What is BCG Matrix? Learn how to create one in 5 steps

The BCG Matrix, also known as the Boston Matrix, is an important analysis tool that helps businesses evaluate the market share of their products and services. Based on the results of the BCG Matrix analysis, managers can determine the most suitable development and investment strategies. Let’s explore every aspect of the BCG Matrix in this article!

What is the BCG Matrix?

SBU concept

SBU (Strategic Business Unit) refers to a business unit with its own vision and development strategy. An SBU functions like an independent business within a company, often representing a product line, a single product, or a brand.

For example, Google Cloud Platform (GCP) is considered an SBU of Google. Its goal is to provide cloud computing services and infrastructure solutions to enterprise customers.

GCP has its own separate departments, such as marketing, product development, engineering, and finance. The performance of GCP is measured using specific KPIs like sales, profit, and market share.

The BCG Matrix (Growth Share Matrix)

The BCG matrix is a business strategy tool developed by the Boston Consulting Group. It is used to assess the growth rate and market share of products or product lines. Based on this assessment, a business can decide whether to retain, sell, invest more in, or phase out a product.

The BCG Matrix categorizes products into four SBU statuses: Star, Cash Cow, Question Mark, and Dog.

• Question marks: Products with high market growth but a low market share.
• Stars: Products with high market growth and a high market share.
• Dogs: Products with low market growth and a low market share.
• Cash cows: Products with low market growth but a high market share.

The importance of BCG matrix

Applying the BCG Matrix provides several key benefits for businesses, including:

• Positioning product status: The BCG Matrix helps managers assess the position of products within their portfolio or their market share. From this, businesses can identify which products are growing rapidly (Star), which hold a large market share (Cash Cow), which have potential (Question Mark), and which are struggling (Dog).
• Allocating resources wisely: Based on a product’s position in the BCG Matrix, businesses can direct resources to products with high growth potential (Star) to achieve better profitability. Meanwhile, for underperforming products (Dog), companies can reduce investment costs.
• Making strategic decisions: With the BCG Matrix, businesses can choose to invest more in potential products (Question Mark) to turn them into Stars, focus on maximizing profits from well-performing products (Cash Cow), or cut investments in non-profitable products (Dog).

However, it’s important to note that BCG Matrix analysis is only relevant for current issues. The BCG Matrix does not forecast the future or evaluate external factors. Therefore, managers should combine the BCG Matrix with other tools to achieve a more comprehensive business strategy analysis.

The four quadrants of BCG Matrix

Dog SBU

The Dog category represents products or services that:

• Operate in slow-growth industries with small market shares.
• Don’t require much capital but also don’t generate significant profit.
• May become a “financial trap,” limiting cash flow profitability.

For products or services categorized as Dogs, managers may consider discontinuing investment to focus resources on more promising opportunities.

Cash Cow SBU

The Cash Cow category refers to SBUs that:

• Hold a large market share in a mature industry with slow growth.
• Generate stable profits without requiring substantial investment.

Cash Cows are often key products or business areas that fund other activities. Therefore, companies should milk these cash cows as long as possible for cash to reinvest elsewhere.

If Cash Cows begin to slow down in growth, it is essential to manage resources and strategies carefully to maximize profitability and prepare for eventual declines.

Star SBU

Stars are products or business units that:

• Hold a large market share in fast-growing industries.
• Have high-profit potential but face strong competition due to the rapidly expanding market.

For Star SBUs, businesses should invest heavily to maintain leadership. With the right development strategy, Stars can eventually become Cash Cows as the industry matures.

Question Mark SBU

Question Marks are characterized by:

• Small market share in a fast-growing industry, requiring significant investment to maintain or gain market share.
• Good commercial potential, but they need to be carefully evaluated for feasibility and profitability.

There’s no one-size-fits-all strategy for Question Marks. Depending on profitability and market conditions, businesses should decide whether to expand, reduce, or exit.

If not invested in, a Question Mark may turn into a Dog. However, with a smart development strategy, a Question Mark could become a Star.

How to build a business strategy using the BCG matrix

Business strategies for SBUs

Data from BCG Matrix analysis provides a critical foundation for SBUs to define strategies that align with their available resources. Each of the four categories of the BCG Matrix corresponds to one of four business strategies: Build, Hold, Harvest, and Divest.

Build strategy - Invest heavily to increase market share  

This strategy is applied to Question Marks with low market share. The focus is on allocating resources to improve the product and increase visibility to capture more market share. However, don’t expect immediate profits, as it requires continuous investment.

Harvest strategy - Cut costs, maximize short-term profits  

The Hold strategy is suitable for Stars. This involves reinvesting profits to strengthen competitiveness and capitalize on consumer interest to expand market share.

Harvest strategy - Cut costs, maximize short-term profits  

The Harvest strategy applies to Cash Cows as their growth rate begins to plateau. This strategy focuses on optimizing short-term profits by reducing costs rather than reinvesting.

