pApeR p6 (ALsO ReLevANT TO pApeR p5)
Management Accounting –
Global contact details
continued from page 41.
n Malaysia Division
Lots 1.03b and 1.05,
Level 1, KPMG Tower,
Is it wise to milk a cash cow to feed your problem child? Steph Edwards Nutton
First Avenue, Bandar
Utama, 47800 Petaling
explains how to use the BCG matrix to analyse your company’s product portfolio.
Jaya, Selangor Darul Ehsan
T: +60 (0)3 7723 0230
F: +60 (0)3 7723 0231
All businesses need to focus on those
n Republic of
areas of activity that give them
THE BCG MATRIX
45-47 Pembroke Road,
competitive strength and the greatest
Ballsbridge, Dublin 4
opportunity for future growth. Portfolio
management is an approach that requires
T: +353 (0)1 6430400
them to visualise their operations as a
High growth, big share
High growth, small share
F: +353 (0)1 6430401
collection of assets that create income.
n Singapore office
This same principle applies whatever the
16 Raffles Quay, Unit 33-
03 B, Hong Leong Building,
type of asset they are considering. For
example, risk and return can be used to
assess an asset (investment) portfolio, a
T: +65 6535 6822
product portfolio or a customer portfolio.
F: +65 6534 3992
Managers must, therefore, make choices
n CIMA South Africa
on the shareholders’ behalf about their
Physical: Second Floor,
company’s portfolio that will provide both
Low growth, big share
Low growth, small share
South Block, Thrupps
Centre, 204 Oxford Road,
a sustainable competitive advantage and
a suitable financial contribution.
The dotted lines indicate the movement of cash for reinvestment.
Postal: PO Box 745
A sustainable competitive advantage
creates a profit, which converts to cash
flows as growth slows and the investment
T: +27 (0)11 268 2555
requirements diminish. This creates the high returns and high
in better profits and cash flows. The conclusion is that market
or: 0861 CIMASA/
business valuations that the shareholders require, which in turn
domination is essential for low costs and competitive success,
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make raising new capital easier and less expensive. The company
so a high relative market share is sought within the BCG matrix.
n Sri Lanka Division
then has the chance to repeat the process to reinvest in growth to It’s worth noting at this point that the model was developed at
356 Elvitigala Mawatha
pursue a competitive advantage with a new business or product.
about the same time as the concept of the learning curve when
It’s crucial that the company keeps its resources fully employed
“big is beautiful” was the popular business strategy.
in those areas that create the highest yields – actual or potential.
Most companies want fast-growing products in growing
T: + 94 (0)11 250 3880
It was the need to manage cash flow that provided the
markets. But these kinds of products nearly always require heavy
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impetus for the Boston Consulting Group (BCG) to design the
investment. The matrix assumes, therefore, that a high growth
n CIMA Zambia
matrix in 1970 that has since become one of the most widely
rate indicates extra demands on investment. Market growth is a
Physical: Plot 6053,
used portfolio analysis models. Companies use BCG analysis in
good indicator of a market’s attractiveness and potential – and
brand marketing, product management, portfolio and strategic
of its attractiveness to future competitors.
Postal: Box 30640
management to help them develop their various businesses or
Every company needs to have products that can generate
products. It involves rating products according to their relative
cash and every company needs to have products that require
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F: +260 (0)1 290 548
market share and market growth rate, and plotting them on
cash in order to develop, grow and eventually become cash
these axes on a scatter graph.
generators themselves. So it’s easy to understand why they
n CIMA Zimbabwe
Physical: Sixth Floor,
The BCG matrix assumes that, as a result of economies of
require a portfolio of products with different growth rates and
Michael House, 62 Nelson
scale, a product’s earnings will grow faster the bigger its market
market shares to maintain this cycle and remain successful. The
Mandela Avenue, Harare
Postal: PO Box 3831
share. This requires a comparison of your product’s market share
low-growth products should be generating the cash needed to
relative to that of its largest competitor. If your product has a
sustain the development of higher-growth products.
market share of 15 per cent and the largest competitor has a
Products with a big share of a market with slow (or negative)
T: +263 (0)4 708600
or: 250475 CIMA ZIM
share of 45 per cent, the ratio would be 1:3, implying that your
growth are called cash cows. Generally, they produce large
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product is in a relatively weak position. If the largest competitor
amounts of cash that exceed the reinvestment required to keep
had a share of five per cent, the ratio would be 3:1 implying your
the product’s market share steady. This excess should be invested
product’s relatively strong position, which may well be reflected
elsewhere in the portfolio. You should safeguard your cash cows,
December/January 2005/06 ManageMent
paper p6 (also relevant to paper p5)
Products with a big share of a high-growth market are called
stars. They often generate a profit but may not always generate
sufficient cash to sustain themselves. If a product is able to stay
in this position, it should eventually become a cash cow when
growth slows down and investment requirements diminish.
Eventually, therefore, this product should create money to
are the firm’s main cash
reinvest elsewhere in the portfolio. But a star must be invested in
generators. If protected, they
throughout its growth phase in order to do achieve this.
will continue to fund their own
The portfolio concept is simple to understand but less easy to
position in the market, pay for
apply. It’s often based on the idea that supserior profits depend
dividends, fund R&D and
largely on having a competitive advantage, and that growth can
subsidise higher-growth products.
be achieved only if the market itself is growing. A superior
Products with a small share of
market share often carries a competitive advantage, but this is
a market with slow (or negative)
not always the case. A competitive advantage could be based on
growth are called dogs. They often
advanced technology, quality, attention to specific customer
show an accounting profit, but all of
requirements, location or speed of response – many factors that
this must be reinvested to maintain
may or may not create overall market leadership. Companies
their place in the market, leaving no
may even choose to gain a competitive advantage via “focused”
extra cash for reinvestment elsewhere.
strategies that may involve contraction, not growth.
