What is BCG Matrix?

April 27, 2018

The BCG Matrix, or the Boston Matrix, or the Boston Box, or the B-Box, is a chart created by Boston Consulting Group in the year 1968 to help businesses analyse their Business Units, and product lines. This strategic management tool, helps the company to allocate resources based on two parameters.

The Chart

bcg matrix

As it can be seen. It is similar to a scatter chart. The two axes measure two parameters Relative Market Share and Industry or Market Growth Rate.

The ParametersThe BCG matrix rates a product or a business based on two main parameters, how much cash it generates, and at what rate is the industry growing.

Relative Market Share indicates likely cash generation. It is based on the simple fact that more the market share of the company, more cash it will generate in revenues. Now, this is a comparative value, e.g., if the business has 20%, and the largest competitor also has the same 20% share, the ratio would be 1:1. If the largest competitor has 60% share, the ratio becomes 1:3 indicating that the business/brand is in a relatively weaker position. If the competitor in question has only 5% share, the ratio becomes 4:1, indicating a very strong position, which means greater profitability and cash inflows.

Industry/Market Growth Rate is seen as an indicator of cash outflow. Another assumption of BCG matrix is that rapid growth of a business in a growing market, is usually "bought". Higher growth rate is hence seen as a higher demand for investment or cash outflow. A cut off point is determined(usually 10%) , and any growth figure exceeding this cutoff is deemed to be significant (and likely to create significant cash outflow). This assumption makes the BCG matrix unworkable for certain businesses or products. However a more comprehensive definition of growth, which talks about maturity of a market, business or product, future prospect, and attractiveness can be used.

The QuadrantsPlotting these parameters on the BCG matrix, will essentially make a business/product, fall into one of the four quadrants Star, Question Mark, Dog, or Cash Cow

StarA star business or a star product is characterized by high growth rate and high market share. Maintaining market share in such a scenario will need a significant spend, but such cost only retains the market leadership with the business. Hopes are that when the market matures/slows down, Stars will turn into Cash cows.

Question MarkQuestion marks experience a complicated situation. While the market has high growth rate, the question mark business has low market share. This means that there is heavy cash outflow, while low cash inflow, resulting in net cash outflow. Question mark businesses should be studied carefully and corrective/betterment action should be taken. If the business succeeds in gaining market share, it will become a star, and eventually a cash cow, when the market slows down. But if it fails to become a market leader, it will eventually degenerate to a dog when the market slows.

DogDogs are businesses/products which are in a slow growing market. They also hold a very low market share. From an accounting point of view, these units are considered worthless as there is barely cash generation to attain profitability. These businesses may however be self sustaining ones, managing to break even, thereby providing social benefits like employment opportunity, and assisting other businesses(suppliers etc). It is generally thought that Dog products/businesses must be discontinued/closed down.

Cash CowCash cows are high market share businesses, in a slow growing market. These businesses generally generate more cash flow than required to sustain business. They are regarded as "boring" businesses in a mature market. They would be "milked" frequently with very low investment, as such investment would not bear much fruits in a low growth market.

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