- A BCG matrix helps businesses understand their current and future competitive landscapes.
- The process can help business owners improve products, identify new opportunities, and even determine services to eliminate.
- There are drawbacks to using a BCG matrix, so some organizations may want to consider alternative models.
- This article is for business owners who want to analyze the state of their business and plan for the future of their company.
Business models are based on providing products or services that are profitable now, but a good business strategy also asks, “What about the future?” Created by the Boston Consulting Group, the BCG matrix – also known as the Boston matrix or growth-share matrix – provides a strategy for analyzing products according to growth and relative market share. The BCG model has been used since 1968 to help companies gain insights on what products best help them capitalize on market share growth opportunities and give them a competitive advantage.
More than 50 years after its inception, the BCG matrix model remains a valuable tool for helping companies understand their potential.
What is a BCG matrix?
A BCG matrix is a model used to analyze a business’s products to aid with long-term strategic planning. The matrix helps companies identify new growth opportunities and decide how they should invest for the future.
Most companies offer a wide variety of products, but some deliver greater returns than others. The BCG matrix gives the business a framework for evaluating the success of each product to help the company determine which ones they should invest more money into and which they should eliminate altogether. It can also help companies identify a new product to introduce to the market.
The matrix is divided into four quadrants based on market growth and relative market share. Each of these quadrants is discussed in more depth later in this article.
Did you know?: Anytime you’re considering making a pivot in your business, it’s helpful to also perform a SWOT analysis. This can help you understand the potential consequences of a major business decision.
What are the benefits of a BCG matrix?
The BCG matrix is a simple framework that all companies can use to evaluate their products. Anyone can look at the matrix and grasp which of the business’s products are performing the best. In addition to giving a bird’s-eye view of how products are performing, the matrix helps identify what factors make each product successful or unsuccessful. It also lets you see how your products stack up against one another.
The BCG matrix is also a useful tool for uncovering new opportunities in your market and eliminating poorly performing products, which can save your company a lot of money in the long run.
What are the limitations of a BCG matrix?
One limitation of using the BCG matrix is it doesn’t account for any factors beyond market share and growth. This means it won’t give you the complete picture as to why your products are succeeding or failing. While the BCG matrix is a great starting point, it’s not enough on its own to guide the future of a company. In many cases, it won’t provide enough information for handling complex business problems.
Key takeaway: The BCG matrix isn’t a predictive analytics tool and won’t help you account for new products that could disrupt the market in the future.
How do you create a BCG matrix?
Now that you understand what a BCG matrix is and some of its pros and cons, let’s look at how you can set up your own matrix. To analyze your company, you’ll need data on your products or services’ relative market share and growth rate.
When examining market growth, you need to objectively analyze your competition and think in terms of growth over the next three years. (Porter’s Five Forces is one useful framework for this type of analysis.) If your market is extremely fragmented, however, you can use absolute market share instead. Next, you can either draw a BCG matrix or find a BCG matrix template program online. Several are free, while others are available for subscription or offered as part of another charting program.
In this four-quadrant BCG matrix template, market share is shown on the horizontal line (low left, high right) and growth rate is found along the vertical line (low bottom, high top). The four quadrants are designated Stars (upper left), Question Marks (upper right), Cash Cows (lower left) and Dogs (lower right).
Place each of your products in the appropriate box based on where they rank in market share and growth. Where you set the dividing line between each quadrant depends in part on how your company compares to the competition. Here is a breakdown of each BCG matrix quadrant.
The business units or products with the best market share and generating the most cash are considered Stars. Monopolies and first-to-market products are frequently termed Stars too. However, because of their high growth rate, Stars 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 a high-growth market slows down. A key tenet of a BCG strategy for growth is to invest in Stars.
Cash Cows quadrant
A Cash Cow is a market leader that generates more cash than it consumes. Cash Cows are business units or products with a high market share but low growth prospects. Cash Cows provide the cash required to turn a Question Mark into a market leader, cover the administrative costs of the company, fund research and development, service the corporate debt, and 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, sometimes also referred to as Pets, are units or products with a low market share and low growth rates. They frequently break even, neither earning nor consuming much cash. Dogs are generally considered cash traps because businesses have money tied up in them, even though they bring back almost nothing in return. These business units are prime candidates for divestiture.
