Boston Consulting Group's Advantage Matrix

To understand the Boston Matrix(by BRUCE HENDERSON(BOSTON) 1970), you need to understand how market share and market growth interrelate. Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher the proportion of the market you control. The Boston Matrix assumes that if you enjoy a high market share you will be making money. (This assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage). The question it asks is, "Should you be investing additional resources into a particular product line just because it is making you money?" The answer is, "not necessarily." This is where market growth comes into play. Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market is expanding, meaning that it’s relatively easy for businesses to grow their profits, even if their market share remains stable. By contrast, competition in low growth markets is often bitter, and while you might have high market share now, it may be hard to retain that market share without aggressive discounting. This makes low growth markets less attractive.http://www.mindtools.com/pages/article/newTED_97.htm The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.

The company must:

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.http://tutor2u.net/business/strategy/bcg_box.htm Methods of Portfolio Planning

The two best-known portfolio planning methods are from the Boston Consulting Group (the subject of this revision note) and by General Electric/Shell. In each method, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.

The Boston Consulting Group Box ("BCG Box")

Using the BCG Box (an example is illustrated above) a company classifies all its SBU's according to two dimensions:

On the horizontal axis: relative market share - this serves as a measure of SBU strength in the market On the vertical axis: market growth rate - this provides a measure of market attractiveness

By dividing the matrix into four areas, four types of SBU can be distinguished:

Stars - Stars are high growth businesses or products competing in markets where they are relatively strong compared with the competition. Often they need heavy investment to sustain their growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows.

Cash Cows - Cash cows are low-growth businesses or products with a relatively high market share. These are mature, successful businesses with relatively little need for investment. They need to be managed for continued profit - so that they continue to generate the strong cash flows that the company needs for its Stars.

Question marks - Question marks are businesses or products with low market share but which operate in higher growth markets. This suggests that they have potential, but may require substantial investment in order to grow market share at the expense of more powerful competitors. Management have to think hard about "question marks" - which ones should they invest in? Which ones should they allow to fail or shrink?

Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that have low relative share in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in.

Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them. In the diagram above, the company has one large cash cow (the size of the circle is proportional to the SBU's sales), a large dog and two, smaller stars and question marks.

Conventional strategic thinking suggests there are four possible strategies for each SBU:

(1) Build Share: here the company can invest to increase market share (for example turning a "question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present position

(3) Harvest: here the company reduces the amount of investment in order to maximise the short-term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the resources elsewhere (e.g. investing in the more promising "question marks").

After its well known growth-share matrix the Boston Consulting Group subsequently developed another, much less widely reported, matrix which approached the `economies of scale' decision rather more directly. This is their `Advantage Matrix', also in the form of a quadrant (four boxes) but which takes as its `axes' the two contrasting `alternatives', `economies of scale' (described by them as `potential size of advantage') against `differentiation' (shown as `number of approaches to achieving advantage'). In essence, the former category covers the approach described in the more popular (Boston) growth-share matrix, while the latter represents the approach (described by Michael Porter) of `differentiating' products so that they do not compete head-on with their competitors.

• Volume business. In this case there are considerable economies of scale, but few opportunities for differentiation. This is the classic situation in which organizations strive for economies of scale by becoming the volume, and hence cost, leader. Examples are volume cars and consumer electronics.

• Stalemated business. Here there is neither the opportunity for differentiation nor economies of scale; examples are textiles and shipbuilding. The main means of competition, therefore, has been reducing the `factor costs' (mainly those of labour) by moving to locations where these costs are lower, even to different countries in the developing world.

• Specialized business. These businesses gain benefits from both economies of scale and differentiation (often characterized by experience effects in their own, differentiated, segment); examples being branded foods and cosmetics. The main strategies are focus and segment leadership.

• Fragmented business. These organizations also gain benefit from differentiation, particularly in the services sector, but little from economies of scale; examples being restaurants and job-shop engineering. Competition may be minimized by innovatory differentiation.

Apart from the fact that it has not suffered as badly at the hands of later popularizers, the particular advantage of this matrix is that it highlights the assumptions that are hidden in the Boston Matrix. It may also give a better feel for the optimum strategy and the likely profits, but it does not give any feel for the cashflow, which was the main feature of the original matrix.