The BCG Matrix – A Powerful Portfolio Analysis

Business Portfolio - As part of its strategic planning process, a company has to analyze its business portfolio
from time to time. A business portfolio is the collection of businesses and products that make up the
company.

The company must:

(1) Analyse its current business portfolio and decide which businesses should receive more or less
investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same
time deciding when products and businesses should no longer be retained.

Strategic Business Units - To carry out the business portfolio analysis a company can classify its Strategic
Business Units into several distinct groups. A Strategic Business Unit (SBU) is an independent unit within
the company that has its own mission and objectives. SBU could be in form of business division, product line
within a division or even a single product or brand.

Analysis of Business Portfolio - Analysis of business portfolio requires a clear understanding on

attractiveness of a SBU based on its current growth and market share. One of the most well known powerful
tools to do this is the BCG Matrix, developed by Boston Consulting Group.

The BCG Matrix – The BCG matrix ( Boston Consulting Group analysis) is a chart that had been created
by Bruce Henderson for the Boston Consulting Group in 1970 to help corporations with analyzing
their business units or product lines. This helps the company allocate resources and is used as an analytical
tool in brand marketing, product management,strategic management, and portfolio analysis .In BCG Matrix,
each SBU fall in to one of the four cells called: Question Marks, Starss, Cash Cows and Dogs.

Question Marks - Question marks are low-share business with high-growth markets. They require a lot of
cash to hold their share. because they have low market shares they do not generate much cash. The result is
a large net cash consumption. A question mark has the potential to gain market share and become a star, and
eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the
market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market
growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the
investment required to grow market share .

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Stars - Stars are high-growth, high-share businesses or products. The often need heavy investment to finance
their rapid growth. because Sustaining the business unit's market leadership may require extra cash, but this
is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash
cows if they have been able to maintain their category leadership, or they move from
brief stardom to dogdom.

Cash Cows - Cash cows are low-growth, high-share business or products. These established and succeed
SBUs need less investment to hold their market share. They produce a lot of cash that the company uses to
pay its bills and to support other SBUs that need investment.

Dogs - Dogs are low growth, low share business and products. They may generate enough cash to maintain
themselves but do not promise to large sources of cash. They depress a profitable company's return on
assets ratio, used by many investors to judge how well a company is being managed.Dogs, it is thought,
should be sold off.
The overall goal of this ranking was to help corporate analysts decide which of their business units to fund,
and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that
allowed them to plan with confidence to use money generated by the cash cows to fund the stars and,
possibly, the question marks.
As the BCG stated in 1970:
Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its
growth opportunities. The balanced portfolio has:

 stars whose high share and high growth assure the future;
 cash cows that supply funds for that future growth; and
 question marks to be converted into stars with the added funds

Circles in the BCG growth-share matrix represent a company’s current SBUs. The size of the circle depicts
the volume of the company’s business in dollar.

Actions to take

Once a company has classified its SBUs, it must determine what role each will play in the future. Further, the
company has to decide whether to build, hold, harvest or even divest the SBU.

Dynamics of SBUs

Companies or SBUs represented by circles in BCG Matrix are dynamics. As time passes, they will change
from one cell to another cell, as they have their own life cycle. Many SBUs start with Question Marks and
move into star category if they succeed. They later become cash cows as market growth fall, then finally die
off or turn in to dos toward the end of their life cycle.

The company needs to add new product and units continuously to so that some of them will become stars
and, eventually, cash cows that will help to finance other SBUs.