BCG Matrix

Portfolio Management based on Market Share and Market Growth. Explanation of BCG Matrix. ('70)

The BCG Matrix method is the most well-known portfolio management tool. It is based on product life cycle theory. It was developed in the early 70s by the Boston Consulting Group. The BCG Matrix can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. The Boston Consulting Group Matrix has 2 dimensions: market share and market growth. The basic idea behind it is: if a product has a bigger market share, or if the product's market grows faster, it is better for the company.

 

The BCG matrixThe four segments of the BCG Matrix

Placing products in the BCG matrix provides 4 categories in a portfolio of a company:

  • Stars (high growth, high market share)
    • Stars are using large amounts of cash. Stars are leaders in the business. Therefore they should also generate large amounts of cash.
    • Stars are frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold your market share in Stars, because the rewards will be Cash Cows if market share is kept.
  • Cash Cows (low growth, high market share)
    • Profits and cash generation should be high. Because of the low growth, investments which are needed should be low.
    • Cash Cows are often the stars of yesterday and they are the foundation of a company.
  • Dogs (low growth, low market share)
    • Avoid and minimize the number of Dogs in a company.
    • Watch out for expensive ‘rescue plans’.
    • Dogs must deliver cash, otherwise they must be liquidated.
  • Question Marks (high growth, low market share)
    • Question Marks have the worst cash characteristics of all, because they have high cash demands and generate low returns, because of their low market share.
    • If the market share remains unchanged, Question Marks will simply absorb great amounts of cash.
    • Either invest heavily, or sell off, or invest nothing and generate any cash that you can. Increase market share or deliver cash.

the BCG Matrix and one size fits all strategies

The BCG Matrix method can help to understand a frequently made strategy mistake: having a one size fits all strategy approach, such as a generic growth target (9 percent per year) or a generic return on capital of say 9,5% for an entire corporation.

In such a scenario:

  • Cash Cows Business Units will reach their profit target easily. Their management have an easy job. The executives are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash amounts in their mature businesses.
  • Dogs Business Units are fighting an impossible battle and, even worse, now and then investments are made. These are hopeless attempts to "turn the business around".
  • As a result all Question Marks and Stars receive only mediocre investment funds. In this way they can never become Cash Cows. These inadequate invested sums of money are a waste of money. Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become Cash Cows (or Stars), or otherwise companies are advised to disinvest. They can then try to get any possible cash from the Question Marks that were not selected.

Other uses and benefits of the BCG Matrix

  • If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price that is low enough to get early market share leadership. Once it becomes a star, it is destined to be profitable.
  • BCG model is helpful for managers to evaluate balance in the firm’s current portfolio of Stars, Cash Cows, Question Marks and Dogs.
  • BCG method is applicable to large companies that seek volume and experience effects.
  • The model is simple and easy to understand.
  • It provides a base for management to decide and prepare for future actions.

Limitations of the BCG Matrix

Some limitations of the Boston Consulting Group Matrix include:

  • It neglects the effects of synergy between business units.

  • High market share is not the only success factor.

  • Market growth is not the only indicator for attractiveness of a market.

  • Sometimes Dogs can earn even more cash as Cash Cows.

  • The problems of getting data on the market share and market growth.

  • There is no clear definition of what constitutes a "market".

  • A high market share does not necessarily lead to profitability all the time.

  • The model uses only two dimensions – market share and growth rate. This may tempt management to emphasize a particular product, or to divest prematurely.

  • A business with a low market share can be profitable too.

  • The model neglects small competitors that have fast growing market shares.

