What Is a BCG Matrix?

Because so much time and effort goes into starting up a business, it can
be tempting to sit back and take a deep breath once you feel like you're
off the ground. But even established businesses need to find ways not
only to grow, but to evaluate standard product lines to make sure they are
still successful.

Since 1968, the BCG matrix, also known as the Boston or growth-share
matrix, has helped companies answer that question by providing them a
way to analyze product lines in search of growth opportunities. Named for
its creator, the Boston Consulting Group, the BCG matrix aims to
identify high-growth prospects by categorizing the company's products
according to growth rate and market share. By optimizing positive cash
flows in high-potential products, a company can capitalize on market-
share growth opportunities.

Reeves Martin, senior partner and managing director of Boston Consulting

Group, said that nearly 50 years after its inception, the BCG matrix
remains a valuable tool for helping companies understand their potential.

"The concept of BCG's growth-share matrix, central nowadays to business

schools' curriculum on strategy ... provided companies with a disciplined
and systematic tool for portfolio management," Martin told Business News
Daily. "Recently, Harvard Business Review named BCG's matrix one of five
'frameworks that changed the world.'"

Understanding the matrix

To create a BCG matrix, businesses gather market-share and growth-rate
data on their business units or products. One large square is drawn and is
divided into four equal quadrants. Along the top of the box, a market
share or cash generation is written, and a growth rate or cash use is
written down the left side. On the top left is high market share, and low
market share is on the left. On the left-hand side, high cash use is at the
top and low cash use or growth rate is at the bottom.

Within the diagram, "stars" go in the upper-left quadrant, and "question

marks" are put in the upper-right square. At the bottom, "cash cows" go
on the left, and "dogs" are placed on the right. The diagram visually shows
that stars have high market share and a high growth rate, while question
marks have low market share and a high growth rate. On the bottom, cash
cows have a low growth rate but a high market share, and dogs have a
low market share and a low growth rate.

Credit: DeiMosz/Shutterstock
The following ideas apply to each quadrant of the matrix:

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, to cover the administrative costs of
the company, to fund research and development, to service the corporate
debt, and to 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 are consuming a lot of cash but
are bringing 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.
As BCG founder Bruce Henderson wrote in 1968, "all products eventually
become either cash cows or pets [dogs]. The value of a product is
completely dependent upon obtaining a leading share of its market before
the growth slows."

Once a company plots out its matrix, it can begin to further analyze its
products' potential.

Post-analysis strategies
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).

Understanding cash flow

To understand the elements of the Boston matrix, companies should be
mindful of the sources of cash flow. Henderson wrote that four rules are
responsible for product cash flow:

Margins and cash generated are a function of market share. High

margins and high market share go together.
Growth requires cash input to finance added assets. The added cash
required to hold share is a function of growth rates.
High market share must be earned or bought. Buying market share
requires an additional increment or investment.
 No product market can grow indefinitely. The payoff from growth
must come when the growth slows, or it never will. The payoff is cash
that cannot be reinvested in that product.

BCG has acknowledged that the business world is changing, and in 2014,
the company issued a revision to the matrix that focuses on different
drivers of competitive advantage, such as how quickly a company can
adapt to changing circumstances. The updated version can be found
on BCG's website.

"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 the traditional Boston matrix is a powerful and popular tool, it has
been criticized for implying that every company will identify products in
each quadrant, and that there is or should be steady movement of
products among the quadrants as they progress in their life cycles.

For that reason, 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 the control of an individual company.

Comparison of the two can reveal hidden insights that can power more
growth for your company.
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