Question Marks quadrant
These parts of a business have high growth prospects but a low market share. They consume a lot of cash but bring little in return. Question Marks lose a company money. However, since these business units are growing rapidly, they have the potential to turn into Stars in a high-growth market. Companies are advised to invest in Question Marks if the products have potential for growth, or to sell if they do not.
How do you use the BCG matrix to strategize?
Once you know where each product stands, you can evaluate them objectively and strategize the future of your business. The BCG matrix helps you identify which products you should prioritize and which need to be cut altogether.
Here are four ways to use the BCG matrix to strategize for your business:
- If your goal is to focus on innovation, increase your investment in Stars and Question Marks. For example, you may be able to push a Question Mark into a Star and, later, a Cash Cow, by investing more in it.
- If you can’t invest more into a product, keep it in the same quadrant and leave it alone. One of the advantages of a Cash Cow is that it’s a well-established product that takes less effort to maintain.
- Reduce your investment and take out the maximum cash flow from a product, which increases its overall profitability. This strategy is best used for Cash Cows.
- Divest the amount of money invested in a product and apply it elsewhere. This strategy is best for Dogs.
Since consumer preferences are constantly changing, it’s impossible to predict the long-term growth of any product. That’s why you should regularly revise and update your BCG matrix as market conditions change. For instance, a product that was a Question Mark could quickly turn into a Dog, so you should be ready to walk away if the stakes get too high.
At the end of the day, the goal isn’t to succeed in any one area – it’s to create a diversified portfolio. You need products in every quadrant of your BCG matrix to keep a healthy cash flow and offer products that can secure your company’s future.
What is the role of cash flow in the BCG matrix?
Understanding cash flow is key to making the most of the BCG matrix. In 1968, BCG founder Bruce Henderson noted that four rules should guide your approach to product cash flow strategies:
- Margins and cash generated are a function of market share. High margins and high market share go together.
- To grow, you need to invest in your assets. The added cash required to hold shares 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. You need to get your payoff from growth when the growth slows – you lose your opportunity if you hesitate. The payoff is cash that cannot be reinvested in that product.
That last point is more important now than ever. The market moves more quickly now than it did 50 years ago, and BCG has since published recommended revisions on how to analyze and act on the matrix information. Maintaining a healthy supply of Question Marks readies you to act on the next trend. Cash Cows, conversely, need to be milked efficiently because they may fall out of favor – and profitability – more quickly. [Learn why profit margins are important for your business.]
What is a real-life BCG matrix example?
To ensure you understand a BCG analysis, it can be worthwhile to look at a real-life BCG matrix example. A famous BCG matrix example is that of The Coca-Cola Company, which owns many more drink lines than just its titular brand.
In the Coca-Cola BCG matrix example, Diet Coke and Minute Maid are Question Marks, as these products attract a modest audience, but still have room to grow. Its bottled water brands Kinley and Dasani are Stars since they dominate the market in, respectively, Europe and the U.S., and show no signs of slowing growth. Its titular drink is a Cash Cow since it experiences low growth and a high market share. However, Coca-Cola is also a Dog because legislation against soft drinks – not to mention public sentiment turning against them – has decreased soda sales.
The Coca-Cola company’s real-life BCG matrix example provides an important takeaway: Sometimes a product can fall into more than one quadrant.
Tip: One of the best ways to improve your sales is through sentiment analysis. Sentiment analysis can help you determine how consumers feel about your brand and products. You can also do a PEST analysis to consider political, economic, social and technological factors.
What are alternative matrix models?
While a great tool, the BCG matrix isn’t for every business. Some companies find they don’t have products in each quadrant, nor do they have a steady movement of products among the quadrants as their product life cycle progresses.
Some consultants advocate using the GE/McKinsey matrix instead, which measures products according to business unit strength and industry attractiveness rather than market share, the complexity of which may be outside an individual company’s control. Comparing the two models can reveal hidden insights that fuel increased growth for your company.
Jamie Johnson, Max Freedman and Katherine Arline contributed to the writing and reporting in this article.