Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined solely by whether it had become the market leader during the period of high growth.

While originally developed as a model for resource allocation among the various business units in a corporation, the growth-share matrix also can be used for resource allocation among products within a single business unit.

The BCG matrix can help understand a frequently made strategic mistake: having a one-size-fits-all approach to strategy such as a generic growth target or a generic return on capital for the entire corporation.

In such a scenario:

Cash Cows will beat their profit target easily; their managers have an easy job and are often praised anyhow.

Dogs fight an impossible battle and, even worse, investments are made now and then in hopeless attempts to «turn the business around».

As a result, Question Marks and Stars get mediocre investment funds. In this way they are unable to ever become cash cows and earn money.

The BCG matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are:

Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability.

The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a «dog» may be helping other business units gain a competitive advantage.

The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation’s business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units (SBUs).

Source: www.netmba.com

The GE/McKinsey Matrix is a later and more advanced form of the BCG Matrix. It is a model to perform business portfolio analysis on the Strategic Business Units of a corporation. A business portfolio is the collection of SBUs that make up a corporation. The optimal business portfolio is one that fits perfectly to the company’s strengths and helps to exploit the most attractive industries or markets. A SBU can either be a midsize company or a division of a large corporation that formulates its own business level strategy and has separate objectives from the parent company.

The aim of a portfolio analysis is to:

– analyze its current business portfolio and decide which SBUs should be allocated more or less investment;

– develop growth strategies for adding new products and businesses to the portfolio;

– decide which businesses or products should be divested.

The GE/McKinsey Matrix is more sophisticated than the BCG Matrix:

1. Market (industry) attractiveness replaces market growth as the dimension of industry attractiveness. Market attractiveness includes a broader range of factors than just the market growth rate that can determine the attractiveness of an industry/market.

2. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Competitive strength likewise includes a broader range of factors than just the market share that can determine the competitiveness of a SBU.