Last Updated on4 min read
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.
Table of Contents
What is a BCG 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)
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.
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
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.
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.
There are typically four different strategies to apply:
Increase market share by making further investments (for example, to maintain star status, or to turn a question mark into a star).
Maintain the status quo (do nothing).
Reduce the investment (enjoy positive cash flow and maximize profits from a star or a cash cow).
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.
Use of BCG in Digital Marketing
The BCG matrix will inform which products you should be selling through which methods and channels, which will influence your overall digital strategy. You can also use it to assess your digital channels themselves and understand, therefore, whether you are applying your focus effectively.
For example, Is paid search a cash cow or a dog? The value of this channel is often debated and so being able to substantiate where your channels fit on the BCG matrix is a great way to communicate how your channel strategy will be managed.
Moving SEO from a question mark to a star is a common goal of businesses that have poor natural search performance but understand the steps to make improvements.
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.
Go On, Tell Us What You Think!
Did we miss something? Come on! Tell us what you think about our article on What is a BCG matrix? Example, Advantages, Limitations in the comments section.
Geektonight team is putting a well-researched article. Geektonight is a vision to provide free and easy education to anyone on the Internet who wants to learn and grow in their career. We are working towards bringing the entire study routine of students on the Internet.
Want’s to learn and grow online. Message Now