BCG Matrix stands for Boston Consulting Group Matrix which has been used for over 50 years as a method to analyse a portfolio of products.
What Is The BCG Matrix?
The BCG Matrix, otherwise known as the growth share matrix, is a portfolio management framework that helps companies decide how to strategically manage a portfolio of products or services.
What are the four quadrants of the BCG Matrix?
Dogs: These are products with low growth or market share. Question marks or Problem Child: Products in high growth markets with low market share. Stars: Products in high growth markets with high market share. Cash cows: Products in low growth markets with high market share
How to use the BCG Matrix model
The Boston Consulting Group’s product portfolio matrix (BCG matrix) is designed to help with long-term strategic planning, to help a business consider growth opportunities by reviewing its portfolio of products to decide where to invest, to discontinue or develop products. It’s also known as the Growth/Share Matrix.
The Matrix is divided into 4 quadrants. Each quadrant represents a relative position based on market growth and relative market share.
The BCG is more relevant to larger organizations with multiple services and markets. However, smaller businesses that have a broad range of products can use this to analyse their products.
Often the 80:20 rule applies. In other words, eighty per cent of profits come from twenty per cent of the products and therefore the BCG matrix provides a method to analyse your portfolio and decisions.
The Four Quadrants Explained
Think of the BCG Matrix as mapping a portfolio of products or services.
Dog products
The recommended advice is to remove any dogs from your product portfolio as they are a drain on resources. However, this can be an over-simplification since it’s possible to generate ongoing revenue with little cost. For example, in the automotive sector, when a car line ends, there is still an after-market i.e. the need for spare parts. After SAAB ceased trading and producing new cars, a whole business emerged providing SAAB parts.
Question mark products
As the name suggests, these products often require significant investment to push them into the star quadrant. The challenge is that a lot of investment may be required to get a return. For example, Amazon (see the Amazon business model)developed the Firephone but failed to gain traction in the smartphone market. Despite a serious amount of investment, it flopped and failed to compete against the established players such as Apple and Samsung.
Star products
Can be the market leader though require ongoing investment to sustain. They generate more ROI than other product categories.
Cash cow products
The simple rule here is to ‘Milk these products as much as possible without killing the cow! Often mature, well-established products. The company Procter & Gamble which manufactures Pampers nappies to Lynx deodorants has often been described as a ‘cash cow company’.
Advantages and disadvantages of the BCG Matrix
Benefits of the matrix:
Easy to perform;
Helps to understand the strategic positions of a business portfolio;
It’s a good starting point prior to further analysis.
Growth-share analysis oversimplifies the factors involved in assessing the future of a business portfolio. Some other limitations include:
Business can only be classified to four quadrants. It can be confusing to classify an SBU that falls right in the middle.
It does not define what ‘market’ is. Businesses can be classified 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 profitability. Besides, high market share does not necessarily mean high profits.
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.
BCG Matrix Example
The BCG Model is based on products rather than services, however, it does apply to both. You could use this if reviewing a range of products, especially before starting to develop new products.
Looking at the British retailer, Marks & Spencer, they have a wide range of products and many different lines. We can identify every element of the BCG matrix across their ranges:
Stars
Example: Lingerie. M&S was known as the place for ladies underwear at a time when choice was limited. In a multi-channel environment, M&S lingerie is still the UK’s market leader with high growth and high market share.
Question Marks/Problem Child
Example: Food. For years M&S refused to consider food and today has over 400 Simply Food stores across the UK. Whilst not a major supermarket, M&S Simply Food has a following which demonstrates high growth and low market share.
Cash Cows
Example: Classic range. Low growth and high market share, the M&S Classic range has strong supporters.
Dogs
Example: Autograph range. A premium-priced range of men’s and women’s clothing, with low market share and low growth. Although placed in the dog category, the premium pricing means that it makes a financial contribution to the company.
You can also apply the BCG model to areas other than your product strategy.
For example, we developed this matrix as an example of how a brand might evaluate its investment in various marketing channels. The medium is different, but the strategy remains the same- milk the cows, don’t waste money on the dogs, invest in the stars and give the question marks some experimental funds to see if they can become stars.
How the BCG Matrix Fits With Other Forms of Analysis
The BCG Matrix is a portfolio level of analysis. The two other types of analysis related to this are the Ansoff Matrix and the product lifecycle.
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The Product Life Cycle (PLC) has become a leading concept to successfully establish products and services on the market.
The PLC consists of different phases that allow managers to visualise the projected sales and profit development of their product portfolio.
This allows them to proactively plan the necessary marketing measures to extend the life cycle in phases where profits and market shares reach their highest point.
What is the Product Life Cycle?
