The BCG matrix was conceived by the Boston Consulting Group during the early 1970s. The idea was to identify the relative performance of individual business units of large conglomerates to accordingly allocate limited resources. More detailed models have evolved over the years; however, the BCG matrix is still a favorite among businesses for its simplicity and effectiveness particularly at a time when the world is overcoming liquidity crunch issues.
The two quadrants of the BCG matrix are relative market share and market growth. By relative market share, it is meant that if X is the market leader and the business unit of the examined company is half as large as X, then the value allotted is 0.5. In case the business unit of the company in question is the market leader, then value allotted is 1. Market growth, as the name suggests, tracks the growth rate of the market in which the business unit is present.
Based on their relative position on the BCG matrix, business units can be classified into the following categories:
Dogs: These are segments which have a low market share, and the market itself is not growing. There is a strong cause for exiting the market as these business units can tend to be liabilities. Pumping more money into the business is not likely to revive the business unit.
Stars: These segments are the diametric opposite of dogs, garnering high market share in a high growth market. These business units will generate maximum profitability for the company. The threat lies in increased levels of competition because of the opportunities in a high growth market. Business activities would involve strong marketing and branding efforts to retain high market share.
Cash Cows: These segments have high market share in a mature market with little or no growth. These businesses, as the name suggests are high revenue generators. Cash acquired from these businesses can be used as a shot in the arm for other businesses. Business activities should focus less on advertising and more on customer retention.
Question Marks: These segments have low market share but operate in high growth market. The CEO needs to take a call on the potential of such segments. These segments could either become stars, if sufficient cash is pumped into them, or could fizzle out into dogs.