The BCG Matrix

What is the BCG Matrix?

The BCG matrix is named after the Boston Consulting Group. It is a strategy analysis tool which helps to understand the strategic options available across a portfolio of different:

• business units,
• products,
• services,
• customer segments or 
• channels.

The model shows that not all parts of a portfolio business are strategically equal. In so doing, it helps to facilitate more nuanced strategic analysis.

How does the BCG Matrix work?

In its simplest form, the BCG matrix charts each source of value by:

• its share of its market and
• the rate at which that market is growing.   

Sources of value could be business units, products, services, customer segments or channels. That is, you would choose one of these criteria, say product, and then chart all of the organisation's products relative to each other.

The 4 quadrants

The resultant portfolio analysis can then be roughly divided into 4 quadrants. This is shown in the chart to the right.

Each of the four quadrants suggests a different strategic approach.   For example:

• Stars: continue to invest for growth.
• Cash Cows: drive efficiencies.
• Question Marks: decide to invest or exit.
• Dogs: exit.

For example, Cash Cows may more readily lend themselves to "Competitive" strategic thinking (see for example Porter's 5 Forces Analysis). On the other hand, Stars may lend themselves to more "Blue Ocean" strategic thinking (see for example The Strategy Canvas).

In addition, one could vary the size with which you plot each source of value to represent, say, profitability.

Critical success factors

Critical success factors:

• How you define the scope of each market (for measuring market share and growth) is key to the placement of each source of value.
• Don't ignore cross synergies, for example, taking into consideration sources of value which may serve as loss leaders.
• Don't ignore cyclical effects.
• When considering the allocation of costs across sources of value, remember that all costs are variable in the long term. That is, don't think that you need to keep an unprofitable product, channel etc. going just because it is absorbing some of your "fixed" costs.

For more complex businesses

For more complex businesses, you may need to cluster sources of value together. For example, you may cluster large numbers of products together by organisational divisions.

To calculate the market share of a cluster of products or services:

1. add the total value of sales of all products and services in the cluster.
2. add the total value of all of the markets in that cluster.
3. calculate 1 as a percentage of 2.

To calculate the growth rate of a cluster of products or services:

1. add the total value of sales of all products and services in the cluster for the prior period.
2. add the total value of sales of all products and services in the cluster for the previous period.
3. subtract the two and divide them by the first number (and multiply by 100 for a percentage).
4. You may need to consider adjustments for products and services introduced or withdrawn during the time period under consideration.

See also:

• Analysing product and/or service portfolios