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Portfolio Analysis: Igniting a long-term spirit in a short-term world (XV). BCG matrix doesn´t comply with RICE standards.

“Now that ain’t working that’s the way you do it
You play the guitar on the MTV
Money for nothing and your chicks for free

Mark Knopfler/Gordon Sumner for Dire Straits, 1985.

Money for Nothing.
We selected this song on our last post, simply because the BCG Matrix application reflects the same message as this song. The Boston Consulting Group Market Share-Growth Matrix echoes an integrated memorandum of three variables: Axis X- Relative market share of each SBU; Axis Y- Growth (YoY) – it can be in terms of Sales, or Net Profits, or Free Cash-flows-; and the size of the bubble which in this case represents the annual revenues collected by each SBU.

These three variables are important from the point of view of a financial/accounting perspective. But we can´t reduce our decision-making when it comes to portfolio analysis, or how to pick the stars or the cash cows from our diversified SBUs only to this graph. As you already have learned, there is something more than just numbers. There is something more important than the motto “Show me the money”. There is something deeper than just money or cashflows or shareholder value. Money is a medium to create prosperity, of course, but the money used inadequately only creates misery of mindsets. Money utilized incorrectly only ignites disasters with human inventions and disproportionate disrupting technologies. Money in the hands of those who believe that money can be achieved easily, only generates inner destruction for those individuals and their families, or societies. The excess of money without knowing how to invest it in the correct priorities, or money generated “easily” (as the cash generated with cryptos) only comes to ignite the idea that easy money is valuable. But if this money is put in things which are not relevant, can destroy the artworks of God on this planet: as it has occurred with the nuclear armament industry, the drugs cartels and narcotraffic, the selfishness of societies reflected in the fragile middle-class, the excessive digitalization of our industries, the pollution of our environment, the current racial and aging discrimination, the lack of regulation to our inventions, the superfluous squandering and imprudent extravagance lifestyles of those who do not know how to use their money integrally and for the well being of societies.

According to our research, the “Money for nothing” song is about rock star excess and the easy life it brings compared with physical or intellectual real work. Mark Knopfler wrote it after overhearing some delivery men in a New York department store who complained about their jobs while watching MTV”(1). Basically, the workers were carrying stuff as microwaves, refrigerators, color TVs, kitchen appliances; meanwhile, they were also comparing their role with the MTV stars. These chaps were criticizing the fact that MTV stars boosted their economic position playing the guitar, the drums, becoming top models, getting chicks for free… For these delivery laborers, that was easy money. Money for nothing. And that is how the author of the song captured it. The phrase “I want my MTV” was strategically inserted to attract the directors of MTV who pushed it as an MTV advertisement. This song was number one in several countries and won a Grammy in the year 1987.

Analysis of the BCG Growth-Share Matrix. In our last post, we promised to provide some inferences and analysis from the last graph of the slides. I utilized Excel to plot the data. See the result of the graph (version 1.0) below:

BCG Explained. Graph Version 1.0.
  • This company has 7 business units (SBUs). One appeared to be the “Star”, and it has been identified as the greatest in Sales (more than 50% of revenues of the company are sitting there). The next 4 SBUs are plotted in the region called “Cash Cows”, which are the next SBUs: Nuts and Seeds, Soy Cereals-Soy byproducts, Mix Snacks Ziploc and Dehydrated Fruits. In the area of the “Dogs”, two SBUs are positioned: Confectionary (sweets) and Granolas (our product of analysis). The company doesn`t have SBUs identified as “Question Marks”.
  • Horizontal Axis: The line separating areas of high and low relative competitive position was set as 1.0. Anything to the right of this line, has a “dog” status. Any SBU to the left of this 1.0 line on the Axis X is a “cash cow”. Some specialists plot the relative market share on a logarithm scale, with the purpose to be consistent with a more proportionate graph, particularly when we have outlier SBUs.
  • Vertical Axis: The line separating the areas of high and low SBU growth rate was set up as 75% (the midpoint of the scale between 0 and 150%). The growth percentage of the SBU named as “Bulk” is so huge (150%) that we considered anything below half of it (75%) as low growth. Nevertheless, this graph must be normalized under a different scale, because the SBU bulk is an outlier, and is pushing our decision making incorrectly. So better here is where to learn statistics knowledge helps a lot.
  • Bubbles Size: Please remember, each volume of the bubbles represents the sales (from year 2020) for each SBU. If you sum up all the bubbles, you will get 1 million dollars revenues for this whole corporation composed of 7 SBUs.
  • For the sake of our example, we will proceed with the following application of the strategic choices analysis, but please, be aware that we must correct the graph under a different scale, and everything written below will change. So we will need to adjust and reboot for a new graph matrix called version 2.0.

