The Boston Matrix
The Boston Matrix is a more informal marketing tool used for product portfolio analysis and management, developed by the Boston Consulting Group in the early 1970s. It considers the degree of market share and market growth and helps identify where best to use resources to maximize profit from a product management perspective. Market share represents the percentage of the total market achieved by an organization and is measured in terms of revenue or unit volume. The Boston Matrix assumes a high market share provides financial benefits, so a higher share of the market means higher cash earnings. Market growth reflects the attractiveness of a market.
The Boston Matrix describes the impact of market share and market growth on businesses by using four categories: dogs, cash cows, question marks (or problem children) and stars. It is shown diagrammatically in Figure above.
Dogs are confronted with low market share and low market growth problems. They tend to absorb cash rather than generate it and are developing in a slow growing industry.
Cash cows enjoy a high market share in low growing market. These units usually generate cash in excess but opportunities or new investments are limited, due to the low growing market. The aim is to ‘’milk’’ them as long as possible.
Problem children have low market share in a high growing market. These are products or units that grow rapidly and consume a high amount of resources, but generate low cash because of the low market share. They have the potential to grow market share and generate income thus turning into stars or cash cows when market growth slows, but there is also the possibility of them degrading into dogs with little return and wasted investment. Problem children are also called ‘question marks’ because we must analyze them carefully to decide whether they are worth the investment required to increase market share.
Stars represent the ideal combination for a company: high market share in a fast growing industry, two elements which generate cash and further opportunities.
Applying the BCG Matrix
The natural cycle of the business usually starts as problem child which eventually grows and becomes a star. Afterwards, as industries mature and growth slows, they become a cash cow or end up as a dog. The purpose of this matrix is to help companies decide which of their units they should keep, where they should invest further and which ones should they consider getting rid of. To do that, there are typically four strategies to apply:
- Build market share which means making further investments,
- Hold or maintain the same status,
- Harvest which means reducing investment, increasing cash flow and maximizing profit,
- Divest which usually involves removing dogs and investing in other units such as problem children or stars.
This way companies can have a clear and simple view of how they should screen opportunities and identify where it is best to invest their financial resources, time and efforts.