The BCG-Matrix is an effective tool which helps you with strategic planning and implementing your growth strategy by identifying and evaluating the most profitable products and strategic business units. Organizations can identify the current and future value of their products, as well as the best strategic approach to invest in order to increase profit, market share and return on investment. The BCG-Matrix is also called growth/share matrix because the market growth rate and relative market share are being considered. Therefore the revenue streams are positioned in a matrix of four quadrants, which were named symbolically and give an indication for recommendations on actions like investments or divestment.
How to position your products into the matrix:
Dog products: These products have a low market share in a low growth market and should be removed from the product portfolio in order to relocate resources to more profitable business units.
Question mark products: As their name suggests, it is unclear if these products will move into the stars or dog quadrant, that’s why they should be observed closely over time. To that point, the products are operating on a high growth market with a low market share, whereas investments based on in-depth research should be taken to develop those products into stars. It is not easy to spot the future stars under the question marks, that’s why some investments might be wasted.
Star products: This category of products is high in relative market share on high growth market and the most profitable in terms of ROI. They are worth to be invested in as they bring the biggest value to the company.
Cash cow products: At that stage, the products are well established with a high relative market share on a low-growth market, whereas they should be maintained by constant investments as long as they are generating more cash than they consume.
The key to success is that your company should have a portfolio of products with different market shares operating on markets with different growth rates.
How to derive strategic actions from your BCG-Matrix:
After you position your products in the BCG-Matrix, it is time for analyzing and evaluating in order to figure out the best strategic actions to support your growth strategy. Author Hitesh Bhasin stated four strategies, which are based on the results of the BCG-matrix:
- Build: If you want to turn a question mark into a star and then into a cash cow, the most effective way to boost your company’s growth and profit, you have to invest in that product in order to increase its market share.
- Hold: If there is no commitment to investing in products to move them into another quadrant, they will be stuck in their current quadrant. For example a star cannot develop into a cash cow without proper investment commitments. This strategy might be an option for your cash cow products or when your marketing budget is small.
- Harvest: This strategy focuses on generating the most profit possible with a product while the investments are being reduced. This scenario is most likely for cash cow products and aims to increase the product’s profitability.
- Divest: Divesting is a strategy mostly used on dog products in order to release the resources already stuck in the business and invest in products with more potential.
Advantages of the BCG-Matrix
- Easy to understand and no need to bring in any experts or do complicated
statistical work
- The positioning of the product is visualized, so everyone can easily spot
the more promising products and the ones which should be divested.
That allows you to relocate your resources to products with a higher scope
of growth like stars or cash cows depending on your risk appetite and investment
commitment.
Disadvantages of the BCG-Matrix
- Smaller and early-stage businesses often don’t have enough products to
reserve all quadrants, so it becomes difficult to select revenue streams to invest or divest in.
- High market share itself does not guarantee an organization’s success
- Factors like the ability of an organization to adapt to new circumstances are more
meaningful than just its market share
Our video course starter kit describes the entire strategic planning process from start to finish:
