BCG Matrix

The BCG Matrix

Growth share matrix is a portfolio planning method
that evaluates a company’s products in terms of their
market growth rate and relative share.

• Products are classified as: Stars, Cash Cows, Question

marks and Dogs

• Marketing efforts, or investments, will change,

depending on the product’s classification
• Relative market share. One of the dimensions used
to evaluate business portfolio is relative market share.
Higher corporate’s market share results in higher
cash returns. This is because a firm that produces
more, benefits from higher economies of scale and
experience curve, which results in higher profits.
• Market growth rate. High market growth rate
means higher earnings and sometimes profits but it
also consumes lots of cash, which is used as investment
to stimulate further growth. Therefore, business units
that operate in rapid growth industries are cash users
and are worth investing in only when they are expected
to grow or maintain market share in the future.
The BCG Matrix
• Dogs. Dogs hold low market share compared to
competitors and operate in a slowly growing market.
In general, they are not worth investing in because
they generate low or negative cash returns. But this is
not always the truth. Some dogs may be profitable for
long period of time, they may provide synergies for
other brands or SBUs or simple act as a defense to
counter competitors moves. Therefore, it is always
important to perform deeper analysis of each brand or
SBU to make sure they are not worth investing in or
have to be divested.

Strategic choices: Retrenchment, divestiture,

liquidation
• Cash cows. Cash cows are the most profitable brands and
should be “milked” to provide as much cash as possible. The
cash gained from “cows” should be invested into stars to
support their further growth. According to growth-share
matrix, corporates should not invest into cash cows to
induce growth but only to support them so they can
maintain their current market share. Again, this is not
always the truth. Cash cows are usually large corporations or
SBUs that are capable of innovating new products or
processes, which may become new stars. If there would be no
support for cash cows, they would not be capable of such
innovations.

Strategic choices: Product development, diversification,

divestiture, retrenchment
• Stars. Stars operate in high growth industries and maintain
high market share. Stars are both cash generators and cash
users. They are the primary units in which the company
should invest its money, because stars are expected to
become cash cows and generate positive cash flows. Yet, not
all stars become cash flows. This is especially true in rapidly
changing industries, where new innovative products can soon
be outcompeted by new technological advancements, so a
star instead of becoming a cash cow, becomes a dog.

Strategic choices: Vertical integration, horizontal

integration, market penetration, market development,
product development
• Question marks. Question marks are the brands that
require much closer consideration. They hold low
market share in fast growing markets consuming large
amount of cash and incurring losses. It has potential to
gain market share and become a star, which would later
become cash cow. Question marks do not always succeed
and even after large amount of investments they struggle
to gain market share and eventually become dogs.
Therefore, they require very close consideration to decide
if they are worth investing in or not.

Strategic choices: Market penetration, market

development, product development, divestiture
Advantages and disadvantages

• Benefits of the matrix:

• Easy to perform;
• Helps to understand the strategic positions of business
portfolio;
• It’s a good starting point for further more thorough
analysis.
• Growth-share analysis has been heavily criticized for its
oversimplification and lack of useful application.
Following are the main limitations of the analysis:
• Business can only be classified to four quadrants. It can be
confusing to classify an SBU that falls right in the middle.
Advantages and disadvantages (contd…)

• It does not define what ‘market’ is. Businesses can be

classified as cash cows, while they are actually dogs, or vice
versa.
• Does not include other external factors that may change the
situation completely.
• Market share and industry growth are not the only factors of
profitability. Besides, high market share does not necessarily
mean high profits.
• It denies that synergies between different units exist. Dogs
can be as important as cash cows to businesses if it helps to
achieve competitive advantage for the rest of the company.
Using the tool

Step 1. Choose the unit

Step 2. Define the market
Step 3. Calculate relative market share
Step 4. Find out market growth rate
Step 5. Draw the circles on a matrix
• Step 1. Choose the unit. BCG matrix can be used to
analyze SBUs, separate brands, products or a firm as a unit
itself. Which unit will be chosen will have an impact on the
whole analysis. Therefore, it is essential to define the unit
for which you’ll do the analysis.
• Step 2. Define the market. Defining the market is one of
the most important things to do in this analysis. This is
because incorrectly defined market may lead to poor
classification. For example, if we would do the analysis for
the Daimler’s Mercedes-Benz car brand in the passenger
vehicle market it would end up as a dog (it holds less than
20% relative market share), but it would be a cash cow in
the luxury car market. It is important to clearly define the
market to better understand firm’s portfolio position.
• Step 3. Calculate relative market share. Relative
market share can be calculated in terms of revenues or
market share. It is calculated by dividing your own
brand’s market share (revenues) by the market share
(or revenues) of your largest competitor in that
industry. For example, if your competitor’s market
share in refrigerator’s industry was 25% and your
firm’s brand market share was 10% in the same year,
your relative market share would be only 0.4. Relative
market share is given on x-axis. It’s top left corner is
set at 1, midpoint at 0.5 and top right corner at 0 (see
the example below for this).
• Step 4. Find out market growth rate. The industry
growth rate can be found in industry reports, which
are usually available online for free. It can also be
calculated by looking at average revenue growth of
the leading industry firms. Market growth rate is
measured in percentage terms. The midpoint of the
y-axis is usually set at 10% growth rate, but this can
vary. Some industries grow for years but at average
rate of 1 or 2% per year. Therefore, when doing the
analysis you should find out what growth rate is
seen as significant (midpoint) to separate cash cows
from stars and question marks from dogs.
• Step 5. Draw the circles on a matrix. After
calculating all the measures, you should be able to
plot your brands on the matrix. You should do this by
drawing a circle for each brand. The size of the circle
should correspond to the proportion of business
revenue generated by that brand.
Example
Brand Revenues % of Largest Your Relative Market
corporate rival’s brand’s market growth rate
revenues market market share
share share

Brand 1 $500,000 54% 25% 25% 1 3%

Brand 2 $350,000 38% 30% 5% 0.17 12%

Brand 3 $50,000 6% 45% 30% 0.67 13%

Brand 4 $20,000 2% 10% 1% 0.1 15%