BCG Matrix or the Boston Consulting group’s product portfolio matrix is a tool designed to use in long term strategic planning. This helps organizations to analyze their product portfolio and decide what product should be discontinued, on what product the organization should invest more and what product needs to be developed.
This analyzing tool was created by Bruce D. Henderson in 1970 as a help to Boston Consulting Group. They used this BCG Matrix in analyzing their product line and in strategic planning. Boston Consulting Group used the BCG matrix to decide on the resource allocation for their product line.
BCG Matrix can be used as an analytical tool in strategic management, Product management, Marketing as well as portfolio analysis. It is a widely used marketing tool in the modern business world.
There are four elements in the BCG Matrix.
- Cash Cows
- Question Marks
Dogs or Pets in an organization’s product line are the products that have a low market share in mature, slow-growing business industry. Due to the slow rate of growth, these products are considered as the ones that should be liquidated, sold or re positioned. The break-even of these products is barely generating sufficient cash to maintain the market share of the product.
Even though there are social benefits of maintaining the product, in the accounting perspective, maintaining such a product has adverse effects on the organization as it is not generating any profit for the organization. These can adversely affect the organization’s return on asset ratio as well. Dogs can be found in the lower right quadrant in the BCG Matrix. Due to the low market share and the slow growth, Dogs can be turned in to cash traps which can tie up the organization’s funds for a long period without any use or profit.
The products that have slow- growth but with a large market share currently are the Cash cow products. The idea behind this concept is to milk these products as much as possible without killing the cow. same as that, the organization should earn profit as much as possible using the product in the existing market share without discontinuing the product and with a little investment. These products generate an income that exceeds the cost of the product. Cash cow scenarios can be seen in mature markets, considered as boring and settled. Cash cows can be seen in the lower left quadrant of the BCG matrix. Cash cows will eventually move to the Dogs quadrant.
Question marks are also known as ‘adopted children’ and ‘wild dogs’. These are products that operate with a low market share but with a high-growth market. It is not recognized that these types of products will become a star or whether it will drop into the Dogs quadrant. Question marks have huge growth potential and the ability to capture a bigger market share.
If the organization wants to push the product to the star quadrant, they need to do a significant investment in the product. This investment is a risk to the organization as it can require a huge investment to push the product to a level where it can generate a profit. Question markets can be mostly seen in the starting level of many products.
If the question marks are unable to become the market leader even after the investment by the organization, they will eventually end up in the Dogs quadrant. Due to this reason, any organization needs to analyze the question marks carefully and decide whether to invest in the product and push it to the star level or to give up on the product and put it in the Dogs quadrant. Question marks can be seen on the upper right side in the BCG Matrix.
Stars can be considered as the products that are in the organization product line with high market share and high market growth. These products can be seen in the fast-growing industry. Stars generate a high income to the organization and also consumes a large amount of money from the organization. This can be the leading product in the market, but it requires a huge amount of investment to survive in the market. Stars can be seen in the upper left quadrant in the BCG matrix. Star can remain as the market leader for a certain period and it will eventually turn in to a cash cow when the overall market growth rate declines.