The BCG Matrix was created by the The Boston Consulting Group (BCG) and it became on of the most well-known portfolio management Decision Making Tools in the early 1970’s. It is based on the product life cycle theory, and it is used to prioritize the product portfolio in a company or department. There are two dimensions – market share and market growth. The basis premise in using the Matrix is that the higher the market share a product has, the higher the growth rate and the faster the market for that product grows.
The BCG Matrix was created in order to alleviate the standard one-size fits all in their time. It is useful to a company to achieve balance between the four categories of products a company produces. Market decisions are also well made by considering and using the Porter’s Five Forces
Four segments in the BCG matrix:
1. Cash Cows (high market share, low growth) – Keep investments low, while keeping profits high. Profits and cash generation should be higher because of low growth.
2. Dogs (low market share, low growth) – Liquidate, if they are not delivering cash. Avoid and reduce the number of these an organization maintains. Keep an eye out for expensive revival strategies – a dog is typically always a dog.
3. Stars (high market share, high growth) – Invest further in these – they incur high costs, but they are market leaders and should also generate lots of cash. Stars may balance on net cash flow, but the organization should try to maintain market share on this would because rewards are likely
4. Question marks (low market share, but high growth) – These have poor cash inflow, but have high demands and low returns due to low market share. Efforts should be made to change market share. If this isn’t possible, this will likely turn into a dog as growth slows.
Caution should be taken as high market share isn’t the only consideration. High market share doesn’t necessarily mean profit. Growth isn’t necessarily the only valid measurement factor. Occasionally, dogs can earn more cash than cash cows.
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