A BCG matrix, also known as a Boston matrix or growth-share matrix, helps organizations figure out which areas of their business deserve more resources and investment.
Developed by the Boston Consulting Group in the 1960s, the matrix framework categorizes products within a company’s portfolio according to each product’s growth rate, market share, and positive or negative cash flow. By using positive cash flows, a company can capitalize on growth opportunities.
“The payoff for leadership [in market share] is very high indeed, if it is achieved early and maintained until growth slows,” Boston Consulting Group’s Bruce Henderson told clients. “Investment in market share during the growth phase can be very attractive, if you have the cash. Growth in market is compounded by growth in share. Increases in share increase the profit margin…The return on investment is enormous.”
Parts of the growth-share matrix
The growth-share matrix helps organizations assess its companies and business units on two levels. The first is its level of growth within the market, while the second measures its market share relative to the competition within its industry.
To help businesses further analyze its assets, the matrix divides the business units or products into four categories, including:
Stars: The business units or products that have the best market shares and generate the most cash are considered stars. However, because of their high growth rate, stars also consume large amounts 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 that the market growth rate declines.
Cash cows: Cash cows are the leader in the marketplace and generate more cash than they consume. These are business units or products that have a high market share, but a 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.
Dogs: Business units or products that are dogs are those have both a low market share and low growth rate. They don’t earn a lot of cash, nor do they consume a lot. Most likely these aspects of a business are making little, if any money. 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.
Questions marks: These parts of a business have high growth prospects, but a low market share. They are consuming a lot of cash, but bringing little back in return. In the end, questions marks — also known as a problem child — are losing money. However, since these business units are growing rapidly, they do have the potential to turn into a star. According to NetMBA, question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow their market share.
BCG matrix examples
On the Cool Rules Pronto blog, Freddy J. Nager, Founder & Fusion Director, Atomic Tango LLC, examined how Coco-Cola’s BCG matrix might look. According to Nager, Coca-Cola’s cash cow is their namesake soft drink Coca-Cola, their star is their bottled water Desani, the dog is their sweetened juice drink Hi-C and their question mark is their energy drink brand Full Throttle.
Based on this matrix, Nager said Coca-Cola would better know where to invest more money and what products to back away from.
“As Coca-Cola’s CMO, you would use income from Coke to invest primarily in Dasani and Full Throttle, while looking to sell off Hi-C to some private equity fund with too much cash on its hands,”Nager wrote in the blog.
Making a BCG matrix
In order to create a BCG matrix, businesses need to gather all of the market share and growth rate data on their business units or products. With those in hand, they will quickly be able to fill in their matrix.
When creating a growth-share matrix, businesses want to make one large square and divide it into four equal quadrants. Along the top of the entire box is market share or cash generation, while running down the left hand side of it is growth rate or cash use. On the left hand side of the top of the box is high market share, with low market share 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.
Stars go into the upper left quadrant, and questions marks are put in the upper right square. At the bottom, cash cows go on the left, and dogs are placed on the right.
What this means is that stars have both high market share and growth rate, while questions marks have low market share and high growth rate. On the bottom, cash cows have low growth rate and high market share, with dogs having both low market share and growth rate.
Once a company plots out its matrix, it can begin to further analyze what it is dealing with. According to Economist, the conclusions drawn from such an analysis are to transfer the surplus cash from a conglomerate’s cash cows to the stars and the question marks, and to close down or sell off the dogs. In the end, question marks reveal themselves as either dogs or stars, and cash cows become so drained of finance that they inevitably turn into dogs.