Monday, 10 January 2011

The BCG Matrix

The BCG (named after the Boston Consulting Group) Matrix, is a strategy analysis tool which helps to understand the different strategic contexts of different parts of a business portfolio.   That is, the model recognises that not all parts of the business are strategically equal, and in so doing helps to facilitate more nuance strategic analysis.

In its simplest form, the BCG matrix charts each source of value by its share of its market and the rate at which that market is growing.   Source of value could be business units, products, services, customer segments or channels (that is you would choose one of these criteria, say product, and then chart all of the organisation's products relative to each other.)

The resultant portfolio analysis can then be roughly divided into 4 quadrants, as shown on the chart to the right.

Each of the four quadrants suggests a different strategic approach.   For example:
  • Stars: continue to invest.
  • Cash Cows: improve efficiencies.
  • Question Marks: decide.
  • Dogs: exit.
For example, Cash Cows may more readily lend themselves to "Competitive" strategic thinking (see for example Porter's 5 Forces Analysis), while Stars may lend themselves to more "Blue Ocean" strategic thinking (see for example The Strategy Canvas). You can read more at Blue Ocean vs. 5 Forces for further insight into this subject).

In addition, one could vary the size with which you plot each source of value to represent, say, profitability.

Critical success factors:
  • How you define the scope of each market (for measuring market share and growth) is key to the placement of each source of value.
  • Don't ignore cross synergies, for example, taking into consideration sources of value which may serve as loss leaders.
  • Don't ignore cyclical effects.
  • When considering the allocation of costs across sources of value, remember that all costs are variable in the long term.   That is, don't think that you need to keep an unprofitable product, channel etc. going just because it is absorbing some of your "fixed" costs.
You can now do a BCG Matrix using Strategic Learning - the free online, interactive, collaborative tool for strategists. The example below was prepared using Strategic Learning (click on the image to enlarge it).