BCG MATRIX

What Is The BCG Matrix?

The BCG Matrix, otherwise known as the growth share matrix, is a portfolio management
framework that helps companies decide how to strategically manage a portfolio of products or
services.

What Are The Four Quadrants Of The BCG Matrix?

Dogs: These are products with low growth or market share.

Question marks or Problem Child: Products in high growth markets with low market share.

Stars: Products in high growth markets with high market share.

Cash cows: Products in low growth markets with high market share

How To Use The BCG Matrix Model

The Boston Consulting Group’s product portfolio matrix (BCG matrix) is designed to help
with long-term strategic planning, to help a business consider growth opportunities by
reviewing its portfolio of products to decide where to invest, to discontinue or develop
products. It’s also known as the Growth/Share Matrix.

The Matrix is divided into 4 quadrants. Each quadrant represents a relative position based on
market growth and relative market share.

The BCG is more relevant to larger organizations with multiple services and markets.
However, smaller businesses that have a broad range of products can use this to analyse their
products.

Often the 80:20 rule applies. In other words, eighty per cent of profits come from twenty per
cent of the products and therefore the BCG matrix provides a method to analyse your
portfolio and decisions.

The Four Quadrants Explained

Think of the BCG Matrix as mapping a portfolio of products or services.

Dog Products The recommended advice is to remove any dogs from your product portfolio as
they are a drain on resources. However, this can be an over-simplification since it’s possible to
generate ongoing revenue with little cost. For example, in the automotive sector, when a car line
ends, there is still an after-market i.e. the need for spare parts. After SAAB ceased trading and
producing new cars, a whole business emerged providing SAAB parts.

Question Mark Products- As the name suggests, these products often require significant
investment to push them into the star quadrant. The challenge is that a lot of investment may be
required to get a return. For example, Amazon (see the Amazon business model)developed the
Fire Phone but failed to gain traction in the smartphone market. Despite a serious amount of
investment, it flopped and failed to compete against the established players such as Apple and
Samsung.

Star Products- Can be the market leader though require ongoing investment to sustain. They
generate more ROI than other product categories.

Cash Cow Products- The simple rule here is to ‘Milk these products as much as possible
without killing the cow! Often mature, well-established products. The company Procter &
Gamble which manufactures Pampers nappies to Lynx deodorants has often been described as a
‘cash cow company’.

Advantages And Disadvantages Of The BCG Matrix

Benefits of the matrix:

● Easy to perform;
● Helps to understand the strategic positions of a business portfolio;
● It’s a good starting point prior to further analysis.

Growth-share analysis oversimplifies the factors involved in assessing the future of a business
portfolio. Some other limitations include:

● Business can only be classified to four quadrants. It can be confusing to

classify an SBU that falls right in the middle.
● It does not define what ‘market’ is. Businesses can be classified as cash
cows, while they are actually dogs, or vice versa.
● Does not include other external factors that may change the situation
completely.
● Market share and industry growth are not the only factors of profitability.
Besides, high market share does not necessarily mean high profits.
● It denies that synergies between different units exist. Dogs can be as
important as cash cows to businesses if it helps to achieve competitive
advantage for the rest of the company.

BCG Matrix Example

The BCG Model is based on products rather than services, however, it does apply to both. You
could use this if reviewing a range of products, especially before starting to develop new
products.

Looking at the British retailer, Marks & Spencer, they have a wide range of products and many
different lines. We can identify every element of the BCG matrix across their ranges:

● Stars Example: Lingerie. M&S was known as the place for ladies underwear
at a time when choice was limited. In a multi-channel environment, M&S
lingerie is still the UK’s market leader with high growth and high market share.
● Question Marks/Problem Child Example: Food. For years M&S refused to
consider food and today has over 400 Simply Food stores across the UK. Whilst
not a major supermarket, M&S Simply Food has a following which
demonstrates high growth and low market share.
● Cash Cows Example: Classic range. Low growth and high market share, the
M&S Classic range has strong supporters.
● Dogs Example: Autograph range. A premium-priced range of men’s and
women’s clothing, with low market share and low growth. Although placed in
 the dog category, the premium pricing means that it makes a financial
contribution to the company.

You can also apply the BCG model to areas other than your product strategy.

For example, we developed this matrix as an example of how a brand might evaluate its
investment in various marketing channels. The medium is different, but the strategy remains the
same- milk the cows, don’t waste money on the dogs, invest in the stars and give the question
marks some experimental funds to see if they can become stars.

