Explaining the BCG Matrix
It is tough for a business to grow and survive in the long term with a single product in the market. Many businesses start with a single product but eventually grow the number and variety of products that they offer. Ideally, businesses should have a portfolio of different products that are in different phases of their life cycle. A few products will be newly launched, a few should be in the rapid growth phase and a few others should be well established and responsible for company’s brand and overall profits. A tool that management can use to manage their portfolio of products is known as the BCG Matrix.
The ‘BCG Matrix’, introduced by Bruce D. Henderson in 1970 for the Boston Consulting Group, was based on ‘product life cycle’ theory. Product life cycle theory described a defined trajectory which products went through from introduction to growth to decline. The BCG Matrix uses the product life cycle underpinnings to identify where a company's resources should be utilized (i.e. deciding which products to invest in and which products to withdraw). A company's products are plotted on the matrix based on their relative market share and revenue growth. Once all products have been plotted you can draw two lines at the average market share and average growth for your products to create four quadrants. The quadrant your product falls into drives the strategy that should be pursued by management for that product according to the BCG Matrix. The four quadrants are explained below.
These are the products that have low market share and low sales growth. Once you recognize these products it is better not to further invest as there will be limited relative returns. However, there are some exceptions where dogs can prove to be profitable in the long run and they may also prove to be synergistic with other products. In depth analysis of market factors for these products may be required to identify whether the dog can be turned into a cash cow or needs to be eliminated/liquidated to avoid future resource investments.
These are the products that provide high cash flow with minimum investment and give great returns. A business should try to own as many of these products as possible. These products have often reached the ‘Maturity’ phase of their life cycle. Cash flow from cash cows should be used to invest into Stars.
These products operate in fast growing markets and possess high market share. They may need investment to keep growing and after a period of time they may become ‘cash cows’. However, all the stars may not become cash cows in the end so continual monitoring of market conditions, product performance, etc. will be required.
These products, also known as ‘problem children’, may have a confusing life cycle. They hold low market share in rapidly growing markets and can tend to tend to consume much of the budget with little return. Some ‘problem children’ may eventually grow to become ‘stars’ and then ‘cash cows’ while others may fail to survive in the competitive environment and become dogs.
Benefits/Limitations of the BCG Matrix:
The benefits of the BCG Matrix are that it is easy to follow and analyze. It can be a convenient tool used by management to discuss investment strategies for products. However there are other important factors that describe a product’s position in the market which are not covered in this matrix. Market share and market growth can help predict profitability but a product's contribution to the company may not be sufficenity summarized by these two factors alone. The BCG Matrix is a great tool to help initiate discussion within the management team but should be used in collaboration with other internal metrics and decision criteria when managing a company's product portfolio.