BCG Matrix explained | SMI 1 of 6

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B C G g ro w t h - s h a re m a t r i x
O v i d i j u s J u rev i c i u s | M ay 1 , 2 0 1 3 Print

De3nition
B C G m a t r i x (or growth-share matrix) is a corporate planning tool, which is
used to portray Jrm’s brand portfolio or SBUs on a quadrant along relative
market share axis (horizontal axis) and speed of market growth (vertical
axis) axis.

G ro w t h - s h a re m a t r i x is a business tool, which uses relative market share

and industry growth rate factors to evaluate the potential of business
brand portfolio and suggest further investment strategies.

Understanding the tool

BCG matrix is a framework created by Boston Consulting Group to
evaluate the strategic position of the business brand portfolio and its
potential. It classiJes business portfolio into four categories based on
industry attractiveness (growth rate of that industry) and competitive
position (relative market share). These two dimensions reveal likely
proJtability of the business portfolio in terms of cash needed to support
that unit and cash generated by it. The general purpose of the analysis is
to help understand, which brands the Jrm should invest in and which ones
should be divested.

R e l a t i v e m a r ke t s h a re . One of the dimensions used to evaluate business

portfolio is relative market share. Higher corporate’s market share results
in higher cash returns. This is because a Jrm that produces more, beneJts
from higher economies of scale and experience curve, which results in
higher proJts. Nonetheless, it is worth to note that some Jrms may
experience the same beneJts with lower production outputs and lower
market share.

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M a r ke t g ro w t h ra t e . High market growth rate means higher earnings and

sometimes proJts but it also consumes lots of cash, which is used as
investment to stimulate further growth. Therefore, business units that
operate in rapid growth industries are cash users and are worth investing
in only when they are expected to grow or maintain market share in the
future.

There are four quadrants into which Jrms brands are classiJed:

D o g s . Dogs hold low market share compared to competitors and operate

in a slowly growing market. In general, they are not worth investing in
because they generate low or negative cash returns. But this is not always
the truth. Some dogs may be proJtable for long period of time, they may
provide synergies for other brands or SBUs or simple act as a defense to
counter competitors moves. Therefore, it is always important to perform
deeper analysis of each brand or SBU to make sure they are not worth
investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation

C a s h c o w s . Cash cows are the most proJtable brands and should be

“milked” to provide as much cash as possible. The cash gained from
“cows” should be invested into stars to support their further growth.
According to growth-share matrix, corporates should not invest into cash
cows to induce growth but only to support them so they can maintain their
current market share. Again, this is not always the truth. Cash cows are
usually large corporations or SBUs that are capable of innovating new
products or processes, which may become new stars. If there would be no
support for cash cows, they would not be capable of such innovations.
Strategic choices: Product development, diversiJcation, divestiture,
retrenchment

S t a r s . Stars operate in high growth industries and maintain high market

share. Stars are both cash generators and cash users. They are the
primary units in which the company should invest its money, because stars
are expected to become cash cows and generate positive cash \ows. Yet,
not all stars become cash \ows. This is especially true in rapidly changing
industries, where new innovative products can soon be outcompeted by
new technological advancements, so a star instead of becoming a cash
cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market
penetration, market development, product development

Q u e s t i o n m a r k s . Question marks are the brands that require much closer

consideration. They hold low market share in fast growing markets
consuming large amount of cash and incurring losses. It has potential to
gain market share and become a star, which would later become cash
cow. Question marks do not always succeed and even after large amount
of investments they struggle to gain market share and eventually become
dogs. Therefore, they require very close consideration to decide if they are
worth investing in or not.
Strategic choices: Market penetration, market development, product
development, divestiture

BCG matrix quadrants are simpliJed versions of the reality and cannot
be applied blindly. They can help as general investment guidelines but
should not change strategic thinking. Business should rely on
management judgement, business unit strengths and weaknesses and
external environment factors to make more reasonable investment
decisions.
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Advantages and disadvantages

BeneJts of the matrix:

Easy to perform;
Helps to understand the strategic positions of business portfolio;
It’s a good starting point for further more thorough analysis.

