In the early 1970’s, BCG Matrix first propounded by Bruce Henderson of the Boston Consulting Group.  It is generally known as BCG matrix , Boston Consulting Group Matrix, BCG Growth-Share Matrix or Matrix Quadrants.

Using the Product Portfolio Matrix approach, a company classified all its SBUs or Products/Markets according to Growth-Share Matrix. Therefore, it is best describe as Portfolio planning model.

Portfolio BCG Matrix in graph:

BCG matrix
Portfolio BCG matrix

 

In this Matrix Quadrants, the plate is divided 4 categories named
A. Star
B. Cash Cow
C. Question Mark
D. Dog

The division is based on Market Share and Growth rate. A brief discussion comes follow:

A. Star: Leader [i.e. high market share] of high growth market is called star.
These SBUs are net user of cash, because they always require heavy investment to finance rapid growth and to sustain market share. When the product comes to mature stage, then the growth slow down and they turn to cash cow.

B. Cash Cow: Cash cows are low growth but high market share (Market leader) businesses or products.
Their high earnings, coupled with their depreciation, represent high cash inflows and they need very little in the way of reinvestment. And thus, they are the net provider of cash. Surplus cash are used for Research and Development and to support other SBUs that need investment.

C. Question mark: Products in a growth market with low market share are categorized as Question Mark.
Because of growth, these SBUs require a lot of cash to hold their market share and let alone to increase it. If nothing is done to increase the market share, a Question mark will simply absorb large amount of cash in the short run and later, as growth slow down, become a dog. Thus, unless something is done to change its perspective, it becomes a cash trap.

Management has to decide which question marks should try to build into stars and which should be phased out.

D. Dog: Dog are low growths, low market share SBUs. They may generate enough cash to maintain themselves, but do not promise to be large source of cash.
Most often case, it should be liquidate and try with Question mark SBUs for investment.

Market Growth Rate and Relative Market Share play important roll in BCG Matrix. Market Growth Rate is the measure of industry attractiveness and Relative Market Share is the measure of Competitive advantage. Therefore, these two are most important factors to consider organizations profitability and strategic plan

Portfolio BCG Matrix Limitations:

Though the Product Portfolio Matrix is well known to ease the way of portfolio analysis,
It has several limitations also. Here some of limitations are narrate briefly:

A. High Market Share is not the only factor to measure competitive advantage. Similarly, Market growth rate is not the only factor to measure industry attractiveness.

B. Sometime a dog SBU used as synergy to other SBUs. i.e. a dog may help other SBUs to gain a competitive advantage.

C. Sometimes Dogs [of a huge market] can earn even more cash as Cash Cows.

Though it has some limitations, BCG matrix is a very effective tool to viewing a corporation’s business portfolio at a glance. And also helpful to the decision making process for allocating corporate resources.

Reference:
1. Principle of Marketing by Kotler and Armstrong (10th International Edition)

2. Online Journals.