How to use the Boston Consulting Group matrix (BCG matrix)
The Boston Consulting Group matrix (also known as the Growth-Share matrix) is for reviewing a product portfolio or determining the future for different business units. Products from the portfolio are positioned in four quadrants of the matrix defined by their prospects for market growth and their relative market share.
The four quadrants are:
1. Dogs: These are products with low growth and low market share.
2. Question marks: These are products in high growth markets and with low relative market share.
3. Stars: These are products in high growth markets with high relative market share.
4. Cash cows: These are products in low growth markets with high relative market share.
Note that some people like to position the relative market share in opposite positions to those in the diagram (ie high share to the right and low share to the left).
The matrix helps strategic planning. A business can decide the best way forward based on the opportunities determined by growth prospects and the relative strengths in that field.
Bruce Henderson, the Boston consultant who developed the tool, believed that companies should have a balanced portfolio of products with different growth rates and different market shares. This balance of products is important in order that there will always be new products on the horizon ready to take over from the old ones that are towards the end of their lives.
When using the tool be clear as to the definition of your "market". If your definition is too broad, there is a danger that you will miss the opportunity. Many B2B companies operate within niches. A company making grass cutting equipment would need to separate out the products it makes that are used by the general public and those used by professionals. It may even want to confine the analysis to just one segment – eg mowers used by golf clubs, or local authorities etc.
The matrix is most useful to large companies. Small companies find that their relative market share is very small and so there is no useful scatter across the matrix.
The readings of the tool shouldn't be seen as definitive. For example, a business unit positioned as a Dog may in some way support other business units. The Dog may be paying its share of the office and factory rent and management charges in the business. If the Dog is closed or sold, the rest of the business units will have to take on these costs. Furthermore, sometimes Dogs can make more profit and generate even more cash than Cash Cows.
Using the BCG Matrix
Step 1 – be clear on market definitions
The BCG tool can be used to analyse the future of product lines in a marketing portfolio or strategic business units in a corporate business. Use the tool for one or the other. Don’t mix product opportunities and strategic business units in the same analysis as it would muddy the waters. Also, be clear as to the niche in which the products operate. If you sell premium products, your market share analysis and growth opportunities should only cover high quality and high priced products.
Step 2 – calculate the relative market share
The tool presupposes that you know your and your competitors’ market shares. Many B2B companies don't have this privileged information. However, it is usually sufficient to make fair estimates. Your products can be positioned as having market shares that are high relative to the competition, about the same, or relatively low. These judgments are usually possible even without detailed data.
Market share higher than most of the competition = High
About the same as most of the competition = Medium
Market share lower than most of the competition = Low
Step 3 - estimate the future market growth rate
Predicting future growth rates isn’t easy. The past is some guide but who knows whether things will change? Independent forecasts may be found on the internet. Trust your own knowledge and that of your colleagues. It should be sufficient to make an estimate of your position in your niche. The BCG is a tool to determine a strategy and strategies are long-term. This means you should be taking a 3 to 5 years look into the future. Consider a PEST analysis to help you arrive at an objective view on growth prospects. Do be as objective as you can about the future. It is very easy to assume a market will grow at 10% per annum just because you hope it will. Once again, approximations will suffice as it is always difficult to be precise with forecast growth rates.
8% per annum or more = High
Above zero and below 7% per annum = Medium
Zero or negative growth = Low
Step 4 – plot the position of your product groups/business units on the matrix
You are now in a position to plot the different product groups on the matrix. Consider making each product group a circle with the area of the circle equal to the volume or value of sales of that product group. This will add another perspective that will help you judge the implications of your strategy.
Step 5 – interpret the position of your product groups/business units
The tool is intended to help determine the balance between products within a portfolio. There are no hard and fast rules though there are some generalities.
Stars are attractive because of their high share and high growth rate. However, they can burn a lot of cash. So too can Question Marks which haven’t yet achieved high market shares. This means that a balanced portfolio requires products that generate cash to help future growth. Cash can come from Cash Cows and Dogs. Too many stars could put too much strain on cash resources. Too many Cash Cows and Dogs could indicate growth problems for the future.
Dogs have an unfortunate name, suggesting that they should be eliminated from the portfolio. A company in this quadrant could have a low market share and low growth rates and yet be profitable – think the iMac or the BIC disposable razor. Not all Dogs should be put down!
The key to interpreting the matrix is balance and direction. Are there too many or too few products in a quadrant? Can any of the products in a quadrant be moved – can Question Marks be turned into Stars and can Dogs be turned into Cash Cows? How much influence can you have over the future of products in the quadrant? In general it is only your relative market share that you can change and it could cost a good deal of money to do so.