The BCG matrix is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. Analysis of market performance by firms using its principles has called its usefulness into question, and it has been removed from some major marketing textbooks.
Understanding the Matrix
BCG matrix means of analyzing the balance of an organization’s product portfolio. According to this matrix, two basic factors define a product’s strategic stance in the market place: 1. Relative market share – for each product, the ratio of the share of the organization’s product divided by the share of the market leader; 2. Market growth rate – for each product, the market growth rate of the product category. Relative market share is important because, in the competitive battle of the market place, it is advantageous to have a larger share than rivals: this gives room for maneuver, the scale to undertake investment and the ability to command distribution.
Stars - The upper-left quadrant contains the stars: products with high relative market shares operating in high-growth markets. The growth rate will mean that they will need heavy investment and will therefore be cash users. However, because they have high market shares, it is assumed that they will have economies of scale and be able to generate large amounts of cash. Overall, it is therefore asserted that they will be cash neutral – an assumption not necessarily supported in practice and not yet fully tested. Cash cows - The lower-left quadrant shows the cash cows: product areas that have high relative market shares but exist in low-growth markets. The business is mature and it is assumed that lower levels of investment will be required. On this basis, it is therefore likely that they will be able to generate both cash and profits. Such profits could then be transferred to support the stars. However, there is a real strategic danger here that cash cows become under-supported and begin to lose their market share.
Question Mark - The upper-right quadrant contains the problem children: products with low relative market shares in high-growth markets. Such products have not yet obtained dominant positions in rapidly growing markets or, possibly, their market shares have become less dominant as competition has become more aggressive. The market growth means that it is likely that considerable investment will still be required and the low market share will mean that such products will have difficulty generating substantial cash. Hence, on this basis, these products are likely to be cash users. Dogs - The lower-right quadrant contains the dogs: products that have low relative market shares in low-growth businesses. It is assumed that the products will need low investment but that they are unlikely to be major profit earners. Hence, these two elements should balance each other and they should be cash neutral overall. In practice, they may actually absorb cash because of the investment required to hold their position. They are often regarded as unattractive for the long term and recommended for disposal. Overall, the general strategy is to take cash from the cash cows to fund stars and invest in future new products that do not yet even appear on the matrix. Cash may also be invested selectively in some problem children to turn them into stars, with the others being milked or even sold to provide funds for elsewhere. Typically in many organizations, the dogs form the largest category and often represent the most difficult strategic decisions. Should they be sold? Could they be repositioned in a smaller market category that would allow them to dominate that category? Are they really cash neutral or possibly absorbing cash? If...