The ‘Boston’ Matrix – Prioritising opportunities in your business
12/01/2012 Leave a comment
Back in 1968, one of the world’s preeminent management consulting groups, Boston Consulting (“BCG”) designed a means for their large (read multi-national or multi-business) clients – to decide how to allocate cash amongst their portfolio of businesses or strategic business units.
They termed that approach the “growth-share matrix” – although it’s often called the Boston Matrix.
Briefly speaking the Matrix categorizes investment / growth opportunities into four groups:
“Stars” (High Market Share / in a growing market)
- In this category you’re well-established, and growth will be enticing.
- Your business maybe investing significantly to gain market share, but learning curve benefits will be reducing costs and hopefully providing an advantage versus the competition.
- There should be some strong opportunities in this ‘quadrant’, and you should work hard to realize them.
“Cash Cows” (High Market Share / in mature or slow growing markets)
- Again, you’re well-established, so it’s easy to get market attention and exploit market gaps.
- The need for marketing and investment is lower. High market share ensures unit cost levels can be maintained below those of competitors and that generates positive cash flows.
- However it is only worth expending limited cash/effort as market opportunities are limited.
“Question Marks” (Low Market Share / in a market of potential growth?)
- These are the opportunities that are really tough to discern.
- They aren’t generating much turnover because you don’t have a large market share. But, they are in high potential markets so the potential to make money maybe good?
- · These opportunities can become Stars and eventual Cash Cows, BUT they could just as easily absorb the effort and $ invested with little return …if cost-reduction achievements don’t materialise as anticipated.
“Dogs” (Low Market Share / in mature or declining markets)
- The worst of all the combinations – your market presence is weak, so it’s going to take heaps of hard work to get noticed. You don’t enjoy the economies of scale of larger or better competitors, so it’s going to be difficult to make a profit.
- Definitely not where you want to be…
Using the Matrix typically four different strategies emerge:
- Build: Make further investments (to retain Star status, or to turn a Question Mark into a Star).
- Hold: do nothing and maintain the status quo.
- Harvest: Reduce investment and maximize profits/cash flows from a Star or a Cash Cow)
- Divest: Lose Dogs, use that capital to invest in Stars / Question Marks.
“Elementary my dear Watson” may be the typical response to what has been outlined… however, the Boston Matrix needs to be used cautiously because:
- there are practical problems around deciding what ‘high’ or low’ market share or market growth mean in different contexts;
- the quadrants aren’t necessarily equal or dissected at, say the 50% market share;
- its easy to make an incorrect classification;
- the matrices’ key dimensions ignore human and organisational behaviour (NB: It is difficult to assess how the “Cash cows” will react if all their surplus cash is invested elsewhere – particularly given inter-company jealousy is one of the hardest things to manage in larger groups!);
- “Dogs” are readily misunderstood – only a few may need immediate divestment or deletion. Others may need to be held for “political” (the brainchild of existing management) reasons, to provide a credible presence, to complete a product or service offering, for defensive reasons (to keep competition out) and others may even be capable of being turned around?
- the tool is best suited to assessing discreet businesses or SBU’s – but the principles can be applied to a situation where a business has a number of different products;
- frequently, the organisational constraint is not CASH (BCG’s original focus when designing the approach) but rather innovative capacity; and
- importantly “stars” and “question marks” are often very management intensive.
Whether you are a company with a portfolio of businesses or a business with a portfolio of products the Boston Matrix can provide you with some useful insights into your business or product mix strategy and can guide you through your investment decisions.
Take some time and allocate your different businesses or products into similar categories as the matrix above and you may be surprised at the result.
Using a healthy measure of common sense …or an external sounding board or advisor will go a long way to achieving a workable result…
For additional information or assistance on strategic planning visit us at www.latticecapital.com.au.
Join us next week when we’ll show you how to use Porters 5 Forces within your business.
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