Boston BCG matrix - Pros, cons and how to use it correctly

The Boston Consulting Group matrix (BCG matrix), also called the product portfolio matrix, is a business planning tool used to assess the strategic position of a company's brand or product portfolio . The BCG matrix is one of the most widely used methods of analyzing the composition of corporate assets. It ranks a company's brands, products, and/or services in a two-axis matrix that forms 4 quadrants. Each quadrant is classified as low or high performing, based on relative market share and market growth rate.

Understanding the Boston Consulting Group (BCG) matrix.

The horizontal axis of the BCG matrix represents a product's market share and strength in a given market. Using relative market share, it helps measure a company's competitiveness.

The vertical axis of the BCG matrix represents the growth rate of a product and its growth potential in a given market.

From this the four quadrants are deduced:

• Question marks: Products with high market growth but low market share.
• Stars: Products with high market growth and high market share.
• Dogs: Products with low market growth and low market share.
• Milking cows: Products with low market growth but high market share.

Let's delve into the quadrants

The matrix is based on the assumption that an increase in relative market share results in an increase in cash flow. A firm benefits from the use of economies of scale and gains a cost advantage over competitors. The market growth rate varies from industry to industry, but usually indicates a 10% demarcation point: growth rates above 10% are considered high, while those below 10% are considered low.

Question marks

Products in the question mark quadrant are in a market that is growing rapidly, but where the product(s) have a low market share. Question marks are the most management-intensive products and require large investments and resources to increase their market share. Investments in question marks are typically financed by cash flows from the cash cow quadrant.

At best, a company would like to turn question marks into stars (as we shall see). If question marks fail to become market leaders, they end up becoming dogs when market growth declines.

Dogs

Products in the dog quadrant are in a slowly growing market where products have a low market share. Products in the dog quadrant are usually able to sustain themselves and provide cash flow, but they will never reach the star quadrant. Companies usually phase out products in the dog quadrant for obvious reasons of efficiency unless they are complementary to existing products or are used for a competitive purpose.

Stars

Products in the star quadrant are in a fast-growing market where the product or products have a high market share. Products in the star quadrant are market leaders and require significant investment to maintain their position (e.g., in marketing), increase growth, and maintain a competitive advantage.

Stars consume a significant amount of cash, but they also generate large cash flows. As the market matures and products continue to be successful, stars become cash cows. Stars are a company's most valuable asset and are the focus of attention in its product portfolio.

Milking cows (cashing cows)

Products in the milking cow quadrant are in a market that is growing slowly but where the product or products have a high market share. Brands, products, and services in the milking cow quadrant are considered to be market-leading products and to be valued but without excessive effort.

Literally: as long as it works and as long as they last, they milk.

What are the benefits of BCG?

In business, the BCG matrix is a simple but incredibly effective tool for evaluating a company's product portfolio. The matrix provides a broad overview of each product's performance and helps identify the factors that determine its success or failure. In addition, the matrix can be used to see how different products compare to each other in a fundamental systems approach.

In addition, the BCG matrix is a valuable resource for companies that want to improve their products or identify new opportunities in their market. One of the most sensitive and difficult activities that an entrepreneur or manager has to deal with.

By shedding light on weak products, the matrix can help companies save money in the long run. In other words, it is is a valuable tool that no company should be without.

What are its limitations?

"BCG" is a great way to get a snapshot of your products' performance in the market, but it does not tell the whole story.

There are other factors to consider when talking about the success or failure of a product, such as customer satisfaction, product quality, and company reputation. Not to mention brand equity in a broader sense. The BCG matrix is a good starting point, but it cannot take everything into account. To make the most informed decisions about your products, you need to look at all available data.

There are many other problematic points in this approach:

1. Market growth is only one of many factors that determine the attractiveness of an industry. Relative market share is only one of many factors that determine competitive advantage. This matrix does not take into account other factors that can affect industry attractiveness and competitive advantage.
2. The underlying assumption is that business units operate in isolation from each other. In reality, one dog can help another unit gain a competitive advantage in terms of cash flow and correlation in sales.
3. The market definition is taken in a broad sense. This does not take into account different situations, such as a business unit that dominates a niche but is less dominant overall in the broader industry. How a market is defined in this case can change its definition from dog to cash cow.

How to properly employ the BCG Matrix in strategies?

So our matrix is a tool that helps you evaluate your products objectively to strategize for the future of your company. It helps you identify products to focus on and those you may need to cut altogether. It can be used in four ways to target a business strategy.

1. If your goal is to focus oninnovation, increase your investment in Stars and Question Marks. For example, investing more in a question mark can turn it into a star and later into a cash cow.
2. If you cannot invest more in a product, keep it in the same quadrant and leave it alone. For example, one of the advantages of a Cash Cow is that it is an established product that requires less effort to maintain.
3. Reducing the investment and deriving maximum cash flow from a product increases its overall profitability.
4. Le you have to direct resources better, you can disinvest the amount of money invested in one product and use it elsewhere. This strategy is best suited for dogs.

An important example

When discussing BCG analysis, it can be useful to look at real examples. One famous case is that of The Coca-Cola Company. This company owns several beverage lines, including the Coca-Cola brand, Diet Coke, and Minute Maid.

In terms of the BCG matrix, Diet Coke and Minute Maid are question marks. These products have a modest following, but still have room to grow. Meanwhile, bottled water brands Kinley and Dasani are considered Stars due to their dominant market shares in the United States, with no signs of slowing growth. Finally, Coca-Cola itself is a Cash Cow, as it lives in a low-growth but high market share segment. However, the company also owns dogs because legislation against soft drinks-not to mention public sentiment to the contrary-has decreased sales of some of its soda brands.