The History and Origin of the BCG Matrix

Introduction

The BCG Matrix, or Boston Consulting Group matrix, describes a portfolio management technique for classifying business units or products on the basis of their overall industry growth rate and relative market share. The BCG matrix aims to support businesses by providing a portfolio framework that informs key business decisions, such as allocating resources across different business units.

In this blog post, we'll offer an overview of the business context which led to the development of the BCG Matrix in the early 1970s. We'll also walk you through the four boxes within the BCG Matrix and the strategies typically associated with them.

History of the BCG Matrix

The BCG Matrix, or Boston Consulting Group Matrix, is a widely used portfolio management tool. It was developed in the late 1960s by the Boston Consulting Group and utilized by CEOs and strategists around the world to compare and contrast the various pieces of a business. Here is an overview of the history of the BCG Matrix.

Developed in the Late 1960s

The BCG Matrix was developed in the late 1960s by Bruce Henderson, the founder of the Boston Consulting Group. Henderson wanted to create a tool that would help strategists and executives analyze their portfolios and better understand where each of their businesses fit into the overall strategy.

Pioneered by the Boston Consulting Group

Since the BCG Matrix was initially developed and popularized by the Boston Consulting Group, it is often referred to as the “Boston Consulting Group Matrix” or simply “BCG Matrix.” Despite its namesake, the BCG Matrix has since become widely accepted and used by strategists and executives at all levels, regardless of the organization’s affiliation with the Boston Consulting Group.

Created to Compare and Contrast Various Pieces of the Business

The goals and objectives of the BCG Matrix are fairly straightforward. The primary purpose of the tool is to compare and contrast the various pieces of a business, whether in terms of its products, markets, or resources. By comparing the different pieces, strategists are able to identify the business’s strengths and weaknesses, and then develop a strategy for growing the business.

How the BCG Matrix Works

The BCG matrix is a method of classifying a corporation's business divisions or products and services according to their market share and growth rate. It results in four categories known as Stars, Cash Cows, Dogs, and Question Marks. A business would allocate resources based on the categorization to keep its operations more organized.

Four Quadrants for Division of a Business

The BCG matrix works by dividing the business into four quadrants using the criteria of market share and growth rate. To create the quadrants, a graph may be used with these criteria along the X-axis and Y-axis respectively. From this graph, the four quadrants, each representing a different division, can be drawn with a horizontal and a vertical line.

The upper-left quadrant represents businesses with high market share and high growth. This division is labeled as Stars. The upper-right quadrant represents businesses with low market share but high growth rate. It is labeled as Question Marks. The lower-left quadrant represents businesses with high market share but low growth rate and is labeled as Cash Cows. Lastly, the lower-right quadrant represents businesses with low market share and low growth rate and is labeled as Dogs.

Categorizes Products and Services as Stars, Cash Cows, Dogs, and Question Marks

Once the quadrants are established, businesses can then categorize their products and services accordingly. For example, products or services that have high market share in a growings industry would be categorized as a Star. On the other hand, products or services with low market share in a rapidly declining industry would be categorized as Dogs.

Each of these categories have a different purpose in the organization. Stars are often in need of resources to stay competitive. Cash Cows are the major source of revenue for the company, and thus the resources often flow from them. Question Marks need to be monitored closely, as they could be a potential source of growth if it is determined that their market share can be increased. Lastly, Dogs are simply unsalvageable and resources should not be allocated to them unless absolutely necessary.

Stars

The stars of the BCG matrix are investments have high growth potential, high market share and are highly profitable. This type of investment requires heavy investment in order to maintain its market share, return on investment and position. Investments in stars are important to the success of an organization.

Highly Profitable Investments

Stars are highly profitable investments, meaning they provide more return on investment than the average investment and have the potential to maximize returns. These investments must be monitored closely in order to ensure they are still profitable and providing a high return on investment.

High Market Share

Stars also have high market share, meaning they hold the biggest portion of the market in comparison to other investments. Holding a significant portion of the market provides an organization with a high level of influence and visibility in the industry.

The BCG matrix provides an important tool for understanding and managing investments. Knowing the differences between stars, cash cows, question marks and dogs can help organizations make sound decisions about where to allocate resources and capitalize on growth opportunities.

Cash Cows

Cash Cows is one of the four categories in the Boston Consulting Group (BCG) Matrix. Cash Cows refer to a product with a high market share in a low growth industry. Cash Cows are typically seen as the main suppliers of funds within a company, although they are less profitable and generate less funds than Star products.

High Market Shares

Products classified as Cash Cows usually have high market shares and are generally consistent in providing companies with a steady source of cash flows. As such, these products are typically 'cash generators' rather than profit maximizers. The presence of a Cash Cow usually allows for expansion into other product markets where higher profits can be made.

Low Market Growth

Cash Cows, however, usually operate in industries or market segments with low growth rates. This means that these products stand out from the competition, as most of them are older products with established market shares. While they may provide a steady stream of cash, they also do not provide much room for further growth.

Dogs

When discussing the BCG Matrix, the term “Dogs” refers to a business or product that has a low market share in an industry that has low growth, or even a negative or slow growth rate. This means that the products lack the distinct advantage that creates market share and monetary growth needed to remain profitable in the long run.

Low Market Shares

Products and businesses that fall into the Dogs category of the BCG Matrix have low market shares in their respective industries. The typical business or product that falls into the Dog category only has a portion of the total sales in the market. The lack of market share for these products results in low revenue and limited market traction.

Low Market Growth

Coupled with the low market share, businesses and products classified under Dogs also experience low market growth rates. Industry growth rates usually stagnate or decline over time when there is a low market share, meaning these products and businesses fail to gain the market traction necessary to be successful. In some cases, these businesses and products may struggle to even maintain their existing customer base.

Conclusion

The BCG matrix, developed in the early 1970s by then-BCG consultant Bruce Henderson, is a globally accepted tool which helps companies to analyze and classify their business units or products based on their relative market share and market growth. The matrix was designed to provide strategic context for a more informed decision-making process, both in terms of resource allocations amongst different business units, and in terms of market strategies that might be employed in differing product lifecycle stages.

The BCG Matrix is a powerful business analysis tool which plays a fundamental role in the strategic planning process of many organizations. It allows organizations to better understand the interactions between their products and the current economic environment and to make informed decisions on how to best allocate their limited resources.

From its original rollout at the Boston Consulting Group, the BCG matrix has become a powerful and widely accepted tool used by an array of companies and institutions around the world. The matrix and its constituent philosophies have played a key role in informing investment and operational decisions, with the goal of helping companies to maximize profit and maximize their strategic potential.

Summary of BCG Matrix and its History

The BCG matrix, developed by Bruce Henderson of the Boston Consulting Group in the early 1970s, is a tool used to help organizations better understand the interactions between their products and the current economic environment and make informed decisions on how to best allocate their limited resources. The matrix was designed to provide strategic context for a more informed decision-making process and has become a widely accepted tool for a range of companies and institutions.

Significance of the BCG Matrix

The BCG Matrix plays a fundamental role in the strategic planning process of many organizations, allowing them to both understand their current and potential future market position, and to make more informed decisions on how to best allocate their limited resources. The matrix has helped to shape the strategic conversations at many of the world's largest organizations, allowing for more informed decisions on how to best use resources, how to enter new markets, how to compete with existing products, and how to stay ahead of competitors.

Though the BCG Matrix can be limiting in certain ways, it remains a powerful tool that helps organizations better understand the market and make more informed decisions on how to best allocate resources. The matrix has been successful in helping organizations to maximize profit and optimize their strategic potential, and will continue to do so into the future.