How can you prioritize business units with the Boston Consulting Group matrix?

1 What is the BCG matrix?

The BCG matrix is a four-quadrant framework that plots business units along two axes: relative market share and market growth rate. The relative market share measures how well a business unit competes with its rivals in its industry, while the market growth rate indicates how fast the industry is expanding. Based on these two dimensions, the BCG matrix divides business units into four types: stars, question marks, cash cows, and dogs.

2 How to identify the four types of business units?

Stars are business units that have a high market share and a high growth rate. They are the leaders in their markets and have strong prospects for the future. However, they also require a lot of investment to maintain their position and fend off competitors. Stars generate a lot of revenue, but also consume a lot of cash.

Question marks are business units that have a low market share and a high growth rate. They are in attractive markets, but face stiff competition and have not established a strong foothold. They have potential to become stars, but they also carry a lot of risk and uncertainty. Question marks require a lot of investment to increase their market share, but they may not generate enough returns.

Cash cows are business units that have a high market share and a low growth rate. They are in mature and stable markets, where they have a loyal customer base and a dominant position. They do not need much investment to sustain their performance, and they generate a lot of cash that can be used to fund other business units.

Dogs are business units that have a low market share and a low growth rate. They are in declining or stagnant markets, where they have little or no competitive advantage. They do not generate much revenue or cash, and they may even incur losses. Dogs are usually candidates for divestment or closure.

3 How to prioritize business units with the BCG matrix?

The BCG matrix helps you prioritize your business units by providing a visual representation of their strategic value and resource needs. When making decisions based on the BCG matrix, you should invest in stars to maintain or increase their market share and growth rate, as they are your future sources of competitive advantage and profitability. Question marks should be evaluated carefully to assess their potential and feasibility, with the aim of converting them into stars or cash cows, or exiting them if they are not viable. Cash cows should be harvested to maximize their cash flow and profitability, while reducing investment in them. Dogs should be divested or restructured to free up resources and improve overall performance, such as by selling them, shutting them down, or finding ways to improve their efficiency and profitability.

4 What are the benefits and limitations of the BCG matrix?

The BCG matrix is a helpful tool to prioritize business units and allocate resources effectively. It can reveal your strengths and weaknesses, as well as opportunities and threats. Additionally, the matrix can align business units with corporate strategy and goals. However, there are some limitations and challenges to consider. For instance, the BCG matrix relies on two dimensions only, which may not capture the complexity of your business units and markets. You may need to consider customer satisfaction, innovation, quality, cost, and risk as well. It also assumes that market share and growth rate are the main drivers of profitability and cash flow, which may not always be true. Furthermore, the matrix does not account for interactions among business units or markets. It is based on historical data and projections, so you may need to update it regularly to keep it relevant and accurate.

5 How to apply the BCG matrix in practice?

To apply the BCG matrix in practice, you need to define your business units and markets, collect and analyze data, plot your business units on the matrix, and prioritize them in order to allocate resources. This requires deciding how to segment your company into distinct and meaningful business units, as well as defining the markets they operate in. You should also gather and process data on the market share and growth rate of your business units and markets from sources such as financial reports, market research, industry reports, or customer feedback. Furthermore, you must assign your business units to one of the four quadrants based on their relative market share and market growth rate. Lastly, you should use guidelines to make decisions on how to invest in, harvest, or divest your business units while also considering your budget, objectives, and constraints.