How The BCG Matrix Fits With Other Forms Of Analysis

The BCG Matrix is a portfolio level of analysis. The two other types of analysis related to this are
the Ansoff Matrix and the product lifecycle.

The BCG Matrix, Ansoff Matrix and the Product Lifecycle.

How to Use the BCG Matrix in Practice?

To use this matrix, the SBUs of the company are plotted on a two- dimensional chart.

One dimension of the chart (vertical dimension or Y-axis) represents future market growth
(growth rate of SBU’s industry), and the other dimension (horizontal dimension or X-axis)
represents an SBU’s relative market share.

The growth rate is measured concerning the economy of the country. The growth rate of an
SBUs industry may be faster or slower than the economy’s growth rate.

As postulated by BCG Matrix, a favorable competitive environment exists in an industry

when the growth rate is faster in the industry. On the other hand, relative market share is ‘the
ratio of an SBU’s market share to the market, the share held by the largest rival company in
its industry.

If SBU X has a market share of 10 percent and its largest rival has a market share of 30
percent, SBU X’s relative market share is 10/30 or 0.3.

If an SBU is a market leader in its industry, it will have a relative market share greater than
1.0.

For example, if SBU Y has a market share of 40 percent and its largest rival has a market
share of 10 percent, then SBU Y’s relative market shareis40/l0 or 4 0.

When an SBU’s relative market share is greater than you can assume that it has a significant
cost advantage over its competitors.

In the Figure, you will find that the market growth rate is placed on the left-hand side (Y-
axis), and the relative market share is placed at the bottom (X-axis), below the horizontal line.

The chart is divided into 4 Quadrants.

 1. quadrant 1 shows the star SBUs,
2. quadrant 2 shows the ‘question mark’ SBUs,
3. quadrant 3 shows’ cash cow’ SBUs, and
4. quadrant 4 shows’ dogs’ SBUs.

Two pieces of information are required to plot and SBU in the matrix

● an estimate of the future rate of growth in the market and

● An estimate of the relative market share of the business unit.

Any business that is to the left of the dark violet is dominant in the market.

Any business to the right of the start point is nondominant.

Separate high growth from low growth markets common cut point is GDP + 3%. Markets
growing faster than these are considered high growth; markets going slower than these are
considered slow growth.

Both cut points are somewhat arbitrary.

For example, a business with its share of 1.01 may be the leader, but it is scarcely in a
commanding position compared to the next largest competitor.

Using the classic Boston Consulting Group (BCG) approach, a company classifies all its
SBUs according to the growth-share matrix, as shown in Figure.

On the vertical axis, the market growth rate provides a measure of market attractiveness.

On the horizontal axis, relative market share serves as a measure of company strength in the
market. The growth-share matrix defines 4 types of SBUs.

4 Strategic Business Units (SBUs) of BCG Matrix

Using the Boston Consulting Group (BCG) approach, a company classifies all its SBUs
according to the growth-share matrix.

On the vertical axis, the market growth rate provides a measure of market attractiveness. On
the horizontal axis, relative market share serves as a measure of company strength in the
market.

By dividing the growth-share matrix as indicated, 4 types of SBUs of BCG Matrix are;
 1. Stars,
2. Cash Cow,
3. Question Marks,
4. Dogs.

Stars: High Growth, High Share Businesses

Stars are high-growth, high-share businesses or products. They often need heavy investments
to finance their rapid growth. Eventually, their growth will slow down, and they will turn into
cash cows.

An SBU with high market growth and a high relative market share is considered as a star
business-unit. It is a profitable business. It has attractive long-term profit opportunities.

Stars are in the high growth rate and, therefore, highly competitive markets. They have the
potential to be the cash cows only if they can consolidate their competitive position.

They generate as well as consume revenue. Their net contribution to the kitty of the
organization is not very substantive.

Cash Cows: Low-Growth, High-Share Businesses

From the matrix, it is clear that these businesses operate in the industries which are in the
maturity stage and hold a very strong competitive position in their respective industry.

They generate far more cash than they consume. The surplus cash can be used to nurture
those businesses that are in the star quadrant or the question mark quadrant.

Cash cows are low-growth, high-share businesses or products. These established and
successful Strategic Business Units (SBUs) need less investment to hold its market share.

Thus, they produce a lot of the cash that the company uses to pay its bills and support other
Strategic Business Units (SBUs) that need investment.

