Back in 1968, one of the world’s preeminent management consulting groups, Boston Consulting (“BCG”) designed a means for their large (read multi-national or multi-business) clients – to decide how to allocate cash amongst their portfolio of businesses or strategic business units – The Boston Matrix also known as Growth-Share Matrix.
The Boston Matrix, classifies products according to their market share and potential for market growth. It is often used by management to help decide on the appropriate product range. This matrix is a powerful tool that assists the firms in planning their product portfolio.
The matrix has four grids which fall under
Stars (High Market Share – High Market Growth)
Stars are high-growth, high share businesses or products. These products generate high amounts of income as they have high growth with relatively high market share. They often need heavy investment to finance their rapid growth. When market growth rate decreases however if it maintains a large market share a star will become cash cows. A diversified company should have stars that have the potential to become the next cash cows in their portfolio to ensure future cash generation.
Cash Cows (High Market Share – Low Market Growth)
Cash cows are low-growth, high-share businesses or products, but will still need marketing to maintain its portion of the market. In a growing market products that hold high share are represented by cash cow. These generate revenue more than what is invested in them as these products are the leaders in the mature market. Firms can continue to have these products in their portfolio till they eventually becomes dogs and stop generating revenue
Problem Child (Low Market Share – High Market Growth)
Problem Children are low-share business units in high-growth markets. These products have low market shares and do not generate much cash. However, these products are in a rapidly growing stage and thus consume large amounts of cash. A question mark has the capability to gain market share when the market growth slows, and can thus become a star and finally a cash cow. Before making the investment required to grow the market share. Question marks must be analyzed carefully in order to determine their potential. It will probably require intensive advertising.
Dogs (Low Market Share – Low Market Growth)
The products that fall in this cell are the ones with a low share of a low growth market. These products do not generate revenues for the company. Firms should get rid of the products that fall in this cell as they tend to require huge investments from time to time
Limitations of the Boston Matrix
The matrix is just based on one factor each in industry attractiveness and competitive advantage. It tends to ignore a number of highly important factors as determinants of profitability.
The framework is based on the assumption that each business unit is independent of the others and their activities are mutually exclusive. However, in practicality, a business unit that is “dog” may be helping other business units gain a competitive advantage.
Using the Matrix typically four different strategies emerge
- Build: Make further investments (to retain Star status, or to turn a Question Mark into a Star).
- Hold: do nothing and maintain the status quo.
- Harvest: Reduce investment and maximize profits/cash flows from a Star or a Cash Cow)
- Divest: Lose Dogs, use that capital to invest in Stars / Question Marks.