Underlying Assumptions of the Model

The BCG matrix has been developed around two essential underlying assumptions. One related to the presence of an experience effect, one related to the product's lifecycle.
  • Because of the presence of an experience effect, a high relative market share implies a competitive advantage in terms of costs compared to the competition and vice versa.
    As a consequence of this first hypothesis, the most powerful competitor will have a competitive advantage in terms of profitability and thus generate more cash-flows.

  • Being positioned on a growing market implies an increased need for liquid funds to finance this growth and vice versa.
    Here we refer to the Product Lifecycle concept to point up the fact that a successful company should allocate its activities accordingly to the Lifecycle phase to maintain an equilibrium between growth potential and profitability potential.

Limitations of the Model

The main advantage of the method developed by the BCG is without doubt the strength of the theoretical development that consists of establishing a link between the strategic positioning and the financial performance.

The starting assumptions may be restrictive but if they're verified they can lead to a precise diagnostic an valuable recommendations.

Nevertheless, this model has some limitations:
  • The consequence of the implicit assumption on the relationship between relative market share and profitability is that this model can only be used where there an experience effect can be observed. Thus limiting the use of the model to Volume Industries.
    Not all product-markets of a company's portfolio may have this experience effect.

  • The model is only based on internal competitive advantages like costs. An external competitive advantage is not considered.
    A "Question Mark" with low relative market share could still be profitable if it has distinctive qualities (differentiation - external competitive advantage) for which customers are willing to pay a supplement that compensates the cost handicap.

  • In spite of the simplicity and the objective measures, some measuring difficulties can appear. Which competitor to compare to? How do you determine the Market Growth? Based on the past or previsions? etc.

  • As with most models, the BCG Product Portfolio Matrix only offers very general recommendations and orientations

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