BCG Matrix 1

BCG Matrix:
If Im the owner of an established company, I may wonder how best to deploy resources
to enhance your prospects. 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.'"
Understand The BCG 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.
Figure: BCG Matrix

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.
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.
Alternatives and next steps

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.
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." Other analysis models include Porter's Five Forces,
SWOT and SPACE.
Once your products have been categorized using any of these tools, your company will
need to decide on a strategy for exploiting their strengths and correcting their
weaknesses. The Quantitative Strategic Planning Matrix (QSPM) can help you sort
through alternatives and settle on the right approach.

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BCG Matrix:

Understand The BCG Matrix:

Figure: BCG Matrix

Understanding cash flow

Alternatives and next steps

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