Web Analytics

The Boston Consulting Group Matrix and Its Limitations (BCG)

The BCG matrix was created in 1970 by Bruce D. Henderson for the Boston Consulting Group, hence the name. Also, known as the growth-share matrix Bruce came up with it to help corporations analyze their business units/product lines. As a tool, the matrix categorizes business units and ranks them on the basis of attractiveness.

This, in turn, enables the organization to identify the strategic options that can help in strengthening its business portfolio in order to better perform. As an analytical tool, it has been used widely in portfolio analysis, product, and strategic management plus brand marketing. In this 2×2 matrix, various business portfolios are plotted accordingly depending on their market growth and the organization’s relative market share.

  • Market or industry growth refers to the rate at which industry sales are growing.
  • Relative market share refers to the ratio of the organization’s market share to that of its biggest rival in the market.

The BCG matrix classifies products/business units into four quadrants as you can see from the image below.

Image of BCG Matrix

See also  What are Marketing Objectives

  1. Stars

  • These are business units with a high market share in a rapid growth market.
  • They are the best brands in business.
  • The product is strong and the market is growing
  • Likely to become the next cash cow.
  • The product generates and uses a lot of cash i.e. there is a lot of high marketing spending on it.

For stars, the strategy should be to defend and grow them. As a business, you should create barriers for competitors to enter or take your market share by for example ensuring customer loyalty or making products have quality advantages.

  1. Question Marks

  • These have a low share in a fast-growing market.
  • They have potential but their future is uncertain.
  • Are heavy net cash users with low return.
  • Today’s question marks are likely to be tomorrow’s stars. They can also be dogs.

For question marks, they need investment and growth strategies. So, either invest heavily in them and build them to stars, sell off the business to individuals who can grow them, or invest nothing and generate what you can from them.

  1. Dogs

  • Are products with a low share in a low growth market.
  • Weak businesses in low growth markets.
  • Products in the decline phase of their product lifecycle.
  • They neither generate nor consume cash.
  • This should be avoided and minimized.
See also  Effective Managerial Skills

Such products need strategies that will drain them for cash. Since they are not going anywhere and have no real potential divestment and liquidation strategies should be undertaken. Proceeds of liquidation may be used to strengthen stars or question marks.

  1. Cash Cows

  • These are often previous stars.
  • They have a high share of a low growth market.
  • They are likely the foundation of a company without them you would have no business
  • The initial investment for this is usually low.
  • The cash cows are mostly in the mature stage in the product lifecycle. They likely have little potential for growth.
  • These are cash-rich brands in that they have large, positive cash inflows.
  • The large amount of cash they generate can be used to develop products with better future prospects e.g. grow question marks and defend stars.

For cash cows strategies that will maintain them so that the organization can continue to ‘milk’ them are best.

With that in mind have a look at an example of what the BCG matrix would look like for an organization like Apple.

Stars would be their iPhone. It has a good market share and drives profits for Apple.

Cash Cows would be their App store and iTunes. They both require little investment and generate billions for Apple.

Question Marks would be the Apple Watch. The product is yet to catch on. Its future is uncertain but time will tell if it will become a star or dog.

Dogs, this would probably be the iPod. Sales for this are declining and with mobile phones having music apps, there is little room for it to grow.

See also  Strategic Management - Meaning, Features and Important Concepts

Limitations

Despite being one of the most famous portfolio analysis matrices the use of the BCG matrix has been questioned. Those opposing its use say it cannot offer a true reality because,

  • It neglects the effects of synergy between business units. Dogs can be as important as cash cows to businesses if it helps to achieve competitive advantage for the rest of the company.
  • A high market share is not the only success factor. A business can have a low market share and be profitable. A high market share doesn’t lead to profitability all the time also.
  • Market growth is not the only indicator for the attractiveness of markets. Steady markets could be profitable.
  • The model only uses two dimensions and these are not the only dimensions important to a business. Prefer the use of the General Electric matrix which uses more dimensions and criteria which give a more accurate unit position.

In 1994 Armstrong & Collopy proved that the use of the matrix leads to lower profits and it shouldn’t be used anymore. The Boston Consulting Group in 2014 acknowledged that the business world is changing and issued a revision to the matrix that focusses on the different drivers of competitiveness such as how quickly a company can adapt to changing time. They, however, maintain that an original matrix is a useful tool for portfolio analysis

About Sonia Kukreja

I am a mother of a lovely kid, and an avid fan technology, computing and management related topics. I hold a degree in MBA from well known management college in India. After completing my post graduation I thought to start a website where I can share management related concepts with rest of the people.