BCG Matrix

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The BCG Matrix method is the most well-known portfolio management tool. It is based on product life cycle theory. It was developed in the early 70s by the Boston Consulting Group. The BCG Matrix can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. The Boston Consulting Group Matrix has 2 dimensions: market share and market growth. The basic idea behind it is: if a product has a bigger market share, or if the product's market grows faster, it is better for the company.

The four segments of the BCG Matrix

Placing products in the BCG matrix provides 4 categories in a portfolio of a company:

• Stars (high growth, high market share)
  • Stars are using large amounts of cash. Stars are leaders in the business. Therefore they should also generate large amounts of cash.
  • Stars are frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold your market share in Stars, because the rewards will be Cash Cows if market share is kept.
• Cash Cows (low growth, high market share)
  • Profits and cash generation should be high. Because of the low growth, investments which are needed should be low.
  • Cash Cows are often the stars of yesterday and they are the foundation of a company.
• Dogs (low growth, low market share)
  • Avoid and minimize the number of Dogs in a company.
  • Watch out for expensive ‘rescue plans’.
  • Dogs must deliver cash, otherwise they must be liquidated.
• Question Marks (high growth, low market share)
  • Question Marks have the worst cash characteristics of all, because they have high cash demands and generate low returns, because of their low market share.
  • If the market share remains unchanged, Question Marks will simply absorb great amounts of cash.
  • Either invest heavily, or sell off, or invest nothing and generate any cash that you can.

the BCG Matrix and one size fits all strategies

The BCG Matrix method can help to understand a frequently made strategy mistake: having a one size fits all strategy approach, such as a generic growth target (9 percent per year) or a generic return on capital of say 9,5% for an entire corporation.

In such a scenario:

• Cash Cows Business Units will reach their profit target easily. Their management have an easy job. The executives are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash amounts in their mature businesses.
• Dogs Business Units are fighting an impossible battle and, even worse, now and then investments are made. These are hopeless attempts to "turn the business around".
• As a result all Question Marks and Stars receive only mediocre investment funds. In this way they can never become Cash Cows. These inadequate invested sums of money are a waste of money. Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become Cash Cows (or Stars), or otherwise companies are advised to disinvest. They can then try to get any possible cash from the Question Marks that were not selected.

Other uses and benefits of the BCG Matrix

• If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price that is low enough to get early market share leadership. Once it becomes a star, it is destined to be profitable.
• BCG model is helpful for managers to evaluate balance in the firm’s current portfolio of Stars, Cash Cows, Question Marks and Dogs.
• BCG method is applicable to large companies that seek volume and experience effects.
• The model is simple and easy to understand.
• It provides a base for management to decide and prepare for future actions.

Limitations of the BCG Matrix

Some limitations of the Boston Consulting Group Matrix include:

• It neglects the effects of synergy between business units.

• High market share is not the only success factor.

• Market growth is not the only indicator for attractiveness of a market.

• Sometimes Dogs can earn even more cash as Cash Cows.

• The problems of getting data on the market share and market growth.

• There is no clear definition of what constitutes a "market".

• A high market share does not necessarily lead to profitability all the time.

• The model uses only two dimensions – market share and growth rate. This may tempt management to emphasize a particular product, or to divest prematurely.

• A business with a low market share can be profitable too.

• The model neglects small competitors that have fast growing market shares.

Book: Carl W. Stern, George Stalk - Perspectives on Strategy from The Boston Consulting Group

