Guarding Against Disruption
Through this article, we are exploring two of the most popular product management frameworks: the BCG Matrix and the GE McKinsey Matrix. Both frameworks are widely applied in corporate strategy, and enable organizations to manage their product portfolios more effectively.
About the Matrices
The BCG Matrix and the GE McKinsey Matrix are strategy frameworks that help organizations better manage their product portfolio, business units, and investment strategies.
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The BCG Matrix, also known as the Growth Share Matrix, categorizes products into four categories: Stars, Cash Cows, Question Marks, and Dogs. The categories are organized by growth potential and market share. For success, organizations should invest profits from Cash Cows into Question Marks, transforming them into Stars. Over time, Stars mature into Cash Cows. This loop should be continued in perpetuity, delivering consistent, long-term growth.Â
The GE McKinsey Matrix enables organizations to prioritize investments across its portfolio. Business units are categorized according to the competitive strength of that business unit and the attractiveness of the industry. Highly competitive business units in attractive industries should be prioritized for investment, whereas weaker business units in unattractive industries should be divested from. Business units that fall in the middle should be protected.
What Is the Growth Share Matrix?
The growth share matrix was created in 1968 by BCG’s founder, Bruce Henderson. It was published in one of BCG’s short, provocative essays, called Perspectives. At the height of its success, the growth share matrix was used by about half of all Fortune 500 companies; today, it is still central in business school teachings on business strategy.
The growth share matrix is, put simply, a portfolio management framework that helps companies decide how to prioritize their different businesses. It is a table, split into four quadrants, each with its own unique symbol that represents a certain degree of profitability: question marks, stars, pets (often represented by a dog), and cash cows. By assigning each business to one of these four categories, executives could then decide where to focus their resources and capital to generate the most value, as well as where to cut their losses.
How Does the Growth Share Matrix Work?
The growth share matrix was built on the logic that market leadership results in sustainable superior returns. Ultimately, the market leader obtains a self-reinforcing cost advantage that competitors find difficult to replicate. These high growth rates then signal which markets have the most growth potential.
The matrix reveals two factors that companies should consider when deciding where to invest—company competitiveness, and market attractiveness—with relative market share and growth rate as the underlying drivers of these factors.
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Each of the four quadrants represents a specific combination of relative market share, and growth:
- Low Growth, High Share. Companies should milk these “cash cows” for cash to reinvest.
- High Growth, High Share. Companies should significantly invest in these “stars” as they have high future potential.
- High Growth, Low Share. Companies should invest in or discard these “question marks,” depending on their chances of becoming stars.
- Low Share, Low Growth. Companies should liquidate, divest, or reposition these “pets.”
As can be seen, product value depends entirely on whether or not a company is able to obtain a leading share of its market before growth slows. All products will eventually become either cash cows or pets. Pets are unnecessary; they are evidence of failure to either obtain a leadership position or to get out and cut the losses.
Enduring Ideas: The GE–McKinsey nine-box matrix
With the rise of multi-business enterprises in the 20th century, companies began to struggle with managing a number of business units profitably. In response, management thinkers developed frameworks to address this new complexity. One that arose in the early 1970s was the GE–McKinsey nine-box framework, following on the heels of the Boston Consulting Group’s well-known growth share matrix.
The nine-box matrix offers a systematic approach for the decentralized corporation to determine where best to invest its cash. Rather than rely on each business unit’s projections of its future prospects, the company can judge a unit by two factors that will determine whether it’s going to do well in the future: the attractiveness of the relevant industry and the unit’s competitive strength within that industry.
Placement of business units within the matrix provides an analytic map for managing them. With units above the diagonal, a company may pursue strategies of investment and growth; those along the diagonal may be candidates for selective investment; those below the diagonal might be best sold, liquidated, or run purely for cash. Sorting units into these three categories is an essential starting point for the analysis, but judgment is required to weigh the trade-offs involved. For example, a strong unit in a weak industry is in a very different situation than a weak unit in a highly attractive industry.
The nine-box matrix is the forerunner of a number of portfolio models, including MACS and the portfolio of initiatives. The criteria for assessing industry attractiveness and competitive strength have grown more sophisticated over the years. To this day, most large companies with a formal approach to modelling their businesses refer to the nine-box matrix or some descendant of it.
