BCG Matrix

The BCG matrix classifies business-unit performance on the basis of the unit's relative market share and the rate of market growth as shown in Figure 1.

Products and their respective strategies fall into one of four quadrants. The typical starting point for a new business is as a question mark. If the product is new, it has no market share, but the predicted growth rate is good. What typically happens in an organization is that management is faced with a number of these types of products but with too few resources to develop all of them. Thus, the strategic decision-maker must determine which of the products to attempt to develop into commercially viable products and which ones to drop from consideration. Question marks are cash users in the organization. Early in their life, they contribute no revenues and require expenditures for market research, test marketing, and advertising to build consumer awareness.

If the correct decision is made and the product selected achieves a high market share, it becomes a BCG matrix star. Stars have high market share in high-growth markets. Stars generate large cash flows for the business, but also require large infusions of money to sustain their growth. Stars are often the targets of large expenditures for advertising and research and development to improve the product and to enable it to establish a dominant position in the industry.

Cash cows are business units that have high market share in a low-growth market. These are often products in the maturity stage of the product life cycle. They are usually well-established products with wide consumer acceptance, so sales revenues are usually high. The strategy for such products is to invest little money into maintaining the product and divert the large profits generated into products with more long-term earnings potential, i.e., question marks and stars.

Dogs are businesses with low market share in low-growth markets. These are often cash cows that have lost their market share or question marks the company has elected not to develop. The recommended strategy for these businesses is to dispose of them for whatever revenue they will generate and reinvest the money in more attractive businesses (question marks or stars).

Despite its simplicity, the BCG matrix suffers from limited variables on which to base resource allocation decisions among the business making up the corporate portfolio. Notice that the only two variables composing the matrix are relative market share and the rate of market growth. Now consider how many other factors contribute to business success or failure. Management talent, employee commitment, industry forces such as buyer and supplier power and the introduction of strategically-equivalent substitute products or services, changes in consumer preferences, and a host of others determine ultimate business viability. The BCG matrix is best used, then, as a beginning point, but certainly not as the final determination for resource allocation decisions as it was originally intended. Consider, for instance, Apple Computer. With a market share for its Macintosh-based computers below ten percent in a market notoriously saturated with a number of low-cost competitors and growth rates well-below that of other technology pursuits such as biotechnology and medical device products, the BCG matrix would suggest Apple divest its computer business and focus instead on the rapidly growing iPod business (its music download business). Clearly, though, there are both technological and market synergies between Apple's Macintosh computers and its fast-growing iPod business. Divesting the computer business would likely be tantamount to destroying the iPod business.

A more stringent approach, but still one with weaknesses, is a competitive assessment. A competitive assessment is a technique for ranking an organization relative to its peers in the industry. The advantage of a competitive assessment over the BCG matrix for corporate-level strategy is that the competitive assessment includes critical success factors, or factors that are crucial for an organizational to prevail when all organizational members are competing for the same customers. A six-step process that allows corporate strategist to define appropriate variables, rather than being locked into the market share and market growth variables of the BCG matrix, is used to develop a table that shows a businesses ranking relative to the critical success factors that managers identify as the key factors influencing failure or success.