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Portfolio-Strategy #2 – BCG-Matrix

Background

A well-known representative of portfolio analysis is the Boston I matrix or the BCG Matrix. It is based only on two dimensions: market growth (compared to the industry average) and relative market share (market share compared to the strongest competitor) and is therefore easy to manage.

Products and strategic business units are evaluated on the basis of these two dimensions (low to high) and then placed within one of four categories:

  • Question Marks show high market growth and low relative market share
  • Stars vave both high market growth and a high relative market share
  • Cash Cows are characterized by a high relative market share and low market growth
  • Poor Dogs have both low market growth and low relative market share

BCG I Matrix Relative market share and market growth

Approach BCG Matrix

The strategic business units of a company are evaluated on the basis of both dimensions and positioned within the matrix. Specific strategies can then be derived from the categorization of the business units:

BCG Matrix in Practice

 

With the BCG Matrix, strategic business units and the entire corporate portfolio can be evaluated and recommendations for action can be derived. Concentrating on two important factors (market share, market growth) ensures that the classifications are as specific as possible. However the tool also poses certain challenges that need to be taken into account:

  • The analysis merely represents a snapshot that cannot reflect developments over time. Nevertheless, it is a good starting point for further considerations.
  • Market growth and market share are sometimes difficult to determine. If no exact valuesIf no exact values can be determined, a subjective assessment based on a scale can also be used.
  • Market growth is seen as an external dimension, but it should be considered that companies can influence market growth positively through appropriate marketing measures.
  • Basically, the classification between high and low growth or market share is subjective. Within the classification presented here, only the market leader can have stars or cash cows. Likewise, the potential of declining markets is practically ignored. It is therefore advisable not to trust the classification blindly and to challenge it critically, since a change in the values can have corresponding effects on the allocation of the business units to the quadrants of the portfolio and the associated recommendations for action:
  • One of the advantages is at the same time an important point of criticism: The focus on only two different dimensions ignores further factors for the evaluation of business units. To counteract this, it may make sense from the company’s point of view to describe the dimensions in more detail with the help of a scoring model.
  • The definition of the market also plays an important role. If the respective market is perceived too small, the own business units are often market leaders, if the respective market is perceived too broadly, the importance of the own business units is underestimated.

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