BCG Growth-Share Matrix inferences.

Position in the quadrantRelative Market Share-Growth RelationshipStrategy Formulation (2)Recipe of Corporate Strategic Choices (2)SBUs of the company in the non-normalized graph (this graph needs a correction of scales)
StarHigh relative market share-High growthDominant competitive position in a growing industryGrowth: Add resources and build the business further based on market projectionsBulk
Cash CowHigh relative Market Share-Low GrowthDominant position in a low/growth industryStability or modes growth: Maintain benefits of strong cash flow while keeping resource investments at minimumSoy Cereals/Byproducts
Nuts and Seeds
Mix Snacks Ziploc
Dehydrated Fruits
DogLow relative market share-Low GrowthPoor competitive position in a low growth industryRetrenchment, Divest, Sell, Liquidate the business to eliminate resource drain.Confectionary
Question MarkLow relative market share-High GrowthPoor competitive position in a growing industryGrowth or Retrenchment: Apply resources to accomplish a positive turnaround or pull back if the outlook looks poor.
Inferences from the Version 1.0 Matrix that needs to be corrected, changing the scales.

Plotting under technological bias. We left the graph with the incorrect scale, not by mistake, but because we want to illustrate the mess that we can cause if we plot data incorrectly. We also explained the table above on purpose. We wanted to show you that all these tools or matrixes are unfortunate if the measures of the graph are chosen wrongly. Also, if the scales are not amended (we need to convert the scale into a new one, probably the logarithm or an exponential), then we will infer wrong conclusions as in the table above.  Plotting graphs without a human being supervising (let´s say using machine learning and AI) can offer us erroneous graphs and mistaken decision-making. Let´s see why?

If we use the BCG matrix without a normalized logarithm scale, we can mistakenly assume that “dog companies” have to be sold or liquidated. For the sake of the “Granola” SBU, this is the most recent or new SBU in the company portfolio; and once we normalize the scale of the Axis Y properly, the “Granola SBU” move up and appear drafted under the “Question mark” region.

The same happens with the readjustments of the positions in the normalized scale graph for the “Nuts and Seeds”, “Soy Cereals” and “Mix Snacks Ziploc”. These appear in the “Star” area.

For the sake of our mock analysis, we selected the variable Sales or revenues from the year 2019 to 2020. But before making any decision, we must open our range of years, and calculate a CAGR (Compounded Average Growth Rate) over an extended period, let´s say 5 or 10 years.

We also need to create at least two new matrixes, in which market growth (the axis Y) is calculated using net profits (or losses), and free-cashflows. That requires extensive market research about our competitors in each of the industries of each SBU. Sometimes this information is not available, or if public, it is hidden under the financial statements, and anything approximated can deviate our graph completely.

Finally, for the purpose of using this matrix well, we also need to consider other variables pro-rated, such as including the number of people working for each SBU (Impact of job creation) and the shock of leaving them unemployed in the case of divestment or liquidation.

Limitations of the BCG Growth-Share Matrix.
The key to success in this tool is assumed to be market share. Firms of market share high tend to have a cost leadership position based on economies of scale, among other cost reduction strategies. We have already discovered that low-cost pricing is not convenient in many societies, because the low-price strategy disrupts the artisans and other industries that require to elevate their price to make a living. Each country has certain standards of local pricing for products/services, and a low-cost price for new entrants only disorders the entrepreneurial middle-class alive, causing more poverty.

If the recipe is to get rid of “Dog” companies. And that is not always the best corporate strategy to pursue. Any company that falls into the “Dog” status can raise up under a good manager, and a good team. Moreover, some products under this category are required, regardless if these are draining cash-flows because there is a balance with the other companies that generate excess cash.

The BCG Matrix has been used to demonstrate that divestments or spin-offs are all right. Thousands, if not millions of employees are then fired, is this the way to help the Middle-Class to expand?

The use of highs and lows to divide the graph into quadrants is relative and up to the data specialist. Four categories are too simplistic.

The link between market share and profitability is questionable. Low-market share businesses can also be extremely profitable.

The growth rate is just “one” aspect of industry attractiveness. Market share is only one aspect of the overall competitive position.

Small business units are many times punished before the time is right. They are thrown out of the portfolio before they can jump to become question marks, and then stars.

Last but not least, the BCG matrix is not a RICE one. What is RICE? RICE is the acronym of Rest-Ice-Compress-Elevate. We will explain this meaning in our next post. To be continued…

Let me leave you with the song favored for you today: “You raise me up”, from Josh Groban, interpreted by the classical trio TRITONIA. We will discover why we chose it in our next post. See you on Friday with the General Electric Business Screen framework. Thank you for reading to me. Blessings for the rest of the week.

Sources of reference used today:


Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.

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