Boston Consulting Group (BCG) Matrix

Relevance & Importance of BCG Matrix It was developed in the early 70s by the Boston Consulting Group. The BCG Matrix method is the most well-known portfolio management tool. It is based on product life cycle theory.

Relevance & Importance of BCG Matrix

To ensure long-term value creation, a company should have a portfolio of products that contains both  High-growth products in need of cash inputs and  Low-growth products that generate a lot of cash. Used to determine what priorities should be given in the product portfolio of a business unit.

Relevance & Importance of BCG Matrix

The BCG Matrix has 2 dimensions : Relative Market share and  Market growth.


The basic idea behind it is : if a product has a bigger market share or if the product's market grows faster, it is better for the company.

Star (high growth, high market share)

Stars use large amounts of cash. Stars are leaders in the business. Stars usually generate cash for the company

It is critical that Stars should hold the market share, because the future rewards are generally cash cows

Cash Cows (low growth, high market share)

Profits and cash generation should be high.  Low market growth does not attract new competitors  Low market growth, call for less investments


Cash Cows are often the stars of yesterday and they are the foundation of a company.

Dogs (low growth, low market share)

  

Avoid and minimize the number of Dogs Watch out for expensive 'rescue plans' Low growth coupled with market share is generally a loss making proposition for a company

Dogs must deliver cash, otherwise they must be liqu

Question Marks (high growth, low market share)



Question Marks have the worst cash characteristics of a  Question Marks have high cash demands (High Mkt growth)  Question Marks generate low returns, (Low market share)  If the market share remains unchanged, Question Mark will simply absorb great amounts of cash

Either invest heavily, or sell off, or invest nothing an generate any cash that you can.

The BCG Matrix Vs One size fits all strategies Imagine a company with a generic growth target (9 percent per year) or a generic return on capital of say 9.5% for an entire corporation.

Outcomes of such a strategy:

Cash Cows Business Units will reach their profit target easily. They are often allowed to reinvest substantial cash amounts in their mature business. Dogs Business Units are fighting an impossible batt and, even worse, now and then investments are made. Question Marks and Stars receive only mediocre investment funds, hence they can never become Cash Cows (or Stars)

Limitations of BCG Matrix It neglects the effects of synergy between business units. High market share is not the only success factor. Market growth is not the only indicator for attractiveness of a market. Sometimes Dogs can earn even more cash as Cash Cows.  There is no clear definition of what constitutes a 'market.


Limitations of BCG Matrix



A high market share does not necessarily lead to profitability all the time. The model uses only two dimensions market sh and growth rate. So companies may be tempted to divest prematurely. A business with a low market share can be profitable too. The model neglects small competitors that have fast growing market shares.