BCG Matrix stands for Boston Consulting Group Matrix also known as Portfolio Matrix. It is a 2 × 2 matrix built for strategic planning. It is used for individual business units or products. Strategy for individual business units and products is planned in accordance with the overall corporate objectives. It’s also known as share/growth matrix.
If you’re reading this blog post, you might be:
- A student who is preparing this topic for exam
- A business who wants to analyze its products or business units with the help of b BCG Model/Matrix.
This’s why, I have explained portfolio matrix from two different perspectives, one is for students and the other one is for businesses. This doesn’t mean you should skip the other one, this is just to make it better for you.
Background of BCG Matrix
Boston Consulting Group Matrix was created in 1969. Boston Consulting Group is an American management consultancy firm. It has more than 90 offices in over 50 countries. It’s one of the big three strategy consulting firm. It has won multiple awards including “Best Firm to Work for” by Consulting Magazine in 2016.
First, I’m explaining share/growth matrix for students. I’ll ask 9 questions and will answer them myself. This is how you can learn and memorize this topic for the exam.
1. What is the main objective of
The main objective of this Matrix is to assist the management in allocation of funds to different business units and products.
2. What is the BCG Matrix?
BCG Matrix is a 2×2 Matrix where:
- One side of the matrix represents the market growth, and
- The other side of matrix represents market share of the product or business unit.
3. Who can use
Share/Growth Matrix is for businesses with multiple products or business units. However, small firms can boost their performance in the market with the help
4. How to Draw a BCG Matrix?
BCG Matrix can be represented as follows:
5. What is Market Growth in BCG Matrix?
The middle of growth side of bcg matrix is set to 10% per year. If growth is greater than 10%, it is said as high whilst if growth is less than 10%, it is called a lower growth rate. Remember that 10 is just an arbitrary figure.
6. What is Market Share in BCG Matrix?
Market share is usually measured as annual sales held by the firm as a percentage of total annual sales in the market. For example, if a product ‘ABC’ of entity say XYZ Ltd has 1,000 annual sales, whilst total annual sales in the market are suppose 20,000. Then XYZ has 1,000/20,000 market share for their product ‘ABC’.
However, in Boston Consulting Group Matrix market share is calculated by taken the annual sales of a product as a percentage of the annual sales by the biggest competitor in the market. The midpoint of market share side of the matrix represents the situation where annual sales for the product of the entity is equal to annual sales by the biggest competitor in the market.
High Market Share is where the entity in focus is the market leader for a product.
Low Market Share is where the entity in focus has very low sales as compared to its biggest competitor in the market.
7. What are the Four Quadrants of the BCG Matrix?
As BCG Matrix is a 2×2 matrix, it has 4 quadrants. These quadrants are represented by:
- A Question Mark,
- A Star,
- A Cash Cow, and
- A Dog
I will discuss each of these in detail for your understanding:
A question mark is a product that has low market share in a high growth market. Since the market is growing quickly, investments are encouraged for such a type of product. However, this will require huge investment of cash to grow the product and to maintain the current market share.
Why is a product called ‘Question Mark’ in Growth/Share Matrix?
A question mark is called question mark because it might drop down to a dog or might push up to a star.
Star is a product that is the market leader in a high growth market. It has a high market share as compared to its biggest competitor in the market. A considerable amount of cash investment is still required to maintain the current position.
A cash cow is a product that is the market leader in a low growth market. The market growth for such a product is even in negative. As the name suggests, cash cow generate enough cash. This is because being a market leader in a market with negative growth, competitors do not mount an attack on such a market. The cash generated by cash cow is invested in Question Marks and Stars.
A dog is a product that has a low share in a low growth market. The market growth is negative like in a cash cow, but here the product is not the market leader. You do not need to invest in a dog, because if your product is a dog, your competitor will have a ‘cash cow’ in the same market. Your competitor will have enough cash to defend its position.
Therefore, a dog might be evaluated for a closure or selling it to someone else.
8. How to Base Strategic Decisions on BCG Matrix?
BCG Matrix can be used to:
- Evaluate the cash required by individual products or individual business units, and
- Whether a product or business unit is required to be disposed or not.
Such decisions about individual products or business units are made in accordance with the overall objectives of the organization. After evaluating individual products or business units, management can then make strategic decisions about the products.
|Question Mark||Whether to invest more heavily to gain a higher market share Whether to invest more heavily to gain a higher position Whether to invest more heavily to gain the market leading position Whether to withdraw from the market|
|Cash Cow||Whether we are able to achieve high economies of scale Whether we have gained enough experience to be efficient in a cash cow Whether it is generating enough cash to support question marks and stars Whether a competitor is planning to target the market where we have a cash cow|
|Dog||Whether a dog is using more cash than it generates Whether the product need to be closed immediately or we need to wait a few more years.|
9. How To analyze a Question Mark, a Star, a Cash Cow and a dog with the help of BCG Matrix?
- How To analyze a Question Mark, a Star, a Cash Cow and a dog with the help of BCG Matrix?
|Question Mark||As a dog has a small share in a high growth market, so an entity cannot last long with such a small share, as biggest competitor will have the advantage of high economies of scale.|
|Star||According to bcg matrix, a star uses more cash than it generates in its initial phase. However, it should gradually change to cash neutral and then finally to a self-financing stage. They might generate high returns in future.|
|Cash Cow||A cash cow should generate enough cash to be used for question marks and stars. If it’s not generating enough cash, cash cow is not worth it.|
|Dog||An entity should not invest in a dog as it is very difficult to achieve a market share in a low growth market.|
BCG Matrix Analysis for Your business
We can analyze our products with the help of Boston portfolio matrix. Boston matrix is a handy tool if you want to know the current market status of your products. In the next few steps, Sacred Accounting will guide you through procedures enabling you to build your own matrix for your own product.