Divest strategy - Exit the market  

The Divest strategy encourages businesses to pull resources from Dogs. Liquidating products or offering discounts helps reallocate capital from underperforming products to more promising ones, starting a new business cycle.

Applying the BCG matrix in Marketing

The BCG Matrix isn’t just for product strategy, it can also optimize marketing strategy performance.

In this case, the vertical axis represents the return on investment (ROI) or profits from marketing channels, while the horizontal axis represents the potential effectiveness or sales of each marketing channel.

Similar to the product BCG Matrix, the marketing strategy BCG Matrix includes:

• Stars: Marketing channels with high ROI and high effectiveness, where the business should invest more and expect good returns.
• Question Marks: Channels with high ROI but low effectiveness, where businesses might experiment with investment, though results may vary.
• Dogs: Channels with low ROI and low effectiveness, where businesses should consider reallocating resources to more promising channels.
• Cash Cows: Channels with low ROI but high effectiveness, which should be maintained for stability.

Examples of BCG matrix from Coca-Cola

Coca-Cola is one of the most well-known soft drink brands globally. Coca-Cola products are available in over 200 countries.

In the example of Coca-Cola's BCG Matrix, the SBUs are as follows:

Limitations of the BCG Matrix

While the BCG Matrix offers many benefits, it also has some limitations:

• Oversimplified categorization: The BCG Matrix divides SBUs into two categories: high and low. However, in reality, many SBUs may fall somewhere in the middle. This can make the matrix less accurate in reflecting the true state of the business.
• Lack of market clarity: The BCG Matrix doesn’t always account for industry-specific factors. For example, a product with a high market share may still require significant investment, resulting in low profitability. Thus, having a large market share doesn’t always guarantee high profits.
• Growth rate and market share aren’t the only profitability indicators: The BCG Matrix may overlook other factors that affect profitability, potentially leading to an incomplete analysis.
• Dogs can still offer competitive advantages: In some cases, a Dog SBU can provide a competitive edge for the company, and it might even generate higher profits than a Cash Cow.

How to draw the BCG Matrix

To effectively create a BCG Matrix, follow these steps:

Step 1: Identify the subject for analysis  

A business can use the BCG Matrix to analyze the status and value of its products, services, or SBUs. The chosen subject will influence the entire analysis, so it's important to clearly define the problem or area you want to focus on.

Step 2: Identify the market to be analyzed  

Defining the market involves determining which market segment your product falls into. For example, if you consider Mercedes-Benz in the general passenger car market, it could be classified as a Dog (with only a roughly 5% market share). However, in the luxury car market, it would be considered a Cash Cow.

Accurately defining the market is crucial to correctly positioning your business within the industry.

Step 3: Calculate the relative market share  

Market share refers to the percentage of the market that a business captures, measured by sales volume or revenue. The BCG Matrix uses relative market share, which compares your business’s sales to the top competitor in the industry.

Relative market share is shown on the X-axis and is calculated as:

Relative market share = Your product’s sales for the year / Top competitor’s product sales for the same year

For example:

• Your product has $50 million in sales.
• The top competitor’s product has $100 million in sales.
• Relative Market Share = 50/100 = 0.5

This result (0.5) indicates that your product has half the market share of the leading competitor.

Step 4: Calculate the market growth rate  

The market growth rate is determined by calculating the average growth rate of the top businesses in the industry.

The formula to calculate market growth rate is:

Market growth rate = (This year’s product revenue – Last year’s product revenue) / Last year’s product revenue

High-growth markets typically lead to increased market share and greater profitability potential.

Step 5: Plot circles on the BCG Matrix  

After calculating the necessary figures, you can plot the brands within the market on the matrix as follows:

• The X-axis represents the relative market share.
• The Y-axis represents the industry’s growth rate.
• Each unit, brand, or product is represented by a circle, with the size of the circle corresponding to the revenue generated by that SBU.

Tips for analyzing the BCG Matrix

To calculate the BCG Matrix accurately, analysts should keep the following points in mind:

• Use accurate and complete data, including market growth rates and relative market share. This ensures that the results are not misleading.
• Combine both qualitative and quantitative factors for a comprehensive evaluation. This approach gives businesses a clearer overview of market potential and their performance.
• Regularly reassess the BCG Matrix as markets and business conditions change over time. This ensures that the classification and positioning of business units remain aligned with current realities.
• The BCG Matrix is only one part of strategic analysis. It should be combined with other tools such as SWOT analysis, PESTEL analysis, and industry analysis to gain a complete understanding of the business environment.

By organizing products and business units into a simple 2×2 grid based on market growth and market share, the BCG Matrix provides a roadmap guiding businesses through strategic decisions, showing where to invest, where to nurture, and where to let go. We hope this framework empowers you to assess market potential and align your portfolios with long-term goals.