The BCG Matrix for Small Businesses: Its Value and Where It Misleads

Why portfolio thinking concerns small businesses too

A business with five services has a portfolio, even if it does not call it that. Some services bring in money reliably, others are growing, still others are running out. Without looking at this deliberately, you allocate time and attention by habit. The service that calls loudest for work gets it, not the one that deserves it most.

For this question, the Boston Consulting Group developed a tool in the late 1960s that still appears in almost every textbook. That raises one question: what is the BCG matrix worth for a small business, and where does it mislead? To answer it, we first clarify how the matrix is meant, then what research and history show about its effect, weigh two readings, and finally set out a version of portfolio thinking that fits a small business.

A tool that sorts complex questions into four boxes is only as good as the numbers used to fill the boxes.

The mental model: the growth-share matrix

The matrix places each business unit according to two characteristics. One axis shows market growth, meaning how fast the market in which the unit operates is growing. The other shows relative market share, meaning one’s own market share relative to that of the largest competitor. This produces four fields with vivid names, each with a recommendation, the so-called standard strategy.

Behind the boxes lies an economic rationale. BCG assumed that unit costs fall as cumulative experience grows, the so-called experience curve. Whoever has the largest market share has the most experience, the lowest costs, and therefore the highest cash inflow. Growing markets, by contrast, consume money because capacity and sales have to be built up. This leads to the core idea: today’s cash cows fund tomorrow’s stars, and the company needs a balance between units that bring in money and units that need money.

Morrison and Wensley (1991) traced its origins. The basic ideas came from consulting work for a paper manufacturer in the late 1960s, which dealt with balancing divisions with cash surpluses against divisions needing growth funding. The matrix bundled these considerations in an easy-to-understand form and thus, according to the authors, met a real need of executives who wanted to think strategically and communicate clearly with decentralized divisions.

What experiments show about the matrix’s effect

Whether a tool is popular says little about whether it leads to better decisions. Armstrong and Brodie (1994) tested this. Over five years, six experimenters ran experiments on 27 occasions in six countries with a total of 1,015 participants, who were asked, in the role of managers, to choose between two investments. One would have doubled the stake, the other would have destroyed half of it. The calculation was clear.

The result is clear: information about the matrix increased the likelihood of choosing the clearly less profitable project. Of the participants who had been introduced to the matrix, 64 percent chose the unprofitable investment; of those who actually used it in their analysis, as many as 87 percent. The obvious explanation is that the boxes divert attention from the actual question. If you are pondering whether a unit is a star or a dog, you stop calculating what it earns.

The study has limits. These were laboratory decisions with simplified cases, made by participants in the role of managers. Real decisions are less clear-cut, and experienced executives may be less easily led. Nevertheless, the finding shows a pattern that is plausible beyond the laboratory: a vivid scheme can crowd out a simple calculation.

Two readings: thinking aid or thinking trap

The first reading defends the matrix. Morrison and Wensley (1991) consider much academic criticism misplaced because it treats the matrix as if it were a comprehensive theory of markets and company performance. It never was. Gomes and Knowles (1997) point in the same direction: in their assessment, managers never used portfolio methods primarily as decision tools, but as a way to illustrate situations and talk about them. In this role, the matrix is useful because it makes visible a question that gets lost in daily business.

The second reading sees the danger in use. Morrison and Wensley themselves speak of the matrix being able to “box in” strategic discussions instead of organizing them, and find indications that teaching in particular often omits the limitations. The experiments by Armstrong and Brodie show where this leads: the labels take on a life of their own, and the standard strategy is carried out without anyone checking whether it holds in the individual case.

I consider both readings correct, and they do not contradict each other. As a basis for discussion that raises a question, the matrix is useful. As a decision rule that delivers an answer, it is dangerous. For a small business, there is the added problem that the axes themselves hardly fit, as the next section shows.

Where the matrix misleads small businesses

The first point is practical. A relative market share assumes you know the revenue of the largest competitor. A trades business or a law practice can at best estimate it. The second point concerns the experience curve. It holds in series production; in the service business, costs fall more through fixed processes than through volume alone.

The third point is the most important. The matrix thinks in cash flows. In most small businesses, however, the bottleneck is not money but specialists’ working time. Then what counts is contribution margin per hour worked, as described in the guide contribution margin per order. The fourth point concerns the dogs. A service with little growth and low returns can retain customers who buy a lot elsewhere. The guide pruning your service portfolio calls this a knock-on effect and requires it to be backed by numbers before a weak service may stay.

Portfolio thinking for small businesses: the two-question grid

What remains is the core idea of balance. A business needs services that carry it today and services meant to carry it tomorrow. The two-question grid translates this idea using numbers a small business actually has. Instead of market growth, it uses the demand trend for the service among your own customers and inquiries over the last two years. Instead of market share, it uses contribution margin per hour worked compared with the business average.

1. List services

   Take the five to eight services that together bring in most of the revenue.

2. Measure demand

   Compare inquiries and orders per service with those two years ago. Add what customers and suppliers say about the trend.

3. Measure returns

   Calculate contribution margin per hour worked for each service and compare it with the average.

4. Place and justify

   Place each service in one of four fields and write one sentence on why. The sentence matters more than the field.

5. Allocate time

   Decide which service will get more working time, training, and sales effort next year, and which less.

The grid deliberately delivers questions instead of standard strategies. In doing so, it takes up the lesson from the experiments by Armstrong and Brodie: placement should lead to calculation, not take its place. For services with rising demand but still weak returns, it is worth asking whether your niche is large enough, as the analysis specialize or diversify asks. If you want to build an entirely new service, test it on a small scale first; more on this in the guide testing a new service.

Transfer: what follows beyond the individual case

The history of the BCG matrix shows a general pattern in management teaching. A tool arises from a concrete situation, is simplified, spreads because it is vivid, and is then applied in situations it was never designed for. That is no reason to do without tools. It is a reason to ask of every tool what assumptions it makes and whether they hold in your own business.

For the annual look at your offering, this means: the portfolio question belongs in the annual strategy check, but with your own numbers. The case study Lego 2004 shows what can happen when a company opens new fields for years without checking whether the old ones can carry them.

Conclusion: what the BCG matrix is worth

What is the BCG matrix worth for a small business, and where does it mislead? Its core idea is worth keeping: a business should decide deliberately which services carry it today and which should carry it tomorrow, and allocate its scarce resources accordingly. What misleads are the axes, which are hardly measurable for small businesses, the assumption that money is the bottleneck, and above all the standard strategies, which in experiments demonstrably led to worse decisions. If you use the matrix, fill it with your own numbers and treat it as a prompt to calculate.

1. This week: List your five to eight most important services with inquiries today and two years ago.
2. Next week: Add contribution margin per hour worked and place each service with a justifying sentence.
3. In a month: Decide which service gets more time next year and which less.

Four boxes do not replace a calculation. But they can remind you that you should do one.