Boston matrix (BCG matrix)

Business planning helps companies decide which areas to invest in and which to abandon, and no business can succeed without it. One of the key tools for building a sound strategy is the Boston matrix, also known as the BCG matrix. It lets you assess the current position of a company's products or services and plan their further development step by step.

What is the BCG matrix: product types

The Boston matrix, also known as the growth-share matrix, is a tool for analyzing and managing a product portfolio. It shows how important each product is and where it stands.

The matrix was developed by the Boston Consulting Group in the late 1960s, which explains its name. Since then, it has become a popular tool for analyzing competitiveness and planning where to put the company's money.

The basic principle of the BCG matrix is to place each product on two axes, relative market share and market growth rate, and then analyze the resulting groups and the relationships between them. The goal is to identify the factors that directly affect the final result.

The main types of products or services in the BCG matrix are cash cows, dogs, stars, and question marks.

1. Cash cows are products that generate stable income. Their main advantage is that they don't require large investments.
2. Dogs, by contrast, bring little or no profit, and investing in them is generally not recommended.
3. Stars generate high revenue but require substantial investment to grow.
4. Question marks (also called problem children) don't generate much income yet but need considerable investment to develop.

Each type corresponds to a quadrant defined by the two axes:

1. Stars: high market share, high market growth.
2. Cash cows: high market share, low market growth.
3. Question marks: low market share, high market growth.
4. Dogs: low market share, low market growth.

The purpose of the BCG matrix is to choose a development strategy for each product based on its current position. The main tasks are to set investment priorities, identify potential profit, and define the further development strategy.

A simple analogy from farming makes this clear: the harvest needs to be grown, especially valuable crops need to be protected from pests, and barren crops should no longer be sown.

Boston matrix strategies

The tool is most often used by company executives and managers to analyze and manage the product portfolio and make strategic decisions.

Let's look at an example of a BCG matrix.

A clothing manufacturer uses the Boston matrix to analyze and manage its product portfolio. Here's how it works:

1. Stars: the company sees that its new line of sportswear for young people has become popular and brings in a lot of money. It decides to invest more in this segment to develop and promote the line further.
2. Question marks: suppose a new line of children's clothing has been launched and isn't showing strong results yet. The company decides to run additional market research and marketing campaigns to determine whether to keep investing in this segment or to reallocate resources to more promising lines.
3. Cash cows: the traditional line of adult clothing keeps bringing the company stable income. The company decides to maintain it without significant changes to preserve its market position.
4. Dogs: an old collection is no longer in demand among consumers. The company decides either to rework and update it or to remove it from the range entirely to free up funding for successful lines.

The Boston matrix makes it easier to understand and forecast the potential of your products and to make better-informed decisions about your resources and investments.

Let's look more closely at strategies for each quadrant. Stars call for market expansion or diversification. Cash cows need a strategy of holding market positions without large investments; the cash they generate funds other products. Question marks require a choice: invest selectively in those that can gain market share, and stop funding the rest. Dogs are usually candidates for divestment or discontinuation unless they serve a specific strategic purpose.

There are four basic BCG strategies:

• Build: investing in promising question marks (and stars) to increase market share and revenue.
• Hold: maintaining the position of stars and strong cash cows to stabilize and protect their market share.
• Harvest: maximizing short-term cash flow by cutting investment in weak cash cows, dogs, and question marks without prospects.
• Divest: selling or discontinuing dogs and question marks that won't win market share. This frees up funding for more promising product lines.

The value of the Boston matrix is that it lets you not only assess the current situation but also anticipate future changes. This is very useful for business because it supports more informed, well-grounded decisions based on the available data.

The Boston matrix can be used to improve decisions in various areas, from finance to marketing. It helps you see hidden opportunities and potential risks and manage resources much more effectively. The matrix can also help with decisions under uncertainty, because it highlights the key aspects and facts worth focusing on.