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(Also known as the BCG Matrix, the Growth-Share Matrix and Portfolio Analysis)
Imagine that you're reviewing your organization's products. You need to decide which ones you should focus investment on.
One of the products is doing well financially. However, demand has fallen, and this trend looks set to continue. Another product is also doing well, but it's in a new market, and needs a lot of cash to support it. Should you continue investing in it? And another product is barely profitable, although its market is growing. Should you kill it or keep it?
To make these decisions, you need to look beyond the income that the products are currently bringing in. You need to assess how they're likely to perform in future.
The Boston Matrix, also called The Boston Consulting Group (BCG) Matrix, is a simple, visual way to examine the likely financial performance of your product or business portfolio. In this article, and in the video and infographic below, we'll look at the Boston Matrix and how to use it. We'll also outline some of its limitations.
Understanding the Boston Matrix
Management consultants at the Boston Consulting Group developed their matrix in the early 1970s. [1] They designed it to help managers at large corporations decide which business units they should invest in.
However, managers in all kinds of organizations now also use it to decide which of their product lines or products to invest in, and which to dispose of or to shut down.
The matrix, shown in figure 1, places products into four categories based on their market share and market growth.
Figure 1 – The Boston Matrix
Adapted from The BCG Portfolio Matrix from the Product Portfolio Matrix, ©1970 The Boston Consulting Group.
The categories are:
- Dogs: Low Market Share and Low Market Growth. Dogs are business units or products that have low market share in a low-growth market. They often don't make much profit, but they don't need much investment either. Much of the time, you'll need to offer a price discount to sell Dog products.
- Cash Cows: High Market Share and Low Market Growth. These businesses or products are well established. They're likely to be popular with customers, which makes it easier for you to exploit new opportunities. However, you should avoid spending too much effort on these, because the market is only growing slowly, and opportunities are likely to be limited.
- Stars: High Market Share and High Market Growth. Businesses and products in this quadrant are seeing rapid growth. There should be some good opportunities here, and you should work hard to realize them.
- Question Marks (Problem Children): Low Market Share and High Market Growth. These are the opportunities that no one knows how to handle. They aren't generating much revenue right now, because you don't have a large market share. But they're in high-growth markets, so they could become Stars or even Cash Cows if you can build market share. However, if you cannot increase market share, Question Marks could absorb a lot of effort with little return.
Market Share and Market Growth
To use the matrix most effectively, you need to know how market share and market growth are related.
Market share is the percentage of the total market that your business or product serves, measured in either revenue terms or unit volume terms. The higher your market share, the higher the proportion of the market you control.
The Boston Matrix assumes that if you enjoy a high market share, you'll be making money, since, theoretically, you'll have learned how to maximize the product's profitability.
The matrix leads you to ask whether you should invest additional resources in a particular business unit or product line just because it is making money. The answer? That depends on market growth.
Market growth measures a market's attractiveness. Markets seeing high growth – where the total market is expanding – are highly attractive. Businesses have many opportunities to grow their profits in these markets, even if companies' market share remains stable.
By contrast, low-growth markets are less attractive. Competition can be bitter, and you may only be able to retain market share by discounting aggressively.
How to Use the Tool
To use the Boston Matrix, download our worksheet, and then follow the steps below.
Step 1
Plot your products or businesses on the worksheet according to their market share and market growth.
Tip:
There's nothing "magical" about the position of the lines between the quadrants. There may be very little real difference, for example, between a Question Mark with a market share of 49 percent and a Star with a market share of 51 percent.
It's also not necessarily true that the line should run through the 50 percent position. As always, use your judgment and common sense.
Step 2
Determine what to do with each business or product. There are typically four strategies that you can apply:
- Build market share/make further investments. Do this for Stars that need to maintain their status, and for Question Marks that you want to become Stars.
- Hold. Maintain the status quo; do nothing.
- Harvest. Reduce your investment, enjoy positive cash flow, and maximize profits. You will typically do this with a Star or a Cash Cow.
- Divest/sell or abandon. You could sell the Dogs and use the capital you receive to invest in Stars and Question Marks. This has the added benefit of removing the management distraction that these products provide.
Further Uses of the Boston Matrix
The Boston Matrix is also useful when you're thinking about where to apply other scarce resources such as skilled people, time, and equipment.
For example, you could redeploy people hours from a Cash Cow to a Star, or redeploy time spent on R&D from a Dog to a Question Mark.
Limitations of the Matrix
First, the matrix only looks at the impact of market share and market growth to determine profitability. Other factors could drive profitability, but the Boston Matrix doesn't address them.
Furthermore, the matrix rests on the assumption that high market share leads to high profits. This isn't always the case: maintaining a high market share could require frequent and large investments that may not be viable for your organization.
In addition, some people might assume that Dogs are a waste of resources – that these business units or products are taking effort away from other offerings. However, Dogs could be important "loss leaders" for some organizations.
Another limitation of the matrix is that it assumes that the marketing potential of Cash Cows is limited, and that organizations should consider diverting cash from them to invest in Stars or new brands. However, they might better use this investment to protect the market position of Cash Cows, or even to revitalize them to suit new markets.
Note:
New brands have only a small chance of attaining the market share of Cash Cows, so always think carefully before diverting profits to these.
As with any tool, analyze the situation carefully, and use your best judgment.
Key Points
The Boston Matrix helps you to classify your organization's business units, product lines or products, based on their market growth and market share. In turn, this helps you to determine which products warrant future investment and which you might need to abandon or sell.
With its straightforward classification of products into Dogs, Cash Cows, Question Marks, and Stars, the matrix helps you screen the opportunities open to you and to identify where to invest money, time and effort.
However, the tool does have limitations, so you should always conduct a careful analysis and use your best judgment.
The Boston Matrix Infographic
See The Boston Matrix represented in an infographic
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References[1] The BCG Portfolio Matrix from the Product Portfolio Matrix, 1970 The Boston Consulting Group,
http://www.bcg.com/
