Business models are based on providing products or services that are profitable now, but they also attempt to identify changes in offerings that will keep the company profitable in the future. The current moneymakers are easy to identify now, but a good business strategy also asks, "What about the future?"
Created by the Boston Consulting Group, the BCG matrix – also known as the Boston or growth share matrix – provides a strategy for analyzing products according to growth and relative market share. The BCG model has been used since 1968 to help companies gain insights on what products best help them capitalize on market share growth opportunities and give them a competitive advantage.
Reeves Martin, senior partner and managing director of the Boston Consulting Group, said that nearly 50 years after its inception, the BCG matrix model remains a valuable tool for helping companies understand their potential.
Creating your matrix
To analyze your own company, first, you'll need data on the relative market share and growth rate of your products or services.
When examining market growth, you need to objectively determine your competitive advantage over your largest competitor and think in terms of growth over the next three years. If your market is extremely fragmented, however, you can use absolute market share instead.
Next, you can either draw a BCG matrix or find a BCG matrix template program online. There are several that are free, available for subscription or are part of another charting program, such as the free one by Miro.
In this four-quadrant BCG matrix template, market share is shown on the horizontal line (low left, high right) and growth rate is found along the vertical line (low bottom, high top). The four quadrants are designated Stars (upper left), Question Marks (upper right), Cash Cows (lower left) and Dogs (lower right).
Place each of your products in the appropriate box based on where they rank in market share and growth. Where you choose to set the dividing line between each quadrant depends in part on how your company compares to the competition.
Here is a breakdown of each BCG matrix quadrant:
- 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 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 a high growth market slows down. A key tenet of BCG strategy for growth is for companies to invest in stars.
- Cash Cows: A cash cow is a market leader that generates more cash than it consumes. Cash cows 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 a question mark into a market leader, cover the administrative costs of the company, fund research and development, service the corporate debt, and 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: Dogs, or pets as they are sometimes referred to, 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 consume a lot of cash but bring little in return. In the end, question marks lose money. However, since these business units are growing rapidly, they have the potential to turn into stars in a high growth market. Companies are advised to invest in question marks if the product has the potential for growth, or to sell if it does not.
Using the BCG matrix to strategize
Now that you know where each business unit or product stands, you can evaluate them objectively.
In an article on Marketing 91, author Hitesh Bhasin outlines four potential strategies you can follow based on the results of your BCG matrix analysis:
- Increase investment in a product to increase its market share. For example, you can push a question mark into a star and, finally, a cash cow.
- If you can't invest more into a product, hold it in the same quadrant, and leave it be.
- Reduce your investment and try to take out the maximum cash flow from the product, which increases its overall profitability (best for cash cows).
- Release the amount of money already stuck in the business (best for dogs).
You need products in every quadrant of your BGC matrix to keep a healthy cash flow and have products that can secure your future.
The role of cash flow in the BCG matrix
Understanding cash flow is key to making the most of the BCG matrix. In 1968, BCG founder Bruce Henderson noted 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.
- To grow, you need to invest in your 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. You need to get your payoff from growth when the growth slows; you lose your opportunity if you hesitate. The payoff is cash that cannot be reinvested in that product.
That last point is even more important now than ever. The market moves more quickly now than it did 40 years ago, and BCG has since published recommended revisions to analyze and act on the matrix information.
Maintaining a healthy supply of question marks readies you to act on the next trend. Cash cows, conversely, need to be milked efficiently, because they may fall out of favor – and profitability – more quickly. You can find more strategies 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."
A real-life BCG matrix example
To understand BCG-based growth, it can be worthwhile to look at a real-life BCG matrix example and then share the matrix with your team. A commonly used BCG matrix example is that of Coca-Cola, which owns many more drinks than just its titular brand.
In the Coca-Cola BCG matrix example, Diet Coke and Minute Maid are question marks, as these names attract a modest audience but still have plenty of room to grow. Its bottled water brands Kinley and Dasani are stars since they dominate the market in, respectively, Europe and the U.S. and show no signs of slowing growth.
Its own titular drink is a cash cow since it experiences low growth despite its high market share, a categorization that makes sense given Coca-Cola's ubiquity among soft drinks. However, Coca-Cola is also a dog, because legislation against soft drinks – not to mention public sentiment turning against them – has lessened soda sales. Coca-Cola's real-life BCG matrix example provides an important takeaway: Sometimes, a product can fall into more than one category.
An alternative for another perspective
While a great tool, the BCG matrix isn't for every business. Some companies find they don't have products in each quadrant, nor do they have steady movement of products among the quadrants as they progress in their product life cycle.
Some consultants advocate the use of the GE/McKinsey matrix instead, which 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 an individual company's control. Comparing the two models can reveal hidden insights that fuel increased growth for your company.
Additional reporting by Max Freedman, Katherine Arline and Karina Fabian. Some source interviews were conducted for a previous version of this article.