What Is the BCG Matrix?

The matrix is named after Boston Consulting Group. According to the firm, Alan Zakon sketched it first and refined it with colleagues, and the founder, Bruce Henderson, made it known in 1970 in his essay "The Product Portfolio".

The two axes: - Vertical axis: the growth rate of the market the product competes in. This is market growth, not the growth of the company's own sales. - Horizontal axis: relative market share, meaning the company's own share compared with that of a reference competitor.

The combination gives four quadrants. Henderson named them: - Star: high share in a growing market. According to Henderson it nearly always shows a reported profit, but growth needs investment and it may not generate all the cash it uses. - Cash cow: high share in a market that grows slowly. It generates more cash than it needs to hold its share. - Question mark: low share in a growing market. It needs more cash than it generates and falls behind if it does not gain share. - Dog: low share in a market that grows slowly. In the 1970 essay the quadrant was called "pet". BCG's page now explains that it is often represented by a dog.

The logic behind the matrix is the experience curve: the company with more share builds more experience, produces at lower cost and earns a higher margin. That is why Henderson wrote that margins and cash generated are a function of market share, and that growth requires cash to finance added assets. A balanced portfolio, in his view, has stars that secure the future, cash cows that fund it and question marks that can become stars with that money.

The first step is to define the units: product lines or businesses, each with its own market. The market definition decides the share. A trail running shoe brand can lead its niche and be small in the sports footwear market.

The second step is to measure two values for each unit, from the same source and for the same period: - Market growth, in revenue or in units. - Relative market share: the company's own share divided by that of the reference competitor. If the reference is the largest competitor (for the leader, the second largest), a value above 1 means market leadership.

The first measurement mistake sits here: putting absolute share on the axis. A worked example with no real market data: a brand with a fifth of the market looks strong. If the leader has twice as much, its relative share is 0.5 and the product lands in the low-share half. In a fragmented market where the number two has half as much as the brand, the same fifth gives 2.0 and the brand leads. With absolute share, both cases would look the same.

The reference competitor belongs next to the matrix. In a 2014 study, BCG divided each company's share by that of the third-ranked company in its industry, not by the leader's. With a different reference, the line between high and low share moves.

The third step is to plot the units and read the cash flows: where the money comes from and where it goes. The matrix does not calculate anything on its own. It structures a discussion about investment that would otherwise happen one product at a time.

The matrix forces you to look at the company as a portfolio. A growing unit consumes cash and a mature one generates it, and the company needs both at the same time. Without that view, each manager defends their budget separately.

A second mistake is to read the quadrants as recipes. The instructions come from BCG itself: milk the cash cows, invest in the stars, invest in or discard the question marks, and liquidate, divest or reposition the dogs. They rest on one assumption, though: that share explains cost and cash. That assumption has to be checked in each market.

BCG tested it in 2014. In its analysis of US listed companies, the share of total profits captured by cash cows in 2012 was 25 percent lower than in 1982, and companies spent less time in each quadrant. The authors concluded that market share is no longer a strong predictor of performance and that the horizontal axis needs a new measure of competitiveness. For dogs, they suggest getting the most out of what they can teach, not only selling them.

Before you close a dog, check what else depends on it: whether it sells alongside another product, keeps customers or covers a gap against competitors. The matrix cannot see those links, because it treats each unit on its own.

Other tools cover other parts. A PESTEL analysis helps estimate whether a market will keep growing, and that figure is the vertical axis. A SWOT analysis crosses each unit's position with its strengths and weaknesses. The Ansoff matrix asks a different question: which direction to grow in from here.

• Define each unit's market before calculating shares and write the definition next to the matrix.
• Use relative share and name the reference competitor.
• Measure growth and share from the same source and for the same period for every unit.
• Read each quadrant as an assumption about cash and test it against the unit's figures.
• Check a unit's links to the others before selling or closing it.
• Redraw the matrix when a market changes: units move between quadrants.

• Putting absolute share on the horizontal axis.
• Measuring the growth of the company's own sales instead of market growth.
• Treating the quadrant as a verdict and closing a dog without checking what it supports.
• Drawing the market boundary so that a product comes out as a star.
• Using the matrix in a single-product company, where there is no portfolio to sort.
• Assuming the link between share and cash without testing it in the industry.