Product Strategy Tools - BCG Growth-Share Matrix

Overview

In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors. The graph is a simple 2x2 grid that creates four quadrants. Each of the firm’s products is plotted into one of the cells of the matrix identified as stars (high share/high growth), question marks (low share/high growth), cash cows (high share/low growth), and dogs (low share/low growth).  

Resources are allocated to business units or product lines according to where they are situated on the grid as follows:

• Cash Cow - a business unit or product that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units or products.
• Star - a business unit or product that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.
• Question Mark (or Problem Child) - a business unit or product that has a small market share in a high growth market. These business units or products require resources to grow market share, but whether they will succeed and become stars is unknown.
• Dog - a business unit or product that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

The BCG matrix is a strategic allocation model that shows how money can be transferred from areas of strategic weakness to opportunity. Based on the classifications of the products in the grid (i.e. star, question mark, cash cow, or dog), the firm then assesses the health of its portfolio. The goal is to continuously generate future cash cows. Money earned from cash cows is invested into question marks with the intent of turning them into stars. As the market matures, stars will degenerate into cash cows and the process is repeated. New cash cows give the firm a steady source of funds to pursue future avenues of growth.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. However, the approach has received some negative criticism for the following reasons:

• The link between market share and profitability is questionable since increasing market share can be very expensive.
• The approach may overemphasize high growth, since it ignores the potential of declining markets.
• The model considers market growth rate to be a given. In practice the firm may be able to grow the market.

Uses for the BCG Growth-Share Matrix

The BCG matrix is an excellent tool for visually displaying the state of a product portfolio or product lines. By mapping each product in your portfolio on the same grid, it is possible to show - on a single easy to understand graph - the state of the complete portfolio e.g.

Note that the size of each product circle is is in relative proportion to the $ revenues for the product itself. So, in the above example, you can see that Product B is a true cash cow with substantial revenues in a low growth market. Product A, on the other hand is a star in a high growth market (almost 40% CAGR). The line that divides high and low growth will change by industry and market maturity. The above example is a sanitized BCG matrix for a software company where we considered anything below a 15% CAGR to be low growth. In other industries, 5% CAGR is considered to be good!

My Experience with the BCG Growth-Share Matrix

The above sanitized example of a BCG matrix comes from my use of the tool to illustrate the state of a major product portfolio. It helped to provide a visual overview of the portfolio to senior management, so that they could understand the position of each product within the grid. I used the matrix as supporting material when discussing the current market conditions (economic, competitive, etc.) for each product and the subsequent strategy for the individual products and portfolio as a whole.

For example, using the above BCG matrix to set the scene, the product management team would lead a discussion with the senior managers about their proposed plans for each product. We would discuss the factors that result in the positioning of the product on the grid (e.g. "It's a very mature product and customers a looking to migrate to newer technologies and this has resulted in falling maintenance revenues.") and then explain our plans to address the situation. This did not always involve plans to move, for example, dogs out of that quadrant. Sometimes the plan would be to allow the dog to continue to live, but look at retaining the customers rather than letting them move to competing products. But the BCG matrix allowed to represent the situation to senior management so that they would listen to the proposed plans with an understanding of the reality of the situation.

While the BCG matrix is a great tool to support real and meaningful product strategy discussion, it is a bit too simplistic in how it categorizes products. Having only four quadrants, of which two are "bad", oversimplifies the reality of markets. Some of these shortcomings are addressed by the GE/McKinsey multifactor portfolio matrix - which is my personal favorite tool for product strategy. More about this tool in my next post...