BCG Portfolio Analysis

Relative Competitiveness

In using the BCG, a company locates each of its business units, major products, or product groups (referred to collectively as a business) in the matrix's four boxes with a circle. The size of the circle will vary in direct proportion to the relative importance of each business to the company—greater importance equals greater size. The proportion of the company's revenues or profits that a business generates generally determines its relative importance to the company.

When a business is rated as belonging to one of the four categories, Star, Cash Cow, Problem Child, or Dog, the model implies certain generic strategies as appropriate to consider. Note that the model's implied strategies are appropriate for consideration, not definite strategies to follow. Competing companies in similar strategic situations have been equally successful using diametrically opposed strategies. The strategic suggestions for each of the categories are as follow:

Figure 1 Generic BCG matrix

• Star. Continue to invest in and to build the business and its profits.
• Cash Cow. Minimize investment in building the business but seek to maximize short- and medium-term profits. Harvest those profits to invest in Stars and those Problem Children considered worthy of trying to build into Star businesses.
• Problem Child. Determine which Problem Children have substantial potential to become Stars and which do not. Invest in those with the best potential to become Stars and divest the rest.
• Dog. Divest the Dogs.

Business definitions can have substantial effects on analysis. For instance, one may define the analgesic market in many ways: the total analgesic market, legend analgesics (controlled substances), OTC analgesics, nonaspirin OTC analgesics, nonaspirin/nonacetaminophen analgesics, and so on. Business definitions affect projections of relative competitiveness and business growth rates, perceptions of largest competitors, and a host of other factors. A related important factor in services is the market's geographic extent. For medical clinics or hospitals, the geographic limit that administrators place on their markets, whether it is the clinic's neighborhood, city, county, or region (such as East Tennessee, northeastern United States), state, national, or international (for example, Mayo Clinic), will have a[Page 41] dramatic effect on market size, market growth rates, market share/relative competitiveness, and so on.

The company's situation can also have a serious effect on how a business is viewed. What may be a Problem Child for a large multinational company may be a Star for a smaller company, and what may be considered a Star by any company may pose a colossal problem for a small or medium-sized company if it does not have the resources to exploit the business's potential. This was what happened in the case of Dolby Labs in the UK (the inventors of Dolby Sound technology), which eventually had to sell itself to Sony to take full advantage of the Dolby technology's potential.

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