the way of reinvestment. And thus, they are the net provider of cash. Surplus cash are used for
Research and Development and to support other SBUs that need investment.

C. Question mark: Products in a growth market with low market share are categorized as Question
Mark.
Because of growth, these SBUs require a lot of cash to hold their market share and let alone to
increase it. If nothing is done to increase the market share, a Question mark will simply absorb large
amount of cash in the short run and later, as growth slow down, become a dog. Thus, unless
something is done to change its perspective, it becomes a cash trap.

Management has to decide which question marks should try to build into stars and which should be
phased out.

D. Dog: Dog are low growths, low market share SBUs. They may generate enough cash to maintain
themselves, but do not promise to be large source of cash.
Most often case, it should be liquidate and try with Question mark SBUs for investment.
Market Growth Rate and Relative Market Share play important roll in BCG Matrix. Market Growth
Rate is the measure of industry attractiveness and Relative Market Share is the measure of
Competitive advantage. Therefore, these two are most important factors to consider organizations
profitability and strategic plan.

Limitations:

Though the Product Portfolio Matrix is well known to ease the way of portfolio analysis,
It has several limitations also. Here some of limitations are narrate briefly:

A. High Market Share is not the only factor to measure competitive advantage. Similarly, Market
growth rate is not the only factor to measure industry attractiveness.

B. Sometime a dog SBU used as synergy to other SBUs. i.e. a dog may help other SBUs to gain a
competitive advantage.

C. Sometimes Dogs [of a huge market] can earn even more cash as Cash Cows.

Though it has some limitations, BCG matrix is a very effective tool to viewing a corporation’s
business portfolio at a glance. And also helpful to the decision making process for allocating
corporate resources.
Reference:
1. Principle of Marketing by Kotler and Armstrong (10th International Edition)
2. Online Journals. 

Definition
Portfolio analysis is a tool which helps managers assess how best to identify opportunities and to allocate resources across
a set of products or businesses. The portfolio analysis framework seeks to first identify individual business units’ growth
cycle stages. The tool then examines these business units in the context of the overall growth of their respective industries,
with a view to optimizing resources and maximizing overall portfolio performance. As an example, the technique seeks to
identify resource-hungry units in sectors with the potential for dynamic growth and then shows how highly profitable cash-
generative units in more mature industry sectors could be exploited to meet the resource needs of the growing businesses
in such a way as to maximize overall portfolio returns. Portfolio analysis can also be used to identify business units or
products that have already fulfilled their potential and could therefore be sold to free up resources for more productive
investment elsewhere.

Though there are many different portfolio analysis tools, many approaches assess business units on the basis of market
share and the growth rate of the industry or sector in which they operate. The technique is founded on the basis that
increasing market share should generate higher earnings, while a higher rate of overall market growth typically requires
higher levels of investment if the business is to capitalize on the available opportunities. Portfolio analysis also seeks to
evaluate the strength of a company’s competitive franchise within an industry or sector, using inputs such as its rate of
change of market share, cost base, and product factors such as cost per unit and the strength of its new product pipeline.
Using these inputs, portfolio analysis can help to promote success by highlighting areas with the potential to deliver the
most attractive future profits, while flagging other areas with limited prospects, thus helping management to steer resources
toward areas where they can best be invested.

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Advantages
Portfolio analysis simplifies complex situations and provides a valuable overview of the strengths and weaknesses
of a company’s mix of businesses and products.

The technique is forward looking and can play an important role in delivering improved overall returns for
shareholders over the medium to long terms.

Portfolio analysis can help understanding of diversification and identify risks in a company’s portfolio, for example
by drawing attention to an overemphasis on particular areas.

The technique underlines the need to understand business and product lifecycles and emphasizes the importance
of achieving the breakthrough to profitability early, long before an industry or a product begins to mature.

The analysis can help to overcome the danger that managers favor their pet projects and industries with extra
resources, particularly if some inputs to analysis, such as industry growth projections, can be sourced independently.

Portfolio analysis also encourages a view of businesses as collections of diversified cash flows and investments
and so shows how corporate strategy integrates with individual business strategy at the business unit level.

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Disadvantages
Portfolio analysis relies heavily on estimates of future patterns. Even a slight change in a forecast can significantly
impact the results of the analysis.

Excessively short-term use of portfolio analysis can lead to frequent and expensive switches of company
resources.

Acquiring or divesting businesses can be complex and time-consuming. One should take these costs into account
before acting on marginal recommendations on portfolio changes.

Most businesses are actually “average” but should still be kept. For example, Apple’s laptop business is not
growing and the market for laptops isn’t growing, but it is still important to keep it in the firm.

Market share is not the same as profitability: firms with low market share can be quite profitable (e.g. mail order
catalogs have low market share but are highly profitable).

There may be better places to put your money than in your surplus cash cows (e.g. the open market).

Portfolio analysis techniques do not generally consider synergies across businesses or products.