Limitations of the BCG matrix

 

Although the BCG matrix is widely used and widely discussed in many strategy and marketing textbooks, it does carry significant practical limitations.

One of the more obvious benefits of the BCG matrix is its level of simplicity – in that it only has two dimensions and four quadrants – and its easy ability to recall the four quadrants due to their descriptive names (for example, cash cows and dogs). However, there are numerous limitations and concerns with using the BCG matrix, as will be discussed below.

Limitations of the BCG matrix

The first concerned with the BCG matrix actually stems from its biggest advantage, which is its overall simplicity.It uses two surrogate measures for its dimensions – namely relative market share (a measure of competitive strength) and market growth rate (a measure of market attractiveness) – these two measures are too simplistic and narrow for the purpose of what they trying to measure and identify.

As you probably know, there are multiple factors that determine a firm’s competitive strength and while market share is one of those factors there are many others that also need to be considered – such as, brand equity, retailer relationships, logistics, financial support, product line, customer loyalty, and so on.

In some cases, relative market share could be a reasonable measure of competitive strength – probably in a low growth market (that is, for the cash cows and the dogs) – but is probably going to be far less effective in the high-growth markets, where the competitive situation (and therefore market shares) are far more dynamic.

The second limitation or concern in regards to the BCG matrix is what should be plotted on the matrix? The BCG matrix was initially developed for large conglomerate organizations that had multiple, and often unrelated, business units in their overall portfolio.

The original intention of the BCG matrix was to be able to plot a large firm’s business interests onto one simplified graph format and be able to compare on a side by side basis and then identify how the available resources of the overall organization should be allocated across the relative business units.

However, over time the BCG matrix has evolved through usage to plot individual brands and sometimes even individual products. There is a concern therefore, that the strategic outcomes of plotting individual products will not be appropriate. For instance, a firm with a large product range plotting individual products onto the BCG matrix will probably identify that they have a mix of cash cows and a lot of dogs. However, it is their overall product offering and extended product line that actually works in synergy to deliver profitability and strong brand equity. Therefore, care needs to be taken when plotting individual brands or products onto the matrix.

A third limitation or concern area for the BCG matrix is the definition of the market. How the firm decides to define the actual market will change the outcomes, as the different portfolios could be plotted in two different quadrants.

As an example, should Apple define its phone market as all mobile phones or smart phones only? Apple only competes in the smart phone sector, but most other mobile phone manufacturers compete in both smart and non-smart phone sub-markets. Therefore, what is the most appropriate approach? That is more of a strategic question, but the answer will influence where the portfolio sits in one of the four matrix quadrants.

In this case, the smart phone market has a higher growth rate and Apple has a higher market share. That means, Apple would classify their mobile phone business as a “star” – but if they consider the overall mobile market – it could be possible to classify their mobile phone business as a “dog”, because the market is more mature and they have less market share.

A fourth limitation of the BCG matrix uses some of the terminology of the four quadrants might be considered misleading. For example, the term “dog”tends to suggest something undesirable that should be divested from the firm’s business portfolio.

The reality is a “dog” is still likely to be quite profitable to the organization and maybe a significant player in a niche position. However, it is classified as a dog because it has limited growth potential and usually make significantly less money than the firm’s major business portfolios.

Likewise, the term “star” indicates a very highly profitable product or business portfolio. Again in reality, a star is a future cash cow only – that means, that in the future it will make a lot of money for the organization, but currently it needs significant investment support to maintain its position and as a result is usually a net-user of cash rather than a positive contributor.

bcg matrix black holeThe final major limitation of the BCG matrix occurs when a brand or portfolio is plotted almost equally between two quadrants or towards the center of the BCG matrix itself. Although not a technical term, I refer to this as the black hole of the BCG matrix – as highlighted in the diagram – if a brand/portfolios falls into the black area it is difficult to determine the best approach

Therefore, for a brand that is half a cash cow and half a dog – or worse a combination of all four quadrants – the matrix has less value as its strategic clarity and guidance is reduced.

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