If you're the owner of an established company, you may wonder how best to deploy resources to enhance your prospects. Since 1968, the BCG matrix, also known as the Boston or growth-share matrix, has helped companies answer that question by providing them a way to analyze product lines in search of growth opportunities.
Named for its creator, the Boston Consulting Group, the BCG matrix aims to identify high-growth prospects by categorizing the company's products according to growth rate and market share. By optimizing positive cash flows in high-potential products, a company can capitalize on market-share growth opportunities.
Reeves Martin, senior partner and managing director of Boston Consulting Group, said that nearly 50 years after its inception, the BCG matrix remains a valuable tool for helping companies understand their potential.
"The concept of BCG's growth-share matrix, central nowadays to business schools' curriculum on strategy ... provided companies with a disciplined and systematic tool for portfolio management," Martin told Business News Daily. "Recently, Harvard Business Review named BCG's matrix one of five 'frameworks that changed the world.'"
Understanding the matrix
To create a BCG matrix, businesses gather market-share and growth-rate data on their business units or products. One large square is drawn and is divided into four equal quadrants. Along the top of the box, a market share or cash generation is written, and a growth rate or cash use is written down the left side. On the top left is high market share, and low market share is on the left. On the left-hand side, high cash use is at the top and low cash use or growth rate is at the bottom.
Within the diagram, "stars" go in the upper-left quadrant, and "question marks" are put in the upper-right square. At the bottom, "cash cows" go on the left, and "dogs" are placed on the right. The diagram visually shows that stars have high market share and a high growth rate, while question marks have low market share and a high growth rate. On the bottom, cash cows have a low growth rate but a high market share, and dogs have a low market share and a low growth rate.Credit: DeiMosz/Shutterstock
The following ideas apply to each quadrant of the matrix:
Stars: The business units or products that have the best market share and generate the most cash are considered stars. Monopolies and first-to-market products are frequently termed stars. However, because of their high growth rate, stars also consume large amounts of cash. This generally results in the same amount of money coming in that is going out. Stars can eventually become cash cows if they sustain their success until a time when the market growth rate declines. Companies are advised to invest in stars.
Cash cows: Cash cows are the leaders in the marketplace and generate more cash than they consume. These are business units or products that have a high market share, but low growth prospects. According to NetMBA, 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. Companies are advised to invest in cash cows to maintain the current level of productivity, or to "milk" the gains passively.
Dogs: Also known as pets, dogs are units or products that have both a low market share and a low growth rate.They frequently break even, neither earning nor consuming a great deal of cash. Dogs are generally considered cash traps because businesses have money tied up in them, even though they are bringing back basically nothing in return. These business units are prime candidates for divestiture.
Question marks: These parts of a business have high growth prospects but a low market share. They are consuming a lot of cash but are bringing little in return. In the end, question marks, also known as problem children, lose money. However, since these business units are growing rapidly, they do have the potential to turn into stars. Companies are advised to invest in question marks if the product has potential for growth, or to sell if it does not.
As BCG founder Bruce Henderson wrote in 1968, "all products eventually become either cash cows or pets [dogs]. The value of a product is completely dependent upon obtaining a leading share of its market before the growth slows."
Once a company plots out its matrix, it can begin to further analyze its products'potential.
Understanding cash flow
To understand the elements of the Boston matrix, companies should be mindful of the sources of cash flow. Henderson wrote that four rules are responsible for product cash flow:
- Margins and cash generated are a function of market share. High margins and high market share go together.
- Growth requires cash input to finance added assets. The added cash required to hold share is a function of growth rates.
- High market share must be earned or bought. Buying market share requires an additional increment or investment.
- No product market can grow indefinitely. The payoff from growth must come when the growth slows, or it never will. The payoff is cash that cannot be reinvested in that product.
Alternatives and next steps
While the traditional Boston matrix is a powerful and popular tool, it has been criticized for implying that every company will identify products in each quadrant, and that there is or should be steady movement of products among the quadrants as they progress in their life cycles.
For that reason, some consultants advocate the use of the GE/McKinsey Matrix instead. The GE/McKinsey Matrix offers more categorization options and measures products according to business-unit strength and industry attractiveness rather than market share, the complexity of which may be outside the control of an individual company.
BCG has acknowledged that the business world is changing, and in 2014, the company issued a revision to the matrix that focuses on different drivers of competitive advantage, such as how quickly a company can adapt to changing circumstances. The updated version can be found on BCG's website.
"With a few tweaks, the matrix can be adapted to help companies drive the strategic experimentation required for success, even in unpredictable markets," Martin said. "The matrix needs to be applied with accelerated speed, while balancing the investments between exploration in new segments and exploitation of established segments. In addition, the investments and divestments need to be managed rigorously, while carefully measuring and monitoring the portfolio economics of experimentation."
Once your products have been categorized using any of these tools, your company will need to decide on a strategy for exploiting their strengths and correcting their weaknesses. The Quantitative Strategic Planning Matrix (QSPM) can help you sort through alternatives and settle on the right approach.
Templates and examples
Additional templates and guidelines can be found here:
Additional reporting by Chad Brooks, Business News Daily senior writer.
Originally published on Dec. 26, 2013. Updated Feb. 3, 2015.