Step 1 Determine the Products to be Analyzed
First, you should decide about product/products to be analyzed with Boston consulting group matrix. Let say you’ve six products A, B,C,D,E and F to be analyzed via Boston consulting group matrix.
Step 2 Collect the Required Data
Second, you need the required data to build your matrix. This includes researching the market, your biggest competitor and your own product. You need:
- Annual sales made by your product/products
- Annual sales made by your biggest competitor for the product/products, and
- Growth in the market.
Let say we collected the following data:
|Product||Your Market Share (%)||Your Biggest Competitor’s Market Share (%)||Growth in the Market (previous year actual) ($)||Growth in the Market (current year actual) ($)||Growth in the Market (next year budgeted) ($)|
Step 3 Create a BCG Matrix
We have collected data in our second step, now you need to draw a 2×2 matrix, you can also find one for yourself online.
Step 4 Fill your Quadrants
Now evaluate each of your product and start filling your products.
This way, you’ll get all your products in any one of the four quadrants. Now, you need to analyze each quadrant and look for the products falling in each quadrant. Let suppose we got the following matrix:
You can see,
Products A and C falling in Question Mark,
Product D falling in Star,
Product E falling in cash cow, and
Product B and F falling in dog.
Step 5 Start Planning a Strategy for Each Product
This means you need to define a strategy for each of your products. Before setting out a strategy, remember the golden rule:
- Milk the cows without killing the cows,
- Spend on the stars,
- Experiment on question marks to see if they can result in stars, and
- Don’t feed the dogs.
|A and C (Question Marks)||You are having a small share of A and C in your target market, while your competitors are earning a lot, that’s surely not the end. You need to invest your money on A and C. You need them to be stars. You need them to earn money for you. For this you will have to conduct research, this will find you strategic gaps in the market. You will fill these spaces and we will outperform our competitors.|
|D (Star)||D is your cash cow for the future. You need to push it up to a cash cow by spending money wisely on its marketing. This way, you will be able to maintain your market share and even convert your product to a cash cow.|
|E (Cash Cow)||This might be your ideal state according to bcg matrix. You’re earning a lot of money; you need to spend this money on your star (D) and Question Marks (A and C). You must defend your market share. Ideally, you should be in a position which is not reachable by your competitors.|
|B and F (Dogs)||You need to close this product. There should be no double mindedness in that decision. You only need to decide when to close the product. You might close it immediately if it’s generating negative cash flows. Otherwise, you might wait for some time if it’s generating some cash.|
Why is Boston’s Matrix Criticized?
BCG analyses should be performed carefully as there are certain weaknesses in Boston matrix. Boston matrix has often been criticized for the following weaknesses:
According to BCG Matrix,
- Competitive strength of a product in a market depends upon its market share. So, if a product has a low market share, it’s not sufficiently competitive.
- New investment should only be made in a market where annual sales growth is high. Thus, a business should not invest in a market where growth is very low.
However, experts argue that these two assumptions are incorrect because:
A product can have a low market share, still it might be competitive. Typical example is Porsche, which has a low share as compared to its competitors i.e. Toyota and General Motors. Still Porsche is earning very high profit. They key points for competitive strength of a product are:
- Its Quality
- Brand name, reputation and
- Low costs (offering a product for a low price)
Similarly, a company might benefit from a product in a low growth market.
Market share and size of the market are not the only factors to decide about a product. Other factors might be relevant for the decision such as strength of the competition, cost base and brand strength.
Another criticism on bcg matrix is that it is used to analyze only individual business units or market segments rather than the whole market.
BCG matrix uses arbitrary figure to determine high market share or low market share and high growth or low growth. In practice it might be difficult to determine exactly high and low growth and market share.
Suppose 10 is the mid figure of the growth side of the matrix, a star had 10.2 sales growth in the previous year whilst for the current year it was 9.9. What do you think? Should we reduce Research and Development spending on this star?
What did you learn?
- Definition of BCG Matrix.
- Advanced Understanding of Boston’s Share/Growth Matrix.
- How BCG is used to analyze product-market portfolio for strategic planning.
Practice Question on Portfolio Matrix
I guess, you’re having enough understanding of Boston Matrix now. That’s why Sacred Accounting wants to test your knowledge. Submit the answer to the following question and get a response with your answer checked:
Let say we collected the following data for 8 products of NHIRKM Engineers:
|Product||NHIRKM’s Market Share (%)||NHIRKM’s Biggest Competitor’s Market Share (%)||Growth in the Market (previous year actual) ($)||Growth in the Market (current year actual) ($)||Growth in the Market (next year budgeted) ($)|
- Create a BCG Matrix for all the products of NHIRKM Engineers.
- Devise a strategy for each of the 8 products?
What would be your strategy, if you and your competitor have equal market share, whilst growth in the market is constant for current and the previous year and is expected to be constant for next year also? Comment with your answer!