BCG Matrix

Definition of BCG Matrix

The BCG Matrix, also known as the Boston Consulting Group Matrix or the Growth-Share Matrix, is a framework used to evaluate the strategic position of a company’s products or business units. Developed by Bruce Henderson for the Boston Consulting Group in 1970, the matrix helps companies prioritize their investment among their portfolio based on two dimensions: market growth rate and relative market share. The matrix visualizes the products into four quadrants: Stars, Question Marks, Cash Cows, and Dogs.

Key Elements:

1. Stars

   • High market growth rate
   • High relative market share
   • These products require heavy investment but have the potential to generate substantial returns.

2. Question Marks

   • High market growth rate
   • Low relative market share
   • Potential future stars but need considerable investment to increase market share.

3. Cash Cows

   • Low market growth rate
   • High relative market share
   • Generate more cash than needed for upkeep; ideal for funding other business units.

4. Dogs

   • Low market growth rate
   • Low relative market share
   • Generate low or negative cash returns and may need to be divested.

Examples

1. Apple Inc. might classify its iPhone as a Star due to its high market share in a rapidly growing smartphone market.
2. Procter & Gamble might consider its Tide detergent as a Cash Cow because it has a dominant market share in a stable market.
3. Google’s wearable devices might be a Question Mark, requiring significant investment to gain market share in the growing wearables market.
4. Microsoft’s old operating systems could be categorized as Dogs—low market share and low growth sector.

Frequently Asked Questions (FAQs)

What is the purpose of the BCG Matrix?

• The BCG Matrix helps companies prioritize their product investments. It visualizes where different products stand in terms of market share and market growth, guiding strategic decisions on resource allocation.

How is “relative market share” calculated?

• Relative market share is calculated by dividing the market share of the product by the market share of its largest competitor.

Can a product move between different quadrants in the BCG Matrix?

• Yes, a product can move between quadrants, for instance from a Question Mark to a Star as it gains market share, or from a Star to a Cash Cow as the market growth slows.

What are the limitations of the BCG Matrix?

• A: The matrix focuses only on two dimensions (market growth and relative market share). It does not consider other factors, such as profitability, competitive dynamics, and market conditions.

Is the BCG Matrix still relevant today?

• While some criticism exists due to its simplicity, the BCG Matrix remains a useful strategic tool for portfolio management and investment allocation.

Related Terms

Market Share

• The percentage of an industry’s sales that a particular company controls. A higher market share typically indicates a competitive advantage.

Market Growth Rate

• A: The rate at which the market for a product is growing. High market growth rates indicate an expanding market.

Divestiture

• Selling off a part of a company’s business. Used as a strategy to focus on more profitable operations or to rid of underperforming assets.

Online References

• Boston Consulting Group: BCG Matrix
• Harvard Business Review: Using the BCG Matrix

Suggested Books for Further Studies

• “Competitive Strategy: Techniques for Analyzing Industries and Competitors” by Michael E. Porter
• “Strategic Management: Competitiveness & Globalization” by Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson
• “Understanding the BCG Matrix” by Tim Stroh

Accounting Basics: BCG Matrix Fundamentals Quiz

Thank you for diving deep into the BCG Matrix with this comprehensive review and quiz. Your understanding of this strategic management tool is essential for effective business analysis and resource allocation!