Book: Carl W. Stern, George Stalk - Perspectives on Strategy from The Boston Consulting Group -

 

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Recent User Comments
arya - Indonesia Not useful for Competitive Analysis "i am not sure if this matrix works to create a competition map, it does not work like swot chart. It's merely plotting the products you have within your company for evaluation purpose... It will depend on your analysis though where you'll take it forward but for most cases it's totally junk for competition mapping."    0
Shridesh - India Stages may be Different "It's not alway mandatory that a product goes through all of these four stages; there are many examples where a product comes up for launching and after that goes away as a 'Dog'."    3
Salahudin Bhutto - Pakistan BCG Graph "Basically the BCG-share matrix displays the various businesses on a graph of the market growth rate vs. the market share relative to competitors."    1
Manish Sijaria - India Superb explanation of PLC and BCG Matrix "This explanation of BCG matrix is superb, in terms of penetrating the market as start ups. Clearly layouts the structure of SBU's and their expectations in the business product life cycle. "Very Good"!"    29
Rob - Netherlands 10% limit in BCG Matrix "Generally in the BCG Matrix, when the market growth is more than 10%, it would be considered a star. Can anyone explain why they have chosen the (fairly high) limit of 10%??"    42
Best User Comments
Nyle - USA Lack of Question Marks? "If a business has no Question Marks (or just one), what should it do?"    30
John T. - Greece BCG Matrix is useless! "Totally useless (as a contemporary business tool)."    15
Wallace G. - USA - NY The BCG Matrix: Reloaded "(How) could the the BCG Matrix be adapted to include synergy effects between business units?"    15
Manoj Sinha - India BCG Matrix "Use it for a basic analysis.But other metrics are required if a deeper insight in business is needed."    14
Thijs - Netherlands Cola & Pepsi "The matrix is misrepresenting in some cases. Example: Coca cola and Pepsi. Coca cola is market LEADER, as a result of which the relative market share of Pepsi is always smaller than 1. When the relative market share is smaller than 1, you will be at the right-hand side of the matrix. In that case, Pepsi will automatically be a Question mark or a dog. Everyone understands that Pepsi is a cash cow or star!"    13
Marty - Korea Real business "One important thing in business would be how to allocate and manage limited resource to achieve maximum results. In that sense, the matrix is a good tool to see where is the business that a company should focus on to grow. But one thing that we need to consider using the matrix is that real business is not simple to be explained by a 2x2 matrix. For example, a business can make more money and be more profitable than other businessses in a company's portfolio even if the market growth and the relative market share of the business is low."    10

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Compare with the BCG Matrix: McKinsey Matrix  |  ADL Matrix  |  Product/Market Grid  |  Stage-Gate  |  Three Dimensional Business Definition  |  Relative Value of Growth  |  Rule of Three  |  Core Competence  |  Bass Diffusion Model  |  STRATPORT  |  Profit Pools  |  Product Life Cycle  |  Blue Ocean Strategy  |  Four Trajectories of Industry Change  |  Positioning  |  Strategic Types

 

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Copyright 2009 12manage - The Executive Fast Track. V10.3 - Last updated: 7/4/2009. All names tm by their owners.


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  ● RAVI SHANKAR (PAKISTAN) BBA(HONS)-1 "It is 100% correct that BCG GRAPH shows the business location at market growth reate vs. market shares relative to competitors."
  ● Zubair Ahmed khan (Pakistan) BBA (HONS) "Ravi Shanker is totally wrong. He probably even doesn't know about the abbreviation of BCG."

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  ● Albert (UAE) Simple & Understand "Perhaps the BCG matrix is a useful tool for top management but not for middle & below."

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  ● S. Adnan (Pakistan) 10 % limit in BCG Matrix "No this is wrong, there is no 10% limit in BCG matrix. The horizontal line is drawn on the average market growth. So if the brand is growing faster than market then it will be in star or question mark category other wise it will be down the line in cash cow or dog section."
  ● shikha trivedi (India) Product Life Cycle and BCG "A really very good summary but plz explain the scaling of BCG and who can tell something more about the relationship of the Product Life Cycle and the BCG Matrix?"
  ● Sanjay T Rane (India) Average Growth rate of the Industry "Low and high are divided on the basis of the average growth rate of the industry. Let's say the growth rate of a certain industry is 40%. Then the separator line will come near 20%. Exactly you will have to calculate on the basis of weighted average or return from a product portfolio."

