Boston Consulting Group (BCG Matrix)
Boston Consulting Group (BCG Matrix):
The BCG matrix is a strategic planning tool that helps you analyze your product portfolio and decide which products or services to invest in, maintain, or divest. It was developed by the Boston Consulting Group in the 1970s and is still widely used by managers and consultants today.
The BCG matrix is based on two dimensions: market growth rate and relative market share. Market growth rate indicates how fast the market for a product or service is growing, while relative market share indicates how well a product or service is performing compared to its competitors.
The BCG matrix divides the product portfolio into four quadrants, each representing a different type of product or service:
1. Stars:
These are offerings characterized by a significant market growth rate coupled with a robust relative market share. They are the leaders in their markets and have great potential for further growth and profitability. However, they also require a lot of investment to maintain their position and fend off competitors. The goal for stars is to turn them into cash cows when the market growth slows down.
2. Cash cows:
These are products or services that have a low market growth rate but a high relative market share. They are the cash generators of the portfolio, as they have a stable and loyal customer base and low costs. They provide the funds for investing in other products or services, especially stars and question marks. The goal for cash cows is to maintain their profitability and market share for as long as possible.
3. Question marks:
These are products or services that have a high market growth rate but a low relative market share. They are the risky bets of the portfolio, as they have uncertain prospects and require a lot of investment to increase their market share and become stars. The goal for question marks is to either invest in them to make them stars or divest them if they are not profitable or strategic.
4. Dogs:
These are products or services distinguished by a lethargic market growth rate and a rather modest market share. They are the weak performers of the portfolio, as they have low profitability and little or no growth potential. They may generate some cash flow, but they also consume resources that could be better used elsewhere. The goal for dogs is to either divest them or reposition them if they have some strategic value.
Limitations:
The BCG matrix can help you make strategic decisions about your product portfolio by providing a simple and visual way to assess the strengths and weaknesses of your products or services. Nevertheless, it does come with certain constraints that warrant your attention:
- It assumes that market growth rate and relative market share are the only factors that determine the success of a product or service, while ignoring other factors such as customer preferences, competitive advantages, innovation, quality, etc.
- It assumes that high market share always leads to high profitability, while ignoring the effects of economies of scale, learning curve, pricing strategy, etc.
- It assumes that markets are clearly defined and stable, while ignoring the dynamics of changing customer needs, emerging technologies, new entrants, etc.
- It assumes that products or services are independent of each other while ignoring the synergies and interdependencies among them.
Therefore, you should not rely on the BCG matrix alone to make your strategic decisions but rather use it as a starting point for further analysis and evaluation.
To illustrate how the BCG matrix works in practice, let’s look at some examples of how different companies use it to manage their product portfolios.
Examples:
1. Apple and the BCG Growth Matrix:
Let’s apply the BCG Growth-Share Matrix to Apple:
Star: iPhone
Cash Cow: iPad
Question Mark: Apple Watch
Dog: iPad
Stars:
The iPhone is Apple’s star product, as it dominates the smartphone market and generates huge revenues and profits for the company. However, it also faces fierce competition from rivals such as Samsung, Huawei, Xiaomi, etc., so Apple needs to keep investing in research and development, marketing, distribution, etc., to maintain its leadership position.
Cash cows:
The iPad and the Mac are Apple’s cash cows, as they have a loyal customer base and a strong brand image in their respective markets. They provide steady cash flow for Apple to invest in other products or services, such as the iPhone or new ventures.
Question marks:
The Apple Watch and the Air-pods are Apple’s question marks, as they are relatively new products in fast-growing markets. They have the potential to become stars if Apple can increase their market share and popularity among customers. However, they also require a lot of investment to achieve that goal.
Dogs:
The iPod is Apple’s dog product, as it has lost its relevance and appeal in the era of streaming music services. It has low sales and profitability and little or no growth potential. Apple may consider divesting it or repositioning it for niche markets.
2. Amazon:
Star: Amazon Prime
Cash Cow: Amazon Web Services
Question Mark: Amazon Echo
Dog: Amazon Fire Phone (Discontinued)
Stars:
Amazon Prime is Amazon’s star product, as it offers a bundle of benefits to customers, such as free and fast delivery, video and music streaming, cloud storage, etc. It has a high market growth rate and a high relative market share, as it attracts and retains millions of loyal customers. However, it also requires a lot of investment to maintain its quality and variety of services and to expand into new markets and segments.
Cash cows:
Amazon Web Services (AWS) is Amazon’s cash cow product, as it is the leader in the cloud computing market and generates huge revenues and profits for the company. It has a low market growth rate but a high relative market share, as it has a large and stable customer base and a competitive edge over rivals such as Microsoft, Google, etc. It provides the funds for investing in other products or services, especially stars and question marks.
Question marks:
Amazon Echo and Alexa are Amazon’s question marks, as they are relatively new products in the fast-growing market of smart speakers and voice assistants. They have the potential to become stars if Amazon can increase their market share and popularity among customers. However, they also face competition from rivals such as Google, Apple, etc., so Amazon needs to invest in research and development, marketing, distribution, etc., to achieve that goal.
Dogs:
Amazon Fire Phone is Amazon’s dog product, as it was a failed attempt to enter the smartphone market. It had low sales and profitability and little or no growth potential. Amazon discontinued it in 2015 and shifted its focus to other products or services.
The 4 Quadrants of the BCG Matrix:
The BCG Growth-Share Matrix employs a 2×2 grid with growth and market share as axes:
Low Growth, High Share: Cash cows should be milked to reinvest elsewhere.
High Growth, High Share: Stars with high potential should receive significant investments.
High Growth, Low Share: Question marks should be invested in or discarded based on their potential to become stars.
Low Share, Low Growth: Pets should be liquidated, divested, or repositioned.
How Does the BCG Matrix Work?
The matrix considers a company’s growth prospects and available market share, helping executives allocate resources effectively and make informed decisions.
Do Companies Implement the BCG Matrix in Practical Scenarios?
The BCG Growth-Share Matrix has been widely used by Fortune 500 companies and remains a central teaching tool in business strategy.
Conclusion:
The BCG Growth-Share Matrix is a valuable asset for companies seeking to prioritize and optimize their business activities. By categorizing products into stars, cash cows, question marks, and dogs, businesses can make strategic decisions that maximize their potential for success. While it has its limitations, this matrix remains a powerful tool for businesses striving to thrive in dynamic markets. Real-world examples like Amazon and Apple demonstrate its practical applicability in assessing and strategizing for diverse product portfolios.