They do not, therefore, support the rest
A further problem with the portfolio concept is its idea of
of the portfolio. The BCG recommends
investing in market growth. The broad, large-scale market growth
that dogs are dropped, but the following
of the sixties and seventies is now a somewhat elusive goal.
questions must be answered before such action is taken:
Growth occurred then as a result of a general high demand as
n Does the product still make a positive contribution?
consumers became more aware of what was on offer to them.
n What impact would dropping the dog have on the rest of the
But today’s consumers are more sophisticated and growth is
portfolio? Does the product influence the overall image of
now more likely to be stimulated by substitution, both of
the company? Does it attract customers to the business?
products and of better ways of doing things.
n Are the dog’s competitors likely to leave its market? If they
Creating and exploiting growth opportunities
do, its market share will grow by default and it will become a
requires a lot of insight, market awareness and
cash cow. In the late nineties Reckitt & Colman disposed of
risk-taking. In many cases, growth is where
its mustard division and acquired a number of manufacturers
you make it – opportunities may in fact be
of industrial toiletries products – a market with low margins
lying dormant in areas widely considered
and no growth. But these acquisitions allowed it to build a
too mature to grow any further.
significant market share, so turning a dog into a cash cow.
The BCG matrix ranks only market
Products with a small share of a high-growth market are
share and market growth, implying
commonly known as problem children. They often require more
that profitability is the purpose of any
cash to be invested in them than they themselves will return.
enterprise. It overlooks other factors
If sufficient cash isn’t available, they often fail. The main feature
of industry attractiveness and
of a problem child is that a lot of money must be invested for it
competitive advantage. For
to gain a bigger market share. The risk is that this high-
example, it’s possible that
investment product could become a liability if it doesn’t move
particular products classed as
towards the cash cow position and become a market leader, so a
dogs by the matrix can make a
company must decide between investing large sums in the
profitable contribution without
product to build market share or dropping it before it absorbs
requiring any extra cash from
unnecessary amounts of money that it won’t be able to repay.
other products. Even though
ManageMent December/January 2006/07
paper p6 (also relevant to paper p5)
the market they are in may not be growing and
allowing its competitors to see its intentions.
their share of it may not be big, dogs can still create
Strategy is increasingly about making innovative
value in a portfolio, so it is not always a wise decision to
moves and outwitting the competition, which is one of
shoot them. Also, many companies have entire portfolios
the reasons why this particular model receives less and less
with no market leaders – ie, no cash cows or stars. In this
coverage in strategy teaching.
case it would be most unwise to disinvest in products
A further problem with the model is that it implies
that are profitable and require little support from
that a balanced portfolio can be achieved only by
elsewhere in the portfolio. Criticisms about the
having products in each of the four quadrants. The
simplicity of the BCG matrix have been addressed
focus is upon divesting money from the cash cows to
to some extent by General Electric’s business
fund the stars because sooner or later the cash cow
screen matrix, which assesses a range of factors along
will become the dog. Similarly, trying to move a
the axes of business strength and industry attractiveness.
problem child into a star position by once again using surplus
Another major pitfall of the BCG matrix is its suggestion
cash cow funds demonstrates a need to ensure that the
that cash cows should be milked in order to fund other
company has a number of products moving around the portfolio,
products in the portfolio. But research has shown that, of all the
balancing it out continually. The reality for most organisations is
products to be defended, it is the brand leader that needs the
that their cash cows are the most important products. All of the
most protection. It may be generating large cash flows, but it
others play a supporting role. It would be risky for any company
should not be milked so extensively as to leave it vulnerable to
to divest funds from a cash cow when those funds are needed to
attack by the competition.
extend its own life. It is important to recognise a dog, but it
The only real link between products identified by the BCG
would be foolish either to create one simply to balance the
matrix is that of the movement of cash. But other potential links
portfolio or to shoot one when it’s actually making a positive
do exist. The sale of one product may generate sales for another
contribution. Similarly, many organisations may panic if they
product via cross-selling (a simultaneous purchase) or sell-
don’t have a star product, but a healthy cash cow, together with
through (a later purchase). Many products in a portfolio may
a potential problem child, may well be sufficient.
share the same fixed costs, so shooting a dog might make other
The BCG matrix is a useful way to analyse a
products uneconomic. Dropping one product may, therefore,
product portfolio, but it is important to
have a negative impact upon the rest of the portfolio. The
recognise its limitations and not to
concept of real portfolio analysis should recognise the group of
follow its principles too rigidly.
products as a unit and the effects that they have on each other.
Product portfolio management
One criticism of any prescriptive model, particularly the BCG
requires a more detailed
matrix, is that the organisation using it becomes predictable,
understanding of the market,
the competitive position of a
product and its place in the
p6 Recommended reading
portfolio. Although it’s a
N Botten, Management Accounting – Business Strategy
handy tool, BCG analysis
Study System (2006 edition), CIMA Publishing, 2005.
should not be relied upon
R Kaplan and K Atkinson, Advanced Management
when you’re making
Accounting (third edition), Prentice Hall, 1998.
strategic decisions. FM
C Emmanuel and D Otley, Accounting for Management
Control (second edition), Chapman & Hall, 1999.
Steph Edwards Nutton is
J Gohnson and K Scholes, Exploring Corporate Strategy
a former CIMA examiner
(sixth edition), FT/Prentice Hall, 2002.
and lead marker for
R Lynch, Corporate Strategy (third edition), Pearson
ManageMent December/January 2006/07