Any business knows that to survive, it has to have products that bring in money now and products that will bring in money in the future, and identify which products are a drain on resources without the potential to come back. While it’s easy to identify the profitable products, determining how the rest of your portfolio fits into the growth scheme can be harder. The BCG matrix was designed as an analysis tool to help you determine the role of products in your future profit margin so you can decide where to invest.
The BCG matrix – also known as the Boston or growth-share matrix, created by the Boston Consulting Group – provides a framework for analyzing products according to growth and market share. The BCG matrix has been used since 1968 to help companies gain insights on what products best help them capitalize on market-share growth opportunities.
Creation of matrix
First, the data on the market share and growth rate of the products or services would be required. When examining market growth, one needs to objectively compare oneself to one’s largest competitor and think in terms of growth over the next three years. If the market is extremely fragmented, as in case of the publishing industry, absolute market share can be used instead.
In this four-quadrant chart, market share is shown on the horizontal line (low left, high right) and growth rate 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 the products into the appropriate box based on where they rank in market share and growth. Where you choose to set the dividing line between each quadrant depends in part on how your company compares to the competition.
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. Cash cows provide the cash required to turn question marks into market leaders, 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: 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 consume a lot of cash but bring 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 a potential for growth, or to sell if it does not.
- Build– Increase investment in a product to increase its market share. For example, you can push a question mark into a star and, finally, a cash cow.
- Hold– If you can’t invest more into a product, hold it in the same quadrant and leave it be.
- Harvest – Reduce your investment and try to take out the maximum cash flow from the product, which increases its overall profitability (best for cash cows).
- Divest– Release the amount of money already stuck in the business (best for dogs).
While a great tool, the BCG matrix isn’t for everyone. Some businesses find they don’t have products in each quadrant, nor do they have steady movement of products among the quadrants as they progress in their life cycles.
Reeves Martin, senior partner and managing director of the Boston Consulting Group, has said that nearly 50 years after its inception, the BCG matrix remains a valuable tool for helping companies understand their potential.
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