GET TO KNOW THE STARS – VISIT BOSTON

23 04 2012

The Boston Matrix was once described as one of the most powerful tools in the history of strategy. It’s use peaked in the 1970s but it is still used today and, when applied in the right context, can be highly illuminating.

So, what is the Boston Matrix and how does it work?

The Boston Matrix was developed in the late 1960s by Bruce Henderson of the Boston Consulting Group (hence its name). It can be used by companies to analyse sections within their business in order to inform deciding what to do with them; spend resource on building them up, just keep them ticking over or possibly dump them. Information is gathered before being moulded into a snapshot of the business which can be used to plan future direction.

The first step is to break the company into ‘Strategic Business Units’ (or SBUs). An SBU is any unit with its own customers and competitors such as a subsidiary, a division, a product or a brand. The SBU is placed within the Matrix according to a combination of two things; (1) its strength in the market and (2) the attractiveness of that market.

On one axis the SBU’s relative market share is plotted and on the other the growth rate of the market itself. These variables were selected by Henderson for their implications on cash generation and consumption. He explained it thus; “an increase in relative market share should be accompanied by a cost advantage and, therefore, an increase in cash generation. A rapidly growing market demands investment in capacity, which means increased consumption of cash.

These principles are reflected in the analysis that follows the establishing of the SBU within the Matrix. It will occupy one of four quarters within a two by two box and be labelled as follows:

Cash Cows – SBUs with a high share of a mature market. As the name implies, Cash Cows should generate more cash than they consume. They should be ‘milked’ of their cash and fed as little as possible. The cash generated should be used to build up ‘Question Marks’ and fund existing ‘Stars,’ to support diversification into new opportunities and pay shareholders dividends.

Stars – SBUs which hold a strong position in a high-growth market. Like Cash Cows they generate lots of cash but unlike Cash Cows, because of their growth they consume a lot too. The Star should continue to be well fed in order that once the market slows it will be well placed to become a Cash Cow.

Dogs – SBUs which hold a weak position in a low or no growth market. They don’t consume much cash but then, neither do they generate much and are unlikely to be very profitable. Henderson suggested they are strong candidates for disposal, releasing cash that can feed stars or diversify. This is a contentious area as critics of the Boston Matrix argue dogs can be (and sometimes are) turned into cash cows. (Note; Dogs are also often referred to as ‘Pets’ – reflecting their status as pet project for company Director or owner).

Question Marks – SBUs which operate in an attractive, growing market but have a low share of that market. Also commonly referred to as ‘Problem Children,’ Question Marks are the most difficult SBUs to deal with. They consume cash to fund growth but generate little in return. They are question marks because they pose the challenge of figuring which are worth added investment to aid growth and become Stars and which are Dogs in the making.

The Boston Matrix can prove a useful analysis tool as long as its limitations are understood. Growth rate is only one of many features determining the attractiveness of a market and competitive advantage is not limited solely to relative share; something not recognised by the Matrix hence requiring the understanding of the user.

Because of its simplistic analysis, it is particularly harsh on Dogs which may well be supporting the success of other SBUs. The definition of their market might limit understanding.

The Boston Matrix is not the ‘all-seeing prism’ it was once thought to be, however it can provide a useful starting point for any discussions on the relative strength or otherwise of SBUs and their alignment and development (or otherwise) within a company.

© Jim Cowan, Cowan Global Limited, April 2012

Read more blogs by Jim Cowan

info@cowanglobal.net

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