Key Learning Outcomes

  • Learn about the Boston Matrix, one of the best-known business strategy models, developed by Bruce Henderson of Boston Consulting Group in 1970.
  • Benefit from breaking down your business into strategic business units to allow for more detailed analysis and better decision-making.
  • Use Henderson’s model to analyse your business to ensure you are investing capital and time wisely.
  • Identify the key areas of your business that you should focus on and develop.

Article

Also referred to as the “growth/share matrix”, the Boston Matrix was developed in 1970 by Bruce Henderson of the Boston Consulting Group. The tool was designed to assist companies to analyse their portfolio of businesses and decide what to do with them. While this tool was intended for use in large businesses and corporations, it can be effectively used in any business that has more than one product line, brand or division to assist in determining the future strategic direction of these business units.

The first step is to break your business down into distinct strategic business units (SBUs). So for example, a real estate agency may break their business down into residential sales, commercial sales, residential leasing, commercial leasing and holiday lettings; or a retail store selling athletes’ shoes may break their business down into men’s and women’s shoes, or sport category. Each SBU is then plotted on a matrix according to its relative market share and the potential growth in the market.

In order to complete the exercise, you must know your market share relative to your competitors. There are a number of learning articles in this section of the website that will assist with this. It is easier in some industries than others; however, the more accurate you can be, the more useful the tool will be in determining the value of each of your separate business units.

The relative market share is calculated by looking at the market share of your SBU in comparison to your competitors. So for example, if we looked at the real estate agency example and looked at their residential sales department, they may have a 20% market share. If their largest competitor holds 40%, the SBU has a relative market share of 50% or 0.5. If the company held a market leadership position at 40% and it was the rival holding 20%, then the relative market share would be 200% or 2.0. The growth rate of the market is then plotted on the other axis.[wlm_ismember]

Staying with the residential sales example, if the business operated in a very established area with no new development, this would represent low market growth; however, if the business was operating in an area where there was a large number of new developments being built there would be high market growth.

Boston Matrix Diagram

Stars

When a business unit holds a strong market position in a growing market, they are considered “stars”. These business units generate high volumes of revenue; however, they will usually also consume large amounts of resources. It is worthwhile and necessary to invest in these businesses to ensure market share is maintained. High growth markets are usually highly competitive, and without this level of focus and investment, these business units can become falling stars very quickly. Over time, as the market growth slows down, it is inevitable that these stars move into the cash cow quadrant so long as market share is maintained.

Cash cows

Business units that have a high share of a mature and low growth market are considered “cash cows”. They should generate more revenue than they consume. In Henderson’s model, the theory is that these business units should be milked of their cash and that the revenue is spent on building up the question marks, funding the stars, paying shareholders or developing new business opportunities. The risk with cash cows is that if the focus and attention on them diminishes too much or too quickly, they can turn into dogs overnight.

Question marks

These business units can be difficult to deal with as they operate in a high growth market but have a low share of the market. These units usually require significant investment in time and money in order to grow; however, they are not usually generating enough revenue to fund the cost. The art is being able to determine which of the question marks are your future stars and which are future dogs.

Dogs

These are the business units that have little going for them. They have low market share in a low growth or mature market. These business units often operate at a very low profit margin, not consuming much cash but likewise not generating much either. The theory suggests that these business units should be disposed of, potentially raising cash to be invested in question marks or stars. However, there are many experts that suggest there may be cash cows among the dogs if additional effort and resources were applied to them.

Theory into practice

As suggested this model was designed for large corporations and businesses. However, there is definitely merit in applying the theory to analyse your own business. Think about the different business units within your business and plot them on the matrix. Look for opportunities to turn your question marks into stars and to capitalise on the revenue generated by your cash cows. If you have some dogs, look at each one on its merit and start to analyse why. Often a small business is doing something “just because we have always done it”, only to find the product or service is no longer relevant. Or, it may be that the business unit has not been given enough attention over time and with some additional focus, market share could be gained. Don’t forget that if the market is low growth, you may find competitors have lost interest providing you with an opportunity to gain market share.[/wlm_ismember]

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