At the end of the 1960s, Bruce Henderson, founder of the Boston Consulting Group, BCG, developed his portfolio matrix. The effect on the business world was dramatic. Henderson ﬁrst came up with the concept of an experience curve, which differs widely from the learning curve, a concept formulated many years before and which states that staff productivity increases according to the number of times a particular work task is carried out. The experience curve does not have the inherent threshold effects of the learning curve. The experience curve states that when a particular task is duplicated, the cost of carrying it out the second time will fall by about 20 per cent. Thus, by doubling our sales force, customer sales costs will fall by about 20 per cent. The same thing applies to invoicing, production, etc. For more on this, see the entry Experience curve. The other important principle in the BCG concept was relative market share, which was calculated in relation to the biggest competitor. The experience curve was combined with relative market share and the life cycle curve in the well-known BCG matrix shown in the ﬁgure below. The matrix was popularized by the use of symbols mainly representing animals. Such terms as ‘dogs’, ‘wildcats’, ‘star’ and ‘cash cow’ subsequently came into business use, whereupon the Boston matrix was referred to as the ‘BCG zoo’. If we look at the four squares of the BCG zoo and try to predict cash ﬂow for the next 3.5 years, we begin to make out certain patterns. The dog or the star should have a minimal positive or negative cash ﬂow. The cash cow delivers very positive cash ﬂow, while the wildcat has negative cash ﬂow. When portfolio strategy was in its infancy, balancing the cash ﬂow was one of group management’s most important functions. The theory was that cash ﬂow should be created in the cash cow and invested in the wildcat in order to increase market share and reach a strong competitive position. This would then bring the unit into the star square. When the market gradually stopped growing, the star business would tumble into the cash cow.
The underlying idea of the BCG matrix is that the best strategy is to dominate market share when the market is mature. The thinking goes like this: 1. 2. Proﬁtability is greatest when the market matures. A dominating market share gives the highest accumulated production volume. 3. According to the experience curve, high volume leads to lower production costs. 4. Low production costs can either be used to lower prices and take market share, or to increase proﬁt margins. The BCG matrix proved a great success and most of the big American companies used it to review their business units. BCG’s competitors naturally wanted to get on the band wagon and both McKinsey and Arthur D Little developed a method involving matrices of nine cells instead of the BCG four-cell model (see for example Industry attraction and strategic position).
High Market growth %
0 10x High 1x Market share Low 0.1x
The Boston matrix has come in for harsh criticism. Here are two examples of the risks involved in connection with its use.
James Ferguson, Managing Director of a foodstuffs group, tells the story of the company’s coffee business, known for, among other things, the Maxwell House brand. According to the prevailing portfolio pundits, this unit was classed as a cash cow. It was therefore supposed to create positive cash ﬂow and not to develop and grow. The management of the unit consequently relaxed and were on the way to missing the wave of brewed and freeze-dried coffees, which were of course making a great breakthrough in the early market. The other example concerns General Electric, a great pioneer of portfolio strategy. General Electric began to apply strategic management to its portfolio as early as the 1960s. Since then they have realized the limitations and dangers of BCG....