Boston Matrix of Stocks

BCG Matrix (Boston Consulting Group Matrix)

Within the world of product management and strategic planning, few strategies are as well recognized and appreciated as that of the Boston Matrix, which comes from the world-renowned Boston Consulting Group. 

A BCG matrix, also known as a Boston matrix or growth-share matrix, helps organizations figure out which areas of their business deserve more resources and investment. 

The “BCG matrix” or Portfolio Analysis is a portfolio planning model which had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. 

The matrix framework categorizes products within a company's portfolio according to each product's growth rate, market share, and positive or negative cash flow. This helps the company allocate resources and is used as an analytical tool in marketing, product, strategic management, and portfolio analysis. By using positive cash flows, a company can capitalize on growth opportunities.

The matrix is recognized as the preeminent tool for classifying individual product lines within a company’s entire product portfolio, and for outlining the marketing strategies these companies must use to maximize their products’ returns.

"The payoff for leadership [in market share] is very high indeed, if it is achieved early and maintained until growth slows," Boston Consulting Group's Bruce Henderson told clients. "Investment in market share during the growth phase can be very attractive, if you have the cash. Growth in market is compounded by growth in share. Increases in share increase the profit margin...The return on investment is enormous." 

Often referred to as simply the BCG Matrix, its purpose isn’t merely to identify a company’s strongest product lines, but also to provide guidance as to 1) which product line the company should prioritize, 2) which product line the company should retain, 3) which product line it should kill, and finally, 4) which product line needs further definition and analysis. So, how does the BCG Matrix help define these four product classes? More importantly, how can your company use the BCG Matrix? 

A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future.

A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. There is the milking cow that brings in the constant flow of cash. An example of this product would be regular Colgate toothpaste.

But the question is, how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix ? Should we promote one product more than the other one? The BCG matrix can help with this.

The BCG matrix reaches further behind product mix. Knowing what we are selling helps managers to make decisions about what priorities to assign to not only products but also company departments and business units.

The growth-share matrix helps organizations assess its companies and business units on two levels. The first is its level of growth within the market, while the second measures its market share relative to the competition within its industry.

It is based on the observation that the company’s business and to further analyze its assets, the matrix divides the business units in four different categories on the basis of their Market growth Rate (MGR) & Relative Market Shares (RMS).

Stars

The business units or products that have the best market shares and generate the most cash are considered stars. However, because of their high growth rate, stars also consume large amounts cash. This generally results in the same amount of money coming in that is going out.

Stars are units with a high market share in a fast-growing industry. Stars can eventually become cash cows if they sustain their success until a time that the market growth rate declines.

The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom.

Strategic options for stars include:

• Integration – forward, backward and horizontal
• Market penetration
• Market development
• Product development
• Joint ventures

As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, and then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.

The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG stated in 1970:

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:

• Stars whose high share and high growth assure the future;
• Cash cows that supply funds for that future growth; and
• Question marks to be converted into stars with the added funds.

Cash cows

Cash cows are the leader in the marketplace and generate more cash than they consume. As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate – so they generate more cash than they consume. These units should be ‘milked’ extracting the profits and investing as little as possible.

They generate the abundant cash required to turn question marks into market leaders. These are business units or products that have a high market share, but a low growth prospects. 

Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They consume minimum of company resources They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible.

According to NetMBA, cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders.

It is desirable to maintain the strong position as long as possible and strategic options include:

• Product development
• Concentric diversification
• If the position weakens as a result of loss of market share or

Market contraction then options would include:

• Retrenchment (or even divestment)

Dogs

Business units or products that are dogs are those have both a low market share and a low growth rate and neither generates nor consumes a large amount of cash.

They don't earn a lot of cash, nor do they consume a lot. Most likely these aspects of a business are making little, if any money. Dogs are generally considered cash traps because businesses have money tied up in them, even though they are bringing back basically nothing in return. These business units are prime candidates for divestiture.

Dogs are more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. A company must avoid the business than can be categorized as dogs.

Strategic options would include:

• Retrenchment (if it is believed that it could be revitalised)
• Liquidation
• Divestment (if you can find someone to buy!

Question marks

Question mark, are characterised by rapid growth and thus consumes large amounts of cash, but because they have low market shares they do not generate much cash. The result is large net cash consumption but bringing little back in return They are also known as problem child or losing money.

A question mark has the potential to gain high market share and become a star, and eventually a cash cow when the market growth slows.

However, if the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines.

According to NetMBA, question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow their market share.

Strategic options for question marks include:

• Market penetration
• Market development
• Product development
• Which are all intensive strategies or divestment.