Wondering how big companies and corporates decide on their portfolio of businesses. Which business to keep and cash out, which one to shut off completely. Well if you are seeking answers – we’ve got you. This article will help you understand the nuances of BCG matrix and calm your ich for knowledge
Let’s start with basics and understand what we mean by matrix here, it’s a basic graphical matrix divided into four quadrants. Each quadrant holds different sets of business from the business portfolio.
By The Boston Consulting Group (BCG) Growth Share Matrix, a business could break down its company’s business portfolio of units or product lines into the two dimensions that are basic: “market growth rate” and “relative market share”. Knowing and using the BCG Matrix helps businesses understand data-driven decisions for investments, resource distribution, and product development.
How the BCG Matrix Works
The BCG matrix categorizes the business units or products into four quadrants. And each represents a distinct strategic position:
- Stars: Leaders
Stars are those products or business units that have the opportunity to enjoy a “high market share” in “fast-growing industries.” Their revenues are quite high, though they require high investments to continue holding the position and allowing the market to realize its potential as well. Later, the stars become cash cows as the market matures.
For example, in the technology sectors, the star was smartphone units. Apple and Samsung invested millions of dollars in innovation so that they were current in this high-growth sector.
- Cash Cows: Cash Generators
Those products where the market share is very high in slow growing industries are cash cows. These are those products which are leading in mature markets and require low investment but generate strong cash flows that can be used in other businesses, such as stars or question marks.
For example, Microsoft Office is a classic example of dominance in a mature market. Even though this market for productivity software is not booming much, Microsoft still holds on to big profit margins with this product.
- Question Marks: Potential or Risk
Question marks are those products that have a “low market share” in “high-growth industries”. They hold a lot of promise and uncertainty at the same time. It is hard to make a decision for the company either to spend its resources to enable these products to shine bright or let them fade into the background.
The early electric vehicles (EVs) may be the one good example. Low market share was quite common for many companies as they came along in the fast-growing market. Companies like Tesla invested wisely and eventually their products moved into the star category.
- Dogs: Declining Assets
Dogs are “low market share” products “in low growth markets.” These products do not drive a lot of revenue and may actually suck resources away. Not all dogs have to go out the door today, but they often present products that need to be discontinued or divested.
DVD players come to mind. DVD players became useless in the sedate market with digital streaming.
The Role of Strategic Equilibrium
The BCG Matrix is far more than a mere classification of products. It helps companies “balance their portfolio.” A good, balanced portfolio boasts cash cows, which bring in cash; stars, which will be the leaders of future growth; question marks, which may become future stars with investment; and dogs, which may be sold off when they no longer contribute much.
Criticisms and Limitations of the BCG Matrix
Despite numerous uses, the BCG Matrix has its drawbacks. According to Stephen Mitchell “the danger of oversimplification” pervades a BCG Matrix and maybe other framework in this article. While business real life is so complex, reduction of all factors toward making a decision to only two, namely market growth and market share, could potentially ignore other important dimensions as seen with competitors, market situation, as well as customer behavior. Companies that focus only on the matrix and also pay no attention to all other strategic factors may be prone to making wrong investment decisions.
Another problem relates to market share definition. Applying different methods of computation and comparison-for example, global or regional markets-will yield different results and will lead to a “misinterpretation” of a business unit’s actual place in the market.
Conclusion: Is the BCG Matrix Still Relevant?
The BCG Matrix, despite its disadvantages, is still a very useful tool for strategic decision-making, especially as a complement to other frameworks. It presents the simplest and yet most effective way of considering a company’s portfolio and deciding which areas to concentrate on in order to allocate resources. Companies are continuing to implement it in the light of today’s fast pace, digitally-driven business environment.
That is to say that companies put modern elements such as digital transformation and innovation into strategic assessments according to the Boston Consulting Group; therefore, businesses should be aware of industries’ disruptions and not encompass classifying products but understand the forces changing in the market.
Recognizing complexity may, therefore help companies make better decisions and stay in the competition by taking advantage of the BCG Matrix as a starting point for further dives.
References:
– Michel, S. (2024). The BCG Matrix: The Danger of Simple Frameworks. LinkedIn.
– Boston Consulting Group (2024). Growth-Share Matrix: Our History. BCG.com.
– Investopedia (2024). BCG Matrix Definition.
– Glowbl (2024). The BCG Matrix: An Essential Tool in Marketing Strategy.
