Portfolio Management using the BCG-Matrix

Revision as of 18:39, 11 September 2016

The Boston Consulting Group (BCG) matrix, also known as growth share matrix, is a tool to manage a companies business portfolio and derive appropriate actions towards a higher total performance. Depending on the growth rate and market share, each business is individually assigned to one of the four clusters inside the two-dimensional matrix. Based on that, the optimal combination of individual business strategies is developed to manage a companies business portfolio in such a way, that it can make the most out of its opportunities ^[1]. Initially developed in 1970 by Bruce D. Handerson ^[2], a senior partner of the management consulting firm BCG, the concept has been widely applied since then and can be seen as a foundation for similar tools. Although the BCG describes it still as a relevant tool today, the growth share matrix has been criticized by professionals and academics for its limitations and underlying assumptions. The following article will present the matrix developed by Handerson with its foundations and core elements. Hereafter, the application of the tool is shown with its implications for the business portfolio. These serve as a guideline for a companies overall strategy. Finally, limitations of the matrix are discussed based on empirical research and new findings.

Key Assumptions and Core Elements of the Matrix

When the BCG-Matrix was developed, it met a real market need. Based on only a limited amount of input data (relative market share and market growth), senior executives gained a clear picture of their business portfolio in an increasingly complex environment. Furthermore, it could be used to communicate decisions to subsidiaries within the company ^[3]. At the time Handerson said about the matrix ^[2]:

"Such a single chart with a projected position five years out is sufficient alone to tell a company's profitability, debt capacity, growth potential, dividend potential and competitive strength."

In order to understand this position, the underlying assumptions and core elements of the matrix are presented in the following. Basically, the matrix can be divided into six core elements, each with specific assumptions ^{[3] [4]}. These are:

1. Strategic Business Units (SBU) and Product Markets:

Within the portfolio analysis usually different SBU’s are analyzed. These describe a business focused on a particular product-market combination. It is essential that these are mostly independent from each other but have similar structures and resources. This is required to make decisions for each SBU independently without affecting others in the portfolio. However, the definition of SBU’s might be challenging, as products within a SBU might have different market growth and relative market shares.

1. Relative Market Share and Cash Generation:

Based on the experience curve concept, which Handerson introduced prior to the matrix in 1968, it is assumed that the company with the highest market share has the highest profit margin. The reason is, that the stronger the company’s position relative to its competitors, the higher profits should be and the simplest measure of relative competitive position is relative market share. It can be computed by the market share of a business (i.e. SBU) divided by that of the largest other competitor ^[1]. That means the higher the relative market share is the more cash the business will generate.

1. Market Growth and Cash Use:

The assumption made here is that market growth relates to the opportunity for investments. Growing business offer the ideal vehicle for investment, as money put into the business will compound over time and provide even higher returns in the future. However, the lager a market growths the more cash is required to maintain market share and compeditive position. Within the BCG-Matrix market growth is the only indicator for the attractiveness of a market.

Annotated bibliography

1. ↑ ^{1.0 1.1} Barry Hedley 1977; Strategy and the ¨Business Portfolio¨p. 9-15 Annotation: Hedley, a director of BCG at the time, describes the importance of portfolio management and how the growth share matrix can be used to increase a company's performance.
2. ↑ ^{2.0 2.1} Bruce D. Handerson 1970; The Experience Curve - Reviewed IV. The Growth Share Matrix or The Product Portfolio Annotation: In this article Handerson describes the initial concept of the growth share matrix and outlines the basic underlying assumptions. However, Handerson and employees of BCG developed the matrix further with minor adaptadtions until 1973.
3. ↑ ^{3.0 3.1} Alan Morrison and Robin Wensley; Boxing up or Boxed in ?: A Short History of the Boston Consulting Group Share/Growth Matrix; Journal of Marketing Management, 1991, 7, p. 105-129 Annotation: Besides decribing the history of the BCG Matrix, the authors also explain the core elements, its application in US industry since the 1970's and evaluate academic criticism. The paper can be seen as one of the most comprehensive works about the tool.
4. ↑ Hanno Drews; Farewell to the Growth Share matrix after more than 35 years of usage? A Critical examination of the BCG Matrix; Yeitschrift für Planung & Unternehmenssteuerung, 2008, 19, p. 39-57 Annotation: Drews gives a short overview of the BCG Matrix and examines emperical research about the matrix. Based on academic papers and a self conducted case study on the german airline Lufthansa, he conculudes that due to its limitations the BCG Matrix should not be applied.