BCG Matrix
The purpose of the BCG Matrix is to determine investment priorities for a company with a portfolio of products/BUs.
LEARNING OBJECTIVES
Demonstrate the criteria and use of the BCG Matrix
KEY TAKEAWAYS
Key Points
- According to the BCG Matrix, there are four different possible outcomes for a BU: cash cow, dog, question mark, or star.
- According to the principles behind the BCG Matrix, as an industry grows, all business units become cows or dogs. Usually a BU will go from being a question mark, to a star, then a cow, and finally a dog.
- Other possible uses for the BCG Matrix are determining relative market share and the market growth rate of a product line.
Key Terms
- product life cycle: The process wherein a product is introduced to a market, grows in popularity, and is then removed as demand drops gradually to zero.
BCG Matrix
The BCG Matrix was created in 1970 by Bruce Henderson and the Boston Consulting Group. The purpose of the BCG Matrix is to determine investment priorities for a company with a portfolio of products/BUs. A scatter graph is used to show how a product/BU ranks according to market share and growth rates.
BCG Matrix: The BCG Matrix helps a company determine its investment priorities.
Four Outcomes
According to the BCG Matrix, there are four different possible states for a product/BU:
- Cash Cow
- Dog
- Question Mark
- Star
A cash cow is a product/BU that has high market share and is in a slow growing industry. It is bringing in way more money than is being invested in it and the main idea is to ride it out as long as possible. A company shouldn’t invest any more money in a cash cow because the industry cycle is at its end, but it is still a viable product/BU while the profits last.
A dog has a low market share in a mature industry. There is no room for growth so no more funds should be invested in the product or product/BU. If it is a BU, then the consensus is to sell it off.
A question mark is a product/BU growing rapidly in a growing industry. It is consuming vast amounts of financing at this point and creating a low rate of return. A question mark does have the potential to become a star, however, so it should be monitored to determine its growth potential.
A star has a high market share in a high growing industry. This is a product line or BU a company should focus its efforts on in the hopes that it will become a cash cow before the end of its life cycle. According to the principles behind the BCG Matrix, as an industry grows, all business units become cows or dogs. Usually a BU will go from being a question mark, to a star, then a cow, and finally a dog.
Other Uses for the BCG Matrix
Other possible uses for the BCG Matrix are determining relative market share and the market growth rate of a product line. The BCG Matrix can help determine where a product is in its product life cycle and if there is a possibility of growth for the market or product.