The BCG Matrix is a strategy tool that can help your business make the right investment decisions when planning your product portfolio strategies for 2014. Also known as the Boston matrix or the Growth-Share matrix, the BCG Matrix is among the most popular strategy tools, and for good reason. It’s simple but effective and can show you clearly which of your products to invest in and which, potentially, you can live without.
What is the BCG Matrix?
The Boston Consulting Group (BCG) Matrix is defined by InvestorWords as a business model which “compares each business unit of a company against its main competitor in terms of market growth and market share.”
The business units included in the BCG Matrix are divided into four categories. They are Dogs, Question Marks, Stars and Cash Cows. These descriptions are used to define the areas of your business that are doing well and those that aren’t.
What is the BCG Matrix used for?
Put simply, the BCG Matrix helps businesses decide how and where to invest. Using the BCG matrix, your business groups its products – or product categories – according to their position of market growth and market share. Market growth is indicated by the maturity of a market. A growing market, for example, is typically a high opportunity market that offers investment potential. Meanwhile, market share is the percentage of the market enjoyed by your business or its products.
A business using the BCG Matrix analyses each of the products in its portfolio and classifies them into one of the following four categories:
- Question Marks – These represent products which are in a high growth industry but your business is a small player in that industry. Sometimes, investing more in these products will generate large profits, but not always. They require a great deal of consideration before money is invested, because while the opportunity for market growth exists, a firm marketing strategy needs to be in place before further investment should be carried out.
- Stars – Your product is a star if it’s in a high growth industry in which your business is already a leader. Examples might include Dell laptop computers or Sony games consoles. These products give your business confidence and credibility and are a worthy target for greater investment to nurture and maintain their market position.
- Cash cows – Your business or products are cash cows if they hold a high market share in a low growth industry. In other words, you’re well established and business is steady, but further investment may not be worthwhile as your opportunities here are limited due to low market growth.
- Dogs – Dogs are products in a low growth industry in which your business has a low market share. In other words, you’re a small player in an industry that’s going nowhere. There may be a reason to hold onto these products, but they’re rarely worthy of investment when compared with your more profitable ventures that take less effort and fewer resources.
When your business has categorised its products or services, you need to decide what to do with them. For instance, you may choose to eliminate your Dogs or invest some of the money from your Cash Cows into your Stars or Question Marks. In some instances, you may choose to do nothing at all.
When do I use the BCG Matrix and how often?
As mentioned at the start of the article, you should be using the BCG Matrix now to help plan your product portfolio strategy for 2014. Meanwhile, throughout the year, your Question Marks could quickly become Stars, or you could find yourself pouring money into products that have slipped to Dogs status, so a regular review of your products is a must to ensure your investments are well placed. We recommend you use the BCG Matrix at least once a year.
The BCG Matrix in practice
KG Moore recently applied the BCG Matrix when helping creative agency Frontmedia to develop its marketing strategy. Frontmedia offers a variety of services from website design, branding and print design including advertisements, brochures and packaging. We used the matrix to decide which services Frontmedia should continue to invest in. As a result, the organisation has been able to make more informed decisions.
Who developed the BCG Matrix?
In 1968, Bruce Henderson from the Boston Consulting Group created the BCG Matrix, according to the site’s history pages. The BCG says that Henderson would tell clients, “The payoff for leadership [in market share] is very high indeed, if it is achieved early and maintained until growth slows. Investment in market share during the growth phase can be very attractive, if you have the cash. Growth in market is compounded by growth in share. Increases in share increase the profit margin…The return on investment is enormous.”
Every Thursday, we’ll take a look at a different strategy tool. We use a variety of strategy tools to help our clients define their marketing strategy. Essentially, the tools help you with your thinking and decision making during the strategic marketing planning process. We hope to give you a better understanding of the tools available, and how and when they can be applied.