The BCG Matrix, also known as the Boston Consulting Group Matrix, is a tool that companies use to evaluate the potential growth and market share of their products or businesses.
It provides a framework for analyzing a company’s portfolio of products and businesses and deciding how resources should be allocated to maximize growth and profitability.
Definition
The Boston Consulting Group (BCG) growth-share matrix is a planning tool that uses graphical representations of a company’s products and services to rank them. It classifies a firm’s product and/or services into a two-by-two matrix, helping companies identify new growth opportunities and decide how to divide resources
Understanding the BCG Matrix
The BCG Matrix consists of four quadrants:
- Stars: High growth and high market share
- Cash Cows: Low growth and high market share
- Dogs: Low growth and low market share
- Question Marks: High growth and low market share
The BCG Matrix is based on two key factors
Market growth rate and market share. The market growth rate is a measure of the speed at which a market is expanding, while market share is a measure of a company’s relative position in the market.
Simply we can say that the market growth rate and market share, as these two concepts, provide valuable insights into a company’s position within a particular market. The market growth rate measures the speed at which a market is expanding, while market share refers to a company’s relative position in the market.
Stars are businesses or products that are growing quickly and have a high market share, making them the most valuable assets for a company. Cash Cows are businesses or products that are mature and generate significant profits, but have limited growth potential.
Dogs are businesses or products that have low market share and low growth potential, making them a drag on the company’s resources. Question Marks are businesses or products that are growing quickly, but have low market share, making them high-risk, high-reward investments.
Implementing the BCG Matrix in Practice
To use the BCG Matrix in practice, follow these steps:
- Identify all of the businesses and products in your portfolio.
- Determine the market growth rate and market share of each business or product.
- Plot each business or product on the BCG Matrix.
- Analyze each quadrant and decide how to allocate resources accordingly.
Stars
Stars require significant investment to continue their rapid growth and maintain their high market share. This investment may come in the form of additional marketing, research, and development, or other initiatives. In addition, companies should consider acquiring similar businesses or products to further expand their presence in the market.
Cash Cows
Cash Cows require minimal investment and generate significant profits, making them a valuable source of funding for other initiatives. Companies should focus on maintaining their market position and maximizing profits from these businesses or products.
Dogs
Dogs should be phased out or sold if possible. If they cannot be sold, they should be divested or downsized, as they are a drain on the company’s resources and offer little to no potential for growth.
Question Marks
Question Marks require significant investment to turn them into Stars, but they also offer the potential for significant growth. Companies should evaluate the potential growth of each Question Mark and make a decision on how much investment to allocate based on their growth potential and the company’s overall strategy.
How to Use the BCG Matrix
The BCG matrix can be a useful tool for businesses to make strategic decisions. But it is important to use it properly. Here are some steps to help you use the BCG matrix effectively:
- Identify Your Product Lines: The first step is to identify your product lines and determine which category they belong in based on market growth and market share.
- Assess Market Growth and Market Share: The next step is to assess the market growth and market share of each product line. We can gather this information from market research and industry reports.
- Make Strategic Decisions: Based on the results of your analysis, you can make strategic decisions about each product line. For example, you may choose to invest in a star SBU to help it grow, or divest a dog SBU to focus on more profitable product lines.
- Reassess Regularly: It is important to reassess your product lines regularly to ensure that your strategic decisions are still relevant and effective. The market can change quickly, and your product lines may move from one category to another.
Strategic Considerations of BCG Matrix
The four key strategies, Businesses can use to improve their portfolio health: Building, Holding, Harvesting, and Divestment.
Building
The building is a strategy aimed at improving market positions, even if it results in temporary damage to profitability. This strategy is ideal for moving “question marks” into the “star” category or for increasing the size of existing “stars.” But, it requires significant company resources to be successful.
Holding
Holding is a defensive strategy that focuses on preserving market positions, primarily for “cash cows.” This strategy helps to maintain the productivity of “cash cows” and protect them from new competitors.
Harvesting
Harvesting is a strategy designed to maximize the return on investment from a product. This involves reducing promotion and production costs to a minimum to extract as much cash flow as possible. This approach is suitable for “weakening” “cash cows,” “dogs,” and “question marks.”
Divestment
Divestment is a strategy aimed at liquidating businesses to generate cash. This strategy is employed on “question marks” and “dogs” that the company cannot finance into better growth positions. Divestment can be a win-win situation for both the seller and the buyer.