A key strategic objective for a company is proper allocation of its resources to specific business units and/or product lines in order to produce the greatest financial results and increase the overall strength of the firm in the marketplace. The Boston Consulting Group (BCG) Matrix is a chart that was created by Bruce Henderson for the Boston Consulting Group in 1969 to help companies analyze their products and the businesses they operate in order to complete this allocation. The chart is completed using a scatter graph to rank the business units or products based on their relative market shares (the market percentage accounted for by a specific entity based on units or revenue) and growth rates. A circle is used to designate each company product or service and the size or area of the circle represents the value of its sales. The chart or matrix is divided into four sections: cash cows, dogs (or pets), question marks (or problem child), and stars. Following is a description of each section within the matrix and a visual representation of where The Gap, Inc. falls in both the domestic and global market:
- Cash cows generate more cash than is needed to maintain the business and they are products or lines with high market share in a slow-growing market. They require the little investment in a mature market and are favored the highest amongst the other areas. In the domestic market, Gap could be considered a “cash cow” with the highest market share in the slow growing U.S. economy. This can also be supported with their large volumes of cash reserves.
- Dogs, or pets as they are also known, are somewhat the opposite of cash cows. They are also found in a slow moving industry, but they also have low market share. These lines or products usually just break even and barely generate enough cash to maintain market share. Dogs are usually advised to be sold as they decrease an otherwise profitable company’s return on assets ratio. However, companies who favor themselves on being socially responsible tend to hold onto these units or lines in order to avoid job losses. They should be reviewed carefully before any divestiture decisions are made as they could also provide assistance or synergies to other areas of the company. Some may consider Gap as a “dog” in the U.S. industry with a market share close to that of the next highest competitor.
- Question marks, or what’s also known as problem child, grow quickly but have a small market share. They require large amounts of cash but do not make a large profit in return and can be equated to a demanding teenager. Question marks have the ability to become stars and later cash cows, but if it does not become the market leader it will turn into a dog. A company needs to carefully evaluate question marks and determine if they are worth the investment. In the international market, Gap, Inc. can be viewed as a “question mark.” Their market share is low – ranking third among the top competitors – but the industry is growing quickly and at a rate higher than the domestic market.
- Stars are those products or business lines with a high market share in a speedy industry. The ideal is for a star to eventually become a cash cow. It is worthwhile for the company to focus resources on these units in order for it to remain a market leader. As the market slows, if their leadership role is sustained it will become a cash cow. Otherwise, it will be in the “dog” house. Gap has the potential to turn its operations in the international sector into a “star” if it continues to follow the trend of expanding internationally.
The natural cycle is for businesses to start as question marks, become stars, slow down as a cash cow, and retire as a dog. (http://en.wikipedia.org/wiki/Growth-share_matrix)