How do you prioritize growth and investment decisions using the BCG matrix?

1 What is the BCG matrix?

The BCG matrix, also known as the growth-share matrix, was developed by the Boston Consulting Group in the 1970s. It is a simple 2x2 matrix that plots products or business units along two dimensions: relative market share and market growth rate. The relative market share measures how well a product or business unit competes against its rivals in the same market, while the market growth rate indicates how fast the market is expanding or contracting. Based on these two criteria, the BCG matrix divides products or business units into four categories: stars, question marks, cash cows, and dogs.

2 How to interpret the BCG matrix?

The BCG matrix has different implications for growth and investment decisions. Stars are products or business units with high market share and a high growth rate; they have strong potential for future growth, but require a lot of investment to maintain their position. Question marks are products or business units with low market share and a high growth rate; they require a lot of investment to increase their market share, but carry a high risk of failure. Cash cows have high market share and low growth rate; they are the main source of profit and cash for the company, so should be maintained and protected. Finally, dogs have low market share and low growth rate; they consume more resources than they generate, so should be eliminated or minimized to free up resources for more promising products or business units.

3 How to use the BCG matrix?

Collecting data on the market share and growth rate of your products or business units, as well as the industry average, is essential for using the BCG matrix. Plotted on the matrix, you can assign them to one of the four categories and use the size of the circles to represent the revenue or profit contribution of each product or business unit. With this, you can guide your growth and investment decisions. Generally speaking, you should invest in stars to sustain their growth and leadership position, invest selectively in question marks to turn them into stars or divest them if they have low potential, harvest cash cows to generate cash and fund other products or business units, and divest or exit dogs to avoid wasting resources and improve profitability.

4 What are the limitations of the BCG matrix?

The BCG matrix is an effective tool for analyzing and prioritizing products or business units; however, it has certain drawbacks that should be taken into consideration. For instance, it assumes that market share and growth rate are the only factors that determine success, disregarding other elements such as customer loyalty, innovation, differentiation, quality, cost, etc. Additionally, it assumes the market is stable and predictable without considering changes in customer preferences, technology, competition, regulation, etc. Furthermore, it does not account for the synergies or conflicts that may exist among products or business units. Moreover, it assumes the market share and growth rate are linear and constant without accounting for nonlinear or variable trends. Finally, it assumes the industry average is a valid benchmark without considering differences in market segments, niches, or regions.

5 How to overcome the limitations of the BCG matrix?

To overcome the limitations of the BCG matrix, you should not rely on it as the sole basis for your growth and investment decisions. Instead, you should consider other factors and tools that may provide more insights and perspectives on your products or business units. For instance, the customer value proposition can help you understand customer needs, pains, and gains. You can also use the competitive advantage tool to assess your strengths, weaknesses, opportunities, and threats. Additionally, the lifecycle stage tool can identify the different phases of your product or business unit. Furthermore, the portfolio balance tool enables you to evaluate your current and potential products or business units. All of these tools can help you create value for customers and optimize your portfolio for growth and profitability.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?