Suppose you are reviewing all of your organization’s products and you have to decide on which one you should invest your money, for one of the products that is really doing well financially but its demand has declined from the market which doesn’t seem to persist for a longer time.
Another product has a high demand but as it has entered a new market that needs more cash to support it. Do you find this right to continue investing in this product? On the contrary, a product has a high potential growth but turned out to be unprofitable for the organization. Do you want to keep creating the product or destroy it?
In order to make such decisions, you have to look beyond the profits that the products are bringing up and look forward towards how they can perform in the future.
The BCG matrix which stands for Boston Consulting Growth Matrix is a simple tool to analyze the financial performance or business portfolio of your product. The BCG matrix is classified on two dimensions: relative market share and relative market growth. This explains the idea that if the product’s market share is higher or it has a higher growth rate, it’s beneficial for the company.
The BCG matrix falls under the following four categories:
[large]1- The Star represents a business unit that has a higher market share in a fastest growing industry. They may generate huge cash but in order to maintain their lead the company has to make a large investment. As the product continues to mature, it’s likely to enter into the Cash Cow stage.
2- The Cash Cow has a high market share in a slow growing industry and therefore it has a low growth. The Cash Cows don’t need much investment and utilize the cash by further investing into other business units. The key source of the business lies in generating cash and when the product gets into the deteriorating stage, the company goes for the retrenchment strategy.
3- The Question Marks represents a low market share in a high growth industry. The business needs to invest heavily then they have a chance to become Stars, to utilize the amount of cash as much it can or sell off the whole business is required as the growth will reach to its end and the Question marks will turn into Dogs.
4- The Dogs are those businesses that have a low market share located in a low growth industry. Ineffective marketing, poor quality of the product is one of the reasons of having a low market share. The businesses are not able to generate any cash and adopt a retrenchment strategy in order to maintain a market share at the cost of its competitors.
Limitations of BCG Matrix
1- The market is not clearly identified in this matrix.
2- A high market share does not always suggest a high profit; it can also engage a high cost as well.
3- Growth rate and market are not the only factors to generate profits, other indicators has been overlooked in this matrix.
4- Dogs can provide competitive advantage to other businesses and can earn even more then Cash Cows.