Back in the 1970s Bruce Henderson (the founder of BCG) started circulating his “perspectives” articles as a way to drum up business for his nascent consulting firm. His articles on the experience curve and the rule of three and four were well received.
However, he didn’t have a hit until he released 1970’s The Product Portfolio in which he first described BCG’s Growth-Share Matrix. Today’s article will explain what the Growth Share Matrix is, why it was popular, and what its weaknesses were.
What is the BCG Growth Share Matrix?
The Growth-Share Matrix is based on a few assumptions:
1. High market share = high margins (because more market share = more accumulated experience = lower costs).
2. Growing market share requires cash.
3. There’s a limit to growth.
Now, generally speaking a large company has multiple products. What BCG would do is go in and plot the growth vs. the market share for each of the companies’ products and usually create a table like this:
The upper left quadrant are stars, which are high growth and high market share. It may not generate excess cash and may even be cash starved as it grows.
The upper right quadrant is question marks, which are growing quickly but in which your product has low market share. Ideally, you’d like to invest in question marks and turn them into stars.
The lower left quadrant are cash cows, which generate a large amount of cash. Ideally you’d use the cash generated from cash cows to fund your stars and question marks.
The lower right quadrants are dogs, in which you have poor market share and which are a structurally low growth market. Ideally you’d have none of these.
The “Success Sequence” is the lifecycle of a good product: you use cash from a cash cow to fund the growth of a question mark and it becomes a star. Eventually stars become cash cows and you use their cash to fund new question marks.
The “Disaster Sequence” is when you mismanage your portfolio and everything becomes dogs.
Why Was It Popular?
The Growth-Share Matrix was really, really easy to understand (its simplicity was its greatest strength and its greatest weakness). It was leaked to the public pretty quickly and generated an enormous amount of publicity.
What Are Its Weaknesses?
The main problem is that its an oversimplification of reality. This plays out in several ways:
1. Product Lifecycles Are Complicated. Very few products have the sort of lifecycles that Henderson imagined, and having high market share is not necessarily always the best investment possible of money.
2. It Can Create a Self Fulfilling Prophecy. If you believe something is a dog, you’ll pump money out of it and it becomes a dog. If you believe something is supposed to be a star, you’ll invest in it and possibly turn it into one (and may lose money on the investment). If you believe something is a cash cow and you slash your investments into it, it starts to putter out on the growth side and becomes a cash cow.
3. It’s Demotivating. If you work for a large company and your division’s product is classified as a “cash cow,” why should you keep trying to improve? Management has given up on growth and improvements, and your division’s cash is being spent to grow another part of the company.
4. It’s Transparent. If everybody is using the growth share matrix then its pretty easy to tell your neighbor’s strategy and take advantage of that information.
BCG’s Growth Share Matrix was Bruce Henderson’s way to help a company manage its portfolio of products. It was incredibly popular in its time, but has fallen out of favor because of its oversimplification of the dynamic business environment.
Still, it’s important to appreciate just how revolutionary it was, and how it essentially reinvented the consulting industry.