Growth-share analysis has been heavily criticized for its oversimpliJcation

and lack of useful application. Following are the main limitations of the
analysis:

Business can only be classiJed to four quadrants. It can be confusing

to classify an SBU that falls right in the middle.
It does not deJne what ‘market’ is. Businesses can be classiJed as
cash cows, while they are actually dogs, or vice versa.
Does not include other external factors that may change the situation
completely.
Market share and industry growth are not the only factors of
proJtability. Besides, high market share does not necessarily mean
high proJts.
It denies that synergies between different units exist. Dogs can be as
important as cash cows to businesses if it helps to achieve
competitive advantage for the rest of the company.

Using the tool

Although BCG analysis has lost its importance due to many limitations, it
can still be a useful tool if performed by following these steps:

Step 1. Choose the unit

Step 2. DeJne the market
Step 3. Calculate relative market share
Step 4. Find out market growth rate
Step 5. Draw the circles on a matrix

S t e p 1 . C h o o s e t h e u n i t . BCG matrix can be used to analyze SBUs,

separate brands, products or a Jrm as a unit itself. Which unit will be
chosen will have an impact on the whole analysis. Therefore, it is essential
to deJne the unit for which you’ll do the analysis.

S t e p 2 . D e J n e t h e m a r ke t . DeJning the market is one of the most

important things to do in this analysis. This is because incorrectly deJned
market may lead to poor classiJcation. For example, if we would do the
analysis for the Daimler’s Mercedes-Benz car brand in the passenger
vehicle market it would end up as a dog (it holds less than 20% relative
market share), but it would be a cash cow in the luxury car market. It is
important to clearly deJne the market to better understand Jrm’s portfolio
position.

S t e p 3 . C a l c u l a t e re l a t i v e m a r ke t s h a re . Relative market share can be

calculated in terms of revenues or market share. It is calculated by dividing
your own brand’s market share (revenues) by the market share (or
revenues) of your largest competitor in that industry. For example, if your
competitor’s market share in refrigerator’s industry was 25% and your
Jrm’s brand market share was 10% in the same year, your relative market
share would be only 0.4. Relative market share is given on x-axis. It’s top
left corner is set at 1, midpoint at 0.5 and top right corner at 0 (see the
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S t e p 4 . F i n d o u t m a r ke t g ro w t h ra t e . The industry growth rate can be

found in industry reports, which are usually available online for free. It can
also be calculated by looking at average revenue growth of the leading
industry Jrms. Market growth rate is measured in percentage terms. The
midpoint of the y-axis is usually set at 10% growth rate, but this can vary.
Some industries grow for years but at average rate of 1 or 2% per year.
Therefore, when doing the analysis you should Jnd out what growth rate is
seen as signiJcant (midpoint) to separate cash cows from stars and
question marks from dogs.

S t e p 5 . D ra w t h e c i rc l e s o n a m a t r i x . After calculating all the measures,

you should be able to plot your brands on the matrix. You should do this by
drawing a circle for each brand. The size of the circle should correspond to
the proportion of business revenue generated by that brand.

Examples

Corporate ‘A’ BCG matrix

Brand Revenues % of Largest Your Relative Market

corporate rival’s brand’s market growth
revenues market market share rate
share share

Brand $500,000 54% 25% 25% 1 3%

1

Brand $350,000 38% 30% 5% 0.17 12%

2

Brand $50,000 6% 45% 30% 0.67 13%

3

Brand $20,000 2% 10% 1% 0.1 15%

4

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This example was created to show how to deal with a relative market
share higher than 100% and with negative market growth.

Corporate ‘B’ BCG matrix

Brand Revenues % of Largest Your Relative Market

corporate rival’s brand’s market growth
revenues market market share rate
share share

Brand $500,000 55% 15% 60% 1 3%

1

Brand $350,000 31% 30% 5% 0.17 -15%

2

Brand $50,000 10% 45% 30% 0.67 -4%

3

Brand $20,000 4% 10% 1% 0.1 8%

4

Sources
1. Wikipedia (2013). Growth-share matrix. Available at:
http://en.wikipedia.org/wiki/Growth-share_matrix
2. Costa, C. (2012). Evaluating Product Lines Using the BCG Matrix
(VIDEO). Available at: http://www.youtube.com
/watch?v=Uuuxs9gO8C0

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About Ovidijus Jurevicius

Ovidijus is the founder of SM Insight and the lead writer
since 2013. His interest and studies in strategic
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source on the subject online.

He's been using his knowledge on strategic management and swot analysis
to analyze the businesses for the last 5 years. His work is published in many
publications, including three books.

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