BCG Matrix
May 17, 2022
What is the BCG Matrix?
The Boston Consulting Group (BCG) designed its four-celled matrix, the BCG Matrix, to aid in long-term strategic planning. The matrix is used to assess the growth opportunities of different products/brands that an organization has in its portfolio based on relative market share and market growth rates across industries/sectors.
The matrix makes it possible to examine the business potential and market environment of different products and brands, which enables the company to decide where to invest, divest, or develop new products.
For credit analysts, the matrix can be a helpful framework for analyzing business risk, an essential part of deciding the credit-worthiness of a company.
In this article we’ll examine how the matrix categorizes products, giving examples. We’ll then see what actions companies can take having decided on the categories. Finally we’ll look at some of the limitations of the matrix.
Key Learning Points
- The BCG matrix is divided into four quadrants and is based on two parameters, relative market share and market growth rate
- The BCG Matrix includes four categories: stars, cash cows, question marks, and dogs
- To calculate the relative market share of a product, divide its market share by the market share of the product’s largest competitor
- This matrix can help businesses make good choices around their portfolio. For example, it can help companies decide which products should be their focus and which should be discontinued
- Care should be exercised around the use of the matrix. It can over-simplify concepts due to its two axis nature
- “High” and “low” market share and market growth determine which category a product ends up in, but deciding what “high” is can be difficult
- Defining the market can also be difficult. Deciding define the market broadly or more narrowly will make a big difference to the matrix and the categories it suggests for a company’s products.
BCG Matrix – Key Terminologies
The BCG matrix is divided into four quadrants and is based on two parameters – relative market share and the market growth rate. The horizontal axis of this matrix represents relative market share, while the vertical axis represents the market growth rate. The four cells of this matrix are designated stars, cash cows, question marks, and dogs. There are general actions associated with the 4 different types, but in the real world companies may of course decide to do something completely different if it suits their plans!
“High” and “Low”
The axes are categorized by “high” and “low”, which means there may be some difficult choices. When analyzing market growth, 10% is often used to decide a market is “high” growth. This can seem arbitrary. Imagine two markets, one with 10.1% growth, and another with 9.9% growth. Some judgement may be needed to decide what “high” and “low” mean in BCG market growth.
Market share is somewhat easier to analyze. The market share of all players in the market are compared. If the market share of the company being analyzed is greater than its next biggest rival, it’s deemed “high” (we’ll look at how that works in more detail later in this article).
Four Quadrants of the BCG Matrix
The four quadrants of the BCG Matrix are:
Stars
Exhibit high growth and command a high market share. A company should invest more in stars, as they are well-established products or brands in high-growth markets. Stars are leading brands in exciting markets. The Apple Watch in 2022 is a star. It’s selling around a third of smartwatches worldwide and has more than three times the market share of its nearest rival, Huawei. The market is predicted to grow by around 28% every year at this point, making it a very high-growth market. Despite being the market leader Apple will have to hold its position. This means it will have to spend a great deal on marketing, and making sure its product stays competitive. Because of this, as of 2022 the Apple watch probably isn’t the most cash-positive product in Apple’s portfolio. If Apple keep spending and making good choices, the watch market may mature and the Apple watch may become a cash cow. This would be the best outcome according to the BCG matrix.
Cash Cows
Exhibit low market growth but command high market share. These are the ideal products to have, according to the BCG matrix. They are leading brands, in slower markets.
It may seem counterintuitive that slower market growth would be seen as positive, but cash cows require little investment. The brand is dominant, and the fewer new buyers to the market will naturally gravitate to the brand. The market is less frenetic than before, and the company doesn’t have to spend as much cash winning the hearts and minds of all that growth!
The cash these products generate can be invested elsewhere. This is an important part of BCG, not immediately obvious from the diagram. The portfolio of a company should be a pipeline, with cash-positive products (primarily the cash cow) paying for the development of question marks and stars.
Coca-Cola has been a cash cow product for the Coca-Cola company for a long time. As of 2023, it holds around 46% of the soft drink market sales, far beyond its nearest rival. The market growth is modest, around 3.2% per year at this point. Coca-Cola has created excellent positive cashflows for the company, which they can use for other ventures such as their less mature food business. The part of Coca-Cola that doesn’t fit as well is the marketing spend. You’re probably aware of Coca-Cola adverts. A better BCG fit would have Coca-Cola not feeling the need to spend so much on marketing. Again, the real world means not everything fits nicely into a matrix.
Question Marks
Show high growth but command low market share. Question marks require significant investment to maintain or increase market share, but are excellent prospects for the company.
Question marks are usually recently introduced products with sound commercial prospects. With sufficient investment, they have the potential to become stars. If neglected, they may become dogs. Wise companies will know if they can’t build a question mark into a star. They’ll divest despite the exciting market.
