Boston Consulting Group (BCG) Matrix

It is a business planning tool used to assess the strategic position of a company's brand portfolio.

One of the most often used techniques for portfolio analysis is the BCG Matrix or the Boston Consulting Group Matrix. Introduced in 1970 by BCG, it is a business planning tool used to assess the strategic position of a company's brand portfolio.

BCG Matrix

The growth-share matrix is a portfolio management model that aids firms in determining which among their various businesses to prioritize. It is also known as the product portfolio matrix.

The Product Portfolio matrix assigns a two-by-two matrix classification to a company's goods and services. Each quadrant is categorized as poor or high performance, depending on the relative market share and market growth rate.

Each quadrant has a different symbol that denotes different levels of market share and growth rate:

  • Stars
  • Question marks
  • Cash cows
  • Pets (typically a dog)                                                                                                                                                                                                                       

Executives could then choose where to allocate their resources and cash to achieve the most value and where to eliminate their losses by classifying each organization into one of these four categories.

Quadrants of the Growth-Share Matrix                 

quatrants

Each quadrant of the matrix denotes a different level of profitability, need for financing, and cash flows, and each quadrant has unique characteristics.

1. Stars: High Market Share, High Growth

Business units or products with a significant market share in a rapidly expanding industry are represented by stars. These stars may make money, but because of the rapidly growing industry, they need significant financing to meet customer expectations and to answer the competitors' moves &  expenditures to stay in the front.

This quadrant consists of market-leading products and business units that need a lot of investment to keep their market position, accelerate growth, and preserve their competitive edge. As a result, they generate large cash flows while also consuming the funds.

Stars will relocate to become cash cows as the market develops and the items continue to be successful. Stars are a company's most cherished property and are at the forefront of its product line.

2. Question Mark: Low Market Share, High Growth

Question marks denote business units and products with a low relative market share in an industry experiencing rapid expansion. The products and services in this quadrant are weak competitors in a fairly growing market.

They need an enormous amount of investment to keep or expand their market share. They need to be considered to see if the business can succeed.

Generally speaking, question marks represent brand-new products and services with a promising commercial future.

There is no precise strategy that may be used. If the company believes it has a dominant market share, it can pursue an expansion; otherwise, it can pursue a retrenchment strategy.

Most companies begin as question marks when they attempt to join an industry with significant growth and an existing market share. 

In a perfect situation, a company would like to transform question marks into stars. But unfortunately, if question marks fail to establish themselves as the market leader, they eventually turn into pets (or dogs) when market growth slows.

3. Cash Cows: High Market Share, Low Growth

   

cash cow

Cash Cows are examples of business units with a significant market share in an established, slowly growing field. Cash cows are businesses that need low capital commitment and produce cash that may be invested in other company units.

These business units or products, primarily the core business, are the company's main cash source. They serve as the foundation of an organization. Typically, these companies employ stability tactics.

Cash cows produce significant cash flows, typically used to fund stars and question marks. Business units in the cash cows quadrant are "milked," Businesses make the least amount of capital investments while still profiting from their sales.

retrenchment strategy may be used when cash cows lose their attraction and deteriorate.

4. Pets (or Dogs): Low Market Share, Low Growth

pets

Dogs (or pets) represent products and business units with low market shares in slow-growing industries. Therefore, they neither need huge investments nor generate high cash flows.

These business units have cost disadvantages due to their limited market share. As a result, retrenchment tactics are typically used since these products can only acquire market share at the expense of rival or competitor enterprises.

Due to their exorbitant expenses, defective products, inefficient marketing, etc., these products and business units have a small market share.

If a dog has a lower chance of securing market share, it should be liquidated unless it has another strategic objective. In an organization, dogs should be avoided and kept to a minimum.

Working on the BCG Growth-Share Matrix

The reasoning behind the framework of the growth-share matrix is that market leadership yields greater profits that are sustainable.

In the end, the market leader achieves a tough cost advantage for rivals to match. These high growth rates then highlight the markets with the most growth potential.

The matrix displays two aspects that firms should take into account when determining where to invest:

  • Firm competitiveness
  • Market attractiveness

The underlying drivers of these parameters are relative market share and growth rate.

optimum cash flow

As stated before in this article, each of the four quadrants reflects a certain mix of growth and market share relative to other quadrants:

  1. High Share and Low Growth: Businesses should extract the cash from these "cash cows" to reinvest.
  2. High Share and High Growth: Because of their significant future potential, businesses should heavily invest in these "stars."
  3. Low Share and High Growth: Depending on their potential to become stars, businesses should either invest in or eliminate these "question marks."
  4. Low Share and Low Growth: These "pets" should be liquidated, sold, or repurposed by businesses.

As can be seen, The ability of a company to secure a dominant market share before growth ceases determines the value of its products.

Sequences

 Every product will ultimately turn into a pet or a cash cow. Therefore, pets are unneeded; they are proof of a failure to acquire a leadership position or to exit and cut losses.

NOTE

The matrix is not a prediction tool but a tool for making decisions. Thus, it may not always account for all the variables a company will eventually have to deal with.

For instance, gaining a more significant market share might cost more than the increased income from new sales. Businesses must carefully plan for contingencies because product development might take years.

Benefits

benefits

The challenge of resource distribution across various business units typically arises in large corporations that need to establish business units.

The BCG matrix was created to aid companies with the management of various business divisions.

The following are the benefits of the growth-share matrix:

  • Effective Tool:

The BCG Matrix is a valuable management tool that provides a suitable framework for directing resources among different units. The managers may now compare other company divisions whenever they wish.

