Describe the The BCG growth-share matrix as a strategic planning tool

The best-known portfolio planning method is from the Boston Consulting Group. The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970’s. It is based on the observation that a company’s business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name “growth share”.
The first step is to identify the various Strategic Business Units (“SBU’s”) in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands – it all depends on how the company is organised. Using the BCG Box a company classifies all its SBU’s according to two dimensions:
i) On the horizontal axis: relative market share – this serves as a measure of SBU strength in the market
ii) On the vertical axis: market growth rate – this provides a measure of market attractiveness
The matrix is divided into four areas in which four types of SBU can be distinguished:
-Stars – Stars are high growth businesses or products competing in markets where they are relatively strong compared with the competition. Often they need heavy investment to sustain their growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows.
-Cash cows – Cash cows are low-growth businesses or products with a relatively high market share. These are mature, successful businesses with relatively little need for investment. Such business units should be “milked”, extracting the profits and investing as little cash as possible. They need to be managed for continued profit – so that they continue to generate the strong cash flows that the company needs for its Stars.
-Question marks – Question marks are businesses or products with low market share but which operate in higher growth markets. This suggests that they have potential, but may require substantial investment inorder to grow market share at the expense of more powerful competitors. A question mark (also known as a “problem child”) has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Management have to think hard about “question marks” – which ones should they invest in? Which ones should they allow to fail or shrink?
-Dogs – Unsurprisingly, the term “dogs” refers to businesses or products that have low relative share in unattractive, low-growth markets. Dogs may generate enough cash to break even, but they are rarely, if ever, worth investing in.
-Using the BCG Box to determine a strategy:
Once a company has classified its SBU’s, it must decide what to do with them. Conventional strategic thinking suggests that there are four possible strategies for each SBU:
(1) Build share: here the company can invest to increase market share (for example turning a “question mark” into a star)
(2) Hold: here the company invests just enough to keep the SBU in its present position
(3) Harvest: here the company reduces the amount of investment in order to maximise the short-term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows.
(4) Divest: the company can divest the SBU by phasing it out or selling it – in order to use the resources elsewhere (e.g. investing in the more promising “question marks”).

---

Titany answered the question on September 20, 2021 at 08:05