Quick Overview of the BCG Matrix
For those people familiar with the BCG matrix, you should recall that the horizontal axis measures relative market share.
This is the more important of the two dimensions. A high or low relative market share makes the difference between a cash cow and a dog or a star and a question market – whereas a high or low market growth rate makes the difference between cash cow and a star (which are both good portfolios to have).
In the late 1960s and 1970s when the BCG matrix was developed and was popular in practical use, many large firms aspired to be the market leader.
Why relative market share was used in the BCG matrix?
The strategic thinking at that time was that large-scale production, enabled by being the market leader, led to cost leadership advantages through experience curve benefits.
Therefore the BCG matrix uses the metric of relative market share as a surrogate measure of competitive advantage. A firm with a large relative market share advantage would also have a cost and margin advantage that would deliver a high level of profitability. Its inclusion as the main dimension in the BCG matrix is based upon the following assumptions:
- A higher market share means that production is greater and these firms can build a cost leadership advantage primarily through the experience curve benefits
- The combination of both high sales (that is, relative market share) and a higher unit margin means that the firm has much greater profitability than any of its competitors
- Because of the structure of the original definition of a cash cow in the traditional BCG matrix, they can only ever be ONE cash cow in any industry
A different competitive era?
Keep in mind that the BCG matrix was constructed in an era where manufacturing was still a significant part of the economy – therefore the underlying focus on linking market share, experience curve benefits, and profitability.
However, much the economy is now service based, the role of other competitive advantages have become more important, and the speed of technology change has dramatically increased.