BCG Matrix

One of the best know frameworks – probably on everybody’s top ten list: the BCG growth / market share matrix. The tool was developed by the Boston Consulting Group in the 70s. The objective is to identify priorities of specific products within a business unit, or priorities of different business unit in a larger corporate setting. The fundamental assumption is that an enterprise should have a portfolio of products that contains both high-growth products in need of cash and low-growth products that generate cash. The BCG matrix has two dimensions: market share and market growth.




The matrix results in four quadrants:
Stars (high growth, high market share): Stars are leaders in the business. They are frequently roughly in balance on net cash flow. The goal is to hold or expand market share.
Cash Cows (low growth, high market share): Cows are often the stars of yesterday and they are the foundation of a company. Because of the low growth, investments needed should be low.
Dogs (low growth, low market share): Avoid and minimize the number of Dogs in a company. Watch out for expensive ‘rescue plans’. Dogs must deliver cash, otherwise they should be liquidated.
Question Marks (high growth, low market share): Question Marks have the worst cash characteristics of all, because they have high cash demands and generate low returns, because of their low market share. Either invest heavily, or sell off, or invest nothing and generate any cash that you can.

The BCG matrix has a number of advantages. It highlight, for example, that generic targets (in terms of growth, or return on capital), can be very misleading in a portfolio of business units. The matrix was developed in the context of an overall understanding of product life cycles: A new business may start as a small star, will grow over time, becomes one of the cash cows of the company, and may end up as a dog towards the end of its life cycle. But the concept also has a number of limitations:
It neglects the effects of synergy between business units.
High market share is not the only success factor, and doesn’t necessarily always lead to high profitability.
Market growth is not the only indicator for attractiveness of a market.
Sometimes Dogs can earn even more cash as Cash Cows.
There are also basic problems in terms of defining what is a “market,” getting the right data on market share and growth, etc.

But overall, it’s definitely a good model to know and keep in the back of your mind.