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Hong Kong Polytechnic University - PolyU

Management & Organizations

Sebastian C. ©
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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 discarded by the organization.


The following are the possible reasons why the management may derive results that are inconsistent with empirical evidence when making Corporate Portfolio Analysis with BCG Matrix.


  1. BCG Matrix oversimplifies the determinants regarding the performance of SBU.


As introduced in the basic concepts of BCG Matrix, only two dimensions are included in the measurement of a unit’s current state of competitiveness, which are relative market share and market growth rate. In fact, there are multiple factors that would bring effects to the overall performance of a SBU and they should also be taken into account so as to obtain an unbiased and comprehensive judgement. These factors range from logistics, customer loyalty, and brand equity to the degree of autonomy given to each SBU.

Oversimplification of these factors and their interdependent relationships may give rise to unreliable decision that would jeopardize the strategic planning of multi-business firms (Grant, 2008).


Be that as it may, in some scenarios, relative market share, one of the dimensions included in BCG Matrix, could be useful to measure the unit’s competence in a low growth market, which means that the actual performance of the units categorized as Cash Cow and Dogs would more likely to be consistent with what the matrices imply (Robins & Wiersema, 1995). Nevertheless, the case is entirely different when it comes to the units operating in fast growing industries.


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.


In light of this dilemma, Ansoff, Kirsch and Roventa suggested that the management who adopts BCG Matrix should plot areas rather than points into the matrices based on the estimated probability of occurrence of the related determinants (see Figure 2). The scatter graph rather than a 4-grid system enables the management to quantitatively differentiate the business units lying under the same category, and it also allows the “median” business units to cross over two matrices.


c. The underlying assumptions and basic components are ambiguous and subjective in definition.


BCG Matrix is erected upon some basic factors, such as relevant market, strategic business units (SBU), the dividing lines and the matrix scales. These factors are vaguely defined and can be interpreted subjectively in accordance to different users. Moreover, Day (1977) pointed out that the definition of market growth and relative market share, which are the two decisive dimensions in the measurement of SBU performance, is largely dependent on the definition of relative market, so these two dimensions may be subject to ambiguity, too.


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.


d. The criterion determining the performance of SBU are somewhat untenable.


Firm growth and clash flow seem to constitute the main criterion of SBU performance, since, under the framework of BCG matrix, they are regarded as the predominant drivers of success and profitability (Nippa, Pidun, & Rubner, 2011). However, there have been mounting criticisms indicating that they are not the only dominant variables that could fully illustrate the growth opportunities (Hax & Majluf, 1983).


Apart from this, the relationship between relative market share and profitability is not definitely unequivocal as well, according to the study of Hambrick and Mcmillan (1982). They stated that not all Dog business units should be regarded as under-performers, and certainly should not be discarded by the organization simply based on the analysis using BCG Matrix.


Conclusion


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.


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), 23-38.


Day, G. (1977). Diagnosing the Product Portfolio. Journal Of Marketing, 41(2), 29.


Grant, R. (2008). Contemporary strategy analysis (6th ed.). Malden, MA: Blackwell.


Hambrick, D. & MacMillan, I. (1982). The Product Portfolio and Man's Best Friend. California Management Review, 25(1), 84-95.


Hax, A. & Majluf, N. (1983). The Use of the Growth-Share Matrix in Strategic Planning. Interfaces, 13(1), 46-60.



Robins, J. & Wiersema, M. (1995). A resource-based approach to the multibusiness firm: Empirical analysis of portfolio interrelationships and corporate financial performance. Strategic Management Journal, 16(4), 277-299.


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


Figure 1


Figure 2



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