BCG Matrix
An excerpt from The Innovation ANSWER Book (Chapter 2, Question 5).
Q5: How is the BCG matrix used to analyze strategy?
A5: The BCG matrix, originally developed by the Boston Consulting Group in the 1960s, is a visual representation of the products in the company’s portfolio and includes competition to evaluate the balance of an innovation strategy. As indicated in the figure, the BCG matrix illustrates market share on the x-axis and market growth on the y-axis. Traditionally, the horizontal axis for market share is shown decreasing from a high level on the left side to a low level on the right side of the graph. By plotting the number or type of products in each quadrant, management can discern organizational strengths and competitive threats. This analysis drives innovation strategy as well as selection of active NPD projects.
- Stars: Products that have high market share and generate significant revenue are considered stars. First-to-market products often are termed stars but will convert to cash cows as more competitors enter the market. New and existing products that fall into the stars category are good investments yet often require continued cash influx due to the high growth rates.
- Cash Cows: Products in the cash cow category of the BCG matrix are ones in which the firm has a high category market share or brand recognition. Yet, the overall growth in the market is slowing. These products generate profits since the expenses to maintain them are low while revenues are high. Organizations should monitor cash cows in case competition or technology changes occur that would transition these products into dogs.
- Dogs: Products at the end of their life cycle are frequently termed dogs. They have both a low market share and a low growth rate. Revenues and expenses are nearly equal, yet the organization has some burden to maintain these products in the portfolio and to support sales and marketing. Senior management must decide whether to retire these products, divest the product line, or rejuvenate the product through NPD investment for a next generation product.
- Question Marks: Existing or new products that are new to a market and involve new technologies are often considered question marks. These products have a potentially high growth rate but have a small market share requiring large investments of financial and human resources. When the product is a new-to-the-world offering, it has the potential to transition to a star. Investment decisions are made based on the potential for growth and aggressiveness of competition in the market.
