What is BCG matrix?

The Boston Consulting Group BCG Matrix is a portfolio management tool created in 1970 by Bruce Henderson. It is also referred to as the BCG growth-share matrix. 

The Boston Consulting Group BCG Matrix is a simple corporate planning tool, to assess a company’s position in terms of its product range.

The purpose of the BCG Matrix (or growth-share matrix) is to enable companies to ensure long-term revenues by balancing products requiring investment with products that should be managed for remaining profits.

The BCG matrix has two dimensions: relative market share (indicating profitability, through economies of scale) and market growth rate (indicating market attractiveness).

Four categories of BCG matrix 

The BCG growth-share matrix breaks down products into four categories:

• Question marks – High Growth, Low Market Share (uncertainty)

• Dogs – Low Growth, Low Market Share (less profitable)

• Stars – High Growth, High Market Share (high competition)

• Cash cows – Low Growth, High Market Share (most profitable)

1. Question Marks: High Growth, Low Market Share

Question marks are products that grow rapidly and as a result, consume large amounts of cash, but because they have low market shares, they don’t generate much cash.

Question marks need to be analysed carefully to determine if they are worth the investment required to grow market share. New assets enter the market as Question Marks.

Question mark examples: Mac Book Air of Apple, FUZE Healthy Infusions of Coca-Cola, tablet from Philips.

2. Stars : High Growth, High Market Share

Stars generate large sums of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate. So, the cash being spent and brought in approximately nets out.

If a star can maintain its large market share it will become a cash cow when the market growth rate declines.

Star examples: iPhone of Apple, Vitamin Water of Coca-Cola, LED lamp from Philips

3. Cash Cow: Low Growth, High Market Share

As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate – so they generate more cash than they consume.

These units should be ‘milked’ extracting the profits and investing as little as possible. They provide the cash required to turn question marks into market leaders.

Cash Cow examples: iPods of Apple, Coca-Cola Classic of Coca-Cola, Philips energy-saving lamp, Procter and Gamble which manufactures Pampers nappies to Lynx deodorants.

4. Dogs: Low Growth, Low Market Share

Dogs have a low market share and a low growth rate and neither generate nor consume a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.

Dog examples: New Coke of Coca-Cola, Plasma TV from Philips.

Four Strategies of BCG Matrix

After measuring market share and market growth, business units can be plotted in the matrix.

4 Strategies of BCG Matrix:

1. Build

Increase market share by making further investments (for example, to maintain star status, or to turn a question mark into a star).

2. Hold

Maintain the status quo (do nothing).

3. Harvest

Reduce the investment (enjoy positive cash flow and maximize profits from a star or a cash cow).

4. Divest

For example, get rid of the dogs, and use the capital you receive to invest in stars and question marks.

When to use BCG Matrix

The BCG matrix should be used as part of strategic portfolio management to manage cashflow (McDonald, 1999). The matrix enables you to determine which assets could produce future revenues and make investment decisions that ensure funds are allocated to the right assets.

The tool can reveal portfolio weaknesses that may threaten a company’s future cashflow. If a company is not developing many Question Marks, it needs to consider where income will come from in future.

Advantages of BCG Matrix

• It is simple to implement and easy to understand. Larger companies can use it for the seeking volume and experience effects. It predicts the future actions of a company. Hence, the company can decide its proper management strategy.

• Helpful for managers to evaluate balance in the firm’s current portfolio of Stars, Cash Cows, Question Marks, and Dogs

• The matrix indicates that the profit of the company is directly related to its market share. Therefore, a company can increase market share if it seems profitable.

• It has only four categories that make it in simple form to operate efficiently.

Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many other business units. But, BCG matrix is not free from limitations.

Limitations of BCG Matrix is discussed below:

• BCG matrix classifies businesses as low and high, but generally, businesses can be medium also. Thus, the true nature of the business may not be reflected.

• The distinction between high and low is highly subjective.

• The use of BCG analysis cannot help managers take into account synergies that may possibly exist among the various SBUs within the product portfolio.

• The market is not clearly defined in this model.

• The problems of getting data on the market share and market growth.

• The framework assumes that each business unit is independent of the others.