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Fig. 6. Example matrix BCG for a hypothetical portfolio
“Problem children” (“question marks”, “wild cats”) are named so due to the
difficulty of making a decision regarding their prospects. On the one hand, there is a
low relative market share, on the other, a promising industry. Here a decision must be
made either to increase market share, which will require investment, or to remove this
area from the portfolio through sale, liquidation or a harvesting strategy.
“Stars” are the most promising business areas in the portfolio, as they are
characterized by a high relative market share and a promising industry. Young “stars”
require significant investments to maintain their market position. Mature “stars” can
independently ensure their proportional market growth. But at the same time, it is
unlikely that they will bring net profit, since all the profits received are directed to the
development of the business area.
“Cash cows” are characterized by a low relative market growth rate and a high
relative market share. They are the main source of profit in the portfolio, since financial
resources are required only to maintain already occupied positions. They usually
become “stars.”
“Dogs” have a low relative market share and low relative market growth rate.
“Dogs” are unpromising in the long term and are of little interest from the point of view
of the current moment. Typically, “dogs” are liquidated, sold, or subjected to a
“harvest” strategy.
In general, the typical path of a viable business unit of a company is as follows:
“problem child” — (conquering the market) — “star” — (decrease in industry rates) —
“cash cow” — (abandonment of the business area) — “dog”. But it may also be that the
created product can immediately turn from a “difficult child” into a “dog”.
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The implementation of such a sequence depends on efforts aimed at achieving a
balanced portfolio. Ideally, an organization’s balanced business portfolio includes
2–3 “cash cow” products, 1–2 “stars”, several “difficult children” as a foundation for
the future and, possibly, a small number of “dogs”. An excess of “dogs” indicates the
danger of a recession; an excess of “difficult children” can lead to financial difficulties.
The advantages of the matrix are:
• due to the clarity of the presentation of the business portfolio, the BCG matrix
is sometimes called the “business screen” or “bubble chart”;
• the use of the BCG matrix greatly facilitates the portfolio management process
for managers, allowing them to select more promising and profitable business areas for
investment;
• the results of the analysis carried out using this matrix allow us to divide the
goods produced by the organization into 2 groups: money generators (“cash cows”)
and money eaters (“stars”, “difficult children”, “dogs”).
An organization cannot strive to convert all its products into “cash cows.” Such
a policy will lead to an increase in its net cash flows, but will deprive it of chances for
sustainable development in the future.
On the other hand, organizations whose main product range is made up of “stars”
and “problem children” have high growth potential and often face a lack of funds to
finance and turn their products into “cash cows”. Sometimes it is more profitable for
them to sell the rights to produce some “problem children” to other organizations in
order to obtain free funds to transfer the remaining goods into “cash cows”.
Disadvantages of the matrix:
• the matrix is too simple and gives only the most general idea of the portfolio;
• does not allow you to accurately determine what you need to invest in — “stars”
or “cash cows”;
• does not allow you to make a completely reasonable choice of strategy in
relation to problematic areas of business;
• For different business areas (industries), there is a different correlation between
relative market share and profitability.
An example of constructing the BCG matrix is presented in the appendix A.
McKinsey Matrix / General Electric (GE)
The McKinsey matrix complements the BCG matrix, allowing you to assess the
position of each SBU in the organization's business portfolio in terms of market
attractiveness and the competitive position it occupies and suggesting possible strategic
decisions in the field of investment.
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In this matrix, the OX axis shows the competitive position of the SBU (business
area), and the OY axis shows the attractiveness of the market (industry). The axes are
divided into 3 zones, the total number of quadrants in the matrix is 9. The positioning
of the SBU is carried out using expert assessments based on taking into account certain
factors.
When determining the attractiveness of a market (industry), the following factors
can be taken into account:
• market volume and the rate of its growth (gain);
• current and future industry profitability;
• intensity of competition;
• exposure to economic cycles;
• degree of government regulation;
• emerging threats and opportunities;
• values of entry and exit barriers.
When determining the competitive position of an SBU (business area), the
following factors may be taken into account:
• relative market share of the business area and its dynamics;
• image of the business sector and its dynamics;
• ability to compete on prices and quality;
• technological capabilities;
• environmental friendliness of production;
• professionalism of managers.
SBU are depicted as circles, the diameter of which corresponds to the share of
SBU data in the business portfolio of the enterprise. Within the circles, segments are
distinguished, which, in turn, correspond to the market shares of SBU in certain
industries (another option is the cost and profit of SBU).
All SBU, in accordance with their position, can be combined into three groups
based on the principle of investment priority:
• SBU with high investment priority (1, 2, 3);
• SBU with medium investment priority (4, 5, 6);
• SBU with low investment priority (7, 8, 9).
