The BCG matrix refers to a chart created by Bruce Henderson, in 1968 for the Boston Consulting Group: helping his corporations to adeptly analyze their product lines or business units. The growth share matrix chart helped in deciding the corporations where to allocate the cast. It has been popular two decades, and still is used as an analytical tool.
To use the chart, corporate analysts plot a scatter graph germane to their business units, ranking the relative market shares and the growth rates of their particular industries. This led to a categorization of four different types of businesses:
These are the units comprising of high market share in a dawdling emergent industry. These units typically breed cash in excess of the amount of cash required in maintaining the business. These are often said as sedate and tedious in a mature market, and every corporation would be excited to own these as much as possible. These need to be milked continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.
More considerately known as pets, are the units with relatively low market share in the mature but slow growing industry. These are the units typically break even, barely generating enough cash to maintain the market share of the business. Despite of the concern that to owe a break even point provides social benefits and human resources that can assist the other business units; and from the accounting perspective, these units are worthless i.e. not generating enough cash for the company. They depress a profitable company’s return on assets ratio, which are used by several investors in order to judge how good a company is being managed. So as per dogs, these are thought to be sold out.
The question marks are the units with a low market share, but in a fast growing industry. Such kinds of business units require comparatively large amount of cash in order to expand their market share. The corporate goal must be therefore to grow the business to turn out to be a star. Else, upon maturing the industry, the growth will turn slow and this unit can eventually fall in to the dog category.
The stars are the units comprising of high market share in the fast growing industry. The ultimate hope about the stars is that they are the next cash cows. Thus to sustain the market leadership of the business unit, an extra amount of cash may be required. But doing this so is worthy as if the company manages to retain the same positions. And when the growth slows down, they become cash cows and are able to maintain their categorical leadership.
Practical use of BCG Matrix
For any of the product, service or idea – the area of circle is to represent the values of its generated sales. The Boston Matrix thus offers a pretty handy and practical map of the organization’s product strengths and weaknesses as well as the likely cash flows.