The BCG Matrix is one of the most popular methods of portfolio planning, and is based on the product life cycle. It was created for the Boston Consulting Group by Bruce Henderson in 1968. The BCG Matrix works on the principle that every company should have a portfolio of products containing both high-growth products requiring cash investment, and low-growth products that throw off excess cash. Together they ensure long-term business success.
BCG Matrix Overview
THE BCG Matrix is a simple grid with Market Growth on one axis, and Market Share on the other. All products in an organization’s portfolio are assessed individually against these axis and placed into the matrix against one of four different categories: cash cows, stars, dogs, and question marks. The company can then analyse the products which make up the portfolio with the basic idea being to invest in growth opportunities to benefit the organization.
When to Use
The BCG Matrix was concevied as a strategic tool to measure the profit potential from each business unit within an organization. By determining a strategy for each individual business unit of either hold, divest, harvest, or build, the portfolio mix of a business can be maintained in a profitable combination, long-term. The BCG Matrix can also be used to evaluate individual product lines or any other cash generating assets.
How to Use
Plot your business units or products into the matrix by assessing their relative market share and market growth values. This will result in your portfolio being arranged across four categories:
- Cash Cows: these are units with a high-market share in a show growing industry. They are profitable, generating good margins, and throwing off excess cash without the need for further investment. Cash Cows needed to be milked for profits but given minimum investment.
- Stars: these are units or products with a high-market share in a growth market. These stars have the potential to provide a high proportion of the business’ future profits, and obviously the market is expected to grow significantly. It is thus advisable for a business to invest in these business units/products to maintain market leadership and secure future profits.
- Dogs: these are units with a low market share in low-growth markets. If these units are not profitable you may wish to divest them or consider a red ocean strategy.
- Question Marks: these are units with a low market share in a high-growth market. Because of this their growth-rate going forward is unclear and further investigation is needed to decide what to do with these units.
One final note on plotting your BCG Matrix in practice. In the example below, the area of the circle in the diagram represents the value of sales for that unit. This is particularly useful as it allows us to visualize an organization’s strengths and weaknesses in terms of cash-flows.
As you can see in the example, the two “cash cow” business units (A and B) bring in significant revenues currently. Business units I and H are growing rapidly but not yet generating revenues anywhere near the size of our cash cows. Business units C & D are dogs and should be disposed of if they are not generating a profit as their markets are unlikely to grow. The question mark business units require further investigation to determine which ones to invest in and which ones to divest.
Most businesses, business units, or products will start as question marks. Those question marks which are successful (able to maintain their category leadership) turn into stars. Eventually as market growth slows they turn into cash cows. Towards the end of the product life cycle the cash cow becomes a dog.
It is important to realize that the BCG Matrix contains entries for the relative market share and relative market growth for different business units, and only implies profitability. This means, for example, that dogs can be profitable, and that stars could have high market share and high growth but be operating in an extremely low margin industry and therefore never be profitable.
The BCG Matrix is a method of examining a portfolio of products by relative market share and relative market growth. This results in the portfolio being broken down into stars, cash cows, dogs, and question marks. The information within the matrix can then be used to create the right portfolio mix. By this we mean that we can use the BCG Matrix to ensure the organization has enough stars to secure the future high-growth of the organization, that it has enough cash-cows to supply the funding for this future growth, and that it has enough question marks underway with the potential to be turned into future stars.