It’s easy to think of examples of successful question marks, just think of any star or cash cow and rewind some years. It’s more interesting to think of a failed question mark. You could argue that Google Glass was a question mark that went wrong. Their wearable smart glasses were introduced around 2013. At that point, their market share of wearable tech was small, as not many wearable glasses were being sold compared to e.g. watches (this does rely on us putting glasses in with the broader “wearables” market, highlighting one issue of BCG: defining the market). But, the market was growing. It was arguably a case of “too early”, which is fairly common in tech. Google found the technology wasn’t quite good enough, and presumably was having to spend colossal amounts of money behind the scenes to develop, market and distribute the glasses. They ended up halting the production of the glasses in 2015.
Dogs
Have both low growth and low market share. The bad performance may be due to high costs, inferior quality, or a lack of effective marketing.
Unless there is some hope of gaining market share, a company is wise to dispose of these products if they are a drain on cash. Dogs are often, but don’t have to be, cash negative.
Imagine you are the undisputed market leader in producing vinyl records in the 1990s. You probably have a great cash cow, but the years to come will reduce that to a dog. CDs and streaming will make your position obsolete and turn your product into a dog. It may be tempting to divest all dogs, but they may still be cash-generative. Vinyl now commands a premium price, so although they represent a slim minority of music sales it is still probably worth being in the market.
BCG Matrix – Advantages and Limitations
The BCG matrix is very useful for manufacturing companies since an understanding of a product’s market position is imperative to understanding its growth potential. The BCG matrix can also be used to assess the market share of a product relative to competing products. The matrix offers a useful framework for allocating resources to particular products.
However, the matrix does have certain limitations. First, markets may be less clearly defined than the matrix suggests. Moreover, it doesn’t offer information about what the competition is doing. Second, the market growth rate and relative market share are not the only indicators of profitability. Third, this four-quadrant approach may be overly simplistic considering the dynamic nature of markets and industries/sectors. Finally, a high market share does not always result in strong profits given that high costs may also be involved in maintaining that market share.
BCG Matrix – How to use the BCG Matrix
Using five parameters – the definition of the market, relative market share, market growth rate, cash generation, and usage of cash – a company should allocate its products to the relevant quadrant. Based on this allocation, the company can determine which products to invest in and which to discontinue.
It might be noted that defining the market is the most important step. If a market is incorrectly defined, the product could be incorrectly classified. The relative market share is calculated by dividing the selected product’s market share (or revenue) by the market share or revenue of the largest competitor in the sector. Moreover, it’s also necessary to calculate the market growth rate. This can be estimated by assessing the average revenue growth of the leading companies within the product sector.
BCG Matrix – Advantages and Limitations
The BCG matrix is very useful for companies since an understanding of a product’s market position is useful for understanding its growth potential. The BCG matrix can also be used to assess the market share of a product relative to competing products. The matrix offers a useful framework for allocating resources to particular products and building a healthy pipeline in a product portfolio.
However, the matrix does have certain limitations. First, markets may be less clearly defined than the matrix suggests. We’ve seen in the examples that you could narrowly define the vinyl market, or put it as part of the wider music market.
Market growth rate and relative market share are not the only indicators of profitability. We saw that vinyl still has good cashflows for some companies, and question marks may not always be the best to build if it is a pointless drain on company resources with no future.
Finally, we need to be mindful that categorizing by “high” and “low” may lead to some products that are very similar being given different categories. Our earlier example of a 9.9 and 10.1% market growth is relevant here. Some judgment and discussion would be needed to get the most out of the matrix in this case.
Calculating Relative Market Share
The relative market share is used to compare a company’s brand market share with the market share of its largest competitor in the industry. When we calculate relative market share, the market leader’s market share is used as the benchmark.
Relative Market Share Formula:
Relative Market Share = % market share of the company’s product divided by the market share of the largest competing product.
Below we’ve calculated the hypothetical relative market shares of two products from one company using the market share of the largest competitor in that industry. If you’d like to practice this yourself, please see the download attached to this article. This attachment has more products to practice on beyond what’s in the graphic below.
Brand B appears to be dominant in its market, far beyond the share of its nearest rival, rival 1. It is a star or cash cow, depending on the market growth.
Brand A is lagging. It operates in a different market to brand B, and can’t compete on share with its rival 1. It will be a question mark or dog.
Conclusion
The BCG matrix can be a helpful tool for thinking about a company’s portfolio. It creates clear categories and can create great discussions about the balance of products, their cashflows, and their future. It can also suggest sensible actions to create that balance. However, it should be treated with care. It is arguably too simple, reducing the world to two axes. It’s also important to think carefully about what the market is before starting the analysis.
For credit analysts, BCG can create a clear set of categories and language when putting together presentations on a company’s business risk.
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