BCG matrix is a corporate planning tool. It was developed by the Boston Consulting Group. The business tool helps companies determine the best performing product lines or businesses so that they can plan a right investment strategy. For instance, if a business has a wide product portfolio, managers have to know how the different products are doing in the market so that they can wisely allocate their time and cash to the most prospective portfolio. Managers use the BCG matrix to see which products have the highest potential to increase company’s profitability and which are gradually becoming company’s liabilities.
The main objective of using BCG matrix is building an effective portfolio strategy. The matrix classifies a product line based on two major dimensions – a product’s competitive position in the market (relative market share) and the growth rate of the industry. If a company has several brands to look after, this matrix will help the managers decide which brand they should invest in and which brands should be divested ideally. This reduces the wastage of money and time investments.
When applying the framework, managers draw a square diagram and divide it into four equal quadrants. The four quadrants are named as Cash Cows, Dogs, Stars and Question Marks. The horizontal axis represents market share, and the vertical axis indicates the speed of market growth.
Understanding BCG Matrix
Depending on a product’s cash generating potential and market share, managers decide in which of the four quadrants a product will fall.
The ‘Star’ segment represents the products which are best known for excellent market performance. These products generate stable and growing income for the company and operate in the high growth industry. However, a company needs to invest a lot of cash in marketing strategies to keep this type of products alive and maintain the market dominance. The ‘Stars’ can also become Cash Cows if the industry growth starts to slow down, or a newly invented technology or product outcompetes it.
Products that belong to the ‘Cash Cows’ segment are the most profitable for the company. They generate lots of cash for the company. They have a high market share. Companies should invest money in these products so that they can maintain the market share.
Managers categorize products as ‘Question Marks’ when they find the products hold a very low market share in a fast-growing industry. Although question marks might become cash cows sometimes later, it’s not true always. Managers need to monitor these products closely because they may fail to succeed in the market despite lots of investments.
Products falling into the ‘Dog’ category hold a low market share and operate in a slow-growing industry. Despite the investments, these products always tend to generate a negative cash or return.
How The BCG Matrix Can Be Applied in a Real Situation?
Here is another example. Let’s say you’re an affiliate marketer, and you’ve five different websites. Now, if you want to see the individual performances of each website, you will have to apply the tool. Stars are the websites that generate lots of traffic and high revenue. Cash cows are the websites which have low traffic growth but generate high revenue. Question mark sites generate high traffic but have a low revenue. The sites that have low traffic and low revenue will be the dogs. You will have to apply the BCG matrix to make optimum strategic decisions. The tool will help you figure out effective traffic generation strategies, revise promotion plans and identify the strengths of the outstanding websites. So this was one example of how the BCG matrix can be applied for the improvement of business performance.