What is the BCG Matrix

What is the BCG Matrix

Created by the Boston Consulting Group in 1970, the BCG matrix (a.k.a. the growth-share matrix, Boston matrix, Boston Consulting Group analysis) is a framework chiefly used to evaluate and examine the strategic position of a business brand portfolio, along with its potential. The BCG matrix classifies business portfolios into four categories, under the basis of industry attractiveness, which is the growth rate of that industry, and competitive position, the relative market share. These two factors uncover the likeliness of the business portfolio’s profitability, which is identified in terms of cash that supports the unit and the generated cash. The main purpose of the analysis is to help companies understand the processes deeper, which brands they should be investing in, and those that need to be divested. 

The four quadrants in which the firm brands are classified:

• Dogs

Compared to its competitors, dogs hold low market share. They operate in a slowly growing market, which in general, makes them not worth investing in. Generation of cash is either low or negative in returns, but that isn’t always the case. Some dogs prove to be profitable for longer periods of time, and some companies find that they provide synergies for other brands or strategic business units. Sometimes they simply act as defense fortifications against competition and their strategic decisions. This makes a deeper analysis of each brand vital, as companies need to make sure that the dogs can perform well before choosing to divest, as removing them can potentially hurt the company.

• Cash cows 

The most profitable brands are referred to as cash cows, and they should be “milked” in order to provide as much cash possible. It is highly recommended that the cash gained from these cows be invested into stars, which will promote further growth. Based from the growth-share matrix, corporations should not only invest in cash cows for the sake of inducing growth, but to help support them in maintaining their current market share. However, this is not always true. Take note that cash cows are usually from large companies, and these companies are more than capable of innovating new products and implementing new business processes, which makes their potential to become stars extremely high. Support for these cash cows is integral, as without it they will not be capable of becoming stars. For strategic choices, companies should look into diversification of products and services offered, along with product development and retrenchment.

• Stars

Stars are brands that operate in high growth industries and are capable of maintaining high market share. Stars are considered as both cash users and cash generators, and are the primary units which companies should invest their money. They generate positive cash flows, but not every star has the potential to become this. Factors that come into play are rapidly changing industries. New innovative products can easily outshine existing ones, and services can be outcompeted by new technological advancements. Instead of flowing cash in, stars can become dogs. For growing stars, companies should look into strategic plans like market penetration, market development, and integration.

• Question marks

The brands which require much closer consideration are called questions marks,  as they hold low market shares in fast growing markets. These usually consume large amounts of cash and incur losses. It, however, question marks have the potential to gain market share and then become stars, which can later become cash cows. Despite the potential, question marks do not always succeed even after investing large amounts of money, as they struggle to gain market share and later decrease into dogs. Companies need to evaluate if they are worthy of investment or not, and some of the strategic choices they can follow is market development and penetration.Need help with your term paper or essay?

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Advantages and Disadvantages of Using the Matrix

Advantages:

• The BCG-Matrix aids decision makers in evaluating the balance in their company’s current portfolio of Stars, Cash Cows, Question Marks and Dogs.
• BCG-Matrix is advantageous to large companies who generally seek increase in volume and experience effects.
• The model is easy to understand and simple to use, which makes it the go-to for strategic planners.
• It serves as base for management for decisions and preparations on future actions.
• If a company is able to utilize the experience curve to its benefit, it should be able to construct and be able to offer new products at cost-effective prices, which will then help them gain and early market share leadership. Once a brand becomes a star, its profitability will follow suit.

However, this growth-share analysis has been heavily critiqued for its oversimplification and lack of any useful application. 

Disadvantages: 

• The business can only be classified to four categories or quadrants. It can get confusing when a brand or SBU falls right in the middle of a classification.
• The BCG matrix does not define what ‘market’ is. Businesses can be classified as cash cows, but they can actually be dogs, and vice versa.
• The matrix does not include other external factors that may affect the situation entirely.
• It should be noted that market share and industry growth are not the only factors that drive profitability. Furthermore, high market share does not overtly equate to high profit.
• The possibility of synergies between different units existing is denied. Truth be told, dogs can be as just important as cash cows are to businesses, as long as it helps achieve competitive advantage for the rest of the company.

In a Glimpse

• BCG matrix

The BCG matrix (also known as the Boston matrix, Boston Consulting Group analysis) is a corporate planning tool. This is mainly used to present firm’s brand portfolio, categorized in four quadrants. 

• Growth-share matrix

The growth-share matrix is a business tool which uses industry growth rate factors and relative market share, which evaluates a business brand portfolio’s potential and suggests other investment strategies.

• Relative market share

Relative market share is one of the dimensions utilized to evaluate a business portfolio. The higher a corporation’s market share, the higher the cash returns can be. A firm that produces more benefits from higher economies experiences curve, resulting to greater profit.

• Market growth rate

Usually, a high market growth rate means bigger earnings and more profit, but it also consumes lots of cash used for growth investment.  Business units that operate in a rapid growth industry should be considered carefully, and should only be invested in if proven to have the potential for growth and sustainability. 

The industry continuously develops and changes rapidly, and it is vital for companies to remain steadfast and strategic in order to not get left behind. Using models such as the BCG matrix helps corporations adapt to change, and aids them in making strategic decisions that will help them maintain market share and profitability.