BCG Matrix-Analyzing Product Growth

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The following article was taken from Business News Daily. The BCG matrix was designed as an analysis tool to help you determine the role of products on your future profit margin so you can decide where to invest.

Created by the Boston Consulting Group, the BCG matrix – also known as the Boston or growth-share matrix – 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.

Reeves Martin, senior partner and managing director of the Boston Consulting Group, said that nearly 50 years after its inception, the BCG matrix remains a valuable tool for helping companies understand their potential.

Creating your matrix

First, you’ll need data on the market share and growth rate of your products or services. When examining market growth, you need to objectively compare yourself to your largest competitor and think in terms of growth over the next three years. If your market is extremely fragmented, however, you can use absolute market share instead, according to the Strategic Thinker blog.

Next, you can either draw a matrix or find a BCG chart program online. (There are several that are free, available for subscription or part of another charting program.) 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).

Credit: DeiMosz/Shutterstock

Place each of your 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. Here is a breakdown of each quadrant:

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. According to NetMBA, 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 potential for growth, or to sell if it does not.

Using the matrix to strategize

Now that you know where each business unit or product stands, you can evaluate them objectively. In an article on Marketing 91, author Hitesh Bhasin outlines four potential strategies you can follow based on the results of your BCG matrix analysis:

  1. 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.
  2. Hold– If you can’t invest more into a product, hold it in the same quadrant and leave it be.
  3. 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).
  4. Divest– Release the amount of money already stuck in the business (best for dogs).

The article in Strategic Thinker notes that you want a balance. You need products in every quadrant in order to keep a healthy cash flow and have products that can secure your future.

The role of cash flow in the matrix

Understanding cash flow is key to making the most of the BCG matrix. In 1968, BCG founder Bruce Henderson noted that four rules are responsible for product cash flow:

  1. Margins and cash generated are a function of market share. High margins and high market share go together.
  2. To grow, you need to invest in your assets. The added cash required to hold share is a function of growth rates.
  3. High market share must be earned or bought. Buying market share requires an additional increment or investment.
  4. 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 even more important now than ever. The market moves more quickly now than it did 40 years ago, and BCG has since published some recommended revisions to analyzing and acting on the matrix information. Keeping a healthy supply of question marks keeps you ready to act on the next trend, while cash cows need to be milked efficiently because they may fall out of favor – and profitability – more quickly.

“With a few tweaks, the matrix can be adapted to help companies drive the strategic experimentation required for success, even in unpredictable markets,” Martin said. “The matrix needs to be applied with accelerated speed, while balancing the investments between exploration in new segments and exploitation of established segments. In addition, the investments and divestments need to be managed rigorously, while carefully measuring and monitoring the portfolio economics of experimentation.”

An alternative for another look

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.

Some consultants advocate the use of the GE/McKinsey matrix instead. The GE/McKinsey matrix offers more categorization options and 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 can reveal hidden insights that power more growth for your company.

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Additional Reading

The Founder’s Mentality: Bringing Back Growth

Cliffs Kill – Framework Your Company’s Growth Path

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