Forum Forum discussions about Strategic Portfolio Management. Example BCG Matrix: Coca Cola & Pepsi Cola The matrix is misrepresenting in some cases. Example: Coca Cola and Pepsi. Coca Cola is market leader, as a result of which the relative market share of Pepsi is always smaller than 1. When the relat... 47   9 comments 10% Limit in Market Growth in BCG Matrix Generally in the BCG Matrix, when the market growth is more than 10%, it is considered a star. Can anyone explain why they have chosen the (fairly high) limit of 10%?... 46   7 comments Company Strategy if Lacking Question Marks? If a business has no Question Marks (or just one), what should it do?... 34   2 comments Why the Quadrants of BCG Matrix are Named as Star, Dog, Cow, Problem Child The BCG matrix's underlying assumptions are these: (i) High market growth rate, by virtue of attracting competition, entails high resource usage for the firm; (ii) High relative market share, by vir... 18   2 comments Assumptions of the BCG Matrix The BCG matrix is ​​a matrix based on a self-financing idea and structure: the cash cow products finance star products and question mark (dilemma) product). This matrix tends to neglect o... 15   1 comments BCG Matrix is useless! Totally useless (as a contemporary business tool).... 14   8 comments Advantages and Disadvantages of Portfolio Planning Tools What are the pros and cons of portfolio planning tools like the BCG Matrix or the GE/McKinsey matrix?... 11   1 comments Application of BCG Matrix in Forestry Hello everyone, does anybody can help me with application of BCG matrix in forestry? Currently I am working on a project and got a task to use BCG model to analize business portfolio of a forest comp... 11   1 comments Differences Between BCG Matrix and Ansoff Matrix The Boston Consulting Group (BCG) tool matrix is one of the tools used in product portfolio analysis. It's used to determine business growth opportunities and to decide on investment priorities. It's ... 11   2 comments BCG Matrix in Emerging or Fragmented Markets The tool is really great, but how to use it in fragmented industries where there is a lack of information making almost impossible to make intelligent decisions. For instance how would market growth ... 10   1 comments Distinction Between PLC and BCG Matrix? What are the similarities and differences between the product life cycle and the BCG Matrix?... 8   4 comments Direction of Arrows in the BCG Matrix I wonder if the direction of the arrow between Cash Cow and Star isn't incorrect? I think the Cash Cow (with excess dollars) should fund the star which is cash hungry (high working capital needs). So... 8   2 comments BCG Matrix: Can Dogs be More Lucrative than Cash Cows? Can someone support this statement with an example or a case study? "Sometimes dogs can earn even more cash as cash cows".... 8   8 comments The 4 BCG Categories are not Always Stages Note that it's not alway mandatory that a product goes through all of these four BCG stages. For example, there are many cases where a product was launched and after that goes away as a 'Dog' or neve... 6   2 comments BCG Matrix Question Mark Strategies and Examples What type of strategy and policies may be used by an organization or business unit for a product line which falls into the category... 6   1 comments Start a new topic about Strategic Portfolio Management Sign up for free

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Best Practices The best, top-rated topics about Strategic Portfolio Management. Here you will find the most valuable ideas and practical suggestions. 🥇 Modified BCG Matrix 2.0 Harvard Business Review labelled the BCG Matrix as one of the frameworks that changed the world. In the late 1970s and early 1980s, about half of the Fortune 500 companies employed this framework. But... 36   11 comments 🥈 Pitfalls in Strategic Portfolio Management. How to Avoid Them Strategic Portfolio Management (SPM) has evolved into a critical component of success in large corporations. SPM is enabling such businesses to make informed decisions about capital allocation, resour... 24   🥉 How do I Place my Products / Services in the BCG? Currently I'm trying to place the services of my company in the BCG matrix, and I have problems in theses aspects: 1. Should the products be placed by their relation of cost-benefit? 2. My core busi... 20   3 comments The BCG Matrix and Synergy Effects (How) could the the BCG Matrix be adapted to include synergy effects between business units?... 18   3 comments BCG Matrix Star Strategies and Examples What type of strategy and policies may be used by an organization or business unit for a product line which falls into the category... 12   8 comments How to Calculate the Relative Market Share in BCG Matrix? In one of my company products' portfolio we are the market leader and have 92% of the market share (the second largest company has only 6%). To calculate the relative market share based on the BCG ma... 11   3 comments

Expert Tips Advanced insights about Strategic Portfolio Management. Here you will find professional advices by experts. Consultancy Tips Teaching Tips Practical Implementation Tips Combine BCG Matrix (Market Share / Market Growth Rate) with a Margin / Market Growth Rate Matrix Combining the Market Situation with Our Profitability It can be extremely useful to adapt the BCG Matrix to address a particular situation. Suppose you have plotted a portfol... Pitfalls of Applying Portfolio Matrices Portfolio Management, Best Practices, Using BCG Matrix - Care should be taken to generate sufficent information (knowledge) and avoid many forms of cognitive bias of managemen... BCG Matrix Revisited Improve BGC Matrix In a recent research Steven E. Phelan, University of Nevada (Las Vegas) and Markus Venzin, Universitá Bocconi (Milan), u... Reasons for the Decline in Use of the BCG Matrix Limitations Despite is one of the best known and persistent tools in strategic management, widely used during the decade 1972-82, th...

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Compare with the BCG Matrix: McKinsey Matrix  |  ADL Matrix  |  Product/Market Grid  |  Stage-Gate  |  Three Dimensional Business Definition  |  Relative Value of Growth  |  Rule of Three  |  Core Competence  |  Bass Diffusion Model  |  STRATPORT  |  Profit Pools  |  Product Life Cycle  |  Blue Ocean Strategy  |  Four Trajectories of Industry Change  |  Positioning  |  Strategic Types

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