  • Simplified Approach:

Many business factors are simplified by showing employees the market share and growth rate and how to use them to develop new strategies.

  • Encourage Better Decision-Making:

The growth-share matrix enables comparisons between a company's growth and development rate and the average growth rate for that particular industry. 

Furthermore, this specific matrix is enjoyable to use, fostering improved decision-making.

  • Relevant Support and Guidance:

The BCG matrix may be among the first ever created, but it is also the most popular and well-known matrix taught globally.

Due to the popularity of the BCG matrix, there are forums on the internet where people discuss the best ways to use it. This guarantees that anyone wishing to utilize it will always have support and guidance.

The BCG matrix is still useful and efficient for allocating resources and assuring higher earnings.

Limitations

With the BCG Matrix, it is easily possible to compare several business units and create a structure for allocating resources among various business units. However, it does have certain restrictions as listed below:

  • Inability to Reflect the True Nature:

Businesses may typically be classified as medium in the BCG matrix, in addition to the low and high categories. As a result, the actual nature of business might not be shown.

  • Undefined Market:

In this framework, the market is not precisely defined.

  • High Expenses:

A large market share does not necessarily translate into high earnings. A large market share comes with high expenses as well.

  • Ignorance of Other Profitability Metrics:

The sole indications of profitability are growth rate and relative market share. This approach excludes and dismisses other profitability metrics.

  • Undermining of Dogs:

Dogs can occasionally provide rival companies with a competitive edge. They occasionally make even more money than cash cows.

  • Basic Strategy:

This four-celled strategy is seen to be overly basic.

Relevance of The Growth-Share Matrix Today

relevance

Whether the matrix has lost any significance comes in light of the frequent and unforeseen changes in the modern economy.

Not at all. However, its relevance has evolved: to allow adaptation to a more volatile corporate environment, it has to be implemented swiftly and with a greater emphasis on strategic experimentation.

Additionally, the matrix requires a new competitiveness metric to replace its horizontal axis as market share is no longer an effective performance indicator.

Organizational behavior must be more thoroughly ingrained with the matrix's usage for strategic experimentation.

Companies should concentrate on the following four operational precepts to optimize the matrix for effective experimentation in the current business world.

1. Accelerate their Strategy Timer:

It is essential to assess the portfolio regularly. In addition, shorter planning cycles and feedback loops demand streamlined approval procedures for investment and liquidation choices.

Hence, businesses should accelerate their strategic timer to maintain pace with the environment.

2. Obtain a balance between exploration and exploitation:

This involves maximizing the advantages of both cows and pets while having a fair number of question marks. This can be done through the following:

  • Increase the number of question marks: This needs a culture that embraces uncertainty, rewards risk-taking, and accepts failure.
  • Quickly and efficiently check question marks: Successful experimenters accomplish this by conducting quick (for, e.g., virtual) tests that reduce the cost of failure.
  • Effectively milk cows: Successful businesses recognize the need to capitalize on current competitive advantages. They exploit low-growth business units by increasing profitability through continuous innovations and operational optimization.
  • Maintain a short leash for all pets: Failure is a part of experimentation. According to an analysis conducted by BCG, the number of pets has risen by about 50% over the past 30 years.

Despite Bruce Henderson's claim that dogs have little significance, successful firms now use pet failure signals to guide future decisions about where and how to conduct experiments. 

Pets also make an effort to make exit roadblocks more feasible and move rapidly to extract any residual value before divestment.

Scales

 

3. Choose carefully:

Companies must carefully choose both investments and divestitures.

To decide which question marks should be upgraded through additional investment and which pets and cows should be proactively divested, successful organizations use a variety of data sources and build predictive analytics.

4. Evaluation and management of the portfolio economics of experimentation:

Long-term sustainability requires a thorough understanding of the level of experimentation necessary to sustain growth. This can be achieved through the following:

  • Regulate the pace of experimentation: To keep their pipeline full, successful businesses must continuously monitor and control the volume and expense of the question marks they generate.
  • Boost the success of new products and businesses: To sustain growth from fresh goods, companies must ensure that the odds of question marks becoming stars are high enough and that the cost of their failing is bearable.
  • Maintain a balanced portfolio: Successful businesses aim for today's stars and question marks to eventually provide sufficient profitability to replace cows and pets later in their life cycles.

This is done so that the business portfolio eventually generates enough profitability.

KEY TAKEWAYS

key takeways

  • The BCG Growth-Share Matrix is a business planning tool used to assess the strategic position of a company's brand portfolio. It is also known as the product portfolio matrix.
  • The BCG matrix assigns a two-by-two matrix classification to a company's goods and/or services. Each quadrant has a different symbol that denotes a different level of profitability depending on the market share and growth:
  • Stars: High Market Share, High Growth
  • Question marks: Low Market Share, High Growth
  • Cash cows: High Market Share, Low Growth
  • Pets (typically a dog): Low Market Share, Low Growth
  • Executives could then choose where to allocate their resources and cash to achieve the most value and where to eliminate their losses by classifying each organization into one of these four categories.
  • The matrix displays two aspects that firms should take into account when determining where to invest:
  • Firm competitiveness
  • Market attractiveness
  • The matrix is not a prediction tool but a tool for making decisions and thus may not always account for all the variables that a company will eventually have to deal with.
  • The relevance of the growth-share matrix has evolved, and now, it has to be implemented more swiftly and with a greater emphasis on strategic experimentation to allow adaptation to a more volatile corporate environment.
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Researched and authored by Aqsa Wasif | LinkedIn

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