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BCG Matrix

Guide to Understanding the BCG Matrix

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BCG Matrix

BCG Matrix Growth Share Framework

The growth share matrix created by the Boston Consulting Group (BCG) is a tool for identifying new growth opportunities and making informed capital allocation decisions to achieve long-term, sustainable growth.

The BCG growth-share matrix is a framework for companies to reference when refining and prioritizing their different businesses (and strategies).

The BCG matrix enables a company’s management team to derive insights and develop a plan to improve their current product offerings, focusing on new information about new opportunities to pursue in their current (or adjacent) markets.

The BCG matrix assesses the growth opportunities available for a specific product portfolio by conducting a two-dimensional analysis based on two parameters:

  1. Relative Market Share
  2. Market Growth Rate

By examining a product’s potential and the prevailing (and predicted) market environment, companies can make an informed decision on where to invest more capital, develop new products/services, or divest certain assets.

BCG Matrix Structure: Four Quadrants

The structure of the BCG matrix plots a company’s products or strategic business units (SBUs) on a four-square matrix.

  • Y-Axis → Market Growth Rate
  • X-Axis → Relative Market Share

The four quadrants of the BCG matrix are as follows.

  1. Cash Cows → Low Growth; High Market Share
  2. Stars → High Growth; High Market Share
  3. Question Marks → High Growth; Low Market Share
  4. Pets→ Low Growth; Low Market Share

The image below shows the common version of the BCG matrix.

Growth Share Matrix

Growth-Share Matrix (Source: BCG)

Quadrant 1. Cash Cow in BCG Matrix

The term “Cash Cow” encompasses companies with a high market share in a slow-growing industry.

For such companies, neither profitability nor liquidity is an issue.

The one drawback is that because the markets are mature, the overall growth rate is low with limited opportunities to reinvest or expand into different markets, i.e. such companies are boring but profitable.

The required reinvestments and overall efforts are minimal to sustain the historical levels of cash generation for such companies.

Quadrant 2. Star in BCG Matrix

The “Star” quadrant describes companies with high market share in a high-growth industry.

By exhibiting strong historical growth (and a pipeline of promising future opportunities) alongside high market share, stars are perceived as the most favorable products for those seeking the highest risk-adjusted returns.

Most often, these companies provide niche products or services, and tend to exhibit a clear competitive advantage, i.e. “moat”.

Of course, high growth requires spending, meaning that reinvestments are necessary to maintain strong growth.

Once the growth of the company declines and the market position stabilizes, the stars would ideally then become cash cows.

Quadrant 3. Question Mark in BCG Matrix

The “Question Mark” refers to companies with low market share operating in a high-growth market.

Since these sorts of companies are not market leaders, significant spending is necessary to grow and take market share away from incumbents.

The potential upside and downside are unknown, as the outcome of the company depends entirely on being able to obtain market traction and executing properly; hence, the uncertainty.

Quadrant 4. Pet in BCG Matrix

The final quadrant consists of “Pets” — the least favorable categorization in the matrix — which are companies with low market share in a mature industry with declining growth.

These companies are characterized by low margins with minimal (or potentially even negative) cash flow generation.

The most common treatment of such companies (or business units) is to discontinue operations, liquidate, or complete a divestiture, i.e. a sale to a third-party buyer.

How to Interpret the BCG Growth Share Matrix

Relative Market Share vs. Growth

BCG Matrix Growth Quadrants (Cash Cows, Stars, Question Marks, Pets)

BCG Matrix Growth Quadrants (Source: BCG)

Limitations of BCG Matrix: Criticism Examples

While the BCG matrix is a practical tool for allocating resources and is widely taught in academia, the model comes with its limitations:

  1. Low vs. High Categorization, i.e. No Middle Option
  2. Market Sizing (TAM) Involves Subjective Approximations
  3. Maintaining High Market Share Can Be Costly (and Prime Target in Market)
  4. Profitability is Determined by Numerous Factors (i.e. Growth Rate and Market Share is Too Simplified)
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