The BCG Matrix, shown below, establishes four cells (a 2X2 matrix), with the midpoint for the Relative Market Share set at 1.0 (Key Rival's market share). Where the mid-point of the Market Growth Rate axis is set depends. If all SBU's are in the same industry, then the average growth rate of the industry is used. If the SBU's are located in different industries, then the mid-pont is set at the growth rate for the economy. Each quadrant is then labeled to describe a strategy, as follows:

Stars - SBU's placed in this cell are highly attractive because the industry in which they are located is robust and the business has a strong competitive position in the industry. Stars generate large amounts of cash, but also require heavy investment to continue to grow and to maintain competitive positioning. Net cash flow is usually modest.

Cash Cows - These SBU's are the corporation's key source of cash, and are typically the core business. They possess a strong competitive position, but are located in an industry that is mature, not growing or declining. a Cash Cow generates more cash than it requires, providing funds to the corporation to invest in other ventures.

Question Marks - When a business is located in a growing industry, but has not achieved a strong competitive position, an attempt to evaluate further investment is shrouded by ambiguity as to eventually becoming a "winner". These are termed "Question Marks" because they deserve attention to determine if the venture can be viable.

Dogs - a business situated in a low growth or declining industry, such as at the decline stage, has a precarious future. If the business has not already developed a strong competitive advantage, it should be divested.

Using these two dimensions, SBU's are evaluated and located within the matrix. When locating each SBU within a cell the convention is to draw each SBU as a circle. The circumference of the circle informs as to the relative importance of the business unit's contribution to the corporation. Therefore, Relative Contribution is measured by:

The characteristics of each SBU are:

• Cash cows , units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.
• Dogs , or more charitably called pets, units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.
• Question marks , units with low market share in a fast-growing industry. Such business units require large amounts of cash to grow their market share. The corporate goal must be to grow the business to become a star. Otherwise, when the industry matures and growth slows, the unit will fall down into the dogs category.
• Stars , units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership.

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:

stars whose high share and high growth assure the future;

cash cows that supply funds for that future growth; and

question marks to be converted into stars with the added funds.

Cash cow

In business, a cash cow is a product or a business unit that generates unusually high profit margins: so high that it is responsible for a large amount of a company's operating profit. This profit far exceeds the amount necessary to maintain the cash cow business, and the excess is used by the business for other purposes. The expression is a metaphor for a dairy cow, which after being acquired can be milked on an ongoing basis with little expense.

Risks of a cash cow include complacency, with management ignoring the need for change as market forces erode value; and ongoing turf wars between the management in charge of the cash cow and other managers trying to garner support for other products.

That said, every business longs for a cash cow product. The BCG growth-share matrix developed by the Boston Consulting Group, still used by analysts in large companies, uses the term "cash cow" to describe business units experiencing high market share and low market growth.

BCG Matrix:

The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product's market grows the better it is for the company.

Placing products in the BCG matrix results in 4 categories in a portfolio of a company:

1. Stars (=high growth, high market share)

• use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.
• frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold share, because the rewards will be a cash cow if market share is kept.

2. Cash Cows (=low growth, high market share)

• profits and cash generation should be high , and because of the low growth, investments needed should be low. Keep profits high
• Foundation of a company

3. Dogs (=low growth, low market share)

• avoid and minimize the number of dogs in a company.
• beware of expensive ‘turn around plans’.
• deliver cash, otherwise liquidate

4. Question Marks (= high growth, low market share)

• have the worst cash characteristics of all, because high demands and low returns due to low market share
• if nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, a dog.
• either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash

The BCG Matrix method can help understand a frequently made strategy mistake: having a one-size-fits-all-approach to strategy, such as a generic growth target (9 percent per year) or a generic return on capital of say 9,5% for an entire corporation. In such a scenario:

• Cash Cows Business Units will beat their profit target easily; their management have an easy job and are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash amounts in their businesses which are mature and not growing anymore.
• Dogs Business Units fight an impossible battle and, even worse, investments are made now and then in hopeless attempts to 'turn the business around'.
• as a result (all) Question Marks and Stars Business Units get mediocre size investment funds. In this way they are unable to ever become cash cows. These inadequate invested sums of money are a waste of money. Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become a cash cow (or star), or otherwise companies are advised to disinvest and try to get whatever possible cash out of the question marks that were not selected.

Some limitations of the Boston Consulting Group Matrix include:

• High market share is not the only success factor
• Market growth is not the only indicator for attractiveness of a market
• Sometimes Dogs can earn even more cash as Cash Cows

The BCG Growth-Share Matrix

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". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability.

This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption often is true because of the experience curve; increased relative market share implies that the firm is moving forward on the experience curve relative to its competitors, thus developing a cost advantage. a second assumption is that a growing market requires investment in assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indication of its cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units could be obtained from the firm's other business units that were at a more mature stage and generating significant cash. By investing to become the market share leader in a rapidly growing market, the business unit could move along the experience curve and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix was born.

The four categories are :

Dogs - Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.

Question marks - Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash comsumption. 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. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.

Stars - Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. If a star can maintain its large market share, it will become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation.

Cash cows - as leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. Such business units should be "milked", extracting the profits and investing as little cash as possible. Cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders. Because the cash cow generates a relatively stable cash flow, its value can be determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis.

Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined soley by whether it had become the market leader during the period of high growth.

While originally developed as a model for resource allocation among the various business units in a corporation, the growth-share matrix also can be used for resource allocation among products within a single business unit. Its simplicity is its strength - the relative positions of the firm's entire business portfolio can be displayed in a single diagram.

Limitations

• The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are:

• Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability.

• The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage.

• The matrix depends heavily upon the breadth of the definition of the market. a business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation's business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units.

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, 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.