| Growth-share Matrix |
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The growth-share matrix is a chart created by the Boston Consulting Group in 1970 to help Corporation s analyze their Business units or Product Line s, and decide where to allocate cash. It was popular for two decades, and is still used as an analytical tool. THE CHART To use the chart, corporate analysts would plot a Scatter Graph of their business units, ranking their relative Market Share s and the growth rates of their respective industries. This led to a categorization of four different types of businesses:
As a particular industry matures and its growth slows, all business units become either ''cash cows'' or ''dogs''. The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the ''cash cows'' to fund the ''stars'' and, possibly, the ''question marks''. As the BCG stated in 1970: Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:
PRACTICAL USE OF THE BOSTON MATRIX For each product or service the 'area' of the circle represents the value of its sales. The Boston Matrix thus offers a very useful `map' of the organization's product (or service) strengths and weaknesses (at least in terms of current profitability) as well as the likely cashflows. The need which prompted this idea was, indeed, that of managing cash-flow. It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate. Relative market share This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of `economies of scale' (a basic assumption of the Boston Matrix), it is assumed that these earnings will grow faster the higher the share. The exact measure is the brand's share relative to its largest competitor. Thus, if the brand had a share of 20 per cent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 per cent, however, the ratio would be 1:3, implying that the organization's brand was in a relatively weak position. If the largest competitor only had a share of 5 per cent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cashflow. If this technique is used in practice, it should be noted that this scale is logarithmic, not linear. On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is that the most stable position (at least in FMCG markets) is for the brand leader to have a share double that of the second brand, and treble that of the third. Brand leaders in this position tend to be very stable - and profitable; the Rule of 123 . The reason for choosing relative market share, rather than just profits, is that it carries more information than just cashflow. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective. Market growth rate Rapidly growing brands, in rapidly growing markets, are what organizations strive for; but, as we have seen, the penalty is that they are usually net cash users - they require investment. The reason for this is often because the growth is being `bought' by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits. The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment. The cut-off point is usually chosen as 10 per cent per annum. Determining this cut-off point, the rate above which the growth is deemed to be significant (and likely to lead to extra demands on cash) is a critical requirement of the technique; and one that, again, makes the use of the Boston Matrix problematical in some product areas. What is more, the evidence , from FMCG markets at least, is that the most typical pattern is of very low growth, less than 1 per cent per annum. This is outside the range normally considered in Boston Matrix work, which may make application of this form of analysis unworkable in many markets. Where it can be applied, however, the market growth rate says more about the brand position than just its cashflow. It is a good indicator of that market's strength, of its future potential (of its `maturity' in terms of the market life-cycle), and also of its attractiveness to future competitors. RISKS AND CRITICISMS The BCG growth-share matrix ranks only market share and industry growth rate, and only implies actual Profitability , the purpose of any business. (It is certainly possible that a particular ''dog'' can be profitable without cash infusions required, and therefore should be retained and not sold.) The matrix also overlooks other elements of industry attractiveness and competitive advantages. Another matrix evaluation scheme that attempts to mend these problems has been the G.E. Multi Factoral Analysis (also known as the GE McKinsey Matrix). With this or any other such analytical tool, ranking business units has a subjective element involving guesswork about the future, particularly with respect to growth rates. Unless the rankings are approached with rigor and skepticism, optimistic evaluations can lead to a Dot Com mentality in which even the most dubious businesses are classified as "question marks" with good prospects; enthusiastic managers may claim that cash must be thrown at these businesses immediately in order to turn them into stars, before growth rates slow and it's too late. Poor definition of a business's market will lead to some ''dogs'' being misclassified as ''cash cows''. As originally practised by the Boston Consulting Group , the matrix was undoubtedly a useful tool, in those few situations where it could be applied, for graphically illustrating cashflows. If used with this degree of sophistication its use would still be valid. However, later practitioners have tended to over-simplify its messages. In particular, the later application of the names (problem children, stars, cash cows and dogs) has tended to overshadow all else - and is often what most students, and practitioners, remember. This is unfortunate, since such simplistic use contains at least two major problems: 'Minority applicability'. The cashflow techniques are only applicable to a very limited number of markets (where growth is relatively high, and a definite pattern of product life-cycles can be observed, such as that of ethical pharmaceuticals). In the majority of markets, use may give misleading results. 'Milking cash cows'. Perhaps the worst implication of the later developments is that the (brand leader) cash cows should be milked to fund new brands. This is not what research into the FMCG markets has shown to be the case. The brand leader's position is the one, above all, to be defended, not least since brands in this position will probably outperform any number of newly launched brands. Such brand leaders will, of course, generate large cash flows; but they should not be `milked' to such an extent that their position is jeopardized. In any case, the chance of the new brands achieving similar brand leadership may be slim - certainly far less than the popular perception of the Boston Matrix would imply. As with most marketing techniques there are a number of alternative offerings vying with the Boston Matrix; although this appears to be the most widely used (or at least most widely taught - and then probably 'not' used). The next most widely reported technique is that developed by McKinsey and General Electric; which is a three-cell by three-cell matrix - using the dimensions of `industry attractiveness' and `business strengths'. This approaches some of the same issues as the Boston Matrix, but from a different direction and in a more complex way (which may be why it is used less, or is at least less widely taught). REFERENCES Mercer, D, A Two Decade Test of Product Life Cycle Theory pp 269-274, British Journal of Management, Vol. 4 (1993) OTHER USES OF THE GROWTH-SHARE MATRIX The initial intent of the growth-share matrix was to evaluate business units, but the same evaluation can be made for Product Line s or any other cash-generating entities. This should only be attempted for real lines that have a sufficient history to allow some prediction; if the corporation has made only a few products and called them a product line, the Sample Variance will be too high for this sort of analysis to be meaningful. SEE ALSO REFERENCES |
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