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BCG Growth Share Matrix
Boston matrixa framework for highlighting and analysing PRODUCT DEVELOPMENT policy and associated CASH FLOW implications in a firm, used by corporate planners in formulating BUSINESS STRATEGY.
Fig. 10 shows the matrix which depicts market growth rate on one axis and the product's market share on the other; the matrix indicates that the higher the product's growth rate, the greater will be the capital investment required and hence cash used, while the greater the product's market share, the greater will be the profit earned and hence cash generated. The four market growth/share segments relate to four product types:
- cash cows – products, usually in the mature phase of the PRODUCT LIFE CYCLE, which have a low growth rate, so that they require little new investment to support them, and a high market share yielding a high profit return. Cash cows are the firm's primary source of internal funds for financing the introduction and development of new products;
- stars – products which have a high growth rate and need a considerable amount of new investment to keep up with market demand, and a high market share often yielding sufficient cash to make their operations self-financing. Star products are usually relatively new products in the growth phase of the product life cycle that it is hoped, with proper handling, will become the firm's cash cows of the future;
- problem children – products which have a high growth rate and so require heavy injections of capital to support them, and a low market share providing only a modest profit return if at all. Such products are a cash drain but they have ‘star’ potential if their market shares can be improved;
- dogs – products which have both a low growth rate and a low market share and which seemingly lack potential for future development. Such products are prime candidates for DIVESTMENT if a suitable buyer can be found.
The Boston matrix can be used in conjunction with the PRODUCT-MARKET MATRIX to assist the firm in planning for a suitable ‘balanced’ portfolio of mature, growth and newly-launched products so as to sustain the growth of the firm's profits over time. See COMPETITIVE ADVANTAGE.
Boston matrixsome COLLATERAL SECURITY to lenders, for example, property deeds, which lenders may retain in the event of borrowers failing to repay the loan. See DEBT, DEBTOR, FINANCIAL SYSTEM.
Boston matrixa matrix (developed by the Boston Consulting Group) for analysing product-development policy within a firm and the cashflow implications of product development. Fig. 16 shows the matrix, which is used to identify products that are cash generators and products that are cash users. One axis of the matrix measures market growth rate: because the faster the growth rate for a product the greater will be the capital investment required and cash used. The other axis measures market share: because the larger the market share the greater will be the profit earned and cash generated. The market growth/share matrix encompasses four extreme product types:
- star products - those that have a high growth rate (so that they tend to use cash) and a high market share (so that they tend to generate cash). Star products are usually new products in the growth phase of the PRODUCT LIFE CYCLE.
- problem child products - those that have a high growth rate (and so tend to use cash) and a low market share (so that they tend to generate little cash). Problem products are frequently a cash drain but they have potential if their market share can be improved.
- cash cow products - those that have a low growth rate and a high market share (so that they tend to generate a lot of cash). Cash cows are usually mature products in the later phases of the product life cycle.
- dog products - those that have a low growth rate and a low market share and tend to generate little cash. Dog products generally have little potential for future development.
It is important for any firm to have a balanced portfolio of mature ‘cash cow’ products, newer ‘stars’, etc., and to use the cash generated by cash cows to help the development of ‘problem children’ if its product development policy is to ensure the firm's long-term survival. See PRODUCT PERFORMANCE, DIVERSIFICATION, PRODUCT-MARKET MATRIX.