Fig. 7 shows the McKinsey / General Electric matrix for a hypothetical portfolio
of business areas of a diversified company.
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Fig. 7. McKinsey / General Electric matrix for a hypothetical portfolio
of business areas of a diversified company
The analysis of this matrix consists of determining strategies for business areas
that fall into various quadrants (fig. 8):
1. Leader. This is the best option. The business area occupies a strong position
in a highly attractive market. It is necessary to strengthen and support this area of
business as much as possible, increasing production and sales volumes.
2. Growth leader. Investments are needed here to increase the volume of this
product in accordance with the expansion of the market. This area of business will be
profitable, self-financing is possible.
3. Must try harder. Such a position may be unstable in the future. Investments
are needed to strengthen the competitive position of this business area in the market.
4. Source of profit. The business sector generates high profits, and investments
in its support are not needed.
5. Handle with care. Caution is required when investing in this area of business,
since it is not a market leader, yes and the latter is not very attractive.
6. Double up or quit. A selective policy is needed here: some modifications
must be abandoned, and the remaining ones must be promoted more actively on the
market.
7, 8. Cautious retreat. The prospects for making a profit here are low, and
therefore it is necessary to organize a careful diversion of resources from this area of
business.
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9. Taking French leave. Here you can only lose money, and therefore you
should get rid of this area of business as quickly as possible.
Fig. 8. Strategies for business areas falling into different quadrants
of the McKinsey / General Electric matrix
An example of constructing a McKinsey / General Electric matrix is presented
in the appendix B.
Matrix of industry life cycles (Life Cycle, LC)
The matrix of industry life cycles is intended to optimize the portfolio of business
areas according to the parameter “Stage of the life cycle of the market (industry)”
(fig. 9).
Fig. 10 provides a description of the stages of market development.
The “Market Formation” stage is characterized by high market growth rates,
a low number of competitors, the absence of a threat from substitute products, the use
of new technologies, a high level of investment in the industry and high prices. At the
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stage of industry formation, the penetration1 of a product or service among the
population is small. The market growth potential is high.
The Market Growth stage is characterized by a strengthening market that
continues to grow, showing high rates of increase in sales and profits. Competition at
the growth stage is still low, so companies operating in the industry “reap the benefits”
of their investments. The price level is stable. But new players, gradually borrowing
technology, are beginning to enter the market. Towards the end of the growth stage,
the penetration of a product or service reaches its maximum. The market growth
potential is high.
The “Market maturity” stage is characterized by a slowdown in growth rates.
Competition is growing due to an increase in the number of players, production
capacity in the industry is increasing, and supply begins to exceed the level of demand.
The period of development of differentiation between numerous goods. The price level
is decreasing. The penetration of a product or service among the population is highest,
the frequency of use is increasing.
The “Aging (decline) of the market” stage is characterized by a decrease in
sales dynamics and a decline in demand. Companies begin to leave the market or
consolidation processes begin. Only strong players continue to fight for market share.
Fig. 9. Market (industry) life cycle curve
1
Sales penetration (market penetration) is the share of a specific organization’s products in the total volume
of customer purchases for a given product; measured in %.
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Fig. 10. Description of the stages of market development
The second parameter used in the market life cycle matrix is the “Competitive
position of the business sector”, which can be characterized as follows:
Dominant (leading). Only one business representative, if any, can hold a given
position in the industry. The position is often the result of a quasi-monopoly or a highly
protected technological lead. This business representative sets the standard for the
industry and controls the behavior of other competitors. A leading business has a wide
range of strategic options that it can use at its own discretion.
Strong. A strong type of business usually chooses its own strategies, regardless
of the behavior of its competitors, and has certain advantages over them. The relative
market share is 1.5 times greater than for the largest closest competitor, but such a
business does not have an absolute advantage.
Favorable (noticeable). This type of business has certain features and
advantages. This is, as a rule, one of the leaders in weakly concentrated industries,
where all competitors are at approximately the same level and none of them dominates.
If it has its own niche, then this type of business is relatively safe from competitors,
and usually it can soon significantly improve its competitive position.
Unstable. In this position, a type of business achieves profit by specializing in a
narrow and relatively protected niche, be it specializing in a small part of a large market
or in a specific subtype of product. The business sector can maintain this situation for
a long time, but has virtually no chance of improving it.
Weak. This position may mean that the type of business has a number of critical
weaknesses that prevent it from ultimately becoming a profit-generating center for the
organization. Weakness may be due to the type of business itself (it may be too small
or may lack important resources to support it) or mistakes made in the past during its
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development. In any case, such a business cannot survive on its own under the
prevailing competition in the industry.
