The BCG growth–share matrix is a chart that was created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help businesses decide which markets and business units to invest in. The matrix looks at two basic factors:
Relative Market Share that represent cash generation
Relative Growth Rate that represents cash usage
The matrix has four quadrants:
Cash Cows (low-growth, high-share) that should be milked for cash to reinvest in high-growth, high-share “stars”
Stars (high-growth, high-share) with high future potential
Question Marks (high-growth, low-share) that should be invested in or discarded, depending on their chances of becoming stars
Dogs (low-share, low-growth) that are essentially worthless and should be liquidated, divested, or re-positioned given that their current positioning is unlikely to ever generate cash.
The matrix provides companies a tool to strike the right balance between the exploitation of mature businesses and the exploration of new businesses to secure future growth.
From a recent study from the BCG itself, they found that companies circulated through the matrix quadrants faster in the five-year period from 2008 through 2012 than in the five-year period from 1988 through 1992. This was true in 75 percent of industries, reflecting the higher rate of change in business overall. In those industries, the average time spent in a quadrant halved: from four years in 1992 to less than two years in 2012. Only a few, relatively stable industries, such as food retail and health-care equipment, saw fewer disruptions and hence did not show faster circulation.
The study also showed the breakdown of the relationship between relative market share and sustained competitiveness. Cash generation is less tied to mature businesses with high market share: in their analysis of public companies, the share of total profits captured by cash cows in 2012 was 25 percent lower than it was in 1982. At the same time, the duration of that later part of the life cycle declined as well, on average by 55 percent in those industries that witnessed faster matrix circulation.
In this new and faster pace economy, tools like the BCG growth-share matrix need to be applied with greater speed and with more of a focus on strategic experimentation to allow adaptation to an increasingly unpredictable business environment. Methodologies like Design Thinking are now mandatory to keep pace in today’s markets.
With a new emphasis on experimentation through Design Thinking, requires companies to:
- Invest in more Question Marks (R&D)
- Experiment with them in a quicker and more economical with Design Thinking
- Systematically select promising ones to grow into Stars
At the same time, companies need to be prepared to respond to changes in the marketplace, cashing out stars and retiring cows more quickly and maximizing the information value of pets.