Idea 5 - Boston matrix (50 Management ideas you really need to know)

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

Next Post »