BCG Growth Matrix
INTRODUCTIONWhen I attended business school we were introduced to the Boston Consulting Group (BCG) 2 X 2 growth share matrix. It explained a product life cycle from its introduction as a market Star, generating much revenue, to a Dog where it no longer was the marketplace darling and was on the path of revenue decline. It allows management to view their products or services as a Star or as a Dog, and realize where resources should be applied or removed to create the next Star. My professor explained that the matrix is simple to explain and ideal for the senior executive crowd given their limited attention span. In other words, it's visual and easy to digest!
BCG introduced the matrix in 1968 and is still used to this day to understand where in the product life cycle a product may be and where a firm should be applying its resources. It's a simple strategic tool for a firm to classify it's products. The usefulness of the matrix is to:
- Segment a firm's products into the four categories.
- Prioritize the resources that should be given to each product.
- Facilitate strategic decisions as to what products to invest and which to divest.
- Stars are products or services that generate high revenues and are market leaders in their segment. This could be the introduction of a new product to meet a market demand and is widely accepted resulting in a surge in revenues. Stars often have a limited lifetime as they are eclipsed by new products from competitors.
- Question Marks are generally regarded as a gambles. They can consume large amounts of cash but not establish a dominant market position, thereby not generating as much revenue as expected.
- Cash Cows are products that have reached their maturity, no further investments in product development are needed but they continue to generate revenue from their customer base. Cash Cows have slow growth but due to a mature market cash generation is high. This is where firms can use the cash to create the next Star or Question Mark product. Cash Cows generate cash to fund dividends, operating costs and funds R&D for the next big thing.
- Dogs are mature products in a decline. These products or services have low growth and low market share. They are generating little to no revenue and often, are cash drains on the firm. These have no value to contributing to future revenue growth.
In the late 1990s I worked for General Electric (GE) Information Services (GEIS). I was part of a B2B Marketplace professional services division. It was a division established in 1998 to build a new generation of Internet based B2B marketplaces for GE's Fortune 500 clients. In 1999 GEIS generated approximately $800M US in revenues from its EDI products and services. GEIS aimed to be a $1B GE division, but revenues continued to decline in the years ahead. EDI networks tied clients and vendors together to support efficient supply chain transactions. For example, a WalMart inventory system, detecting a low supply of toilet paper in its warehouse would automatically send an EDI order to a supplier over the network to ship more product.
Star. Using the B2B matrix, we can see that GEIS had a market dominance in the 1970s through the 1990s in EDI based products and services. Their clients were major retailers. This was a time when EDI transactions occurred through private networks, before the days of the Internet. GEIS had both the products that would interface client systems to the EDI networks as well as having an EDI network for clients to transact EDI orders. This was a time characterized by high market share and high growth for GEIS. The EDI portfolio was a Star!
Cash Cow. The mid 1990s saw the emergence of the Internet for commercial use. By the late 1990s firms began exploring the possibility of moving B2B commerce transactions to the Internet and away from vendor's EDI networks. In the early 2000s, GEIS revenues declined to $600M from $800M in 1998. GEIS continued to take over competitors in the EDI world and thus sustained cash flow in this manner. At this time the EDI business was a Cash Cow; mature, slow growth, but still revenue positive.
Question Mark. Seeing a decline in EDI future revenue, it decided to create a new series of products and services based on B2B Internet marketplace exchanges. The goal was to connect clients and vendors over Internet based B2B networks; an updated strategy to the legacy EDI networks. The new products were based on Netscape's SellerXpert and BuyerXpert products. This new division was named Global Exchange Services (GXS). In effect, it used the cash generated from EDI services to fund this new service. Potentially this could be the new Star. Since this was a new division with a new product and no market share yet, it was really a Question Mark at this stage as to whether it would succeed. GE could see that there was no future for its EDI products, and invested in GXS to be its next Star; it was a financial gamble.
GXS didn't succeed with it's B2B Marketplaces. Personal relationships between clients and vendors persisted, weakening the base for market driven marketplaces. For example, on-line auctions for MRO (Maintenance Repair and Operations) products, although saved money, but never fully gained their potential market foothold. B2B exchanges eventually fell by the wayside. Companies such as CommerceOne, Ariba and GXS with proprietary B2B networks were Question Marks but didn't have staying power. Royal Bank of Canada and TD Bank invested in the Ariba Buyer product but eventually dropped it. Commerce One used on-line auction marketplaces to connect clients to their vendors At its peak it had a $21.5B US capitalization, by 2004 it filed for bankruptcy.
Dog. GE failed to create the next Star through its investments in GXS. As well, the EDI products and services market continued to decline. It was time for GE to divest itself of GXS.
GEIS Decline Example
By the mid 2000s, GE spun off GXS to a turnaround firm; San Francisco Partners. The lesson here is that products and services often follow a series of life cycle stages before they are no longer viable. A Star today will be tomorrow's Dog. The key takeaway is to know where in this matrix model your products lie.
STRATEGIESProfits generated from Cash Cows (high market share/low-growth products) are used to develop the next Stars (high market share/high growth products). Often, firms miss the mark and invest in new products meant to be Stars but end up being Dogs (no market growth, no revenue generation). Management can use several growth strategies depending on the life cycle of a product.
- Divest. A low market share and low revenue are the characteristics of a Dog. These are products that have matured in the market and have had better days, they are now in a decline and the best way to deal with them is to divest. This was the case with GE and GXS. It decided that there was no future to the strategy that GXS adopted and with a declining market share in its foundational products it was time to let it go. GE recovered some of its direct GXS cash investment through its sale to San Francisco Partners.
- Harvest. This is a strategy typically used on Cash Cows. It consists of trying to harvest as much revenue from the product as possible. This is achieved by cutting costs or increasing the product cost to the client if the market will bear it. This strategy can also be used for Dogs. For example, prior to the sale of GXS, there was a significant staff downsizing and cost cutting to make the sale of the unit more palatable to the buyer. It is not a long term product strategy, but one to extract the most value out of a declining product.
- Hold. Typically used to prolong the life of a Cash Cow to derive as much revenue as possible from the product while it still has a market share. Cash Cows don't typically last forever. As with GXS it continued to derive revenue from the EDI space by acquisition of EDI firms. It prolonged the Cash Cow from becoming a Dog.
- Develop. This requires continued investments to the product to increase its market share. This could be investments in making more competitive products or investments in marketing to raise product awareness. Typically applied to Question Marks to make them into Stars. However, as with GXS there is no guarantee that development of a new product will realize a new Star, market failure is sometimes the reality for a Question Mark.