Stamp BCG

The Boston Consulting Group (BCG), at the end of the Years 1960, proposes to evaluate on a matrix ( matrix BCG ) each activity of the Entreprise. This matrix is a matrix of resource allocation within a business portfolio. It relates to the diversified companies which are present on several spheres of strategic activity (French DAS, SBU (Strategic Business Unit) in English). It is thus about a strategic tool. This tool is used by extension in Marketing to evaluate the wallet of products of the company, but it is not its initial function.

matrix BCG consists in positioning each DAS of the company according to two axes:

what each DAS reports, measured by its relative market share, i.e. the market share of the DAS compared to that of the leader on the same market
what each DAS costs, measured by the growth rate of the market of each DAS;

matrix BCG rests on three assumptions:

H1 : Each activity has a growth rate dependant on its life cycle:

Plus the activity is young, plus the investments are important (the DAS consumes cash flows)
Réciproquement, plus the activity is old minus the investments are important (the DAS generates cash flows)

H2: The higher the Relative Market share (compared to the leader) is, the more the DAS is profitable, because it benefits from the effect of experiment

the idea is that the more the DAS has a raised market share, the more it will sell, therefore to produce in greater quantity, which will enable him to lower its production costs (principle of the effect of experiment also called scale effect). In this logic, profitability is directly correlated with volume of production.

H3 : Each activity will know a financial result resulting from the H1 relation/H2

Ainsi if a DAS became ripe and that it has on the one hand market raised, its benefit will be high (few investments and important margin). The company will be able to use cash the flows generated by this DAS to finance the development of another activity.

The crossing of the situations and the positions leads to a table with 4 boxes. Each one of them has commercial and financial characteristics which justify its name and the strategy to be followed.

For the qualified activities of stars or dead loads , the choice of resource allocation is clear: to invest thoroughly on the first and to forsake (even to try to yield) the secondes.
The cases of the cash cows and the dilemmas are more complex. Very often, a company will make use of cash the flows generated by its cash cows to finance its dilemmas ; the latter constitute a less sure investment but which can pay much in the long term, on the condition of being able to transform them into stars (in their saving market shares before the market does not stagnate). If one does not manage to make dilemmas stars before the market does not stagnate, they become dead loads .

The idea of the BCG was to provide to its customers a visualization enabling them to obtain a business portfolio balanced (to have sufficient DAS Cash cows to finance Stars and the Dilemmas, so as to balance the generation and the consumption of cashs flows).

The principal limit of this model is that it is only relevant for DAS which benefit from a high effect of experiment (for example in the iron and steel industry, the semiconductors, the bank of deposit, etc). For the DAS in which the effect of experiment is weak, profitability does not have a raison d'être correlated with the market share. It is the case for example in the industry of the luxury, where the most profitable companies are not necessarily those which have the strongest market share. More generally, when the strategy retained by the company is a strategy of differentiation and not a strategy of volume based on the effect of experiment, to use matrix BCG can result in making bad decisions of resource allocation.

Explanation of the graph

- the horizontal axis measurement the relative market share of the company. A figure of 0,5 reveals that the company holds a market share equal to 50% of that held by the leader. A figure of 4 means that the company is leader and holds a market share four times higher than that of number 2 of the market.

- The vertical axis measurement growth of the market. Each market having a different growth, one will adapt the data consequently.

- The size of the bubble is proportional to the contribution of the DAS to the total turnover of the company.

Matrix BCG makes it possible to classify the products according to their aptitude to be generated cash, while taking of account the growth of the market, like their relative market share.

- Star : market in strong growth and high market share. Strong need for to continue the growth (ex cash: mobile telephony in the business portfolio of France Telecom).

- Cash cow : market in low growth and high market share. Release many cash allowing the company to finance other activities (ex: fixed telephony in the business portfolio of France Telecom).

- Dilemma : market in strong growth and weak market share. Strong need for to maintain cash or increase the market share (ex: telephony on IP in the business portfolio of France Telecom).

- dead Load : neither growth, nor important market share. Difficulty of surviving and cannot finance other activities (ex: " My Visio" line; , video-telephony in the business portfolio of France Telecom offers).

External bond

economic matrices

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