The basic model of the product life cycle defines five different phases that a product passes through from market launch to eventual market exit:
The profit and sales performance during the product life cycle
Figure 1 Product life cycle and cash flow
Phase 1: Introduction
The first phase describes the market launch, which begins with the market entry of the product. From this point on, the product can be purchased by customers.
During the market launch phase, advertising the product is an integral part of a successful and sustainable marketing strategy to ensure consumers become aware of the new offer.
Managers must put special emphasis on explaining those products whose added value or function is not immediately clear to the customer.
Depending on the industry, product type and marketing strategy, products are often advertised before the actual sales launch and sometimes even offered for pre-order.
The video games industry is an example where companies have long adopted pre-sales processes to build customer anticipation before releasing a product. FMCG companies, on the other hand, make little to no use of such pre-order sales models.
The market launch phase is cost-intensive and thus negatively affects a firm’s profit curve. The reason for that is simple:
Companies must first invest more money in marketing activities than they can earn with the new product. Once the company starts to realize more sales, profits also start to rise, resulting in a positive profit ratio.
The end of the market introduction phase is marked by reaching the break-even point. The point from which the sales revenue cover the cost of selling the product.
Break-Even = Sales x Price – Sales x Variable Costs – Fixed Costs = 0
Note that not every product reaches the next phase of the life cycle. Many products already fail after their launch and/or never break even.
Phase 2: Growth
The following growth phase is characterised by a continuous increase in sales as more and more customers buy the product.
The growth phase is crucial for brands as they gain momentum and start to realize their first profits. Their focus then shifts from pure marketing to meeting demand forecasts to ensure they remain available across all retail channels.
In this phase, competitors also become increasingly aware of the product in question. If they see an attractive market entry opportunity, they will launch their own versions of it. This may result in price wars and imitations, which can harm the long-term success of the product.
Phase 3: Maturity
When the maturity phase is reached, the strong growth curve from the previous stage begins to flatten.
Most products reach their most profitable state in the maturity phase, as they are now established in the market and therefore no longer need to be promoted so heavily.
In the maturity phase, growth is achieved almost exclusively by poaching customers from competing products in the industry.
Brands need to continuously build and focus on their own brand and marketing messages to not fall victim of these approaches themselves.
Phase 4: Saturation
A decline in turnover and profits characterises the following saturation phase. Market growth completely ceases to exist.
Instead, companies strive for cost leadership in their industry. The aim is to offer products cheaper than other market participants to increase profits while sales stagnate.
If cost leadership is achieved and successfully sustained, the saturation phase allows firms to secure their market share and withstand competitors’ attempts to initiate price wars in their industry.
Phase 5: Decline
Finally, the product life cycle ends in the degeneration phase. It is characterised by an increasing loss of profit, turnover and market share, which can no longer be compensated for by a firm’s marketing efforts.
The focus in this phase is to bring innovations to market that satisfy the current needs of customers.
The FMCG industry is a great example in which companies are constantly launching new product features to revive their products’ life cycle: Razors get more blades, and snack bars launch with new flavours based on seasonal customer trends.
When the degeneration phase is reached, the basic model of the product life cycle ends; the product “dies”.
A way of visualising the idea of product life cycle in terms of market share and growth.
As a product moves through its life cycle the price elasticity of demand will also tend to change - this is shown in figure 2 below. As a product becomes more mature, it is likely that competition in the form of substitute products will increase which should make the demand more price elastic. This may well reduce the profit margin the firm earns on the product unless they are able to reduce costs correspondingly.
Figure 2 Product life cycle and elasticity
The Boston Consulting Group (BCG) Matrix
Based on the basic product life cycle model above, the Boston Consulting Group developed its own BCG Matrix. It aims to identify the strategic potentials of a company’s existing product portfolio.
The Boston Consulting Matrix
A core component of this analysis is to determine, in which of the four life cycle quadrants (stars, question marks, cash cows, poor dogs) a product is currently situated.
Companies can measure this by looking at the existing market growth and relative market share of their product.
Relative market share = (Market share of a company / Market share of its strongest competitor ) * 100
Due to its strategic and quantitative orientation, the BCG matrix has become the preferred choice for companies to monitor the product life cycle over time.
Stars
Products with a high relative market share and high market growth are referred to as Stars.
Managers should invest in products within this quadrant to benefit from the fast-growing market segment for as long as possible and to enable further growth.
Question Marks
A product in the Question Mark stage has a low relative market share and high market growth. At this stage, products have usually just entered the market.
The question mark quadrant corresponds to the market introduction phase of the basic PLC model explained earlier. Further growth in relative market share is again achieved through investments in marketing activities.
Cash Cows
As soon as market growth slows down, but high relative market shares continue to be recorded, products are referred to as Cash Cows.
These products continue to generate substantial profits due to lower cost structures and represent the most profitable quadrant of the BCG matrix.