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  ● Luc Baz. (France) No Question Marks... "The idea of the BCG Matrix is clearly to have a PORTFOLIO of products. In this portfolio there should be cash cows (generating lots of cash) and also some stars and question marks (consuming cash to further develop). This means that the answer to the question is that the firm should invest in R&D and Product Development, especially if there are also no or few Stars. Otherwise the firm will have no growth potential in the future."

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  ● obaid ur rehman (pakistan) marketing management "different example related to product in BCG "
  ● Ronnie (Maldives) Strategic Management "This model is for basic elementary level of Business School. We can not practice it in the real life business situation". Too bad. :("
  ● Nitish (India) BCG Matrix is useless! "BCG has been widely used as a quick and dirty analysis tool. Cannot be dubbed as useless. It is much like saying "Vaccume tubes is useless"; Vaccume tubes gave way to today's VLSI technology."

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  ● Thijs (Netherlands) synergy "Synergy between business units can be created by e.g. a shared distribution-proces."
  ● Luc Baz. (France) Synergies not in BCG Matrix "As far as I know, synergies are between business units or organizational entities. The BCG is not accommodating this."

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  ● Pierre (France) Other Metrics "Such as?"

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  ● Henri Zalamea (New Zealand) Number of Competitors "If you're going to do a BCG matrix, be sure to list more than two competitors. As in your example, Pepsi will definitely not be a "dog" if you'll just include more participants in your grid. Personally, a "question mark" product is the one who gets the second largest budget (behind the star product) and is the closest thing to become a star in the future, given the right promotion, rather than a cash cow product, given a few more years, will start its decline towards the dog quadrant. Just my perception. Cheers!"
  ● JoeCal (USA) Cola & Pepsi "You are misinterpreting the matrix. It should not be used to make judgements about an entire company, but instead specific products or offerings. Coke isn't market leader for every product and not every Pepsi product is a star."
  ● Tim (NL) BCG Matrix Coca Cola and Pepsi "Thijs, your approach might be a bit digital. It does not need to be either high OR low. Pepsi's market share still can be considered high even though not they are not the marketleader."
  ● Ifan Hikmawan Putra (Indonesia) coca cola and pepsi "Pepsi and coca cola is like a mandatory fight, but what if coca cola and pepsi do merger, The BCG is not useless anymore, but as long as pepsi and coca cola still become a superstar in food and beverage industry , the BCG still needeed, we measure from all prespective, market share and business growth are looked from the marketing side, one thing we must considered , is the BCG important to measure 2 or more competitor in food and beverage industry. thanks for all discussion"
  ● salla (urgup) bcg "To me, it requires more than 2 companies or products in this case it results in ridiculous situation"
  ● Chocolate (Pakistan) Coca-Cola and Pepsi "While talking about Coca-Cola and pepsi, the BCG matrix is about different SBUs of th same organization. And the other important thing is Pepsi is not that bad either:) Pepsi has some advantages over Coca Cola as well. Among them their marketing force is noteable."
  ● So (India) Coca cola and Pepsi "The BCG matrix is essentially usable only for Strategic business units (SBU's) of ONE organisation. It cannot be used to compare brands of different organisations. There is a difference between products/brands and SBU's. So, BCG matrix if applied to any company's SBU's works perfect."
  ● George (Kenya) Cola & Pepsi "BCG is used to analyse products or SBU's for market growth and Market share. It is done as an internal analysis tool to build a competitive strategy based on current positioning. Therefore the comparison of Coca-cola and Pepsi should not arise."

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  ● Luis Cabral (Angola) Useful when used with other tools "in spite of have limitations the BCG is a good tool as it shows where we are exactly . the vision is not deep but using with other tools ( SWOT, PESTLE,PLC, ANSOFF MATRIX..) it becomes useful and allow to have a complete analysis."

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