Why BCG Growth-Share Matrix Fails Sometimes: Discussion on the Reasons Behind BCG Matrix Malfunction
Introduction
Due to the growing trend of diversification with respect to corporate business nature, most major companies have acquired a combination of distinct product-market businesses, and they are still expanding their subsidiaries in various industries.
One of the key determinants of these multi-business firms’ success is whether the resource could be allocated efficiently across different business units (Slater, 1992). This is when Corporate Portfolio Analysis/Management (CPA/CPM) displays its critical value— it could help the management of a diversified company make strategic decisions to identify latent opportunities, allocate resources to business units with growth potential, and formulate future development plan.
Amongst the available CPA instruments, BCG Growth-Share Matrix is the most widely adopted tool in the industry, and it was implemented by a number of large companies due to its user-friendly graphical representation and simple classification of business units.
However, it has confronted with doubts regarding whether it is logical to apply and transfer CPA concepts from BCG Matrix’s theoretical framework to the real business industry (Sharpe, 1963). The objective of this paper is to identify the reasons why BCG Growth-Share Matrix is incapable of recognizing a strategic business unit’s (SBU) true growth potentials under certain circumstances, and provides suggestions for the management of multi-business firms when BCG Matrix malfunctions.
By congregating the research from past academic literature, this paper will demonstrate the reasons behind different BCG Matrix malfunctions and discuss the relevant limitations.
Reasons behind BCG Growth-Share Matrix malfunctions
To begin with, it is essential to introduce the basic concepts underlying BCG Matrix.
This CPA tool categorizes an organization’s SBU into 4 kinds of matrices, which are Cash Cows, Stars, Question Marks and Dogs, with respect to their relative market share on a horizontal axis, and their market growth rate on a vertical axis (Bettis & Hall, 1981), as shown in Figure 1 below. Cash cows are units that have high market share but in a slow-growing industry, and usually generate an excess amount of cash to maintain the business while being invested in as little as possible; Stars refer to the units with high market share in an industry with high market growth rate, which have the potentials to become the Cash cows if funded heavily; Question Marks refer to units that have low market share but located in a low-growing industry, but they have potential to become the Stars or Cash Cows in the future; Dogs are the units with low market share in a slow-growing industry and should be discard.....[read full text]
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Please click on download. Nevertheless, the case is entirely different when it comes to the units operating in fast growing industries. The measure of relative market share becomes far less effective in the high-growth markets, in which the environment is more competitive and therefore the changes in market share is much more dynamic as well.
The above findings suggest that the management should be more careful when implementing BCG Matrix to assess SBU that operate in fast-growing industries, since the results have a greater degree of deviation with the SBU’S true growth potential and competences.
In order to minimize this deviation, the management is recommended to adopt other corporate portfolio analysis instruments that take more dimensions and variables into account, and should not solely rely on what BCG Matrix renders.
b.
BCG Matrix oversimplifies the categories to which SBU belong.
Technically speaking, this defect stems from the oversimplification of determinants in BCG Matrix. Ansoff, Kirsch and Roventa stated that “single point positioning” of SBU into a 4-grid system may fail to identify some SBU that fall between two categories.
For instance, a dilemma may arise if a business unit in a fast-growing industry has a relative market share of median value among that of other business units. It would be a hare choice to decide whether this business unit belongs to Stars or Question Marks.
Even if the management simply categorized the business unit as either Star or Question Mark, the respective strategy suitable for either of the two categories could not be applied to this “median” business unit, and it may further lead to an infer.....
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Please click on download. An empirical research of a Fortune 500 company with 15 SBUs was conducted by Wind et al. (1983), which substantiates the variability of such classification method.
The group analyzed the classification of these 15 SBUs within BCG Matrix based on four different definition of market growth and market share, only to find that only 4 out of the 15 SBUs were concordantly positioned as in the BCG Matrix. This study illustrated the repercussion of vague and weak definitions of the matrix dimensions, and warned the users of the potential danger arising from subjectively interpreted definitions.
To further illustrate that, the case of Apple provided an interesting question with respect to the ambiguous definition of “relative market share”.
The question is whether Apple should define its phone market as all mobile phones or smart phones only. It is generally acknowledged that Apple produces the most innovative and high-quality smart phones in the world, so if the relative market share refers to the share in smart phone market, then iPhone should be positioned as a Star product, since the smart phone market is growing rapidly and Apple yields a large proportion of shares.
However, when the reference of market shifts to the entire mobile phone market, iPhone may suddenly fall to the matrix for Dogs, since the entire mobile phone market is already mature and saturated, and Apple is not a major competitor in this market. This simple scenario proves that the variance in definition of “market” will result in the classification of a SBU in two different matrices.
d. The criterion determining the performance of SBU .....
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Please click on download. To conclude, the malfunction of BCG Growth-Share Matrix probably arises from the following reasons: firstly, the determinants regarding the performance of SBU are oversimplified; secondly, the 4-grid system is insufficient and oversimplified to position various types of business units; Thirdly, the underlying assumptions and basic components are ambiguous and subjective in definition; and lastly, the criterion determining the performance of SBU may lack reasonable ground. As has been noted above, complete reliance on BCG Growth-Share Matrix may lead to inferior strategic decisions and may further jeopardize the strategic planning of the entire organization. Given that BCG Matrix have the limitations above, we should not de-recognize the value of this system due to its virtue of simplicity and straightforwardness. Management of multi-business firms is advised to embed the BCG Matrix into other CPA process, and pay heed to the situations when one of the limitations above is present. (1615 words)
References
Ansoff, H., Kirsch, W., & Roventa, P. (1982).
Dispersed positioning in portfolio analysis. Industrial Marketing Management, 11(4), 237-252.
Bettis, R. & Hall, W. (1981). Strategic Portfolio Management in the Multibusiness Firm. California Management Review, 24(1).....
This page(s) are not visible in the preview.
Please click on download. Sharpe, W. (1963).
A Simplified Model for Portfolio Analysis. Management Science, 9(2), 277-293.
Slater, S. (1992). Shareholder Value and Investment Strategy Using the General Portfolio Model. Journal Of Management, 18(4), 717-732.
Wind, Y., Mahajan, V., & Swire, D. (1983).
An Empirical Comparison of Standardized Portfolio Models. Journal Of Marketing, 47(2), 89.
Appendix
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