A Strategic Business Unit (SBU) is considered a question mark when it has high market
growth and low market share.

It is relatively weak in competitive terms. A question mark business-unit is risky due to the
inherent uncertainty in a high-growth market and weak market share position.
However, such a unit is considered to have a future. It may offer-opportunities for long-term
profit. If more cash is poured down into this SBU and properly nurtured, it may become a star
Strategic Business Unit (SBU).

Question Marks: Low-Share Business Units in High-Growth Markets

Question marks are low-share business units in high-growth markets. They require a lot of
cash to hold their share, let alone increase it.

Management has to think hard about which question marks it should try to build into stars
and which should be phased out.

An SBU is considered as a cash cow when it has low market growth and high market share.

It is a highly profitable firm and generates a substantial amount of cash. Since this Strategic
Business Unit (SBU) has a lack of opportunity for future expansion, more cash should not be
injected.

Question marks lie in the high business growth rate segment with a weak competitive
position.

This means that the organization has to develop some competencies to make the best use of
high growth rates. To sustain these business resources, the organization has to be committed
to developing them in the select areas.

Dogs: Low-Growth, Low-Share Businesses

Dogs are low-growth, lo,w-share businesses, and products. They may generate enough cash
to maintain themselves but do not promise to be large sources of cash.

An SBU with low market growth and low market share is treated like a dog. It has a weak
competitive position in a low-growth industry. It cannot generate cash, and also, it has a dim
prospect.

The corporate head office has to decide about its future. It may be divested or liquidated or
turned around if there are sufficient reasons for its revival.

Dogs are in the low attractiveness, low competitiveness (low relative market share) quadrant.
They are not generating revenue, nor does it make sense to develop them as their competitive
position would remain weak. It is best to divest these businesses.

Understanding BCG Matrix

The chart below shows the ten circles in the growth-share matrix represent a company’s ten
current SBUs. The company has two stars, two cash cows, three question marks, and three
dogs.
The areas of the circles are proportional to the SBU’s dollar sales. This company is in fair
shape, although not in good shape. It wants to invest in the more promising question marks to
make them stars and maintain the stars to become cash cows as their markets mature.

Fortunately, it has two good-sized cash cows whose income helps finance the company’s
question marks, stars, and dogs. The company should take some decisive action concerning
its dogs and its question marks. The picture would be worse if the company had no stars, if it
had too many dogs, or if it had only one weak cash cow.8

Once it has classified its SBUs, the company must determine what role each will play in the
future.

One of the four strategies can be pursued for each SBU. The company can invest more in the
business unit to build its share. Or it can invest just enough to hold the SBU’s share at the
current level.

It can harvest the SBU, milking its short-term cash flow regardless of the long-term effect.
Finally, the company can divest the SBU by selling it or phasing it out and using the
resources elsewhere.9

As time passes, SBUs change their positions in the growth-share matrix. Each SBU has a life
cycle. Many SBUs start as question marks and move into the star category if they succeed.
They later become cash cows as market growth falls, then finally die off or turn into dogs
toward the end of their life cycle. The company needs to add new products and units
continuously so that some of them will become stars and, eventually, cash cows that will help
finance other SBUs.

BCG recommends several things based on the grid;

1. The stars should be nurtured with the surplus cash flows from the cash cows. The
long-term objective should be to consolidate the star SBU’s position.
2. The question marks should be provided supports from the surplus of the cash cows.
However, if a question mark SBU’s long-term prospect is uncertain, it should be
divested.
3. To make a diversified company’s business- portfolio more attractive, the corporate
head office should have an objective of turning the favored question mark SBUs into
stars.
4. The company should seriously think about getting rid of dog SBUs.
5. The corporate management should consider making the company an organization of a
balanced portfolio with enough number of stars, question marks, and cash cows.

Strategic Considerations of BCG Matrix

The portfolio matrix gives the company an idea about the health of its businesses. If there are
too many dogs or question marks or too few cash cows and starts, the company’s portfolio
can be called an imbalanced one.

After getting the portfolio’s picture, the company should then decide on each SBU’s
objective, strategy, and budget. With regards to this, it can pursue one of the following
strategies:

Building- The building strategy is designed to improve market positions in spite of possible
short-run damage to profitability. Building strategies are most appropriate when a firm wants
to move question marks into the star category. A building approach can also be used to
convert small stars into bigger stars. To ensure success, both of these building strategies
require significant commitments of company resources.

