What Is the BCG Matrix? Pros and Cons of Using BCG in Business

BCG matrix was designed to help businesses spot growth opportunities across their product portfolios, then decide whether to keep investing or stop production. So what is the BCG matrix? What are its pros and cons in strategic management ? Let us Mona Media explore the details in the article below!

What is the BCG matrix?

The BCG matrix (Boston Consulting Group) is a model that helps businesses build a market-share growth strategy by placing product portfolios into 4 groups, then locating those products on the market the matrix to decide whether to invest in or drop them.

The BCG matrix analyzes product portfolios based on two factors:

• Market share (Market Share): A product's or service's share of the market.
• Market growth: The rate at which that product or service is growing in the market.

What does the BCG matrix include?

The BCG matrix is divided into 4 quadrants. A matrix has 4 SBUs, one per quadrant. For those who don't know, an SBU (Strategic Business Unit) is a strategic business unit. In the BCG matrix, an SBU is a product line, a product or a brand of the company, aimed at a specific target customer group.

The BCG matrix includes:

• Star SBU: Products in high-growth markets with high market share.
• Question mark SBU: Products in markets with high growth rates but low market share.
• Cash cow SBU: Products in markets with low growth rates but high market share.
• Dog SBU: These products have low growth and low market share.

In short, there are 3 basic things to remember about the BCG matrix:

• The BCG matrix is a tool used inside a business to assess the current value of the company's product lines.
• Based on the BCG matrix, the company decides which products to keep, drop or invest more in.
• The matrix contains 4 separate categories: dog SBU, question mark SBU, star SBU and cash cow SBU.

BCG matrix analysis

Now that you understand what the BCG matrix is and what it contains, let's analyze the BCG matrix in detail in the next section.

Star SBU

The star SBU contains products in high-growth markets that hold a large share of that market. Products in this group have a strong competitive advantage and many chances to grow profit and expand over the long term.

Products in the “star” group are highly rated for profitability and can fund their own capital needs. But building them also takes a large amount of the business's investment capital to hold the leading position.

However, when overall market growth slows, a market-leading product in the star SBU eventually becomes a product in the cash cow SBU.

Question mark SBU

Products in the question mark SBU have a relatively weak competitive position and low market share. However, they are in high-growth industries and are very promising for generating profit. A question mark SBU can become a star SBU if it is nurtured, because it needs large investment and its growth potential must be assessed correctly so investment is timed right.

Cash cow SBU

The cash cow SBU contains products with low growth but high market share and a strong competitive position. This SBU can generate high profit, but has little room to grow, and growth in the industry is very low. So its capital needs are not large, and it is seen as a very good source of profit for the business.

In practice, products in the cash cow SBU hold a high share of cash and grow slowly, so they are “milked” for money to reinvest in the “stars”, which have high growth potential in the future.

Dog SBU

Products in this SBU have low competitiveness and low market share, and sit in slow-growth industries. This SBU demands heavy investment just to hold on to a very small share, and its future outlook is also poor, so there is little chance of high profit.

In short, an effective marketing strategy must strengthen or maintain support for the “star” and “question mark” products, while cutting back investment in “cash cows” and skipping or ending all the “dog” products.

Pros and cons of using the BCG matrix in a business

Advantages of the BCG matrix

The main advantages of the BCG matrix are:

• Not too complicated, easy to apply

With a fairly simple diagram, users can easily understand it and apply it to their business model.

Looking at the BCG matrix, you can see that the “star” and “cash cow” groups are the most beneficial to a business. Conversely, products in the “question mark” and “dog” groups need special attention to avoid risks and failures.

• Helps a business see how well each business unit performs

Using the BCG matrix is an effective way to identify which fields or business units perform poorly and should be dropped. This saves a lot of resources and investment capital that would go to products with no potential, so you can focus on developing the profitable ones.

In other words, the BCG matrix is a guide that helps a business allocate investment capital sensibly, using its budget to get the most out of its business structure.

• Easy to decide where to invest in promising products

Once you've identified which categories to drop, you can focus on the products with the most potential, namely the star and cash cow categories.

Depending on financial strength and risk tolerance, managers can develop in two directions: either products with high growth potential in the “star” group, which also need significant investment, or the “cash cow” group, which brings in good cash flow with minimal investment.

Disadvantages of the BCG matrix

Besides the advantages above, the BCG matrix also has some drawbacks:

• Ignores other business factors

The biggest limit of the BCG matrix is that it ignores other aspects of business that also matter for success. Market share and industry growth are not the only factors that affect profit. High market share also does not mean high profit.

Even after choosing an industry with the potential to make money, a business can still lose money if senior leadership manages poorly, staff are not committed, or unforeseen outside causes arise.

Moreover, choosing a product in the “star” or “cash cow” group does not guarantee that the company will always make a profit.

• Not suited to complex business models

For businesses with complex business models, the BCG matrix is not very effective. The model only looks at 3 criteria, namely cash flow, market share and growth rate, so it cannot offer the best solution in every case.

In addition, only four quadrants are analyzed, so it is hard to classify a product that falls between these categories.

What the BCG matrix means

The BCG matrix has the following meanings:

• The BCG matrix is a useful tool that helps businesses allocate investment sensibly.
• The BCG matrix is one part of the overall view of how a company's current product portfolio is allocated.
• It does little to forecast future results.
• The BCG matrix does not address factors from the external environment.
• The assumptions drawn from the BCG matrix will still contain errors.

Things to note when using the BCG matrix

Things to keep in mind when applying the BCG matrix:

• Market share does not necessarily measure accurately how attractive a product is in the market.
• Market share is a measure of a product's capacity to generate profit.
• Focusing only on those two factors, market share and growth rate, can make a company overlook other factors that also affect the long-term health of a product.

Applying the BCG matrix in marketing and strategic management helps a business decide where to concentrate its resources. Developing products in the "star" and "question mark" groups helps a business grow its market share quickly. If it invests in "cash cow" products, the business should keep them fresh through upgrades and modernization to maintain steady growth.

That covers what MONA Media wanted to share about the BCG matrix. We hope this has given you a clearer view of this useful model.

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