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!
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 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.
Applying the BCG Matrix provides several key benefits for businesses, including:
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 Dog category represents products or services that:
For products or services categorized as Dogs, managers may consider discontinuing investment to focus resources on more promising opportunities.
The Cash Cow category refers to SBUs that:
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.
Stars are products or business units that:
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 Marks are characterized by:
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.
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.
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.
The Hold strategy is suitable for Stars. This involves reinvesting profits to strengthen competitiveness and capitalize on consumer interest to expand market share.
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.
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.
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:
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:
| High market share | Low market share | |
| High market growth | Stars: Dasani and Kinley These products dominate the market in Europe and the U.S. with no signs of slowing growth. |
Question Marks: Diet Coke and Minute Maid Although these products attract a modest consumer base, they are still considered to have growth potential. |
| Low market growth | Cash Cow: Classic Coca-Cola It has a high market share but low growth potential. |
Dog: |
While the BCG Matrix offers many benefits, it also has some limitations:
To effectively create a BCG Matrix, follow these steps:
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.
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.
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:
This result (0.5) indicates that your product has half the market share of the leading competitor.
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.
After calculating the necessary figures, you can plot the brands within the market on the matrix as follows:
To calculate the BCG Matrix accurately, analysts should keep the following points in mind:
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.