Idea 5 - Boston matrix
The Boston
Consulting Group (BCG) matrix is the one of the greatest of management tools -
brilliant, feted, poorly deployed and then discredited, but still illuminating
in the right context. Otherwise known as the 'growth/share matrix' it is,
according to one management writer, one of the 'two most powerful tools in the
history of strategy'.
Companies can use the Boston matrix to analyse their
portfolio of businesses and then to decide what to do with them - spend money
on building them up, simply keep them ticking over or dump them. Sometimes
referred to as the BCG matrix, it was developed in the late I960s by Bruce
Henderson of the Boston Consulting Group - hence its name. Henderson and his
colleagues were also responsible for the other of those 'two most powerful
tools'.
The first step in using the matrix is to break the company
down into strategic business units (SBUs). An SBU could be a subsidiary, a
division, a product or a brand - any unit with its own customers and
competitors. The unit's position is plotted within the matrix according to two
variables - its strength in its market, and the attractiveness of that market.
The unit's position is plotted within the matrix according
to two variables - its strength in its market, and the attractiveness of that
market. of 25% (or 0.25). If the positions were reversed, it would have a
relative market share of 400% (or 4.0). The growth rate of the market itself is
plotted along the other axis.
Henderson chose these two variables because of their
implications for cash generation and
consumption. In line with his experience curve theory, an increase in relative
market share should be accompanied by a cost advantage and therefore an
increase in cash generation. A rapidly growing market demands investment in
capacity, which means increased consumption of cash. These principles are
reflected in the analysis that follows once the unit's position in the matrix
has been established.
The business will occupy one of four quarters of the
two-by-two box th at is cr eated, to be labelled,
and dealt with, in one of the following ways.
Cash cows Business
units with a high share of a mature (i.e, low- growth) market are called cash
cows. As SUCD, they should generate more cash than they consume. They should be
milked of their cash and fed as little as possible. The cash can then be used
to build up question marks and fund existing stars (see below), diversify into
new businesses and pay the share-holders.
Stars Businesses
are known as stars when they have a relatively strong position in a high growth
marker. They generate lots of cash but, because of their own growth, they
consume lots of it too. That's as it should be, and they should be given as
much investment as needed to maintain their relative market share. If they do,
once the market slows down they will become cash cows. If not, and they are
allowed to lose share, they may become dogs.
Dogs As
the name implies, dogs combine the worst of both worlds, though Henderson
originally called them 'pets'. They have a weak position in a low- or no-growth
segment. While they don't consume much cash, they don't generate much either
and are unlikely to be very profitable.
The theory says they should be strong candidates for disposal, raising cash
that can then be used to feed stars or diversify. Critics have argued that
units in the doghouse - which may, after all, house many of a company's SBUs -
are quite capable of being turned into cash cows.
Question
marks sometimes called 'problem children', question marks are the
trickiest units to deal with. They operate in attractive, growing markets, but
have low share. So, while they are consuming cash to fund growth, they are not
generating much. The question is which ones
are worth the added investment required to grow market share
and turn them into stars.
The Boston matrix set the business world alight in the early
1970s and fuelled an entire culture of centralized strategic planning, business
rationalization and diversification. As some practitioners have pointed out,
growth rate is only one among many features that determine the attractiveness
of a market, and relative share is only one element of competitive advantage.
The matrix does not acknowledge this. It is particularly harsh on dogs, which
may be helping other business units to succeed or which, if the definition of
their 'market' were redrawn, might not be dogs at all.
It remains, however, a revealing prism through which to
observe a business and, at the very least, is a helpful starting point for any
strategic discussion.
Reference: 50 Management Ideas You Really Need to Know
Book by Edward Russell-Walling
Comments