The BCG matrix which takes after the abbreviation of the Boston Consulting Group, is essentially a chart which was developed by the firm’s employee Bruce Henderson in 1970 to assisst businesses in examining their business units and product lines.
(...) each strategic business unit is a profit center on its own, and each plan created for each business unit will create the business’ plan at the highest level (...) all strategic business units (SBU’s) of a business with diverse products and investments is grouped in a 2x2 matrix called growth-market share matrix. These matrices are difficult to apply, have high-cost and take a long time to prepare.
Whereas the market growth rate in vertical axis (sales increase rate) exists to measure the attractability of the market; relative market share in the horizontal axis shows the power of the business against competitors in the market. All the profits and cash acquired from each of the strategic business units are considered to be connected with the market share of the product and high profit margin is related to high market share as a principle.
(...) initially each SBU or product sales are is divided by sales of the biggest competitor in order to calculate market share. Subsequently, year over year, the market growth rate or the sales rate of a product is calculated.
As the market growth rate exists in the vertical axis, relative market share exists in the horizontal axis growing from right to left. In the matrix, the strong cash flow products are on the left; and the weak cash flow or negative cash flow products are on the right.
SBU’s are characterized in four quadrants such as Stars, Question Marks, Cash Cows and Dogs. These groups are explained as follows:
1-Stars are the products, brands or divisions that have a high growth rate and high market share. In order to support their rapid growth, heavy investment/cash usage is required. Their growth slow down over time and they become cash cows.
2-Cash cows are the SBUs which have low market growth rate and high market share. These established and successful business units require less investment to keep their market share and fall within the lower-left corner of the matrix.
3-Question Marks or Problem Children are business units with a high growth rate yet low market share. Which of the products in this group have potential to become a Star is an important decision for the management.
4-Dogs are the products, brands or divisions with both low growth rate and low market share. Although they can generate enough cash to be self-sufficient, they don’t have potential of generating high amounts of cash.
Managers may follow one of the four strategies called “build”, “hold”, “harvest”, “divest” according to the SBU’s situation. If the company decides to improve the stuation of an SBU it can allocate more budget or it can invest more to build the share of that business unit. If the company is happy about the current situation of the SBU and wants to keep it as it is, the company may only invest to hold the unit at that level. Sometimes a SBU may provide a lot of cash flow to the company and in harvesting strategy the company may use the cash coming from this unit to finance other units. Of course sometimes the companies follow divesting strategy especially for the question marks or dogs by selling this unit to another company.