The BCG (Boston Consulting Group) matrix, developed by Bruce Henderson of the Boston Consulting Group in the 70's, is a portfolio management technique used by organisations that have diversified their businesses, to decide which ones to participate in and identify a means through which their businesses can be managed to maximise corporate performance. The BCG matrix can help in setting the desired distribution of resources including cash.
The Business Analyst may employ the BCG Matrix to assist the business in evaluating its product lines to determine which are profitable or otherwise, based on these two dimensions:
1) Growth rate: How is the product growing in the market relative to other products?
2) Market share: What portion or size of the market has the product garnered relative to competition?
The underlying theory is that the more appealing business opportunities for the organisation are the fast-growing markets where the business records the highest market share in comparison to the slow-growing markets in which the business records small market share.
Businesses that an organisation may engage in are classified as dogs, question marks, cash cows and stars.
How to use the BCG matrix
Dogs: These represent the products of a business with low growth rate and low market share. The best marketing advice for any business is to eliminate dogs from their product portfolio since they drain resources and may result in losses. Some of these businesses can however, generate partial revenue with little costs.
Question marks: These represent businesses that have only a small market share of a fast growing market, making the future performance of the business uncertain. A question mark that is capable of seizing growing amounts of the market share is likely to be profitable. On the contrary, a question mark that is unable to maintain market growth will generate low profit. The best marketing advice for organisations is to invest wisely in question marks and define a plan for ensuring that the market share can be increased.
Stars: These are businesses with high market share and growth rates. These products are market leaders and considerable attention should be devoted to them to ensure they maintain their lead.
Cash cows: These are businesses with high market shares but which are not expected to grow significantly. They are able to generate large profits that can be used by the organisation to improve other sections of the business. With cash cows, there is less competitive pressure due to the low growth rate of the market. The proceeds from these products may be used to support star products.
The main takeaway from analysing the portfolio of a business using the BCG matrix is to ensure that the business invests resources wisely on products that are likely to generate superior returns. The BCG Matrix is based on the theory that an increase in market share will increase revenue through economies of scale.
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