Arthur D. Little (ADL) matrix
In the Arthur D. Little (ADL) matrix, the OX axis shows the stages of the
industry life cycle: formation, growth, maturity, aging; along the OY axis — the
competitive position of the SBU (business area): weak, unstable, favorable, strong,
dominant (see fig. 11, table 11). There are a total of 20 quadrants in the matrix.
Fig. 11. Matrix Arthur D. Little (ADL)
Business areas in the matrix are depicted in the form of circles, the sizes of which
reflect the corresponding shares of business areas in the economic portfolio, and the
segments reflect the values of the market shares of business areas in the corresponding
industries.
The use of this matrix can help avoid a situation where too many business areas
in the portfolio end up in industries at the stages of maturity and aging or at the stages
of formation and growth.
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Table 11
Business development strategies
Maturity level of industry, market, segment
Formation stage
Growth stage
Maturity stage
Aging stage
Competitive position of the
company in the industry
Dominant
A strategy for aggressively
capturing market share.
Sales growth goals: higher than
market growth.
Competitive advantages:
develop innovations.
Investment level: high. Invest
at a faster rate than market
share growth
Strategy for maintaining
position and market share in
the industry.
Sales growth goals: maintain
growth slightly above or equal
to market growth.
Competitive advantages:
develop innovations.
Level of investment:
corresponds to the growth of
the company, only to maintain
the growth rate
Strategy for maintaining
position and maintaining
market share in the industry.
Sales growth goals: maintain
growth equal to market growth.
Competitive advantages:
maintain at existing level.
Level of investment: reduce,
only to maintain market share
Strategy for maintaining
position and maintaining
market share in the industry.
Sales growth goals: to contain
the decline for as long as
possible.
Invest only when sales decline
Strong
A strategy for aggressively
capturing market share.
Sales growth goals: higher than
market growth.
Competitive advantages:
strengthen the existing qualities
of a product or service.
Investment level: high. Invest
at a faster rate than market
share growth.
Pay high attention to
investments in strengthening
competitive advantages
Strategy for maintaining
position and maintaining
market share in the industry.
Sales growth goals: maintain
growth slightly above or equal
to market growth.
Competitive advantages:
strengthen the existing qualities
of a product or service.
Average level of investment;
maintain only those
investments that will directly
lead to market growth (in the
short to medium term)
Strategy for maintaining
position and maintaining
market share in the industry.
Sales growth goals: maintain
herbal market growth.
Competitive advantages:
maintain at existing level.
Invest only when sales decline
Strategy for maintaining
position and maintaining
market share in the industry.
Sales growth goals: to contain
the decline for as long as
possible.
Reduce costs to maximize
profits.
If possible, avoid reinvestment
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Maturity level of industry, market, segment
Formation stage
Growth stage
Maturity stage
Aging stage
Favorable
Waiting strategy. Wait for a
favorable situation to quickly
capture market share.
Sales growth goals: higher than
and equal to market growth.
Competitive advantages:
strengthen the existing qualities
of a product or service.
Selective investment, only in
projects that can significantly
improve the company's
competitive advantage in the
industry
Waiting strategy. Wait for a
favorable situation to quickly
capture market share.
Sales growth goals: equal to
market growth.
Competitive advantages:
strengthen the existing qualities
of a product or service
Selective investment, only in
projects that can significantly
improve the company's
competitive advantage in the
industry
Strategy for capturing market
niches and strong
differentiation.
Sales growth goals: equal to
market growth.
Maintain competitive
advantages at the existing level.
Reduce investment to the
minimum required level
Strategy for reducing costs and
preparing to exit the market.
Investments are minimal or
non-existent
Unstable
Strategy for survival and
maintaining market share.
Sales growth goals: equal to
market growth.
Competitive advantages:
strengthen the existing qualities
of a product or service.
Selectively invest only in
projects that can significantly
improve the company's
competitive advantage in the
industry
Strategy for capturing market
niches and strong
differentiation.
Sales growth goals: equal to
market growth.
Competitive advantages:
strengthen the existing qualities
of a product or service.
Selective investment, only in
projects that can significantly
improve the company's
competitive advantage in the
industry. Be more careful with
investments and the risk of low
return increases
Strategy for capturing market
niches and strong
differentiation. If impossible,
exit the market.
Sales growth goals: equal to
market growth.
Maintain competitive
advantages at the existing level.
Investments are minimal or
non-existent
Strategy for reducing costs and
preparing to exit the market.
No investments
Weak
Strategy: either invest and
develop competitive
advantages, or leave the market
Strategy: either invest and
develop competitive
advantages, or leave the market
Strategy: either invest and
develop competitive
advantages, or leave the market
Exiting the market, closing a
business with minimal costs
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