The BCG Matrix (aka Boston Matrix) is a popular tool which can help a business analyze its portfolio.
In a business sense, a portfolio simply means the range of products sold by a business.
No business has an infinite supply of money to invest. So, when a business has a portfolio of products it must decide how to allocate investment, such as marketing budget or R&D resource, to that portfolio. The Boston Matrix is a tool which can help in making these decisions.
In this article, we analyze products, but the BCG Matrix can also be used to evaluate individual business units (called Strategic Business Units (SBUs)) or any other cash-generating assets, such as property.
The BCG Matrix works on the principle that every company should have a portfolio containing both high-growth products requiring cash investment and low-growth products that throw off excess cash. Having both types of products will ensure long-term business success.
The BCG Matrix is a simple grid with Market Growth Rate on one axis, and Relative Market Share on the other.
Each product in a business will be assessed against both of these criteria and then placed into the matrix. This will result in each product of the portfolio falling into one of four categories:
These are products with a high-market-share in a slow-growing market. They are profitable, generating good margins, and throwing off excess cash without the need for significant investment. Cash Cows need to be milked for profits but given minimum investment. In a nutshell, we want to milk these products without killing the cow!
These are products with a high-market-share in a growth market. These stars have the potential to provide a high proportion of the future profits of the business. It is thus advisable for a business to invest in these products to maintain market leadership, thus securing future profits as the market continues to grow.
These are products with a low market share in low-growth markets. If these products are not profitable you may wish to divest them or consider a red ocean strategy. If a dog is profitable you should invest as little as possible into it, or even consider divesting it.
These are products with a low market share in a high-growth market. Because of this their growth-rate going forward is unclear and further investigation is needed to decide what to do with these products. These products might become stars, but equally, they might crash and burn as it’s not easy to spot a future star.
The BCG Matrix is a strategic tool to provide an initial screen of a businesses opportunities. By then determining a strategy for each individual product of either hold, divest, harvest, or build, the portfolio mix of a business can be maintained in a profitable combination, for the long-term.
For our example, we’re going to analyze Apple’s product portfolio. You can see this portfolio mapped onto a Boston Matrix in the diagram below.
From this diagram we can see:
One final note on plotting your BCG Matrix in practice. In the example below, the area of the circle in the diagram represents the value of sales for a product. This is particularly useful as it allows you to visualize your company’s strengths and weaknesses in terms of cash-flows.
The BCG Matrix is actually based on the product lifecycle as you can see in the diagram below.
Interpreting this diagram we can see that most products will start life as question marks.
Those question mark products that become successful, that is, those products that can maintain their category leadership as their market grows, will turn into stars.
Eventually, as market growth slows they turn into cash cows. These cash cows generate high profits and require little in the way of investment.
Towards the end of the product’s life, the cash cow becomes a dog as sales growth stops completely or starts to decline.
The advantages of the Boston Matrix include:
The disadvantages of the Boston Matrix include:
The BCG Matrix is a method of examining a portfolio of products by relative market share and relative market growth.
This results in the portfolio broken down into stars, cash cows, dogs, and question marks.
The information within the matrix can then be used to create the right portfolio mix (or a balanced portfolio).
In other words, the portfolio should have enough stars to secure the future high-growth of the organization. It should have enough cash-cows to supply the funding for this future growth, and it should have enough question marks in the portfolio with the potential to be turned into future stars.