Holding- A holding strategy, on the other hand, is a defensive strategy designed to preserve
market positions. Holding is most commonly used to keep cash cows productive. Cash cows
are often vulnerable to newer competitors, and marketing programs need to promote new
versions and applications to maintain customer interest.

Harvesting- Harvesting strategies are aimed at making as much money off a product as
possible. The idea is to cut promotion and production costs to the bone and mine the product
for its cash flow. This approach focuses on extracting cash from a project at the expense of
the business’s long-run survival. Harvesting is a ruthless strategy that is best suited to
weakening cash cows, dogs, and some question marks.

Divestment- A strategy of divestment attempts to sell or liquidate businesses to generate cash

so it can be better used in other areas. Divestment is employed on question marks and dogs
that the firm cannot finance into better growth positions. Candidates for divestment include
businesses that have little room for cost savings and those that just break-even or operate at a
loss. Sometimes divestment can work to the advantage of both the seller and the buyer.

The market share/growth matrix implies a preference for high market growth and the need to
maintain a firm’s cash balance. Neither the theoretical nor the empirical work exists to
support such a preference conclusively.

Moreover, the feasibility of a strategy is dependent on more factors than simply share and
market growth. You should appreciate that SBUs change their positions in the growth-share
matrix with the elapse of time.

Like a product, SBUs have a life cycle starting with question marks, becoming stars, turning
to cash cows, and end up as dogs. That is why companies should examine the businesses’
future positions side by side with the current position analysis.

Limitations of BCG Matrix

BCG matrix has certain flaws. Because of these flaws, it should be used cautiously.

● BCG matrix is criticized as a very simplistic model. An ABU is affected not only by
market share and growth rate. Many other relevant factors, such as product
differentiation^niche market possibility, etc. affect the business operations of the SBU
BCG matrix and do not take into account all these factors.
● BCG matrix suggests a straight-forward Hnkage relative market Share’ and cost
savings. In reality, cost advantage may not accrue to an SBU simply due to high
maShaS Depending on the industry, an SBU with low simple, low-cost technology.
● Cash cow SBUs are supposed to generate substantial cash Sows because of their high
market share. It may not always be in some businesses; the capital investments needed
to remain competitive are so high that an SBU classified as a cash cow may find it
very difficult to yield substantial cash flows.

Resource Allocation with BCG Matrix

In a multi-business, different businesses have different resource requirements. Some

businesses are net resource generators, and some are resource consumers.
To construct a visual depiction of its various businesses, the organization uses the Portfolio
matrices.

The portfolio matrix plots the different businesses on two axes: one that shows the
attractiveness of the industry the business is into the strength of the business based on a
chosen indicator such as relative market share (in case of the BCG matrix as shown above
and Business Strengths in the nine-cell GE Matrix).

The decision-maker must assess the resource requirement of the different businesses plotted
on the matrix to allocate resources.

The portfolio has to be balanced in terms of those businesses that generate revenue and are
likely to generate revenue versus their resource consumption.

The use of the BCG Matrix lies in estimating which businesses are the net cash generators
and which are the net cash consumers. The businesses that are the cash consumers must also
exhibit the potential to be the leaders in their business with a highly competitive position so
that they can contribute enough cash to nurture future businesses in the future.

Strategic choices are concerned with resource allocation among businesses so that the ones
with potential are nurtured and the ones without are divested. The decisions to retain and
divest are top management decisions.

What should an ideal portfolio of business be like? An ideal business portfolio developed
using the GE nine-cell matrix with industry attractiveness and business strengths as the two
measures.

In reality, an organization may have a portfolio where there are too many profit producers,
which means no cash users (young businesses that in the future will be profit earners), or too
many losers (low possibility of growth/profits), or too many developers (demand too much
cash leading to unstable growth).

In such situations, the organization has to balance its portfolio. Those in a strong position and
are growing need cash to be harvested from those in a weak industry position.

You will notice that it is recommended to avoid being in those quadrants where the business
strength and industry attractiveness are low.

In the Figure below, businesses B, C, F, G, and H. A, D, E, and I could be winners in large

markets or have a very dominant position in smaller markets. Notice that businesses are
concentrated in the upper left-hand quadrant of the Figure.
An organization may not have an ideal portfolio. The Figure indicates the direction in which
the corporate strategies must be fashioned to shift the portfolio towards the left hand upper
two quadrants.

According to Hofer and Schendel (1977), the portfolio analysis should yield a statement of
the firm’s current portfolio position as well as a forecast of its future position under the
existing strategy.

