The bcg matrix

The Boston Consulting Group matrix offers a way of examining and making sense of a company’s portfolio of product and market inter­ests. It is a way of viewing the entire product range to see a company’s products as a collection of items in a similar way that a holder of shares in several companies might consider the decision on what to do with the shares.

One way of looking at the products in a portfolio is to consider each product in its position in the product life cycle and aim to have a balance of products in each stage. A more sophisticated approach is based on the idea that market share in mature markets is highly correlated with profitability, and that it is relatively less expensive and less risky to attempt to win a share in the growth stage of the market when there will be many new customers making a first purchase. This is the approach taken by the BCG matrix. It is used to analyse the product range with a view to aiding decisions on how the products should be treated in an internal strategic analysis. Figure 3.2 shows the essential features of the matrix.

		Relative market share
		High 10x 1 x	Low
Rate of market growth	High	Stars	Question marks
	Low	Cash cows	Dogs

Figure 3.2. The Boston Consulting Group matrix

The market share measure. The horizontal axis of the BCG matrix is based on a very particular measure of market share. That measure is share relative to the largest competitor. A product with a share of 20% of the market in which the next biggest competitor had a share of 10% would have a relative share of 2, whereas a product with a market share of 20% and the biggest competitor also had 20% would have a relative share of 1. The cut-off point between high and low share is 1,50 high market share products in this analysis are market leaders. This arrangement of scale is sometimes described as being logarithmic in nature.

The market growth measure. The vertical axis of the BCG matrix is the rate of market growth, with the most relevant definition of the market being served. A popular point used to divide high and low growth in the market is 10% year-on-year growth, but we have found it useful in practical situations to use growth that is faster than the rate of growth in the economy as a whole, which, after inflation is usually between 1% and 2.5% a year.

Using the BCG matrix

Cash cows. A product with a high market share in a low growth market is normally both profitable and a generator of cash. Profits from this product can be used to support other products that are in their development phase. Standard strategy would be to manage conservatively, but to defend strongly against competitors. Such a product is called a cash cow because profits from the product can be ‘milked’ on an ongoing basis. This should not be used as a justification for neglect.

Dogs. A product that has a low market share in a low growth market is termed a dog, in that it is typically not very profitable. To cultivate the product to increase its market share would incur cost and risk, not least because the market it is in has a low rate of growth. Accordingly, once a dog has been identified as part of a portfolio, it is often dis­continued or disposed of.

More creatively, opportunities might be found to differentiate the dog and obtain a strong position for it in a niche market. A small share product can be used to price aggressively against a very large competitor as it is expensive for the large competitor to follow suit.

The matrix does not have an intermediate market share category, but there are large numbers of products that have a large market share but are not market leaders. They may be the biggest profit earners for the companies that own them. They usually compete against the market leader at a disadvantage that is slight, but real. Management needs to make very efficient use of marketing expendi­ture for such products and to try to differentiate from the leader. They should not normally compete head on, especially on price, but attempt to make gains if the market changes in a way that the leader is slow to exploit.

Stars. Stars have a high share of a rapidly growing market and therefore rapidly growing sales. They may be the sales manager’s dream, but they could be the accountant’s nightmare, since they are likely to absorb large amounts of cash, even if they are highly profitable. It is often necessary to spend heavily on advertising and product improve­ments, so that, when the market slows, these products become cash cows. If market share is lost, the product will eventually become a dog when the market stops growing.

Question marks. Question marks are aptly named as they create a dilemma. They already have a foothold in a growing market but, if market share cannot be improved, they will become dogs. Resources need to be devoted to winning market share, which requires bravery for a product that may not yet have large sales, or the product may be sold to an organization in a better position to exploit the market.

Limitations of the BCG matrix

Accurate measurement and careful definition of the market are essential to avoid misdiagnosis when using the matrix. Critics, perhaps unfairly, point out that there are many relevant aspects relating to products that are not taken into account, but it was never claimed by the Boston Consulting Group that the process was a panacea and covered all aspects of strategy. Above all, the matrix helps to identify which products to push or drop, and when. It helps in the recognition of windows of opportunity, and is strong evidence against simple rules of thumb for allocating resources to products.