The BCG Matrix

In Marketing, Strategy on 06/11/2009 by iknowmodels Tagged: Market growth, Market

share, Product portfolio, The BCG Matrix

Definition

The BCG (Boston Consulting Group) matrix is a method developed from product life
cycle for product portfolio planning. It takes account of the inter-relation between market
growth and market share (van Assen et al., 2008) to ensure long-term value creation.

It consists of two dimensions: market share and market growth. Based on such
dimension, there are four categories: stars, cash cows, question marks and dogs.

Purpose

• To identify and assess the priorities for growth in a product portfolio.

• To help to understand a frequently made strategy mistake.

When

The BCG matrix is usually used as a strategic tool to identify the profit and growth
potential of business element cores within an organisation (Dalton and Kesner 1985;
Seeger 1984). The initial intent of the BCG matrix was to evaluate business units, but the
same evaluation can be made for product lines or any other cash-generating entities.

How

There are three stages to conduct BCG matrix analysis:

Stage 1 – determine a measure or rating of expected market growth for each

product/service in the portfolio.

Stage 2 – apply a percentage of the rating to each product to define the relevant market
share.

Stage 3 – plot each of the products in the portfolio into the two dimensional four
quadrants: relative market share and relative rate of market growth.
The four categories are:

Stars (high growth, high market share) – Stars generate large amounts of cash because of
their strong relative market share, but also consume large amounts of cash because of
their high growth rate; therefore the cash in each direction approximately nets out. If a
star can maintain its large market share, it will become a cash cow when the market
growth rate declines. The portfolio of a diversified company always should have stars
that will become the next cash cows and ensure future cash generation.

Cash cows (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, and thus generate
more cash than they consume. Such business units should be ‘milked’, extracting the
profits and investing as little cash as possible. Cash cows provide the cash required to
turn question marks into market leaders, to cover the administrative costs of the
company, to fund research and development, to service the corporate debt, and to pay
dividends to shareholders. Because the cash cow generates a relatively stable cash flow,
its value can be determined with reasonable accuracy by calculating the present value of
its cash stream using a discounted cash flow analysis.

Dogs (low growth, low market share) – Dogs have low market share and a low growth
rate and thus 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.

Question marks (high growth, low market share) – Question marks are growing rapidly
and thus consume large amounts of cash, but because they have low market shares they
do not generate much cash. The result is large net cash consumption. A question mark
(also known as a ‘problem child’) has the potential to gain market share and become a
star, and eventually a cash cow when the market growth slows. If the question mark does
not succeed in becoming the market leader, then after perhaps years of cash consumption
it will degenerate into a dog when the market growth declines. Question marks must be
analysed carefully in order to determine whether they are worth the investment required
to grow market share.

Tips

• Analyse current business portfolio periodically to decide which products require

investment.
• Pay attention to the market conditions, and analyse competitive environment.
• Many critics make the important point that throwing money at a product a product
group does not automatically make it growth or become more profitable (Hall and
Saias 1980; Smith 2002).