However, similar to the maturity phase of the basic PLC model, a higher market share can now only be achieved by poaching customers from existing customers. The market is saturated.
Poor Dogs
At the end of the product life cycle, products in the low market growth and relative market share range are referred to as Poor Dogs.
They are the problem products within a product portfolio and increasingly generate losses.
In this stage, the market exit or a product relaunch must be carried out to sustainably improve the financial situation of the product line.
This diagram highlights the typical product life-cycle pattern – however, there are variations of this pattern for fads (short-term products), style and fashion products as well as products that are essentially reinvented for the consumer and then go from maturity into another period of growth.
However, for the purposes of understanding the BCG matrix, we will concentrate on the typical product life-cycle curve only.
As you can see, stars and question marks only occur in the introduction and growth stages. While cash cows and dogs exist during times of maturity and decline. Therefore, new product portfolios categories will start off as either a star or as a question mark and then in the longer term will progress downwards (to either a cash cow or a dog).
In today’s market, many new products and technology breakthroughs are being adopted by the market much faster than previously, which then indicates the period of time that a product portfolio will remain as a star or as a possible question mark is decreasing.
Conceptually, the product life cycle, suggests that most product portfolios will categories will progress through different stages of rates of growth – from introduction to growth to maturity and then to eventual decline.
Introduction is very early growth, while a mature market should also have a small level of growth, usually almost in line with increases in GDP.
This matrix considers the two strategic parameters of market share and market growth when it allocates a priority to a product in terms of organizational focus and activity. In order to appreciate how this prioritization is assessed you need to understand how market share and market growth are interrelated.
Market Share
Market share is the percentage of either revenue or volume of sales that your organization has of the total market. In other words, the higher your market share, the bigger the proportion of the market you control and influence. The matrix also assumes that earnings rise as your market share does. This is not always the case and is one of the limitations of this analysis.
The Boston Matrix also makes a big assumption in its interpretation of market share and how it relates to profitability. It assumes that a high market share means that this organization is highly profitable for this product or service. It attributes this to the organization being well established and knowledgeable about the market, and having attained the advantages of the economies of scale.
This may have been a safe assumption nearly fifty years ago, but it is not necessarily the case today. There are many reasons why a product may be a market leader but not necessarily the most profitable. For example, it may be fulfilling the role of a loss leader in terms of the initial purchase, but then profits are made through the associated products. For example,
The leading manufacturer of desktop printers may have the largest market share but they may be prepared to make a loss on each printer sold because they make their profit from the sale of the proprietary printer cartridges that are sold subsequently.
The usual way that market share is expressed is as a ratio relative to your largest competitor, because this illustrates the extent to which you dominate the market. So if you have a 20% market share, and your nearest competitor has a 10% share the ratio is 2:1.
Whether a relative share is high or low depends on the industry. For example, in the Fast Moving Consumer Goods (FMCG) market the brand leader is often very stable and profitable. In fact, market share in FMCG tends to follow the '123 rule.' This means that the brand leader's share is double that of the nearest competitor and triple that of the next nearest.
Market Growth
Market growth is the percentage growth compared to the previous year. It is used as a measure of how attractive a market is to existing providers and potential new entrants.
High market growth creates an environment in which it is relatively easy for organizations to grow their profits, even if their market share remains the same.
In contrast, if your product is in a low growth market you will face intense competitive activity and your organization will need to employ significant effort just to retain its market share, even if it is an established provider. Often such market retention is only achieved by aggressive discounting, which makes such a low-growth market less profitable and unattractive.
The Boston Matrix uses cash flow as its means of categorizing an organization's product or service portfolio. It uses market share to illustrate how well a product or service can generate cash and it uses market growth to indicate how much future cash is required.
Factors influencing the Product Life Cycle
Regardless of whether the basic PLC model or the BCG matrix is used: The length of the product life cycle varies from product to product.
Companies can influence the product life cycle through clever pricing, branding campaigns, and after-sales activities.
But it’s not all driven by internal factors.
Changes in the political, legal or economic context can also influence the product life cycle just as much as the sudden market entry of competitors or substitute products.
Conclusion – The Product Life Cycle as a strategic planning tool
The key advantage of the product life cycle is that its concept can easily be applied to the real world.
Businesses can evaluate their product portfolio using either the basic PLC model or the BCG matrix, taking into account market data and internal data points.
Depending on which phase a company’s individual products are in, marketing investments must be made, or new products must be researched and developed with the foresight to avoid a loss of sales.
The concept of the product life cycle can also be used to define specific recommendations for forward-looking marketing tactics. Yet, decision-makers should always take a holistic view in such an analysis.
This is because the changing market conditions also have a direct and indirect impact on the lifecycle stages of their products.
