The profit centers of an organization develop what is known as a business portfolio is a part of

their corporate parenting policy. Whenever a company's divisions compete in several industries,

distinctive strategies are often developed for each business. The Boston Consulting Group (BCG)

Matrix is designed precisely to augment a multidivisional firm's efforts to formulate such

strategies.

The BCG Matrix graphically depicts the differences among different divisions of a firm in terms

of their relative market share position and the industry growth rate. The relative market share is

defined as the ratio of a division's own market share in a particular industry to that of the largest

rival firm in that industry. The BCG matrix is a four quadrant 2x2 matrix with the X-axis

representing the relative market share and the Y-axis as Industry growth rate. Different product

lines can take their position in any of the four quadrants of this matrix. The product lines are shown

with circles of varying diameter where the diameter represents the percentage revenue from the

product. The description of different quadrants follows:

Quadrant 1 (Question Marks) – The first quadrant is known as question marks because the firm is

yet to find a suitable strategy for these products. For these products, the relative market share is

low and the market growth potential is high. The firms incur high cost as large cash is being taken

up by these products with little cash generation. The firms need to decide on whether they should

strengthen these product line to improve cash generation or to hive them off or stop producing

them form the main business on the basis of existing resources and capabilities. If resources and

capabilities exist, the question marks can be converted into stars. But before that, these products

are cash eaters. Most of the businesses start with new products as question marks. For example,

any smart phone manufacturer’s new product will be a question mark in the industry. The relative

market share will be very low initially and the growth potential is high.
Quadrant 2 (Stars) – Stars are the product lines having high relative market share and having high

market growth potential. Here, the investment needs to be high but at the same time, cash

generation will also be higher. Starts are considered leaders in the market. It is necessary to focused

continuously on these product divisions in order to keep their market share intact. To do so,

investment and re-investments are necessary. Otherwise, there is a chance that they become cash

cows. Backward, forward, and horizontal integration; market penetration; product development;

market development; and joint ventures are appropriate strategies to consider for these product

divisions. For example, if we consider Nestle, the Stars are the Nescafe and Ceralac.

Quadrant 3 (Cash Cows) – Cash Cows are the product divisions which have high market share but

low market growth potential. The appropriate strategy to adopt for cash cows are maintenance and

harvesting. They provide excess of cash outflow and often need less cash consumption. Many of

the today’s cash cows were yesterday’s stars. These divisions are to be leveraged upon to ‘extract

the milk’ as long as possible. Product development or concentric diversification should be the

attractive strategies for strong Cash Cows. However, as a Cash Cow division becomes weaker, a

divestiture strategy becomes more appropriate. For the same Nestle, Maggie noodles and KitKat

are the best examples of cash cows.

Quadrant 4 (Dogs) – This is the fourth and final quadrant which represents products that are having

low market share and lower market growth potential. They are the most unattractive segments

where infusing cash does not necessarily imply improvement in market share or cash generation.

They are often taken for divestiture and hiving off for improving the cash flow. They are often

observed at their decline stage of the product life cycle and are perceived as cash traps. Nestle

Milky Bar, Nestea are the examples of Dogs.

The main advantage of BCG matrix is that it is cash flow centric and can be referred by the firms

to understand the position of different products based on investment vs. cash generation

perspective. However, it has some serious drawbacks. For example, it never considers internal

factors. Dimensions of categorizing are industry growth rate and relative market share are all

external factors. It is oriented towards financial resource management and there is a little focus on

intangible resources and capabilities. No emphasis is given on synergy and co-operative

arrangements. It considers possibilities that the Dogs can be in niche areas generating high profit

margins. Another major fallacy is that a market share based analysis does not necessarily imply

profit. Finally, it does not consider the fit with parent capability.