Growth-share matrix

The growth-share matrix is a chart created by the Boston Consulting Group in 1970 to help corporations analyze their business units or product lines, and decide where to allocate cash. It was popular for two decades, and is still used as an analytical tool.

To use the chart, corporate analysts would plot a scatter graph of their business units, ranking their market shares and the growth rates of their respective industries. This led to a categorization of four different types of businesses:

• 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.

Contents

1 Risks and criticisms 2 Other uses of the growth-share matrix 3 See Also 4 References

Risks and criticisms

The BCG growth-share matrix ranks only market share and industry growth rate, and only implies actual profitability, the purpose of any business. (It is certainly possible that a particular dog can be profitable without cash infusions required, and therefore should be retained and not sold.) The matrix also overlooks other elements of industry attractiveness and competitive advantages. Another matrix evaluation scheme that attempts to mend these problems has been the GE McKinsey Matrix .

With this or any other such analytical tool, ranking business units has a subjective element involving guesswork about the future, particularly with respect to growth rates. Unless the rankings are approached with rigor and skepticism, optimistic evaluations can lead to a dot com mentality in which even the most dubious businesses are classified as "question marks" with good prospects; enthusiastic managers may claim that cash must be thrown at these businesses immediately in order to turn them into stars, before growth rates slow and it's too late. Poor definition of a business's market will lead to some dogs being misclassified as cash cows.

Other uses of the growth-share matrix

The initial intent of the growth-share matrix was to evaluate business units, but the same evaluation can be made for product lines or any other cash-generating entities. This should only be attempted for real lines that have a sufficient history to allow some prediction; if the corporation has made only a few products and called them a product line, the sample variance will be too high for this sort of analysis to be meaningful.

See Also

• cash cow
• B.C.G. Analysis

References

• Boston Consulting Group's Growth-Share Matrix page