How should your company progress? If you are looking for the right strategy for your products or services, the BCG matrix can help. This portfolio matrix helps with analysing business units e.g. man­u­fac­tured products. What are the chances of this product being suc­cess­ful? And above all: is your portfolio set up well enough to achieve long-term success for your company? The BCG matrix tells you what you need to know.

The system was developed for the Boston Con­sult­ing Group, which is why the matrix is also known as the “BCG portfolio” or simply the “Boston matrix.” The founder of the group, Bruce Henderson, had already invented the system with four sectors in 1970. His goal was to provide companies with a simple tool with which they could plan their long-term strategy: Which product lines should be invested in and which shouldn’t?

What is the BCG matrix?

Similar to the Ansoff matrix, the portfolio matrix consists of four areas, which in turn result from the com­bin­a­tion of four different factors. The matrix itself is in a co­ordin­ate system: the x-axis indicates the relative market share and the y-axis the market growth. Both scales range from “low” to “high.” A new zone starts on half the scale. The products in the company’s own portfolio can be placed in these zones depending on the two axes.

  • Market share: the relative market share results from the company’s own market share compared to that of its strongest com­pet­it­or. If the value is greater than 1, you are the market leader, otherwise you’re the market follower.
     
  • Market growth: Describes the growth of the market for a par­tic­u­lar product unit i.e. the current market volume in com­par­is­on to that of the previous period; it is stated as a per­cent­age.
Fact

The Boston matrix is also called “Growth share matrix” because of its axis des­ig­na­tion.

A third dimension results from the sales of the cor­res­pond­ing product. This is expressed by the size of the circle rep­res­ent­ing the re­spect­ive business unit.

Depending on which zone the product is located in, different strategies can be es­tab­lished for your further planning.

Question marks

Products in the “question mark” category are char­ac­ter­ised by high market growth combined with a low market share. These are generally new products and services that still have a small market share compared to that of the com­pet­i­tion, but are in a rapidly growing market. These products are called question marks because it’s im­possible to estimate any future de­vel­op­ment. In order for the products to be suc­cess­ful in the long term – i.e. to move into the “stars” category – en­tre­pren­eurs have to invest a great deal.

The problem is that it requires a lot of in­vest­ment to make a question mark product more suc­cess­ful because the item can’t support itself. The strategy is therefore very clear: selection. A company cannot afford to fund every business unit in this area and must choose exactly which product it wants to invest money in.

Stars

Stars have both a high market share and high market growth. As market leaders, these “stars” have a high return on in­vest­ment (ROI). Therefore, it’s not a problem to continue investing in these products and therefore ensure long-term success. If stars maintain their high market share over a longer time, they can become cash cows.

Cash cows

Products or services known as “(dairy) cows“ also have a re­l­at­ively high market share, but are in a market that is growing very slowly or not at all. They generate a very high and steady cash flow even without any in­vest­ments. On the contrary: Products found in the cash cow area of the portfolio matrix generate the financial means that are invested in question marks or stars.

Poor dogs

“Poor dogs” are products or services that a company is phasing out. Market growth is low, stable, or even declining. The relative market share is also low: compared to the market leaders, hardly any sales are generated with these products. As a result, products like these are barely self-sus­tain­ing. Companies must pursue a di­vest­ment strategy when the product can sustain itself no longer. The capital contained in these products is extracted again in order to have more liquid funds.

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The BCG matrix explained using an example

We’ll use a fictional company: Bob’s Butchers. With the help of the Boston Con­sult­ing Group matrix, the managing director of the company wants to review the portfolio and develop sus­tain­able strategies. The company currently has six products on the market: beef goulash, pheasant, chicken, pepperoni, chorizo, and a ve­get­ari­an sausage. Bob’s Butchers has two com­pet­it­ors: Brenda’s Butchers and Barry’s Butchers. The BCG matrix first of all needs an analysis of the market and the com­pet­i­tion in order to calculate the market growth and relative market share figures. The managing director receives the following (fic­ti­tious) values:

Market growth

To determine market growth, the managing director looks at the entire market and compares the two previous years with each other.

  2016 (in millions. £) 2017 (in millions. £) Market growth
Beef goulash 12 13.8 15 %
Pheasant 15 15.75 5 %
Chicken 2 2.04 2 %
Pepperoni 7.3 7.8 7 %
Chorizo 2 2.36 18 %
Ve­get­ari­an sausage 5.2 6 15 %

Relative market share

For the relative market share, the market shares of your own company and those of all com­pet­it­ors must be taken into account. The value results from how your own company relates to the market share of the most suc­cess­ful com­pet­it­or in the re­spect­ive business unit.

  Bob’s Butchers Brenda’s Butchers Barry’s Butchers Rel. market share
Beef goulash 55 % 40 % 5 % 1,37
Pheasant 27 % 54 % 19 % 0,5
Chicken 16 % 36 % 48 % 0,33
Pepperoni 60 % 32 % 8 % 1,87
Chorizo 20 % 52 % 28 % 0,38
Ve­get­ari­an sausage 34 % 18 % 48 % 0,7

Now Bob’s Butchers’ managing director can enter their products in the BCG matrix from the cal­cu­lated data. In doing so, it also takes into account the sales generated by each business unit and in­cor­por­ates this in­form­a­tion into the size of the circles.

Now Bob’s Butchers’ managing director can see how to plan in­vest­ments in their products. The pep­p­er­onis have turned out to be cash cows; they generate enough cash flow to finance the beef goulash so this is a star that the managing director should def­in­itely invest in. However, the question is how should the manager deal with the two questions mark products: chorizo and ve­get­ari­an sausage? However,

It may be advisable to make a selection: The managing director could, for example, decide to only promote ve­get­ari­an sausages if they think this could be the most promising. If the ve­get­ari­an sausage develops into a star, Bob’s Butchers must not forget to create a new question mark to be suc­cess­ful in the long run. The company also has two poor dogs: pheasant and chicken. While the pheasant still generates quite high sales, the chicken is very poorly po­si­tioned. This tells the managing director one thing: dis­in­vest­ment.

Fact

The BCG matrix enables a company to sus­tain­ably plan the future of business units and in­vest­ments.

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