To develop a portfolio analysis, an organization may follow the following steps;

● Choose the matrix to plot its position.

● Assess the relative attractiveness of industries that determines the long-run
performance of the business.
● Assess the organization’s competitive position in each industry. Can it derive benefits
from the industry?
● Assess the unique opportunity and threats the organization faces in each industry.
● Assess the unique resources of the organization to match the opportunities/threat. This
may alter the competitive position assessment.
● Plot the organization’s current portfolio.
● Plot a future performance portfolio.
● Assess what results in the business will attain with the current situation.
● Assess the gaps and make decisions to either change some businesses’ competitive
strategies or remove some businesses from the portfolio or add some businesses to the
portfolio or reduce the performance targets.
● Prune/strengthen/consolidate businesses as required.
Having allocated the resources, the organization must also ensure that the corporate parent
removes any problems that may have been caused or are likely to be caused by inadequacy or
shortfall in managerial skills, foresight, and capabilities by sharing of skills, the transference
of learning and meditation.

In multi-business companies, corporate parenting enables the headquarters to focus on core

competencies and tries to create value among various business units by establishing
relationships and a good fit between needs and opportunities of units and resources and
capabilities within the firm.

Incorporate parenting, and the corporate headquarters tries to achieve synergy among
business units by allocating resources, transferring critical skills and capabilities among
various units, and coordinating shared units’ activities to attain economies of scope.

Developing a corporate parenting strategy involves three analytical steps.

1. Assess the critical success factors, which are the basis of the unit’s competitive
advantage.
2. Are there any areas that need improvement? Can the parent contribute?
3. What is the fit between the parent’s capability and that of the unit’s? To what extent
can they complement?

The parent’s role is not to interfere but to develop. Therefore, corporate parenting requires
restraint, the exercise of mature leadership, and discretion retrenchment and combination.
Within each of these options are various sub-options.

Further, the organization can develop a functional strategy to support its options and sub-
options.

This explains how different organizations can follow widely differing strategies leading to
varying profitability in the same industry, other conditions being equal. There is no fixed
manner in which an organization decides upon strategies. There are only indicative
recommendations.

The process of strategic choice also entails the commitment of financial and other resources
through portfolio analysis and access to the corporate parent’s cumulative knowledge and
learning through corporate parenting.

Overall, as is the case with other strategic management aspects, a strategic choice is an
analytical process backed by managerial foresight, commitment, and vision.

Problems with BCG Matrix Approaches

The BCG and other formal methods revolutionized strategic planning. However, such
approaches have limitations. They can be difficult, time-consuming, and costly to implement.
Management may find it difficult to define SBUs and measure market share and growth.
In addition, these approaches focus on classifying current businesses but provide little advice
for future planning. Management must still rely on its own judgment to set each SBU’s
business objectives, determine what resources each will be given, and figure out which new
businesses should be added.

Formal planning approaches can also lead the company to place too much emphasis on
market-share growth or growth through entry into attractive new markets. Many companies
plunged into unrelated and new high-growth businesses using these approaches that they did
not know how to manage—with very bad results.

At the same time, these companies were often too quick to abandon, sell, or milk to death
their healthy mature businesses.

As a result, many companies that diversified too broadly in the past now are narrowing their
focus and getting back to the basics of serving one or a few industries that they know best.

Despite such problems, and although many companies have dropped formal matrix methods
in favor of more customized approaches that are better suited to their situations, most
companies remain firmly committed to strategic planning.

During the 1970s, many companies embraced high-level corporate strategy planning as a
kind of magical path to growth and profits. By the 1980s, however, such strategic planning
took a backseat to cost and efficiency concerns, as companies struggled to become more
competitive through improved quality, restructuring, downsizing, and reengineering.

Recently, strategic planning has made a strong comeback.

However, unlike former strategic-planning efforts, which rested mostly in senior managers’
hands, today’s strategic planning has been decentralized.

Companies are increasingly moving responsibility for strategic planning out of company
headquarters and placing it in the hands of cross-functional teams of line and staff managers
who are close to their markets. Some teams even include customers and suppliers in their
strategic-planning processes.

Such analysis is no cure-all for finding the best strategy.

But it can help management understand the company’s overall situation, see how each
business or product contributes, assign resources to its businesses, and orient the company for
future success. When used properly, strategic planning is just one important aspect of overall
strategic management, a way of thinking about how to manage a business.