Growth–share matrix

Growth share matrix is a method used by companies and investors to determine which holdings are producing, which have the potential to produce, and which are not producing. It is sometimes called the BCG matrix after the Boston Consulting Group (BCG) that developed it. The matrix is used to divide the company's products or divisions or an investor's stock portfolio into categories and suggests a course of action for the items that fall into each category.

Since it was first developed in the late 1960s, changes in the market environment have necessitated changes in the way the growth share matrix is applied. However, it remains an important decision-making tool for companies and investors striving to maximize the return on their investments.

Background

The growth share matrix model was developed in the 1960s and shared publicly in 1970 by the Boston Consulting Group. The company's founder, Bruce Henderson, is credited with originating the concept. At that time, most companies focused only on growing their businesses as a way to increase profits. Henderson believed that while growth was important, it had to be strategic. He also believed that companies had to look not only at their own growth but also at what was happening around them in the same industry.

Henderson and BCG developed the growth share matrix based on the idea that a company or investor should have a portfolio that includes options with different market shares and different rates of growth. It provides a way for companies or investors to analyze their holdings and determine their growth rate and market shares. A Harvard Business Review article written by Phillipe C. Haspeslagh and published in January 1982 estimated that nearly half of all the Fortune 500 companies—the top five hundred companies in revenue as determined each year by Fortune magazine—used the growth share matrix as at least part of their planning strategy. In December 2011, the Harvard Business Review named the matrix as one of the frameworks that changed the world of finance. Although changes in the way the world does business have altered the application of the matrix in some ways, it remains a viable tool for analyzing portfolios and is a key part of the training on strategy given to business students in the twenty-first century.

Overview

A company using the growth share matrix would analyze each of its products and divisions and place them in one of four categories: cash cows, stars, question marks, and dogs. Items in the question marks category are sometimes called wild cats, while those in the dog category are sometimes referred to as pets. These colorful terms are descriptive of the performance of each product or division.

Cash cows are those items that are making a very good profit but have very low potential to grow in market size. This might be a product made by the company that is in high demand but is also made by many other companies, for instance. These items do not require the company to continue to invest a lot of money in them; however, they are often products or divisions that will face a decline at some point in the relatively near future.

Stars are those products or divisions that have a large market or potential market and also have a large share of that market. A company that is the first to produce a new product or service that everyone wants falls into this category. Stars are harder to come by than cash cows, but present a great opportunity because the company has much more room to expand its market share.

Question marks or wild cats are those products or divisions that have great potential for growth but do not have much market share. A new product that is different from others on the market but that has not yet caught public attention might be in this category. While the possibility exists for a great profit, much more risk is involved in this product than with a star.

Dogs or pets are those items or divisions that have both low growth potential and low market share. These are the products or divisions that a company should divest, or get rid of, but sometimes have a tendency to hold out of loyalty, lack of objectivity, or some other attachment. Under the growth share matrix, cash cows turn into dogs when they have exhausted their potential, and question marks can also become dogs if they fail to meet potential.

Each of these categories also has a recommended action to accompany it. Cash cows are milked for all the profit they can provide. The company should then invest the money generated by the cash cows in the stars and, with more care, in the question marks. This will have the effect of moving some of them to cash cow status while also generating additional profits. The dogs should be divested, freeing up resources that can also be reinvested in stars and question marks. The company should review the performance of its products and divisions on a set schedule to determine when to make investment moves; this helps the company form a strategy for fostering growth.

While the growth share matrix was originally developed for companies, stocks and other holdings of an individual investor can also be categorized in the same way. Instead of analyzing products and divisions, however, the investor will analyze the overall performance of the stocks and other investments, use the profits from cash cows to increase investments in stars and question marks, and get rid of investments that have become dogs and are not performing well.

One issue with the strategy as it applies to companies is that the labels can affect employee morale and become self-fulfilling. For example, an employee working in a division that is seen as a probable dog may lose any sense of job security and underperform or leave, decreasing the likelihood that the division will increase its productivity. On the other hand, employees in star divisions can feel like anything is possible and increase the likelihood of success.

The growth share matrix was at the height of its popularity in the 1970s and 1980s. Changes in communication and information sharing technology then created some issues with the matrix. The market as a whole moved faster and changed more quickly, and it was harder for companies to apply the three- to five-year strategies often used with the matrix. Companies responded by adopting faster review cycles, reestablishing the matrix's usefulness.

Bibliography

“The BCG Growth Share Matrix.” NetMBA Business Knowledge Center, www.netmba.com/strategy/matrix/bcg/. Accessed 24 Oct. 2024.

Caramela, Sammi. “What Is a BCG Matrix?” Business News Daily, 12 Sept. 2024, www.businessnewsdaily.com/5693-bcg-matrix.html. Accessed 24 Oct. 2024.

“The Charts That Changed the World.” Harvard Business Review, Dec. 2011, hbr.org/2011/12/the-charts-that-changed-the-world. Accessed 24 Oct. 2024.

“Growth Share Matrix.” The Economist, 11 Sept. 2009, www.economist.com/node/14299055. Accessed 24 Oct. 2024.

Hamermesh, Richard G., and Roderick E. White. “Manage Beyond Portfolio Analysis.” Harvard Business Review, Jan. 1984, hbr.org/1984/01/manage-beyond-portfolio-analysis. Accessed 24 Oct. 2024.

Hanlon, Annmarie. “How to Use the BCG Matrix Model.” Smart Insights, 7 Jan. 2022, www.smartinsights.com/marketing-planning/marketing-models/use-bcg-matrix/. Accessed 24 Oct. 2024.

Hayes, Adam. "Understanding the BCG Growth Share Matrix and How to Use It." Investopedia, 25 June 2024, www.investopedia.com/terms/b/bcg.asp. Accessed 24 Oct. 2024.

Reeves, Martin, et al. “BCG Classics Revisited: The Growth Share Matrix.” BCG Perspectives, 4 June 2014, www.bcg.com/publications/2014/growth-share-matrix-bcg-classics-revisited. Accessed 24 Oct. 2024.